The Valspar Corporation Annual Report on Form 10-K 10-31-2003

FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for the past 90 days. Yes __X__ No _____

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes __X__ No _____

The aggregate market value of the voting stock held by persons other than officers, directors and more than 5% stockholders of the registrant as of April 25, 2003 was $1.5 billion based on the closing sales price of $41.44 per share as reported on the New York Stock Exchange. As of December 31, 2003, 50,876,956 shares of Common Stock, $.50 par value per share (net of 9,344,356 shares in treasury), were outstanding.

Part I

Item 1. Business

Overview

Founded in 1806, The Valspar Corporation (“Valspar” or the “Company”) has grown into a leading global paint and coatings manufacturer. The Company manufactures and distributes a broad portfolio of products, including:

Industrial coatings for factory application by industrial customers and original equipment manufacturers (OEMs);
Architectural paints, varnishes and stains for the do-it-yourself and professional markets;
Packaging coatings and inks for rigid containers, particularly food and beverage cans;
Automotive refinish and other specialty coatings, including high performance floor coatings; and
Specialty polymers, composites and colorants for use by coatings manufacturers and others, including Valspar.

The Industrial coatings product line includes decorative and protective coatings for wood, metal, plastic and glass. The Architectural, Automotive and Specialty (“AAS”) coatings product line includes interior and exterior decorative paints, primers, varnishes and specialty decorative products, such as enamels, aerosols and faux finishes for the do-it-yourself and professional markets, as well as automotive refinish and high performance floor coatings. The Packaging coatings product line includes coatings and inks for rigid packaging containers. The Company also manufacturers specialty polymers, composites and colorants, which are used internally and sold to other coatings manufacturers.

The Company operates its business in two reportable segments: Paints and Coatings. For additional financial information about the Company’s operating segments, see Note 15 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data in this Form 10-K.

Acquisitions

Much of our growth has occurred during the last decade, and, during this time we have expanded our business into international markets. A significant portion of our business growth has been accomplished through acquisitions. Since 1995, we have made more than 20 acquisitions (including purchases of equity in joint ventures).

The most important of these acquisitions include our acquisitions of Coates Coatings, Dexter Packaging and Lilly Industries. Our purchase of Coates and its line of packaging coatings products was structured as a series of acquisitions. In the four phases of the Coates acquisition, completed in 1996, 1997, 2000 and 2001, we acquired packaging coatings businesses in Europe, Australia, the United States, Hong Kong, China, South Africa, Singapore, Malaysia, Indonesia

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Item 1. Business (continued)

and Thailand. Sales for these businesses were approximately $96 million in total in the year immediately prior to each phase.

In February 1999, we acquired the worldwide packaging and French industrial coatings businesses of Dexter Corporation. The Dexter acquisition provided us with additional packaging and industrial coatings facilities and businesses in Europe, the United States and Asia. The Dexter businesses that we acquired generated $212 million in sales in 1998, the last full fiscal year prior to the acquisition.

In December 2000, we completed the acquisition of Lilly Industries, our largest acquisition to date. We acquired all outstanding Lilly Industries shares for $31.75 per share in cash in a transaction valued at $1.036 billion, including the assumption of approximately $218 million of debt. At the time of the acquisition, Lilly Industries was considered to be one of the five largest industrial coatings and specialty chemical manufacturers in North America, with reported net sales of $670 million for its fiscal year ended November 30, 2000. Lilly Industries formulated, manufactured and marketed industrial coatings and specialty chemicals to original equipment manufacturers for products such as furniture, appliances, building products and transportation, agricultural and construction equipment. Through the acquisition of Lilly Industries, we acquired manufacturing facilities and sales offices in the United States, Canada, Mexico, the United Kingdom, Ireland, Germany, China, Malaysia, Taiwan, Singapore and Australia. In connection with the acquisition, the U.S. Federal Trade Commission required us to sell our former mirror coatings business, which has been replaced with Lilly Industries’ mirror coatings business. The Lilly Industries acquisition was significant not only due to its size but because, through the acquisition, we believe we have become the world’s largest supplier of wood, coil and mirror coatings and the leading North American supplier of non-automotive industrial coatings. Lilly Industries also provided us with complementary product lines and new technology, expanding the breadth and depth of our Industrial coatings product line.

