-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TRWlMtqRwYOY6qPAY+s/yrP9aqAqlpqQ2kfS/ddg4j4/gbVqZgDqHCOin8Q0Q0jn 6Y0FQX0X7f4/zX5QrjeCXg== 0001045969-02-000336.txt : 20020415 0001045969-02-000336.hdr.sgml : 20020415 ACCESSION NUMBER: 0001045969-02-000336 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020301 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FULLER H B CO CENTRAL INDEX KEY: 0000039368 STANDARD INDUSTRIAL CLASSIFICATION: ADHESIVES & SEALANTS [2891] IRS NUMBER: 410268370 STATE OF INCORPORATION: MN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09225 FILM NUMBER: 02563870 BUSINESS ADDRESS: STREET 1: 1200 WILLOW LAKE BLVD CITY: ST PAUL STATE: MN ZIP: 55110-5132 BUSINESS PHONE: 6126453401 10-K 1 d10k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 1, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 001-09225 H.B. FULLER COMPANY (Exact name of registrant as specified in its charter) Minnesota 41-0268370 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1200 Willow Lake Boulevard, St. 55110-5101 Paul, Minnesota (Zip Code) (Address of principal executive offices) (651) 236-5900 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share 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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such 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. [_] The aggregate market value of the Common Stock, par value $1.00 per share, held by non-affiliates of the Registrant as of January 31, 2002 was approximately $741,224,000 (based on the closing price of such stock as quoted on the NASDAQ National Market ($27.08) on such date). The number of shares outstanding of the Registrant's Common Stock, par value $1.00 per share, was 28,291,511 as of January 31, 2002. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference to portions of the Registrant's 2002 Proxy Statement. H.B. FULLER COMPANY 2001 Annual Report on Form 10-K Table of Contents
PART I ------ Page ---- Item 1. Business............................................................................... 3 Item 2. Properties............................................................................. 5 Item 3. Legal Proceedings...................................................................... 5 Item 4. Submission of Matters to a Vote of Security Holders.................................... 5 Executive Officers of the Registrant................................................... 6 PART II ------- Item 5. Market for Registrant's Common Stock and Related Stockholder Matters................... 7 Item 6. Selected Financial Data................................................................ 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 8 Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................. 18 Item 8. Financial Statements and Supplementary Data............................................ 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 45 PART III -------- Item 10. Directors and Executive Officers of the Registrant..................................... 46 Item 11. Executive Compensation................................................................. 46 Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 46 Item 13. Certain Relationships and Related Transactions......................................... 46 PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 47 Signatures............................................................................. 50
2 PART I Item 1. Business Founded in 1887 and incorporated as a Minnesota corporation in 1915, H.B. Fuller Company and its consolidated subsidiaries (the "Company") is a worldwide manufacturer and marketer of adhesives, sealants, coatings, paints and other specialty chemical products. The Company has sales operations in 43 countries throughout North America, Europe, Latin America and the Asia/Pacific region. The Company's largest worldwide business category is adhesives, sealants and coatings, which generated approximately 92 percent of 2001 net revenue. These products, in thousands of formulations, are sold to customers in a wide range of industries. The Company also is a producer and supplier of specialty chemical products. The Company generally markets its products through a direct sales force, with independent distributors used in some markets. Segment Information. The Company's segment reporting reflects operating segments consistent with its method of internal reporting. Management organizes its business in five reportable operating segments. The adhesives, sealants and coatings (adhesives) business is broken down into four geographic segments: North America Adhesives, Europe Adhesives, Latin America Adhesives and Asia/Pacific Adhesives. The four geographic segments offer generally similar products and services to industries such as packaging, graphic arts, automotive, footwear, woodworking, window and nonwovens. The fifth reportable segment is the Specialty Group, which consists of five separate operating entities, namely, TEC Specialty Products, Inc. ("TEC"); Foster Products Corporation ("Foster"); Linear Products, Inc. ("Linear"); Paints Division ("Paints") and the Global Coatings Division ("Global Coatings"). These entities provide specialty chemical products for a variety of applications such as, ceramic tile installation (TEC), HVAC insulation (Foster), powder coatings applied to metal surfaces such as office furniture, appliances and lawn and garden equipment (Global Coatings), specialty hot melt adhesives for packaging applications (Linear), and liquid paint sold through retail outlets (Paints). The Paints Division operates solely in Central America. The other four entities in the Specialty Group operate primarily in North America. Management evaluates the performance of its operating segments based on operating income which is defined as gross profit minus operating expenses ("SG&A"). Expenses resulting from restructuring initiatives are excluded from the operating segment results. Corporate expenses are fully allocated to the operating segments. Corporate assets are not allocated to the segments. Inter- segment sales are recorded at cost plus a minor markup for administrative costs. Non-U.S. Operations. The principal markets, products and methods of distribution outside the United States vary with the country or business practices of the country. The products sold include those developed by the local manufacturing plants, within the United States and elsewhere in the world. Operations overseas face varying degrees of economic and political risk. At the end of 2001, the Company had plants in 20 countries outside the United States and satellite sales offices in another 22 countries. The Company also uses license agreements to maintain a worldwide manufacturing network. In the opinion of management, there are countries in Central and South America, where the Company has operating facilities, that have a higher degree of political risk than the United States. Competition. The Company encounters a high degree of competition in marketing its products. Because of the large number and variety of its products, the Company does not compete directly with any one competitor in all of its markets. In North America, the Company competes with a large number of both multi-national companies and local firms. Throughout Latin America, the Company experiences substantial competition in marketing its industrial adhesives. In Central America, the Company competes with several large paint manufacturers. In Europe, the Company competes with several large companies. The principal competitive factors in the sale of adhesives, sealants, coatings and paints are product performance, customer service, technical service, quality and price. 3 Customers. Of the Company's $1,274.1 million net revenue to unaffiliated customers in 2001, $763.0 million was sold through its North American operations. No single customer accounted for more than 10% of consolidated net revenue. Backlog. Orders for products are generally processed within one week. Therefore, the Company had no significant backlog of unfilled orders at December 1, 2001, December 2, 2000 or November 27, 1999. Raw Materials. The principal raw materials used by the Company to manufacture its products include resins, polymers and vinyl acetate monomer. Natural raw materials such as starch, dextrines and natural latex are also used in the manufacturing processes. The Company attempts to find multiple sources for all of its raw materials. While alternate supplies of most key raw materials are available, if worldwide supplies were disrupted due to unforeseen events, shortages of some materials could occur. In addition for certain products produced by the Company, the substitution of key raw materials may require the Company to reformulate, retest or seek re-approval from customers of those products. The Latin American and Asia/Pacific operations import many of their raw materials. Extended delivery schedules of these materials are common, thereby requiring maintenance of higher inventory levels. Patents, Trademarks and Licenses. Much of the technology used in manufacturing adhesives, coatings and other specialty chemicals is in the public domain. To the extent that it is not, the Company relies on trade secrets and patents to protect its know-how. The Company has agreements with many of its employees to protect its rights to technology and intellectual property. The Company also routinely obtains confidentiality commitments from customers, suppliers and others to safeguard its proprietary information. Company trademarks, such as Advantra, Sesame and Plasticola, are important in marketing products. Research and Development. Research and development expenses charged against income were $19.0 million, $18.4 million and $21.3 million in 2001, 2000 and 1999, respectively. These costs are included as a component of selling, administrative and other expenses. Environmental Protection. Management regularly reviews and upgrades its environmental policies, practices and procedures and seeks improved production methods that reduce waste, particularly toxic waste, coming out of its facilities, based upon evolving societal standards and increased environmental understanding. The Company's high standards of environmental consciousness are supported by an organizational program supervised by environmental professionals and the Worldwide Environment, Health and Safety Committee, a committee with management membership from around the world, which proactively monitors practices at all facilities. Management believes that as a general matter its current policies, practices and procedures, in the areas of environmental regulations and the handling of hazardous waste, are designed to substantially reduce risks of environmental and other damage that would result in litigation and financial liability. Some risk of environmental and other damage is, however, inherent in particular operations and products, as it is with other companies engaged in similar businesses. The Company is and has been engaged in the handling, manufacture, use, sale and/or disposal of substances, some of which are considered by federal or state environmental agencies to be hazardous. Management believes that its manufacture, handling, use, sale and disposal of such substances are generally in accordance with current applicable environmental regulations. However, increasingly strict environmental laws, standards and enforcement policies may increase the risk of liability and compliance costs associated with such substances. Environmental expenditures, reasonably known to management, to comply with environmental regulations over the Company's next two years are estimated to be approximately $12.0 million. See additional disclosure under Item 3, Legal Proceedings. 4 Employees. The Company employed approximately 4,900 individuals on December 1, 2001, of which approximately 2,000 individuals were employed in the United States. Item 2. Properties The Company's principal executive offices and central research facilities are located in the St. Paul, Minnesota metropolitan area. Manufacturing operations are carried out at 26 plants (2 leased) located throughout the United States and at 26 manufacturing plants (1 leased) located in 20 other countries. In addition, the Company has numerous sales and service offices throughout the world. Management believes that the properties owned or leased are suitable and adequate for its business. North America Adhesives and the Specialty Group operate 17 and 9 plants, respectively in the United States and 3 and 6 plants, respectively outside the United States. Outside the United States, Europe Adhesives, Latin America Adhesives, and Asia/Pacific Adhesives operates 6, 7 and 4 plants, respectively. Item 3. Legal Proceedings Environmental Remediation. The Company is subject to the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and similar state laws that impose liability for costs relating to the clean-up of contamination resulting from past spills, disposal or other release of hazardous substances. The Company is currently involved in administrative proceedings or lawsuits under CERCLA or such state laws relating to clean-up of 11 sites. The future costs in connection with all of these matters have not been determined due to such factors as the unknown timing and extent of the remedial actions which may be required, the full extent of clean-up costs and the amount of the Company's liability in consideration of the liability and financial resources of the other potentially responsible parties. However, based on currently available information, the Company does not believe that any liabilities allocated to it in these administrative proceedings or lawsuits, individually or in the aggregate, will have a material adverse effect on the Company's business or consolidated financial position, results of operations or cash flows. The Company has received requests for information from federal, state or local government entities regarding nine other contaminated sites. The Company has not been named a party to any administrative proceedings or lawsuits relating to the clean-up of these sites. From time to time management becomes aware of compliance matters relating to, or receives notices from federal, state or local entities regarding possible or alleged violations of environmental, health or safety laws and regulations. In some instances, these matters may become the subject of administrative proceedings or lawsuits and may involve monetary sanctions of $100,000 or more (exclusive of interest and costs). Based on currently available information, management does not believe that such compliance matters or alleged violations of laws and regulations, individually or in the aggregate, will have a material adverse effect on the Company's business or consolidated financial position, results of operations or cash flows. Other Legal Proceedings. The Company is subject to legal proceedings incidental to its business, including product liability claims. In certain claims, the claimants seek damages, which if granted, would require significant expenditures. The Company has recorded estimated and reasonable liabilities for these matters. The Company has also recorded receivables for the probable amount of insurance recovery as it relates to these matters. Based on currently available information, management does not believe that an adverse outcome in any pending legal proceedings individually or in the aggregate would have a material adverse effect on the Company's business or consolidated financial position, results of operations or cash flows. Although management currently believes a material impact on its consolidated financial position, results of operations or cash flows is remote for these claims, due to the inherent nature of litigation, there can be no absolute certainty the Company will not incur charges above the presently recorded liabilities. Item 4. Submission of Matters to a Vote of Security Holders None in the quarter ended December 1, 2001. 5 Executive Officers of the Registrant The following sets forth the name, age and business experience of the executive officers as of January 31, 2002 for the past five years. Unless otherwise noted, the positions described are positions with the Company or its subsidiaries.