As we have done with past acquisitions, we took aggressive steps to integrate Lilly Industries into the Company in order to take advantage of cost savings synergies between the two businesses. Following the acquisition, we consolidated raw material purchases, eliminated duplicative selling, general and administrative services, reduced personnel and closed redundant production facilities. To date, we have closed fourteen facilities and relocated production of more than 20 million gallons of coatings.

Products

Our Industrial coatings product line includes a broad range of decorative and protective coatings for metal, wood, plastic and glass, primarily for sale to OEM customers in North America, Australia, Europe and Asia. Products within our Industrial coatings product line include fillers, primers, stains and topcoats used by customers in a wide range of manufacturing industries,

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including building products, transportation, appliances, automotive parts, furniture, agricultural equipment, construction equipment and metal fabrication.

We utilize a wide variety of coatings technologies to meet our customers’ industrial coatings requirements, including electro-deposition, powder, solvent-borne, water-borne and UV light-cured coatings. This broad technical capability allows us to customize our Industrial coatings products to our customers’ specifications and to provide “one-stop” integrated solutions. For example, in the appliance coatings market, we believe that we are one of only a small number of coatings manufacturers that currently have the technological and manufacturing capabilities to be a single source coatings supplier to appliance customers.

Packaging coatings comprise a portion of the global industrial coatings market segment. Our Packaging coatings product line includes coatings for both interior and exterior use in rigid packaging containers, principally food containers and beverage cans for global customers. We also produce coatings for aerosol and paint cans, bottle crowns for glass and plastic packaging and glass bottle closures.

We believe we became the world’s largest supplier of rigid packaging coatings following our 1996 acquisition of the Coates Coatings business in the United States, Europe and Australia. In addition to providing us with a global manufacturing presence, this acquisition provided us with external packaging coatings and metal decorating ink technologies, thereby improving the depth and breadth of our product line. Our 1999 acquisition of Dexter’s packaging coatings business further expanded our international presence, providing us with additional manufacturing facilities in Europe and Asia. We believe we are now the only coatings manufacturer in the global beverage can market that supplies coatings for the entire can. The major customers of our Packaging coatings product line include global companies that apply our coatings in the production of rigid packaging products, principally food containers and beverage cans. Consolidation and globalization of our customers has been very apparent in this market segment, and we have responded to these trends by offering a wide variety of packaging coatings products throughout the world.

Our Architectural coatings products comprise the largest portion of our AAS coatings product line. We offer a broad portfolio of interior and exterior paints, stains, primers, varnishes and specialty decorative products, such as enamels, aerosols and faux finishes, used primarily in the do-it-yourself market. The primary distribution channels for these products are home centers, mass merchants, hardware wholesalers and independent dealers, including Lowe’s, Wal-Mart and Do it Best stores. Due to the weather requirements of house painting, sales of our AAS coatings product line are seasonal, with the lowest levels occurring in the first quarter of our fiscal year when weather conditions in much of North America are ill-suited for exterior painting.

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Item 1. Business (continued)

We develop highly customized merchandising and marketing support programs for our architectural coatings customers, enabling them to differentiate their paint departments from their competitors’ through point-of-purchase materials, labeling and product and color selection assistance. Through such programs, we offer branded product lines under the names Valspar, Plasti-Kote, Magicolor and McCloskey. We also manufacture customer exclusive brands such as American Tradition, Signature Colors, One & Only, Severe Weather, Enterprise and Decorative Effects, in addition to a variety of other private label brands. At key customers such as Lowe’s, we also offer additional marketing and customer support by providing in-store employees to answer coatings questions. We have been recognized as the paint supplier of the year seven times for Lowe’s and twice for Wal-Mart.

Within the AAS coatings product line, we manufacture and distribute automotive refinish coatings under the brand names Valspar and House of Kolor. We also supply aerosol spray paints for automotive distributors and large automotive supply retailers under the brand names Plasti-Kote, Tempo and Mr. Spray. Major customers for these products include large automotive supply retailers. We also manufacture and distribute high performance floor coatings for commercial and industrial applications.

In addition to our main product lines, we make and sell specialty polymers, composites and colorants. We produce specialty polymers and colorants for internal use as well as for external sale to other coatings and building products manufacturers. We believe our ability to develop proprietary polymers for use in our coatings products (especially our architectural coatings products) provides us with an advantage over some of our competitors who cannot produce these products themselves. Our composites products include gelcoats and related products that are sold to boat manufacturers, shower and tub manufacturers and others.

Competition

All aspects of the coatings business are highly competitive. We face strong competitors in all areas of our business, some of which are larger and better capitalized than we are.

Competition in the market areas in which we sell our Industrial and Packaging coatings product lines is based on technical capabilities for specific product formulation, the ability to meet customer delivery requirements, technical assistance to the customer in product application, price and new technology offerings. In addition, the markets for industrial coatings are becoming increasingly global, and customers are looking for global coatings solutions. We believe we can provide global coatings solutions to our customers in a manner in which most of our competitors cannot due to our position as one of the world’s largest industrial coatings manufacturers and our commitment to developing innovative technologies.

Part I (continued)

Item 1. Business (continued)

Competition in the markets in which we sell our AAS coatings product line is based on factors such as price, product quality, distribution and consumer recognition. In this market segment, we offer highly customized merchandising and marketing support programs to our AAS customers and have maintained product recognition through high-quality and well-designed products. Relationships, such as the ones we have with key retailers like Lowe’s and Wal-Mart, are highly important, as these firms account for much of the growth in architectural coatings market segment.

International Joint Ventures

The Company has formed various international joint ventures over the past several years.

Mexico and Central America. In the Mexican and Central American markets, the Company formed a joint venture in 1993 called Valspar-Marlux with Regio Empresas, a Mexican corporation. While the initial focus of the joint venture was to engage in the marketing, sales, distribution and technical service of packaging, coil, wood and general metals coatings, during fiscal year 1996, the joint venture started manufacturing coatings products at its plant in Monterrey, Mexico. During 1998, the Company obtained a majority position of 51% in the joint venture. In 1999, the Dexter acquisition added a manufacturing facility in Mexico City.

In November 2000, the Company acquired the remaining 49% interest in the Valspar-Marlux joint venture. The former joint venture company is now known as Valspar Mexicana.

India and Japan. Polycoat Powders Limited, a joint venture of the Company and The Goodlass Nerolac Paint Co., Ltd. in India, manufactures decorative powder coatings for the industrial coatings market in India. We sold our minority interest in this joint venture to Kansai Paints, a Japanese company, in 2003. In 1999, the Company also assumed Dexter’s majority position in a joint venture with Rock Paint, a Japanese company, to manufacture and sell packaging coatings in Japan.

Hong Kong and China. The Company and China Merchants Hai Hong Holdings Co., Ltd. formed a joint venture company in Hong Kong in 1995 for the purpose of constructing a packaging coatings plant in the Shenzhen Economic Development Zone in the Guangdong Province of China. This plant became operational at the beginning of the 1997 fiscal year and currently manufactures and distributes the Company’s packaging coatings products in China, Hong Kong and other Southeast Asian markets. The Company also acquired Coates’ packaging coatings and metal decoration inks business in Hong Kong and Guangzhou, China during 1997 and Dexter’s packaging coatings business in China during 1999. The Company has consolidated these businesses with its Hong Kong joint venture.

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Item 1. Business (continued)

South America. The Company formed a joint venture in 1997, called Valspar Renner, with Renner Herrmann S.A., a Brazilian company. Valspar Renner supplies packaging coatings and metal decorating inks to the South American market. In December 2001, the Company acquired a plant from Renner Herrmann S.A. and then, in January 2002, the Company acquired the remaining 50% interest in this joint venture. This company is now known as The Valspar Corporation Limitada.