Name Age Positions Period Served ---- --- --------- ------------- Albert P.L. Stroucken 54 Chairman of the Board October, 1999-Present President and Chief Executive Officer April, 1998-Present General Manager, Inorganics Division, Bayer AG 1997-1998 Executive Vice President and President, 1992-1997 Industrial Chemicals Division, Bayer Corporation Raymond A. Tucker 56 Senior Vice President October, 1999-Present Chief Financial Officer July, 1999-Present Treasurer July-October, 1999 Senior Vice President, 1997-1999 Inorganic Products, Bayer Corporation Vice President, Finance and Administration, 1992-1997 Industrial Chemicals Division, Bayer Corporation Richard C. Baker 49 Corporate Secretary 1995-Present Vice President 1993-Present General Counsel 1990-Present James R. Conaty 54 President and CEO, EFTEC North America L.L.C. April, 1997-Present President and CEO, EFTEC Latin America, S.A. April, 1997-Present President and CEO, H.B. Fuller Automotive 1994-Present Jose Miguel Fuster 62 Group President, H.B. Fuller Latin America December, 2000-Present Commodity Division and Consumer Products Division Group Vice President, Division Manager October-December, 2000 Consumer Products Group Vice President, Division Manager 1996-October, 2000 Paints Division William L. Gacki 53 Vice President and Treasurer October, 1999-Present Director, Treasury 1995-October, 1999 Peter M. Koxholt 57 Group President, General Manager Global Adhesives May, 2001-Present Group President, General Manager Europe January, 1999-May, 2001 Head of Business Unit Textile Chemicals & 1995-1998 Specialities, Bayer AG Stephen J. Large 44 Vice President, Operations/Supply Chain May, 2001-Present Group President, General Manager North America December, 1999-April, 2001 Sales and Operations, Global Coatings Division April, 1998-November, 1999 General Manager, Coatings Australia/NZ January, 1996-March, 1998 Alan R. Longstreet 55 Group President, General Manager North America May, 2001-Present Senior Vice President, Performance Products December, 1999-April, 2001 Senior Vice President, Global SBU's 1998-1999 Vice President, Asia/Pacific Group Manager 1996-1998 James C. McCreary, Jr. 45 Vice President, Corporate Controller November, 2000-Present Vice President, Administration and Controlling, 1997-November, 2000 Industrial Chemicals Division, Bayer Corporation Director, Division Controlling, 1995-1997 Industrial Chemicals Division, Bayer Corporation
6
Name Age Positions Period Served - ---- --- --------- ------------- William McNellis 59 Group President, General Manager Asia/Pacific April, 2001-Present General Manager, Global Coatings Division 1996-April 2001 James A. Metts 61 Vice President, Human Resources 1984-Present Walter Nussbaumer 44 Group President, General Manager Europe May, 2001-Present Vice President, Chief Technology Officer December, 1999-April, 2001 and Head of Full-Valu Vice President, Chief Technology Officer January, 1999-April, 2001 Director, Research & Development 1997-1998 Group Leader, Research & Development 1992-1997 Linda J. Welty 46 Group President, General Manager, Full-Valu/ May, 2001-Present Specialty Group Group President, General Manager, Specialty Group September, 1998-April, 2001 Vice President, General Manager, Superabsorbent 1997-1998 Materials, Clariant International
The executive officers of the Company are elected annually by the Board of Directors. PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters H.B. Fuller Company common stock is traded on the NASDAQ exchange under the symbol "FULL." As of December 1, 2001, there were 3,606 common shareholders of record. The high and low sales price for the Company's common stock and the dividends declared for each of the quarterly periods for 2001 and 2000 were as follows:
High and Low Market Value --------------------------- Dividends 2001 2000 (Per Share) ------------- ------------- ------------- High Low High Low 2001 2000 ------ ------ ------ ------ ------ ------ First quarter...................... $22.00 $16.32 $34.28 $25.73 $0.104 $0.103 Second quarter..................... 24.63 18.68 31.58 17.81 0.108 0.105 Third quarter...................... 27.34 23.19 23.63 16.35 0.108 0.105 Fourth quarter..................... 31.18 17.18 19.50 13.98 0.108 0.105 Year............................... 31.18 16.32 34.28 13.98 0.428 0.418
On November 16, 2001, the Company issued a 2-for-1 common stock split to shareholders of record on October 26, 2001. Share and per share data (except par value) for all periods presented have been restated to reflect the stock split. Cash dividends on common stock may not be paid unless provision has been made for payment of Series A preferred dividends. The annual meeting of shareholders will be held on Thursday, April 18, 2002, at 2 p.m. at the Science Museum of Minnesota, 120 West Kellogg Boulevard, St. Paul, MN. All shareholders are cordially invited to attend. 7 Item 6. Selected Financial Data
(Dollars in thousands, except per share amounts) 2001 2000* 1999 1998 1997 - ------------------------- ---------- ---------- ---------- ---------- ---------- Net revenue.............. $1,274,059 $1,363,961 $1,375,855 $1,357,675 $1,316,028 Income before cumulative effect of accounting change.................. $ 44,940 $ 49,163 $ 44,111 $ 15,990 $ 40,308 Percent of net revenue... 3.5 3.6 3.2 1.2 3.1 Net income............... $ 44,439 $ 49,163 $ 43,370 $ 15,990 $ 36,940 Percent of net revenue... 3.5 3.6 3.2 1.2 2.8 Total assets............. $ 966,173 $1,010,361 $1,025,615 $1,046,169 $ 917,646 Long-term debt, excluding current installments.... $ 203,001 $ 250,464 $ 263,714 $ 300,074 $ 229,996 Stockholders' equity..... $ 434,026 $ 404,710 $ 376,380 $ 341,404 $ 339,114 Per Common Share: Income before cumulative effect of accounting change: Basic.................. $ 1.61 $ 1.77 $ 1.60 $ 0.58 $ 1.46 Diluted................ $ 1.59 $ 1.74 $ 1.58 $ 0.58 $ 1.44 Net income: Basic.................. $ 1.59 $ 1.77 $ 1.57 $ 0.58 $ 1.33 Diluted................ $ 1.57 $ 1.74 $ 1.55 $ 0.58 $ 1.32 Dividends paid........... $ 0.428 $ 0.418 $ 0.408 $ 0.393 $ 0.36 Book value............... $ 15.34 $ 14.32 $ 13.39 $ 12.20 $ 12.24 Common stock price: High.................... $ 31.18 $ 34.28 $ 36.44 $ 32.41 $ 30.13 Common stock price: Low.. $ 16.32 $ 13.98 $ 19.07 $ 17.00 $ 22.25 Number of employees...... 4,891 5,182 5,407 5,953 5,998
- -------- * 53-week year. Certain reclassifications have been made to prior period net revenue amounts to conform to the current period presentation, pursuant to Financial Accounting Standards Board Emerging Issues Task Force No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition Critical Accounting Policies and Estimates Management's discussion and analysis of its financial position and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Management believes the critical accounting policies and areas that require the most significant judgments and estimates to be used in the preparation of the consolidated financial statements are revenue recognition, allowance for doubtful accounts, inventory valuation, pension and other postretirement plan assumptions, management bonus accruals and income tax accounting. The Company recognizes revenue on product sales at the time title passes to the customer. Reductions to revenue are recorded for various customer incentive programs and for sales returns and allowances. Allowances for doubtful accounts receivable are maintained based on historical payment patterns, aging of accounts receivable and actual writeoff history. Allowances are also maintained for future sales returns and allowances based on an analysis of recent trends of product returns. 8 The Company writes down its inventory for estimated obsolescence equal to the cost of the inventory. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations. Pension and other postretirement costs and liabilities are actuarially calculated. These calculations are based on assumptions related to the discount rate, projected salary increases and expected return on assets. The discount rate assumption is tied to long-term high quality bond rates. The projected salary increase assumption is based on recent trends in wage and salary increases. The expected return on assets assumptions on the investment portfolios for the pension and other postretirement benefit plans are based on the long-term expected returns for the investment mix of assets currently in the portfolio. The current investment mix in the portfolios is primarily U.S. equities. The return on asset assumptions are subject to change depending upon the future asset mix in the portfolios. Management incentive plans are tied to various financial performance metrics. Bonus accruals made throughout the year related to the various incentive plans are based on management's best estimate of the achievement of the specific financial metrics. Adjustments to the accruals are made on a quarterly basis as forecasts of financial performance are updated. At year-end, the accruals are adjusted to reflect the actual results achieved. As part of the process of preparing the Company's consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which it operates. The process involves estimating actual current tax expense along with assessing temporary differences resulting from differing treatment of items for book and tax purposes. These timing differences result in deferred tax assets and liabilities, which are included in the Company's consolidated balance sheet. Management records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Management has considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. Increases in the valuation allowance result in additional expense to be reflected within the tax provision in the consolidated statement of income. Results of Operations: 2001 Compared to 2000 (Note: Fiscal year 2001 was a 52-week year and fiscal year 2000 was a 53-week year.) Net Revenue: Net revenue in 2001 of $1,274.1 million was $89.9 million or 6.6 percent less than the 2000 net revenue of $1,364.0 million. The primary reason for the sales decrease in 2001 was reduced demand due to the relative weakness in the global economy. Unit volume decreased 6.9 percent in 2001 as compared to 2000. The strength of the U.S. dollar as compared to major foreign currencies (euro, Japanese yen, Australian dollar, etc.) also contributed to the sales decrease in 2001. The 2001 net revenue decrease due to currency was 1.6 percent. Offsetting the negative sales impact from volume and currency were increases in selling prices of 1.9 percent. There were no significant sales increases or decreases attributed to acquisitions or divestitures in 2001 as compared to 2000.