South Africa. In December 1997, as part of the Coates acquisition, the Company acquired a 49% interest in a joint venture with Coates for packaging coatings in South Africa. In February 1999, as part of the Dexter acquisition, the Company acquired Dexter’s majority position in a joint venture with Plascon (Pty) Limited, a South African company, for packaging coatings in South Africa. As of October 2000, the Company acquired Coates’ 51% interest in the Valspar/Coates joint venture and reorganized the businesses of both South African joint ventures so that Valspar now has a majority position in a joint venture with Plascon for a combined packaging coatings business in South Africa.

Netherlands. In March 2002, the Company acquired from its joint venture partner the remaining 20% interest in Dyflex B.V., a resin manufacturer in the Netherlands.

Raw Materials

We obtain raw materials from a number of suppliers. Many of these raw materials are petroleum-based derivatives, minerals and metals. Under normal conditions, all of these materials are generally available on the open market, although prices and availability are subject to fluctuation. In general, higher oil and gas costs result in higher prices for our raw materials. Because our raw material costs average approximately 80% of our costs of goods sold, raw material efficiency is a critical component of the cost of the products we manufacture.

Patents

Our policy is to seek patent protection for our products and manufacturing processes when appropriate. We also license some patented technology from other sources. Our business is not materially dependent upon licenses or similar rights or on any single patent or group of related patents. Although we believe our patent rights are valuable, our knowledge and trade secret information regarding our manufacturing processes and materials have also been important in maintaining our competitive position. As a condition of employment, we now require domestic employees to sign a confidentiality agreement relating to proprietary information.

Part I (continued)

Item 1. Business (continued)

While we make efforts to protect our trade secret information, others may independently develop or otherwise acquire substantially equivalent proprietary information or techniques or gain access to our proprietary technology or disclose this technology. Any of these factors could adversely impact the value of our proprietary trade secret information and harm our business.

Seasonality and Working Capital Items

The Company’s sales volume is traditionally lowest during the first quarter of the fiscal year, primarily due to the buying cycle in the AAS coatings product line. When sales are generally lowest, the Company builds inventory, the financing for which is provided primarily by internally generated funds and short-term and long-term credit lines discussed in Note 6 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data included in this Form 10-K.

Significant Customers

In 2003, the Company’s sales to Lowe’s Companies, Inc. exceeded 10% of net sales, and our ten largest customers accounted for approximately 37% of net sales.

Backlog and Government Contracts

The Company has no significant backlog of orders and generally is able to fill orders on a current basis.

No material portion of the business of the Company is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government.

Research and Development

Many of the products we offer today have been developed in the last five years. We have adopted a “best practices” approach to technology development by combining our technology efforts with those of the businesses we have acquired. This has resulted in several successful new product developments. For example, we have advanced our Packaging coatings product line technology by focusing on universal coatings for two-piece food cans, and we have further advanced our Industrial coatings product line technology by developing electro-coat technology. We have continued to expand our line of polymers, and we now have a full portfolio of both water-based and conventional polymers for architectural, industrial and packaging markets.

Research and development costs for fiscal 2003 were $69,667,000, representing a 5.7% increase over fiscal 2002 ($65,924,000). Fiscal 2002 costs increased 13.5% over those of fiscal 2001 ($58,105,000). Our primary emphasis has been on developing and refining emerging technologies in our Industrial and Packaging coatings product lines.

Part I (continued)

Item 1. Business (continued)

Environmental Compliance

The Company undertakes to comply with applicable regulations relating to protection of the environment and workers’ safety. Capital expenditures for this purpose were not material in fiscal 2003, and capital expenditures for 2004 to comply with existing laws and regulations are also not expected to be material.

Employees

The Company employs approximately 7,000 persons, approximately 700 of whom are members of unions.