Net Revenue Changes from 2000 to 2001 by Operating Segment ($ in millions): Increase/(Decrease) - -------------------------------------------------- -------------------- North America Adhesives.................................. $ (41.9) (7.0)% Europe Adhesives......................................... (15.5) (6.6)% Latin America Adhesives.................................. (3.5) (4.5)% Asia/Pacific Adhesives................................... (4.2) (4.2)% Specialty Group.......................................... (24.8) (7.0)% --------- Total.................................................... $ (89.9) (6.6)% =========
Gross Profit Margin: The gross profit margin in 2001 of 27.1 percent was 0.7 percentage points less than the 27.8 percent recorded in 2000. Lower production volume combined with higher raw material prices resulted in the lower margin in 2001 as compared to 2000. In the first half of 2001, raw material costs as a percentage of 9 sales were the primary factor contributing to the lower margin. In the second half of the year, selling price increases reduced the negative impact from raw material cost increases, however the lower unit volume combined with a high fixed component of manufacturing costs, caused the margin to remain at levels that were less than the margin recorded in 2000. The 2001 cost of sales includes $1.6 million ($0.05 per share) of depreciation expense for asset impairments related to the restructuring initiative contemplated during 2001, but approved and implemented in 2002, which is discussed further in the 2002 Outlook section of this report. (See Note 4 to the consolidated financial statements.) The impairment charges related to three manufacturing facilities in Latin America. Selling, Administrative and Other (SG&A) Expenses: SG&A expenses of $257.4 million in 2001 were $19.4 million or 7.0 percent less than the expenses in 2000. The impact of having one less week in 2001 as compared to 2000 was a reduction of SG&A expenses of approximately $5.0 million. SG&A expenses decreased $7.2 million attributable to the Company's pension and other postretirement benefit plans. The benefit to SG&A expenses was due to income of $13.8 million for pension and other postretirement plans in 2001 as compared to income of $6.6 million in 2000. Additionally, lower payroll costs associated with reduced census contributed to the lower SG&A expenses. The total census at December 1, 2001 was 4,891 as compared to 5,182 as of December 2, 2000. Of the total decrease of 291 employees, 182 were included in SG&A expenses. One initiative which resulted in increased SG&A expenses in 2001 was the implementation of a new business structure for European operations. SG&A expenses, primarily outside consultant fees, related to this initiative were $4.1 million in 2001. The new structure allows for the European operations to be managed on a true pan-European basis, which is expected to contribute to lower operating costs in the future. As a percent of net revenue, SG&A expenses were 20.2 percent in 2001 as compared to 20.3 percent in 2000. Interest Expense: Interest expense in 2001 of $21.2 million was $2.6 million or 10.8 percent less than the interest expense recorded in 2000. Strong cash flow in 2001 as compared to 2000, which allowed for lower average debt levels, combined with lower interest rates in 2001 were the primary reasons for the lower interest expense. Gains from Sales of Assets: The Company recorded gains from sales of assets in 2001 of $0.8 million. This compared to gains of $4.1 million in 2000. The most significant transaction in 2001 was the sale of an equity investment in a Japanese company, which resulted in a gain of $1.6 million. This gain was offset by losses from a number of smaller transactions. In 2000, the Company actively sold non-productive assets. The sale of two facilities in North America accounted for more than half of the $4.1 million gain in 2000. Other Income/Expense, net: Other income/expense, net was an expense of $4.1 million in 2001 as compared to an expense of $5.9 million in 2000. The primary factor in the lower expense in 2001 was currency translation losses of $1.0 million in 2001 as compared to $2.5 million in 2000. These losses resulted primarily from currency devaluations in Latin American countries. Income Taxes: The income tax rate for 2001 was 31.2 percent. Included in the 2001 income tax expense was a one-time tax benefit of $2.6 million ($0.09 per share) resulting from changes in the Company's legal structure in Europe. The change in legal structure allowed the Company to take advantage of tax losses that were not previously recognizable under accounting principles generally accepted in the United States. Another factor that affected the 2001 income tax rate related to asset impairment charges of $1.6 million discussed in the gross profit margin discussion. These charges were incurred, for the most part, in Latin American countries for which tax benefits were not available. Therefore there was only a $0.1 million tax benefit associated with these charges. Excluding these two items, the effective income tax rate for 2001 was 34.7 percent. In 2000, the effective income tax rate was 37.0 percent. Net Income: Net income in 2001 was $44.4 million as compared to $49.2 million in 2000. Included in the 2001 net income was an after-tax charge of $0.5 million related to the Company's adoption of the Securities 10 and Exchange Commission's Staff Accounting Bulletin (SAB) 101, "Revenue Recognition". The charge was recorded as a cumulative effect of a change in accounting principle. Income per diluted share, as reported, was $1.57 in 2001 as compared to $1.74 in 2000. Excluding the impact from special items in 2001 (one-time tax benefit, adoption of SAB 101 and asset impairment charges), income per diluted share was $1.54. Operating Segment Results (2001 Compared to 2000) Note: Management evaluates the performance of its operating segments based on operating income which is defined as gross profit minus operating expenses (SG&A). Expenses resulting from restructuring initiatives are excluded from the operating segment results. Corporate expenses are fully allocated to the operating segments. (See Note 22 to the consolidated financial statements.) North America Adhesives: Net revenue in 2001 of $557.6 million was 7.0 percent less than the net revenue in 2000 of $599.5 million. Unit volume decreased 9.0 percent in 2001, selling prices increased 2.2 percent and the impact from currency (Canadian dollar vs. U.S. dollar) was a negative 0.2 percent. Sales to the North American automotive market decreased 14.1 percent in 2001 as compared to 2000. This was a direct result of the reduced number of vehicles the automotive industry produced in 2001. Also contributing to the sales decrease in 2001 were the assembly market (woodworking, appliances, etc.), which recorded a decline of 16.0 percent from 2000, and the converting market which decreased 8.0 percent. The slowdown in the U.S. economy negatively impacted both of these markets in 2001. On the positive side, sales to the nonwoven and window markets increased 6.6 and 5.3 percent, respectively. In spite of the sales decline, operating income in North America Adhesives increased $11.1 million or 22.0 percent as compared to 2000. Operating expense reductions of approximately 20 percent offset the negative effects of the lower sales volume and a lower gross profit margin. Key factors in the expense reduction were lower payroll costs due to reduced headcount and increased U.S. pension and other postretirement benefit income as compared to 2000. The benefit plan income increased by $3.9 million in 2001. Another expense reduction realized in 2001 was a decrease in bad debt expense of approximately $2.7 million. Europe Adhesives: Net revenue in 2001 of $217.3 million was 6.6 percent less than the net revenue in 2000 of $232.8 million. Unit volume decreased 7.1 percent, selling prices increased 4.2 percent and the negative impact from the relative weakness of the euro and British pound as compared to the U.S. dollar, was 3.7 percent. The reduced economic activity drove the unit volume decrease in Europe in 2001 as compared to 2000. In addition to the sales decrease, raw material costs increased in 2001 resulting in a gross profit margin that was nearly 2.0 percentage points less than 2000. Operating expenses increased 2.9 percent in 2001 primarily due to the expenses of approximately $4.1 million associated with the implementation of the new business structure in Europe. The operating income for Europe Adhesives was $0.6 million in 2001 as compared to $9.5 million in 2000. Latin America Adhesives: Net revenue in 2001 of $73.6 million was 4.5 percent less than the net revenue in 2000 of $77.1 million. Unit volume decreased 3.0 percent and selling prices decreased 1.5 percent. Economic weakness in Argentina and Brazil were key factors in the sales decrease in 2001. Latin America Adhesives recorded an operating loss of $3.1 million in 2001 as compared to an operating loss of $1.4 million in 2000. Included in the 2000 results was a $1.5 million credit due to a settlement of a claim with a raw material supplier. Asia/Pacific Adhesives: Net revenue in 2001 of $96.7 million was 4.2 percent less than the net revenue in 2000 of $101.0 million. Unit volume increased 3.7 percent, selling prices increased 1.7 percent and the weakness of foreign currencies as compared to the U.S. dollar had a negative impact of 9.6 percent. The negative currency impact was primarily the result of weakness in the Japanese yen and the Australian dollar. Raw material price increases were the main reason for a 0.6 percentage point decrease in the gross profit margin. Operating income decreased $1.3 million or 53.7 percent in 2001 as compared to 2000. 11 Specialty Group: Net revenue in 2001 of $328.8 million was 7.0 percent less than the net revenue in 2000 of $353.6 million. Decreases in unit volume accounted for the entire sales decrease, as the variances from selling price changes and currency were insignificant. The powder coatings market in North America and the liquid paint market in Central America drove the 2001 sales decrease with declines of 16.8 percent and 9.3 percent, respectively. Slowdowns in the economy negatively impacted both of these markets. U.S. pension and other postretirement plan income had a positive $2.6 million impact on 2001 results as compared to 2000. Primarily due to the lower sales, the Specialty Group recorded an operating income decrease in 2001 of $11.6 million or 28.1 percent. Results of Operations: 2000 Compared to 1999 (Note: Fiscal year 2000 was a 53-week year and fiscal year 1999 was a 52-week year. Charges and credits related to the 1998-1999 restructuring initiative which were previously reported in the aggregate, on a separate line of the income statement, have been reclassified for 1999 to: cost of sales; SG&A expenses; and gains from sales of assets in the amounts of $18.6 million, $4.4 million, and $5.8 million, respectively.) Net Revenue: Net revenue in 2000 of $1,364.0 million was $11.9 million or 0.9 percent less than net revenue in 1999 of $1,375.9 million. Weakness in foreign currencies, primarily the euro, versus the U.S. dollar had a negative impact of $31.9 million or 2.3 percent. The negative currency impact offset the benefit of having 53 weeks in 2000 compared to 52 weeks in 1999. Volume increased 1.5 percent while selling prices decreased 0.3 percent. Acquisitions, net of divestitures, contributed 0.2 percent.