Foreign Operations and Export Sales

Our foreign operations are conducted primarily through majority-owned subsidiaries and, to a lesser extent, joint ventures. The bulk of our foreign operations have been acquired in the last seven years, and sales from foreign operations continue to increase. In 1996, we acquired the European, U.S. and Australian metal decorating inks and packaging coatings business of Coates Coatings to provide our packaging coatings customers with global support. In 1999, we acquired the global packaging coatings business of the Dexter Corporation, along with its industrial coatings business in France. This acquisition added several manufacturing facilities throughout Europe and in Singapore. In December 2000, we completed our acquisition of Lilly Industries, which had manufacturing operations in Canada, Mexico, Europe and Asia. We now have manufacturing operations in, among other countries, Australia, Brazil, Canada, China, France, Germany, Ireland, Malaysia, Mexico, the Netherlands, Singapore, Switzerland, Taiwan and the United Kingdom. We also have joint ventures in China, Hong Kong, Japan and South Africa and sales offices in other foreign countries.

Export sales continue to increase. During fiscal 2003, export sales from the United States represented approximately 4.0% of the Company’s business. The Company’s various acquisitions over the past three years have also increased revenues from foreign subsidiaries and operations, which comprised 27% of the Company’s total revenues in fiscal 2003.

Item 2. Properties

The Company’s principal offices in Minneapolis, Minnesota are owned. Operations in North America are conducted at 38 locations, primarily in Illinois, California, Texas, Indiana, North Carolina and Pennsylvania, with two plants each in Canada and Mexico. Thirty-four plants with approximate square footage of 4,300,000 are owned, and two plants with square footage of 280,000 are leased. Manufacturing operations in Europe are conducted at eight owned locations and one leased location, with plants in the United Kingdom, France, Germany, Ireland, the Netherlands and Switzerland with a combined square footage of 457,000. The Company owns

Part I (continued)

one plant in South Africa, one plant in Brazil, two plants in both Australia and China, one plant in each of Malaysia and Taiwan with a combined approximate square footage of 840,000. The Company leases one plant in both Singapore and China with a combined square footage of approximately 35,000.

We believe our principal properties and facilities owned or leased are well maintained, in good operating condition and adequate for the purposes for which they are being used. Operating capacity varies by product line, but additional production capacity is available for most product lines by increasing the number of shifts worked.

Item 3. Legal Proceedings

The Company is involved in various claims relating to environmental matters at a number of current and former plant sites. The Company engages or participates in remedial and other environmental compliance activities at certain of these sites. At other sites, the Company has been named as a potentially responsible party (“PRP”) under federal and state environmental laws for site remediation. The Company’s management reviews each individual site, considering the number of parties involved, the level of potential liability or contribution of the Company relative to the other parties, the nature and magnitude of the hazardous wastes involved, the method and extent of remediation, the potential insurance coverage, the estimated legal and consulting expense with respect to each site and the time period over which any costs would likely be incurred. Based on the above analysis, management estimates the clean-up costs and related claims for each site. The estimates are based in part on discussion with other PRPs, governmental agencies and engineering firms.

The Company accrues appropriate reserves for potential environmental liabilities, which are continuously reviewed and adjusted as additional information becomes available. While uncertainties exist with respect to the amounts and timing of the Company’s ultimate environmental liabilities, management believes there is not a reasonable possibility that such liabilities, individually and in the aggregate, will have a material adverse effect on the Company’s financial condition or results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 8 through 10 of the Company’s 2003 Annual Report to Stockholders incorporated by reference into this Form 10-K.

The Company is one of a number of defendants in numerous proceedings that allege that the plaintiffs suffered injuries or contracted diseases from exposure to chemicals used in the production of some of the Company’s products or waste disposal. The Company is also a defendant in a number of other legal proceedings which it believes are not out of the ordinary in a business of the type and size in which it is engaged. The Company believes that there is not a reasonable possibility that these legal proceedings, individually and in the aggregate, will have a material adverse effect on the Company’s financial condition or results of operations.

Part I (continued)

The Company, along with other companies, is a defendant in several legal proceedings and claims brought against companies who are alleged to have manufactured and sold paint containing lead pigment. The Company believes that the litigation is without merit and is vigorously defending these matters. It is possible that additional lawsuits or claims could be brought against the Company. At this time, management cannot estimate the scope or amount of potential costs or liabilities relating to these matters. However, based on the outcome of such matters to date, and other factors, management does not believe there is a reasonable possibility that the costs and liabilities of such matters will have a material adverse effect on the Company’s financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

There was no matter submitted during the fourth quarter of fiscal year 2003 to a vote of security holders.