Net Revenue Changes from 1999 to 2000 by Operating Segment ($ in millions) Increase/(Decrease) - -------------------------------------------------- -------------------- North America Adhesives.................................. $ 7.9 1.3% Europe Adhesives......................................... (24.5) (9.5%) Latin America Adhesives.................................. (4.0) (4.9%) Asia/Pacific Adhesives................................... 3.1 3.2% Specialty Group.......................................... 5.6 1.6% --------- Total.................................................... $ (11.9) (0.9%) =========
Gross Profit Margin: Throughout 2000 the Company faced rapidly rising raw material costs. The major contributors were petroleum-based materials such as vinyl acetate monomers and vinyl acetate emulsions. The gross profit margin of 27.8 percent was 0.5 percentage points below the 28.3 percent recorded in 1999. Excluding $18.6 million of cost of sales in 1999 related to the 1998-1999 restructuring initiative, the 1999 gross profit margin was 29.7 percent. Selling, administrative and Other (SG&A) Expenses: SG&A expenses improved as a percent of net revenue in 2000 to 20.3 percent from 21.2 percent in 1999. Excluding $4.4 million of expenses related to the 1998-1999 restructuring plan, the 1999 SG&A expenses were 20.9 percent. Census control and savings related to the restructuring plan were the primary factors in the expense reduction. Total census decreased 226 employees during 2000 with 154 of the decrease related to SG&A expenses. The reduced census combined with good asset investment performance and changes to the U.S. postretirement benefit plan resulted in pension and other postretirement benefit plans income of $6.6 million in 2000 as compared to expense of $0.9 million in 1999. Other factors that contributed to the reduced expenses in 2000 were lower management bonuses due to the lower earnings in 2000 as compared to 1999 and the settlement of a claim with a raw material supplier in Latin America which reduced SG&A expenses by $1.3 million. Two initiatives, which increased expenses in 2000, included $3.3 million for the Company's e-commerce investments and $2.0 million related to tax planning. An additional expense in 2000 as compared to 1999 was bad debt expense, primarily in North America which recorded an increase of approximately $2.7 million in bad debt expense. Interest Expense: Interest expense of $23.8 million in 2000 was $3.0 million or 11.2 percent less than 1999. Total debt at December 2, 2000 was $290.7 million as compared to $315.2 million at November 27, 1999. 12 Gains from Sales of Assets: In 2000, the Company recorded gains from sales of assets of $4.1 million, as compared to $6.1 million in 1999. The 1999 figure includes $5.8 million of gains which were associated with the 1998-1999 restructuring initiative. Other Income/Expense, Net: Other income/expense, net, was an expense of $5.9 million in 2000 as compared to an expense of $2.9 million in 1999. A significant factor in the expense increase in 2000 related to the portfolio of assets held for the Supplemental Executive Retirement Plan, or SERP. Until March of 2000, this portfolio was invested in a mutual fund based on the S&P 500 index. In 1999, the gains realized on this portfolio were $3.1 million. In March of 2000 the Company converted these assets into fixed income securities to avoid the unpredictable changes in the stock market. Through the time of conversion, the Company had realized income of $1.0 million and for the remainder of the year, realized another $0.6 million of income for a total year investment income of $1.6 million. Income Taxes: The effective income tax rate in 2000 was 37 percent as compared to 42.7 percent in 1999. Excluding the impact of nonrecurring charges related to the 1998-1999 restructuring initiative, the 1999 rate was 39.6 percent. The reduced rate in 2000 was a direct result of the Company's tax planning initiatives. The negative impact to the 1999 rate from the nonrecurring charges was due to a portion of the charges being incurred in countries for which no tax benefit was available. Net Income: Net income in 2000 of $49.2 million was $5.8 million or 13.4 percent more than the 1999 net income of $43.4 million. Excluding the effects of the 1998-1999 restructuring plan and also a charge related to an accounting change in 1999, the net income in 2000 was $49.0 million as compared to $56.8 million in 1999. The 2000 net income of $49.2 million included a $0.2 million after-tax credit adjustment related to the 1998-1999 restructuring plan due to a change in estimate. The income per share, excluding the nonrecurring items and the impact of the accounting change, was $1.74 per diluted share in 2000 as compared to $2.03 per diluted share in 1999. Operating Segment Results (2000 Compared to 1999) Note: Management evaluates the performance of its operating segments based on operating income which is defined as gross profit minus operating expenses (SG&A). Expenses resulting from restructuring initiatives are excluded from the operating segment results. Corporate expenses are fully allocated to the operating segments. (See Note 22 to the consolidated financial statements.) North America Adhesives: Net revenue of $599.5 million was 1.3 percent better than 1999. The increase was primarily due to volume as selling price increases were only 0.1 percent. Increases in the nonwoven and graphic arts markets were offset by decreases in the window and automotive markets. Escalating raw material costs combined with the difficulty in raising selling prices resulted in a lower gross profit margin in 2000. SG&A expenses were below the 1999 levels, however not enough to neutralize the gross profit margin erosion. The reduction in expenses in 2000 was largely due to lower census and income attributed to the U.S. pension and postretirement benefit plans. The benefit plan income increased $4.4 million in 2000 as compared to 1999. One factor that had a negative impact on operating expenses was a significant increase in bad debt expense of approximately $2.7 million. Operating income of $50.3 million was 16.5 percent below 1999. Europe Adhesives: Net revenue of $232.7 million decreased 9.5 percent in 2000 driven by a negative currency impact of 11.6 percent. Volume increased 1.5 percent and selling prices increased 0.6 percent. The business environment in Europe was similar to North America in terms of raw material cost increases combined with the difficulty in raising selling prices. Operating income decreased $6.5 million or 40.6 percent in 2000. The decrease in operating income attributed to the weakness of the euro was approximately $3.0 million. Latin America Adhesives: Net revenue of $77.1 million decreased 4.9 percent in 2000 as compared to 1999. Several factors contributed to the decrease including, economic recession in Argentina, economic slowdown in 13 Central America and exiting certain product lines in 1999. The raw material increases were not as dramatic in Latin America as the gross profit margin showed some improvement in 2000. SG&A expenses were reduced by $1.3 million due to a settlement of a claim with a raw material supplier resulting in a decrease in the operating loss in 2000 to $1.4 million as compared to a loss of $2.3 million in 1999. Asia/Pacific Adhesives: Net revenue of $101.0 million increased 3.2 percent in 2000 from volume increases of 5.3 percent offset by decreases due to pricing and currency of 1.3 percent and 0.8 percent, respectively. Operating income improved 84 percent from $1.4 million in 1999 to $2.5 million in 2000. Reduced SG&A expenses were the key factor in the improved results. Specialty Group: Net revenue of $353.6 million was 1.6 percent higher than 1999. Volume increased 2.0 percent while the effect of an acquisition, net of a divestiture, added another 0.9 percent, with negative pricing and currency effects of 0.8 percent and 0.5 percent, respectively. Linear Products, Inc. and TEC Specialty Products, Inc. had the strongest growth in 2000. The Specialty Group was not impacted as much as the adhesives businesses by fluctuations in petroleum-based raw materials. Therefore, the Specialty Group did not experience the same magnitude of raw material cost increases in 2000. The gross margin, however, was still slightly below last year and operating income decreased 9.6 percent to $41.3 million. U.S. pension and other postretirement benefit plan income had a positive impact on $2.9 million in 2000 as compared to 1999. Nonrecurring Charges/Restructuring: 1998-1999 Plan: Over the last two quarters of 1998 and throughout 1999, two businesses were sold, several manufacturing facilities were closed or considerably scaled back, sales offices and warehouses were consolidated and layers of management were reduced. Total costs associated with this plan totaled $43.7 million (before tax), net of gains recorded on assets disposed as a result of the plan. The following tables show details of the nonrecurring charges/(credits) for the years 2000 and 1999 by geographic area ($ in thousands):
North Latin Year 2000: America Europe America Asia/Pacific Total - ---------- ------- ------- ------- ------------ ------- Adjustment for change in estimate..................... $ (300) -- -- -- $ (300) ------- ------- ------ ------- ------- Total......................... $ (300) -- -- -- $ (300) ======= ======= ====== ======= ======= North Latin Year 1999: America Europe America Asia/Pacific Total - ---------- ------- ------- ------- ------------ ------- Severance, net of pension curtailment.................. $ 1,943 $ 8,372 $1,114 $ 676 $12,105 Contracts/leases.............. -- 1,660 16 618 2,294 ------- ------- ------ ------- ------- Total restructuring........... 1,943 10,032 1,130 1,294 14,399 Impairment of property, plant and equipment................ 66 2,228 188 32 2,514 Consulting.................... 243 685 192 15 1,135 Integration and relocation costs (1).................... 2,052 1,104 1,465 292 4,913 ------- ------- ------ ------- ------- Subtotal...................... 4,304 14,049 2,975 1,633 22,961 Less: Gains from sales of assets....................... (1,811) (1,497) -- (2,449) (5,757) ------- ------- ------ ------- ------- Total......................... $ 2,493 $12,552 $2,975 $ (816) $17,204 ======= ======= ====== ======= =======
- -------- 1. Integration and relocation costs consisted primarily of costs related to the shutdown of facilities, relocation of employees and other related one-time costs to carry out the restructuring/reorganization activities. Such costs were expensed as incurred. The 2000 credit of $0.3 million was due to a change in estimate of severance payments in North America included in SG&A expenses. The 1999 charges, prior to the gain on sale of assets of $5.8 million, included $22.3 million of costs requiring cash outlays, $2.5 million of non-cash costs and a pension curtailment benefit 14 of $1.9 million. Total costs requiring cash outlays, since inception of the plan, were $42.4 million. The 1999 restructuring amounts are reflected in the income statement as cost of sales ($18.6 million), SG&A expenses ($4.4 million) and gains from sales of assets ($5.8 million). Employee census reductions resulting from the restructuring plan were a total of 820. Annual cost savings as a result of the plan were expected to exceed $30 million (before tax) upon full realization of the benefits of the enacted plan. No additional charges related to the original restructuring/reorganization plan were incurred in 2000. In 1999, the North American charges related primarily to a plant shutdown, and severance associated with closing sales offices and warehouses. These costs were partially offset by the gains from sales of assets. In Europe, the 1999 charges related primarily to severance and the impairment of assets associated with the shutdown of three manufacturing facilities, the reduction in the layers of management and the costs associated with the relocation of the European area office. Latin American charges in 1999 were mainly for the integration costs associated with closing four facilities and for severance related to the closing of three sales offices. The Asia/Pacific charges in 1999 were mainly for severance and the buyout of leases associated with closing warehouses and sales offices, relocation costs related to moving the area office and severance due to reducing layers of management. The charges were more than offset by the gain on sale of assets of the one manufacturing facility that was closed in the region. The following table is a detailed reconciliation of the restructuring reserve balance from November 29, 1998 to December 1, 2001:
Nonrecurring Charge Reserve ($ North Latin Asia/ in thousands) America Europe America Pacific Total - ------------------------------ ------- -------- ------- ------- ------- Balance November 29, 1998....... $ 1,992 $ 7,994 $ 3,141 $ 88 $13,215 Provisions in 1999: Severance..................... 3,057 8,952 1,022 668 13,699 Contracts/leases.............. -- 1,660 16 618 2,294 ------- -------- ------- ------- ------- 3,057 10,612 1,038 1,286 15,993 ------- -------- ------- ------- ------- Adjustments for change in estimate....................... (65) 225 92 8 260 Payments in 1999: Severance..................... (3,060) (13,482) (3,492) (82) (20,116) Contracts/leases.............. -- (399) (16) (175) (590) ------- -------- ------- ------- ------- (3,060) (13,881) (3,508) (257) (20,706) ------- -------- ------- ------- ------- Balance November 27, 1999....... 1,924 4,950 763 1,125 8,762 Adjustment for change in estimate....................... (300) -- -- -- (300) Payments in 2000: Severance..................... (1,577) (2,651) (763) (682) (5,673) Contracts/leases.............. -- (1,136) -- (443) (1,579) ------- -------- ------- ------- ------- (1,577) (3,787) (763) (1,125) (7,252) ------- -------- ------- ------- ------- Balance December 2, 2000........ 47 1,163 -- -- 1,210 Payments in 2001: Severance..................... (47) (152) -- -- (199) Contracts/leases.............. -- (486) -- -- (486) ------- -------- ------- ------- ------- (47) (638) -- -- (685) ------- -------- ------- ------- ------- Balance December 1, 2001........ $ -- $ 525 $ -- $ -- $ 525 ======= ======== ======= ======= =======