Executive Officers of the Registrant

The names and ages of all of the registrant’s executive officers, all of whose terms expire in February 2004, and the positions held by them are as listed below. There are no family relationships between any of the officers or between any officer and director.

The foregoing executive officers have served in the stated capacity for the registrant during the past five years, except for the following:

Prior to January 2002, Mr. Rompala also was President from March 1994 to December 2001.

Prior to November 1998, Mr. Engh was Vice President – International since September 1993.

Part I (continued)

Prior to January 2002, Mr. Erdahl was Senior Vice President – Packaging and Industrial Coatings since February 2000. Prior to February 2000, Mr. Erdahl was Senior Vice President – Operations since November 1998. Prior to November 1998, Mr. Erdahl was Vice President – Industrial Coatings Group since June 1991.

Prior to January 2002, Mr. Mansfield was Senior Vice President – Architectural, Automotive and Specialty Coatings since February 2000. Prior to February 2000, Mr. Mansfield was Senior Vice President – Packaging and Industrial Coatings since November 1998. Prior to November 1998, Mr. Mansfield was Vice President – Packaging Coatings Group since February 1991.

Prior to November 1998, Mr. Reyelts was Vice President – Finance since April 1982.

Part II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

The information in the section titled “Stock Information and Dividends” on pages 6 and 7 of Valspar’s 2003 Annual Report to Stockholders is incorporated herein by reference. All market prices indicated in this section represent transactions on the New York Stock Exchange. The number of record holders of the Company’s Common Stock at December 31, 2003 was 1,614.

The quarterly dividend declared December 10, 2003, which was paid January 15, 2004 to Common Stockholders of record December 31, 2003, was increased to 18¢ per share.

Item 6. Selected Financial Data

The information in the section titled “Eleven Year Financial Summary” for the years 1999 through 2003 on pages 6 and 7 of Valspar’s 2003 Annual Report to Stockholders is incorporated herein by reference.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 8 through 10 of Valspar’s 2003 Annual Report to Stockholders is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk” on page 10 of Valspar’s 2003 Annual Report to Stockholders is incorporated herein by reference.

Part II (continued)

Item 8. Financial Statements and Supplementary Data

For financial statements and the financial statement schedule filed as part of this report, reference is made to “Index to Financial Statements and Financial Statement Schedule” on page F-1 of this report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced above.

Part III

Item 10. Directors and Executive Officers of the Registrant

The information regarding directors set forth on pages 1 through 4 of Valspar’s Proxy Statement dated January 23, 2004 is incorporated herein by reference. The information in the section titled “Section 16(a) Beneficial Ownership Reporting Compliance” on page 8 of Valspar’s Proxy Statement dated January 23, 2004 is incorporated herein by reference. The information regarding executive officers is set forth in Part I of this report.

Item 11. Executive Compensation

The information in the section titled “Executive Compensation” on pages 9 through 12 and the section titled “Director Compensation” on pages 6 and 7 of Valspar’s Proxy Statement dated January 23, 2004 is incorporated herein by reference. The information in the section titled “Termination of Employment and Change in Control Agreements” on pages 12 and 13 of Valspar’s Proxy Statement dated January 23, 2004 is incorporated herein by reference. The information on pages 14 through 19 of Valspar’s Proxy Statement dated January 23, 2004 is not incorporated herein by reference.

Part III (continued)

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information in the section titled “Share Ownership of Certain Beneficial Owners” and “Share Ownership of Management” on pages 24 and 25 of Valspar’s Proxy Statement dated January 23, 2004 is incorporated herein by reference. The information in the section titled “Equity Compensation Plans” on page 12 of Valspar’s Proxy Statement dated January 23, 2004 is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information in the section titled “Certain Transactions” on pages 7 and 8 of Valspar’s Proxy Statement dated January 23, 2004 is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

The information regarding “Audit Fee Information” and “Pre-Approval of Services by Independent Auditors” set forth on pages 23 and 24 of Valspar’s Proxy Statement dated January 23, 2004 is incorporated herein by reference.

Part IV