15 Liquidity and Capital Resources Net cash provided from operations was $89.7 million in 2001, which was $22.8 million or 34.1 percent more than the $66.9 million provided in 2000. The cash provided from operations in 1999 was $105.7. The increase in cash provided from operations in 2001, as compared to 2000, was largely due to changes in working capital. In 2001, changes in inventory levels resulted in positive cash flow of $12.0 million. In 2000, changes in inventory levels accounted for negative cash flow of $11.1 million. As an offset to the inventory changes, accounts payable changes resulted in negative cash flow in 2001 of $11.4 million and in 2000 the cash flow attributed to changes in accounts payable was positive $3.8 million. Accrued compensation amounts were higher at the end of 2001 as compared to 2000. In 2001, increases in the accrued compensation levels accounted for positive cash flow of $2.3 million. In 2000, the cash flow related to accrued compensation was negative $7.8 million, primarily because of payments in 2000 of management bonuses accrued in 1999. Total working capital at December 1, 2001 was $199.7 million as compared to $208.3 million at December 2, 2000. For management purposes, the Company measures working capital performance in terms of operating working capital, which is defined as current assets less cash, minus current liabilities less short-term debt. The operating working capital at December 1, 2001 was $219.3 million as compared to $238.1 million at December 2, 2000 and $219.9 million at November 27, 1999. The number of days sales outstanding (DSO) in trade accounts receivables (net of allowance for doubtful accounts) was 59 days at December 1, 2001 as compared to 55 at December 2, 2000 and 62 days at November 27, 1999. The calculation of DSO is determined by using net revenue for the fourth quarter and the net accounts receivable balance at year-end. In 2000, the DSO calculation was favorably impacted from the extra week of sales in the fourth quarter. On a comparable basis, the DSO at December 2, 2000 approximated the 59 days recorded at December 1, 2001. The strong cash flow from operations allowed the Company to reduce its total debt levels to $234.1 million at December 1, 2001. This compares to $290.7 million at December 2, 2000 and $315.2 million at November 27, 1999. The ratio of long-term debt to long-term debt plus stockholders' equity improved from 38.2 percent at December 2, 2000 to 31.9 percent at December 1, 2001. At November 27, 1999 the ratio was 41.2 percent. At December 1, 2001 short-term and long-term lines of credit were $337.1 million of which $154.3 million was committed. The unused portion of these lines of credit was $321.2 million. The following table shows the due dates and amounts of contractual obligations:
Payments Due by Period ----------------------------------------- Contractual Obligations ($ in 1 year 2-3 4-5 After thousands) Total or less years years 5 years - ----------------------------- -------- ------- ------- ------- -------- Long-term debt...................... $206,086 $ 3,181 $ 7,403 $27,330 $168,172 Capital lease obligations........... 394 298 96 -- -- Operating leases.................... 41,560 10,438 15,163 4,971 10,988
At December 1, 2001, the Company was in compliance with all covenants of its contractual obligations. Also, the Company has no rating triggers that would accelerate the maturity dates of its debt. Management believes that the Company has the ability to meet all of its contractual obligations and commitments in 2002. The Company does not have relationships with any unconsolidated, special- purpose entities or financial partnerships, which would have been established for the purpose of facilitating off-balance sheet financial arrangements. Therefore, the Company is not materially exposed to any financing, liquidity, market or credit risk that could arise had the Company entered into any such relationships. Cash used for capital expenditures was $30.7 million in 2001 as compared to $49.0 million in 2000 and $56.3 million in 1999. Over 50 percent of the capital expenditures in 2001 were for information systems projects. Management expects capital expenditures to approximate $40-50 million in 2002. 16 Recently Issued Accounting Pronouncements In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of Long-lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long- lived Assets and for Long-lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a disposal of a segment of a business". SFAS No. 144 is effective for years beginning after December 15, 2001, with earlier application encouraged. The impact of adopting this accounting standard is not expected to have a material effect on the Company's financial position and results of operations. In June 2001 the FASB issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets". These Statements eliminate the pooling-of-interests method of accounting for business combinations and the systematic amortization of goodwill. SFAS No. 141 applies to all business combinations with a closing date after June 30, 2001, of which the Company has had no such activity. The Company will adopt SFAS No. 142 during the first quarter of 2002. Under the new standard, purchased goodwill is no longer amortized over its useful life. Therefore, the Company will not incur the amortization of goodwill beginning with year 2002. Amortization of goodwill recorded in 2001 was $4.1 million, which had a negative impact on income per diluted share of $0.09 per share. The Company is in the process of assessing any transitional impact of adopting SFAS No. 142. Euro Currency Conversion On January 1, 1999, 11 of the 15 member countries of the European Union (EU) established fixed conversion rates through the European Central Bank (ECB) between existing local currencies and the euro, the EU's new single currency. During a transition period from January 1, 1999, through June 30, 2002, the euro will replace the national currencies that exist in the participating countries. The Company converted to the euro as of December 2, 2001. Management does not believe the transition to the euro will have a significant effect on consolidated results of operations, financial position or liquidity. 2002 Outlook Certain items will have a material impact on 2002 net income. In a continuing effort to strengthen the organization and remove excess manufacturing capacity, the Company announced, on January 15, 2002, a plan to eliminate approximately 20 percent of its current manufacturing capacity. The plan calls for streamlining its facilities and operations in Latin America, Europe and in particular, North America. By reducing the installed capacity and removing other cost structures, management estimates that upon completion, costs will be reduced approximately $10 to $12 million annually. In connection with the restructuring initiative, the Company expects to record special charges in the range of $30 to $35 million before tax, inclusive of the $1.6 million ($1.5 million after-tax) incurred in the fourth quarter of 2001 for Latin America. Cash costs of the plan are expected to be $20 to $25 million. Proceeds from sales of assets affected by the plan however, are expected to offset the cash costs by $10 to $15 million. The remaining charges are expected to be recorded over the next four quarters and will include severance, accelerated depreciation on assets held and used until disposal and other plan-related costs. The amounts associated with the pension and other postretirement benefit plans are expected to reflect a reduction in income of approximately $12 million in 2002 as compared to 2001. This equates to approximately $.27 per share. These amounts will be reflected in SG&A expenses. The reason for the reduction in income is primarily attributed to the poor performance of the benefit plan asset portfolios during 2001 and the decrease in interest rates recorded in 2001. Currency devaluations in Argentina will have a negative impact on the Company's first quarter of 2002 operating results however, the impact is not expected to exceed $0.03 - $0.04 per share in the first quarter. 17 Management continually monitors the economic situation in Argentina, Brazil and other Latin American countries and where appropriate, takes action to minimize the Company's exposure to future currency devaluations. Safe Harbor for Forward-Looking Statements Certain statements in this document, including those under 2002 Outlook, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, including but not limited to the following: political and economic conditions; product demand and industry capacity; competitive products and pricing; manufacturing efficiencies; new product development; product mix; availability and price of raw materials and critical manufacturing equipment; new plant startups; accounts receivable collection; the Company's relationships with its major customers and suppliers; changes in tax laws and tariffs; patent rights that could provide significant advantage to a competitor; devaluations and other foreign exchange rate fluctuations (particularly with respect to the euro, the British pound, the Japanese yen, the Australian dollar, the Argentine peso and the Brazilian real); the regulatory and trade environment; and other risks as indicated from time to time in the Company's filings with the Securities and Exchange Commission. All forward-looking information represents management's best judgment as of this date based on information currently available that in the future may prove to have been inaccurate. Additionally, the variety of products sold by the Company and the regions where the Company does business makes it difficult to determine with certainty the increases or decreases in sales resulting from changes in the volume of products sold, currency impact, changes in product mix and selling prices. However, management's best estimates of these changes as well as changes in other factors have been included. References to volume changes include volume and product mix changes, combined. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Market Risk: The Company is exposed to various market risks, including changes in interest rates, foreign currency rates and prices of raw materials. Market risk is the potential loss arising from adverse changes in market rates and prices. Interest Rate Risk: The Company is exposed to changes in interest rates primarily as a result of borrowing activities used to fund operations. The Company uses committed floating rate credit facilities to fund a portion of its operations. Management believes that probable near-term changes in interest rates would not materially affect the Company's consolidated financial position, results of operations or cash flows. The impact on the results of operations of a one- percentage point interest rate change on the outstanding balance of the variable rate debt as of December 1, 2001 would be approximately $0.3 million. Foreign Exchange Risk: As a result of being a global enterprise, the Company is exposed to market risks from changes in foreign currency exchange rates, which may adversely affect operating results and financial position. Approximately 44 percent of the Company's net revenue is generated outside of the United States. The Company's principal foreign currency exposures relate to the euro, British pound, Japanese yen, Australian dollar, Canadian dollar, Argentine peso and Brazilian real. Management's goal is to balance, where possible, the local currency denominated assets to the local currency denominated liabilities to have a natural hedge and minimize foreign exchange impacts. The Company enters into cross border transactions through importing and exporting goods to and from different countries and locations. These transactions generate foreign exchange risk as they create assets, liabilities and cash flows in currencies other than the local currency. This also applies to services provided and other cross border agreements among subsidiaries. Management minimizes the Company's risks from foreign currency exchange rate fluctuations through normal operating and financing activities and, when deemed appropriate, through the use of derivative instruments. The 18 Company does not enter into any speculative positions with regard to derivative instruments. Note 17 to the consolidated financial statements provides additional details regarding the Company's management of foreign exchange risk. From a sensitivity analysis viewpoint, based on 2001 financial results a hypothetical overall 10 percent strengthening of the U.S. dollar would have resulted in a negative income per share impact of approximately $0.02 per share. Raw Materials: The principal raw materials used by the Company to manufacture its products include resins, polymers and vinyl acetate monomer. Natural raw materials such as starch, dextrines and natural latex are also used in the manufacturing processes. Management attempts to find multiple sources for all of its raw materials. While alternate sources for most key raw materials are available, if worldwide supplies were disrupted due to unforeseen events, or if unusual demand causes products to be subject to allocation, shortages could occur. In 2001, the Company purchased more than $600 million of raw materials, its single largest expenditure item. Management acknowledges that in the long-term, prices of most raw materials will probably increase. Management's objective is to purchase raw materials that meet both its quality standards and production needs at the lowest total cost to the Company. Most raw materials are purchased on the open market or under contracts which limit the frequency but not the magnitude of price increases. In some cases, however, the risk of raw material price changes is managed by strategic sourcing agreements which limit price increases to increases in supplier feedstock costs, while requiring decreases as feedstock costs decline. The Company also uses the leverage created by having substitute raw materials approved for use wherever possible to minimize the impact of possible price increases. 19 Item 8. Financial Statements and Supplementary Data MANAGEMENT'S REPORT The management of H.B. Fuller Company is responsible for the integrity, objectivity and accuracy of the financial statements of the Company and its subsidiaries. The accompanying financial statements, including the notes, were prepared in conformity with accounting principles generally accepted in the United States of America appropriate in the circumstances and include amounts based on the best judgment of management. Management is also responsible for maintaining a system of internal accounting controls to provide reasonable assurance that established policies and procedures are followed, that the records properly reflect all transactions of the Company and that assets are safeguarded against material loss from unauthorized use or disposition. Management believes that the Company's accounting controls provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period by employees in the normal course of performing their assigned duties. The Audit Committee of the Board of Directors, composed of directors from outside the Company, meets regularly with management, the Company's internal auditors, and its independent accountants to discuss audit scope and results, internal control evaluations, and other accounting, reporting, and financial matters. The independent accountants and internal auditors have access to the Audit Committee without management's presence. /s/ Raymond A. Tucker /s/ Albert P. L. Stroucken Raymond A. Tucker Albert P.L. Stroucken Senior Vice President and Chairman of the Board, Chief Financial Officer President and Chief Executive Officer 20 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of H.B. Fuller Company In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the consolidated financial position of H.B. Fuller Company and subsidiaries at December 1, 2001 and December 2, 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 1, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Minneapolis, Minnesota January 15, 2002 21 CONSOLIDATED STATEMENTS OF INCOME H.B. Fuller Company and Subsidiaries (In thousands, except per share amounts)
Fiscal Year Ended ------------------------------------ December December November 27, 1, 2001 2, 2000 1999 ---------- ---------- ------------ Net revenue............................... $1,274,059 $1,363,961 $1,375,855 Cost of sales............................. (928,506) (984,599) (986,380) ---------- ---------- ---------- Gross profit.............................. 345,553 379,362 389,475 Selling, administrative and other expenses................................. (257,446) (276,861) (291,485) Interest expense.......................... (21,247) (23,814) (26,823) Gains from sales of assets................ 752 4,131 6,123 Other income (expense), net............... (4,142) (5,913) (2,864) ---------- ---------- ---------- Income before income taxes, minority interests, equity investments and accounting change........ 63,470 76,905 74,426 Income taxes.............................. (19,833) (28,455) (31,807) Minority interests in consolidated income................................... (873) (1,826) (1,033) Income from equity investments............ 2,176 2,539 2,525 ---------- ---------- ---------- Income before cumulative effect of accounting change........................ 44,940 49,163 44,111 Cumulative effect of accounting change.... (501) -- (741) ---------- ---------- ---------- Net income................................ $ 44,439 $ 49,163 $ 43,370 ========== ========== ========== Basic income (loss) per common share: Income before accounting change........... $ 1.61 $ 1.77 $ 1.60 Accounting change......................... (0.02) -- (0.03) ---------- ---------- ---------- Net income................................ $ 1.59 $ 1.77 $ 1.57 ========== ========== ========== Diluted income (loss) per common share: Income before accounting change........... $ 1.59 $ 1.74 $ 1.58 Accounting change......................... (0.02) -- (0.03) ---------- ---------- ---------- Net income................................ $ 1.57 $ 1.74 $ 1.55 ========== ========== ========== Weighted-average common shares outstanding: Basic..................................... 27,962 27,828 27,616 Diluted................................... 28,330 28,206 27,957
See accompanying notes to consolidated financial statements. 22 CONSOLIDATED BALANCE SHEET H.B. Fuller Company and Subsidiaries (In thousands)
December 1, December 2, 2001 2000 ----------- ----------- Assets Current Assets: Cash and cash equivalents............................ $ 11,454 $ 10,489 Trade receivables, net............................... 211,590 220,796 Inventories.......................................... 141,210 153,785 Other current assets................................. 39,619 49,994 -------- ---------- Total current assets................................... 403,873 435,064 Net property, plant and equipment...................... 371,113 394,689 Other assets........................................... 107,432 88,903 Goodwill, net.......................................... 62,037 66,503 Other intangibles, net................................. 21,718 25,202 -------- ---------- Total assets........................................... $966,173 $1,010,361 ======== ========== Liabilities and Stockholders' Equity Current Liabilities: Notes payable........................................ $ 27,601 $ 34,543 Current installments of long-term debt............... 3,479 5,718 Trade payables....................................... 114,155 126,713 Accrued payroll and employee benefits................ 30,659 28,918 Other accrued expenses............................... 19,714 25,807 Income taxes payable................................. 8,555 5,026 -------- ---------- Total current liabilities.............................. 204,163 226,725 Long-term debt, excluding current installments......... 203,001 250,464 Accrued pensions....................................... 66,012 71,927 Other liabilities...................................... 39,413 37,452 Minority interests in consolidated subsidiaries........ 19,558 19,083 Commitments and contingencies Stockholders' Equity: Series A preferred stock, par value $6.67 per share.. 306 306 Common stock, par value $1.00 per share.............. 28,281 14,116 Shares outstanding--2001: 28,280,896 2000: 28,231,328 (see Note 19) Additional paid-in capital........................... 37,830 36,707 Retained earnings.................................... 396,048 377,846 Accumulated other comprehensive income (loss)........ (25,150) (20,088) Unearned compensation--restricted stock.............. (3,289) (4,177) -------- ---------- Total stockholders' equity............................. 434,026 404,710 -------- ---------- Total liabilities and stockholders' equity............. $966,173 $1,010,361 ======== ==========
See accompanying notes to consolidated financial statements. 23 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY H.B. Fuller Company and Subsidiaries (In thousands, except shares)
Fiscal Years ---------------------------------- 2001 2000 1999 ---------- ---------- ---------- Shares Outstanding Preferred................................ 45,900 45,900 45,900 Common................................... 28,280,896 28,231,328 28,080,310 Preferred Stock............................ $ 306 $ 306 $ 306 Common Stock Beginning balance........................ $ 14,116 $ 14,040 $ 13,983 Stock split.............................. 14,142 -- -- Retirement of common stock............... (10) (21) (9) Stock compensation plans, net............ 33 97 66 ---------- ---------- ---------- Ending balance........................... $ 28,281 $ 14,116 $ 14,040 ========== ========== ========== Additional Paid-in Capital Beginning balance........................ $ 36,707 $ 34,071 $ 31,140 Retirement of common stock............... (371) (53) (22) Stock compensation plans, net............ 1,494 2,689 2,953 ---------- ---------- ---------- Ending balance........................... $ 37,830 $ 36,707 $ 34,071 ========== ========== ========== Retained Earnings Beginning balance........................ $ 377,846 $ 341,356 $ 309,966 Net income............................... 44,439 49,163 43,370 Stock split.............................. (14,142) -- -- Dividends................................ (12,095) (11,786) (11,440) Retirement of common stock............... -- (887) (540) ---------- ---------- ---------- Ending balance........................... $ 396,048 $ 377,846 $ 341,356 ========== ========== ========== Accumulated Other Comprehensive Income (Loss) Beginning balance........................ $ (20,088) $ (7,522) $ (5,997) Foreign currency translation adjustment.. (395) (12,034) (1,684) Foreign currency translation adjustment included in net income.................. -- -- 136 Minimum pension liability adjustment, net of tax.................................. (4,667) (532) 23 ---------- ---------- ---------- Ending balance........................... $ (25,150) $ (20,088) $ (7,522) ========== ========== ========== Unearned Compensation--Restricted Stock Beginning balance........................ $ (4,177) $ (5,871) $ (7,994) Stock compensation plans, net............ 888 1,694 2,123 ---------- ---------- ---------- Ending balance........................... $ (3,289) $ (4,177) $ (5,871) ========== ========== ========== Total Stockholders' Equity................. $ 434,026 $ 404,710 $ 376,380 ========== ========== ==========
See accompanying notes to consolidated financial statements. 24 STATEMENT OF CASH FLOWS H.B. Fuller Company and Subsidiaries (In thousands)
Fiscal Year Ended ------------------------------------ December 1, December 2, November 27, 2001 2000 1999 ----------- ----------- ------------ Cash flows from operating activities: Net income................................ $ 44,439 $ 49,163 $ 43,370 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............. 54,401 52,165 50,776 Gains from sales of assets................ (752) (4,131) (6,123) Change in assets and liabilities (net of effects of acquisitions/divestitures): Trade receivables, net.................. 8,189 2,397 (10,949) Inventories............................. 11,992 (11,142) 9,426 Other current assets.................... 3,495 (2,679) 1,739 Other assets............................ (3,002) (3,332) (2,376) Trade payables.......................... (11,356) 3,794 6,145 Accrued payroll and employee benefits and other accrued expenses............. (4,233) (18,058) (2,010) Income taxes payable.................... 5,731 3,070 10,570 Accrued pensions........................ (12,548) (3,008) 2,317 Other liabilities....................... (6,313) (8,411) (3,796) Other items............................... (375) 7,067 6,616 -------- -------- -------- Net cash provided by operating activities............................. 89,668 66,895 105,705 Cash flows from investing activities: Purchased property, plant and equipment... (30,725) (49,044) (56,253) Purchased businesses, net of cash acquired................................. -- (5,388) (4,483) Purchased investments..................... (3,517) -- -- Proceeds from sale of property, plant and equipment................................ 7,309 11,842 10,916 Proceeds from sale of investments......... 1,567 -- -- Proceeds from sale of business............ -- 3,852 -- -------- -------- -------- Net cash used in investing activities... (25,366) (38,738) (49,820) Cash flows from financing activities: Proceeds from long-term debt.............. 4,602 69,690 41,207 Repayment of long-term debt............... (43,618) (84,876) (79,949) Proceeds (payments) from/on notes payable.................................. (12,143) 3,668 (4,477) Dividends paid............................ (12,095) (11,786) (11,440) Other..................................... (258) 179 (21) -------- -------- -------- Net cash used in financing activities... (63,512) (23,125) (54,680) -------- -------- -------- Net change in cash and cash equivalents............................ 790 5,032 1,205 Effect of exchange rate changes............. 175 (364) 11 Cash and cash equivalents at beginning of year....................................... 10,489 5,821 4,605 -------- -------- -------- Cash and cash equivalents at end of year.... $ 11,454 $ 10,489 $ 5,821 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest...................... $ 22,008 $ 28,198 $ 28,962 Cash paid for income taxes.................. $ 8,420 $ 16,569 $ 11,194
See accompanying notes to consolidated financial statements. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS H.B. Fuller Company and Subsidiaries (Dollars in thousands, except per share amounts) Note 1--Summary of Significant Accounting Policies Nature of Operations: H.B. Fuller Company (the "Company") operates as one of the world's leading manufacturers and marketers of adhesives, sealants, coatings, paints and other specialty chemical products. The Company has manufacturing operations in 21 countries in North America, Europe, Latin America and the Asia/Pacific region. The Company's products, in thousands of formulations, are sold to customers in a wide range of industries, including packaging, woodworking, automotive, aerospace, graphic arts (books/magazines), appliances, filtration, windows, sporting goods, nonwovens, shoes and ceramic tile. The Company generally markets its products through a direct sales force, with independent distributors used in some markets. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and all its subsidiaries. The Company's fiscal year ends on the Saturday closest to November 30th. All fiscal years represent 52- week years, except the year 2000, which was a 53-week year. All significant intercompany amounts have been eliminated in consolidation. Certain prior years' amounts have been reclassified to conform to the 2001 presentation. Use of Estimates: The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition: The Company recognizes revenues from product sales when title to the product transfers, no remaining performance obligations exist, the terms of the sale are fixed and collection is probable, as required by the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 101 (SAB 101). For certain products, the Company maintains consigned inventory at customer locations. For these products, revenue is recognized at the time that the Company is notified the customer has used the inventory. The Company records estimated discounts and rebates in the same period revenue is recognized based on historical experience. Sales to distributors are also recognized in accordance with SAB 101 providing that there is evidence of the arrangement through a distribution agreement or purchase order, and the Company has no remaining performance obligations, the terms of the sale are fixed and collection is probable. As a normal practice, distributors do not have a right of return. Foreign Currency Translation: The financial statements of non-U.S. operations are translated into U.S. dollars for inclusion in the consolidated financial statements. Translation gains or losses resulting from the process of translating foreign currency financial statements, where the local currency is the functional currency, are recorded as a component of accumulated other comprehensive income in stockholders' equity for businesses not considered to be operating in highly inflationary economies. Translation effects of subsidiaries using the U.S. dollar as the functional currency are included in determining net income. Cash and Cash Equivalents: Cash and cash equivalents consist of cash and all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Capitalized Interest Costs: Interest costs associated with major construction of property and equipment are capitalized. Capitalized interest costs were $431, $482 and $441 in 2001, 2000 and 1999, respectively. Environmental Costs: Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments are made or remedial efforts are probable and the costs can be reasonably estimated. The timing of these accruals is generally no later than the completion of feasibility studies. The liabilities for 26 environmental costs at December 1, 2001 and December 2, 2000 were $1,055 and $1,161, respectively. For further information on environmental matters, see Item 3, Legal Proceedings. Postemployment Benefits: The Company provides postemployment benefits to inactive and former employees, employees' beneficiaries and covered dependents after employment, but prior to retirement. The cost of providing these benefits is accrued during the years the employee renders the necessary service. Purchase of Company Common Stock: Under the Minnesota Business Corporation Act, repurchased stock is included in the authorized shares of the Company, but is not included in shares outstanding. The excess of the repurchase cost over par value is charged to additional paid-in capital to the extent recorded on the original issuance of the stock with any excess charged as a reduction of retained earnings. The Company repurchased 10,289, 21,229 and 9,438 shares of common stock in 2001, 2000 and 1999, respectively. Recently Issued Accounting Pronouncements: In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long- lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a disposal of a segment of a business". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The impact of adopting this accounting standard is not expected to have a material effect on the Company's financial position and results of operations. In June 2001 the FASB issued Statements of Financial Accounting Standards No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets". These Statements eliminate the pooling-of-interests method of accounting for business combinations and the systematic amortization of goodwill. SFAS No. 141 applies to all business combinations with a closing date after June 30, 2001, of which the Company has had no such activity. The Company will adopt SFAS No. 142 during the first quarter of 2002. Under the new standard, purchased goodwill is no longer amortized over its useful life. Therefore, the Company will not incur the amortization of goodwill beginning with 2002. Amortization of goodwill recorded in 2001 was $4.1 million, which had a negative impact of $0.09 per share. Note 2--Income Per Common Share (shares in thousands) Basic income per share includes no dilution and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted income per share reflects the potential dilution from the Company's stock-based compensation plans. The difference between basic and diluted income per share data as presented is due to the dilutive impact from stock-based compensation plans. Net income used in the calculations of income per share is reduced by the dividends paid to the preferred stockholder. A reconciliation of the net income and share components for the basic and diluted income per share calculations is as follows:
2001 2000 1999 ------- ------- ------- Net income.............. $44,439 $49,163 $43,370 Dividends on preferred shares................. (15) (15) (15) ------- ------- ------- Income attributable to common shares.......... $44,424 $49,148 $43,355 ======= ======= ======= Weighted-average common shares--basic.......... 27,962 27,828 27,616 Equivalent shares from stock compensation plans.................. 368 378 341 ------- ------- ------- Weighted-average common shares--diluted........ 28,330 28,206 27,957 ======= ======= =======
The computations of diluted income per common share do not include 45, 88 and 1 stock options with exercise prices greater than the average market price of the common shares for 2001, 2000 and 1999, respectively, as the results would have been anti-dilutive. 27 Note 3--Foreign Currency Gains/(Losses)
Foreign currency gains/(losses), included in income before income taxes, minority interests, and cumulative effect of accounting change 2001 2000 1999 -------------------------------------------- ------- ------- ------- Currency translation gains, net................ $ 1,713 $ 182 $ 4,999 Flow-through effect of inventory valuation, net........................................... (1,018) (611) (226) ------- ------- ------- 695 (429) 4,773 Currency exchange transaction losses, net...... (2,754) (2,660) (7,855) ------- ------- ------- Total.......................................... $(2,059) $(3,089) $(3,082) ======= ======= =======
The net loss from the flow-through effects of inventory valuation results from differences between translation of cost of sales at historic rates versus average exchange rates. Latin American operations, whenever possible, raise local selling prices on their products to offset this loss. The result of these efforts to keep pace with inflation appears in net revenue for each operation. The impact from currency translation effects, the flow-through effect of inventory value attributed to foreign currency differences and currency transaction gains and losses are included in other income (expense), net in the consolidated statement of income. Note 4--Restructuring Related Costs The 2001 cost of sales includes $1.6 million of depreciation expense for asset impairments related to the restructuring initiative contemplated during 2001, but approved and implemented in 2002. The impairment charges were calculated by comparing the net book value of the assets to the expected cash flows, including proceeds from sales of assets, to be generated by those assets over their shortened useful life. These charges related to three manufacturing facilities in Latin America. In a continuing effort to strengthen the organization and remove excess manufacturing capacity, the Company announced, on January 15, 2002, a plan to eliminate approximately 20 percent of its current manufacturing capacity. The plan calls for streamlining its facilities and operations in Latin America, Europe and in particular, North America. By reducing the installed capacity and removing other cost structures, management estimates that upon completion, costs will be reduced approximately $10 to $12 million annually. In connection with the 2002 restructuring initiative, the Company expects to record special charges in the range of $30 to $35 million before tax, inclusive of the $1.6 million ($1.5 million after-tax) incurred in the fourth quarter of 2001 for Latin America. Cash costs of the plan are expected to be $20 to $25 million. Proceeds from sales of assets affected by the plan however, are expected to offset the cash costs by $10 to $15 million. The remaining charges are expected to be recorded over the next four quarters and will include severance, accelerated depreciation on assets held and used until disposal and other plan-related costs. 1998-1999 Plan: Over the last two quarters of 1998 and throughout 1999, two businesses were sold, several manufacturing facilities were closed or considerably scaled back, sales offices and warehouses were consolidated and layers of management were reduced. Total costs associated with this plan totaled $43.7 million (before tax), net of gains recorded on assets disposed as a result of the plan. 28 The following tables show details of the nonrecurring charges/(credits) for the years 2000 and 1999 by geographic area:
North Latin Year 2000: America Europe America Asia/Pacific Total ---------- ------- ------- ------- ------------ ------- Adjustment for change in estimate.................. $ (300) -- -- -- $ (300) ------- ------- ------ ------- ------- Total...................... $ (300) -- -- -- $ (300) ======= ======= ====== ======= ======= North Latin Year 1999: America Europe America Asia/Pacific Total ---------- ------- ------- ------- ------------ ------- Severance, net of pension curtailment............... $ 1,943 $ 8,372 $1,114 $ 676 $12,105 Contracts/leases........... -- 1,660 16 618 2,294 ------- ------- ------ ------- ------- Total restructuring........ 1,943 10,032 1,130 1,294 14,399 Impairment of property, plant and equipment....... 66 2,228 188 32 2,514 Consulting................. 243 685 192 15 1,135 Integration and relocation costs (1)................. 2,052 1,104 1,465 292 4,913 ------- ------- ------ ------- ------- Subtotal................... 4,304 14,049 2,975 1,633 22,961 Less: Gains from sales of assets.................... (1,811) (1,497) -- (2,449) (5,757) ------- ------- ------ ------- ------- Total...................... $ 2,493 $12,552 $2,975 $ (816) $17,204 ======= ======= ====== ======= =======
- -------- 1. Integration and relocation costs consisted primarily of costs related to the shutdown of facilities, relocation of employees and other related one-time costs to carry out the restructuring/reorganization activities. Such costs were expensed as incurred. The 2000 credit of $0.3 million was due to a change in estimate of severance payments in North America included in SG&A expenses. The 1999 charges, prior to the gains from sales of assets of $5.8 million, included $22.3 million of costs requiring cash outlays, $2.5 million of non-cash costs and a pension curtailment benefit of $1.9 million. Total costs requiring cash outlays since inception of the plan, were $42.4 million. The 1999 restructuring amounts are reflected in the income statement as cost of sales ($18.6 million), SG&A expenses ($4.4 million) and gains from sales of assets ($5.8 million). Employee census reductions resulting from the restructuring plan were a total of 820. Annual cost savings as a result of the plan were expected to exceed $30 million (before tax) upon full realization of the benefits of the enacted plan. No additional charges related to the original restructuring/reorganization plan were incurred in 2000. In 1999, the North American charges related primarily to a plant shutdown, and severance associated with closing sales offices and warehouses. These costs were partially offset by the gains from sales of assets. In Europe, the 1999 charges related primarily to severance and the impairment of assets associated with the shutdown of three manufacturing facilities, the reduction in the layers of management and the costs associated with the relocation of the European area office. Latin American charges in 1999 were mainly for the integration costs associated with closing four facilities and for severance related to the closing of three sales offices. The Asia/Pacific charges in 1999 were mainly for severance and the buyout of leases associated with closing warehouses and sales offices, relocation costs related to moving the area office and severance due to reducing layers of management. The charges were more than offset by the gains from sales of assets of the one manufacturing facility that was closed in the region. 29 The following table is a detailed reconciliation of the restructuring reserve balance from November 29, 1998 to December 1, 2001:
Nonrecurring Charge North Latin Reserve America Europe America Asia/Pacific Total ------------------- ------- -------- ------- ------------ -------- Balance November 29, 1998................... $ 1,992 $ 7,994 $ 3,141 $ 88 $ 13,215 Provisions in 1999: Severance............. 3,057 8,952 1,022 668 13,699 Contracts/leases...... -- 1,660 16 618 2,294 ------- -------- ------- ------- -------- 3,057 10,612 1,038 1,286 15,993 ------- -------- ------- ------- -------- Adjustments for change in estimate............ (65) 225 92 8 260 Payments in 1999: Severance............. (3,060) (13,482) (3,492) (82) (20,116) Contracts/leases...... -- (399) (16) (175) (590) ------- -------- ------- ------- -------- (3,060) (13,881) (3,508) (257) (20,706) ------- -------- ------- ------- -------- Balance November 27, 1999................... 1,924 4,950 763 1,125 8,762 Adjustment for change in estimate............... (300) -- -- -- (300) Payments in 2000: Severance............. (1,577) (2,651) (763) (682) (5,673) Contracts/leases...... -- (1,136) -- (443) (1,579) ------- -------- ------- ------- -------- (1,577) (3,787) (763) (1,125) (7,252) ------- -------- ------- ------- -------- Balance December 2, 2000................... 47 1,163 -- -- 1,210 Payments in 2001: Severance............. (47) (152) -- -- (199) Contracts/leases...... -- (486) -- -- (486) ------- -------- ------- ------- -------- (47) (638) -- -- (685) ------- -------- ------- ------- -------- Balance December 1, 2001................... $ -- $ 525 $ -- $ -- $ 525 ======= ======== ======= ======= ========
Note 5--Acquisitions and Divestitures In 2000, the Company purchased certain assets of a business in its Specialty Group operating segment for $5,388. In 1999, the Company purchased a business for $4,483 in its Asia/Pacific Adhesives operating segment. The acquisitions were accounted for as purchases and the accompanying consolidated financial statements include the results of these businesses since the purchase date. The estimated fair values of assets and liabilities acquired at the dates of their respective acquisition are shown below as supplemental disclosure for cash flow purposes.
2000 1999 ------ ------ Receivables................................................... $ -- $1,329 Inventories................................................... 1,020 828 Property, plant and equipment................................. 34 780 Goodwill and intangible assets................................ 5,056 1,629 Current liabilities........................................... (722) (83) ------ ------ Net assets acquired for cash, net of cash acquired.......... $5,388 $4,483 ====== ======
The Company sold its liquid paint business in Ecuador for $3,465 cash in 2000. The historical results of operations on a pro forma basis are not presented as the effects of the acquisitions and divestiture were not material. 30 Note 6--Research and Development Research and development expenses charged against income were $19.0 million, $18.4 million and $21.3 million in 2001, 2000 and 1999, respectively. These costs are included as a component of SG&A expenses. Note 7--Accounting Changes In December 1999, the SEC issued SAB 101, which summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company adopted this accounting standard effective in the first quarter of 2001 which impacted income by a negative $0.8 million pretax ($0.5 million after-tax) or $0.02 per share. Pro forma presentation on results of prior years is not presented as the impact in not considered significant. Effective in 2001, the Company adopted the FASB Emerging Issues Task Force (EITF) Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Under its provisions, the EITF requires proceeds from shipping charges billed to customers to be included as revenue. Beginning in 2001, the Company classified revenues from shipping charges billed to customers and the costs related thereto as net revenue and cost of sales, respectively. Shipping revenue and costs have been reclassified for all periods presented. In 1999, the Company, adopted early, an accounting principle which impacted income by $1.2 million pretax ($0.7 million after-tax) or $0.03 per share. The AICPA Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities" issued April 3, 1998, requires the Company to expense as incurred all costs related to start-up activities and organizational costs. Note 8--Allowance for Doubtful Receivables
2001 2000 1999 ------- ------- ------- Balance at beginning of year...................... $ 6,913 $ 4,871 $ 5,073 Charged to expenses............................. 2,377 6,764 3,034 Write-offs...................................... (1,050) (4,495) (2,984) Divested businesses............................. -- (68) -- Effect of exchange rates........................ (119) (159) (252) ------- ------- ------- Balance at end of year............................ $ 8,121 $ 6,913 $ 4,871 ======= ======= =======
Note 9--Inventories Inventories in the United States, representing approximately 35% of consolidated inventories, are recorded at cost (not in excess of market value) as determined primarily by the last-in, first-out method (LIFO). Inventories of non-U.S. operations are valued at the lower of cost (mainly average cost) or market.
Inventories at Year-end are Summarized as Follows 2001 2000 ------------------------------------------------- -------- -------- Raw materials............................................ $ 57,226 $ 59,986 Finished goods........................................... 95,149 104,836 LIFO reserve............................................. (11,165) (11,037) -------- -------- Total.................................................... $141,210 $153,785 ======== ========
31 Note 10--Property, Plant and Equipment
Depreciable Major Classes Lives (in years) 2001 2000 ------------- --------------- --------- --------- Land................................. $ 46,463 $ 48,297 Buildings and improvements........... 20-40 214,034 218,053 Machinery and equipment.............. 3-15 477,153 459,142 Construction in progress............. 21,724 31,750 --------- --------- Total, at cost....................... 759,374 757,242 Accumulated depreciation............. (388,261) (362,553) --------- --------- Net property, plant and equipment.... $ 371,113 $ 394,689 ========= =========
Depreciation is generally computed on a straight-line basis over the useful lives of the assets, including assets acquired by capital leases. Depreciation expense on property, plant and equipment was $47,200, $44,371 and $43,079 in 2001, 2000 and 1999, respectively. Note 11--Intangibles Other intangible assets, primarily technology, are amortized over the estimated lives of 3 to 20 years. Goodwill is charged against income over periods of 15 to 25 years. The recoverability of unamortized intangible assets is assessed on an ongoing basis by comparing anticipated undiscounted future cash flows from operations to net book value.
Other Intangibles Goodwill ---------------- ---------------- 2001 2000 2001 2000 ------- ------- ------- ------- Gross Cost............................... $42,619 $44,883 $80,209 $82,483 Accumulated Amortization................. (20,901) (19,681) (18,172) (15,980) ------- ------- ------- ------- Net...................................... $21,718 $25,202 $62,037 $66,503 ======= ======= ======= =======
Note 12--Income Taxes The Company uses the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
Income Before Income Taxes, Minority Interests and Cumulative Effect of Accounting Change 2001 2000 1999 ---------------------------------------------- ------- ------- ------- United States (U.S.)............................... $43,903 $48,294 $55,943 Outside U.S........................................ 19,567 28,611 18,483 ------- ------- ------- Total.............................................. $63,470 $76,905 $74,426 ======= ======= =======
32
Components of the Provision for Income Taxes (excluding the cumulative effect of an accounting change) 2001 2000 1999 ------------------------------------------------- ------- ------- ------- Current: U.S. federal.................................... $ 5,753 $ 2,524 $12,392 State........................................... 1,835 1,143 1,269 Outside U.S..................................... 9,745 13,514 12,236 ------- ------- ------- 17,333 17,181 25,897 ------- ------- ------- Deferred: U.S. federal.................................... 6,131 10,720 5,171 State........................................... (23) 620 -- Outside U.S..................................... (3,608) (66) 739 ------- ------- ------- 2,500 11,274 5,910 ------- ------- ------- Total............................................. $19,833 $28,455 $31,807 ======= ======= =======
Difference Between the Statutory U.S. Federal Income Tax Rate and the Company's Effective Income Tax Rate 2001 2000 1999 -------------------------------------------------------- ---- ---- ---- Statutory U.S. federal income tax rate................... 35.0% 35.0% 35.0% State income taxes, net of federal benefit............... 1.9 2.3 1.0 U.S. federal income taxes on dividends received from non- U.S. subsidiaries, before foreign tax credits........... 1.4 4.3 6.9 Foreign tax credits...................................... (6.3) (6.6) (3.2) Non-U.S. taxes........................................... 1.4 3.8 6.3 Other tax credits........................................ (2.6) (2.1) (2.3) Other.................................................... 0.4 0.3 (1.0) ---- ---- ---- Total.................................................... 31.2% 37.0% 42.7% ==== ==== ====
The effective tax rate in 2001 and 1999 was impacted by costs related to the restructuring plans. Some of these restructuring costs did not provide a tax benefit in certain foreign countries resulting in an increase in the effective tax rate associated with non-U.S. taxes. The effective rate in 2001 was also impacted by a one-time tax benefit of $2.6 million.
Deferred Income Tax Balances at Each Year-end Related to 2001 2000 ----------------------------------------------------- -------- -------- Depreciation........................................... $(40,227) $(41,183) Asset valuation reserves............................... 2,003 1,800 Accrued expenses currently not deductible: Employee benefit costs............................... 17,174 21,261 Product and other claims............................. 1,293 1,512 Tax loss carryforwards................................. 19,316 17,307 Other.................................................. 7,157 7,280 -------- -------- 6,716 7,977 Valuation allowance.................................... (8,523) (12,406) -------- -------- Net deferred tax liabilities........................... $ (1,807) $ (4,429) ======== ========
33
Net Deferred Taxes as Presented on the Consolidated Balance Sheet 2001 2000 --------------------------------------------------- -------- -------- Deferred tax assets: Current............................................... $ 14,431 $ 15,945 Non-current........................................... 8,774 2,884 Deferred tax liabilities: Current............................................... (1,457) (1,548) Non-current........................................... (23,555) (21,710) -------- -------- Net deferred tax liabilities............................ $ (1,807) $ (4,429) ======== ========
Valuation allowances relate to foreign tax credit carry overs, tax loss carryforwards and other net deductible temporary differences in non-U.S. operations where the future potential benefits do not meet the more likely than not realization test. U.S. income taxes have not been provided on approximately $78,292 of undistributed earnings of non-U.S. subsidiaries. The Company plans to reinvest these undistributed earnings. If any portion were to be distributed, the related U.S. tax liability may be reduced by foreign income taxes paid on those earnings plus any available foreign tax credit carry overs. Determination of the unrecognized deferred tax liability related to these undistributed earnings is not practicable. While non-U.S. operations have been profitable overall, cumulative tax losses of $56,244 are carried as net operating losses in 19 different countries. These losses can be carried forward to offset income tax liability on future income in those countries. Cumulative losses of $44,635 can be carried forward indefinitely, while the remaining $11,609 must be used during the 2002-2007 period. Note 13--Notes Payable The primary component of notes payable relates to short-term lines of credit with banks. This component totals $27,601. The amount of unused available borrowings under these lines at December 1, 2001 was $166,851. The weighted- average interest rates on short-term borrowings were 6.6%, 8.8% and 8.1% in 2001, 2000 and 1999, respectively. Fair values of short-term financial instruments approximate their carrying values due to their short maturity. 34 Note 14--Long-Term Debt
Long-term Debt, Including Obligations Weighted-Average Under Capital Leases Interest Rate Maturity 2001 2000 ------------------------- ---------------- --------- -------- -------- U.S. dollar obligations: Notes (a)................. $ -- $ 6,365 Senior notes.............. 7.27% 2001-2012 190,000 190,000 Industrial and commercial development bonds........ 5.60% 2004-2016 7,100 7,100 Various other obligations.............. 7.23% 2004-2006 3,857 4,795 -------- -------- 200,957 208,260 -------- -------- Foreign currency obligations: Pound sterling notes (a).. -- 31,746 Japanese yen note (a)..... 1,620 7,685 Japanese yen.............. 3.80% 2002-2009 3,509 6,536 Various other obligations.............. -- 927 -------- -------- 5,129 46,894 Capital lease obligations... 2002-2004 394 1,028 -------- -------- Total long-term debt........ 206,480 256,182 Less: current installments............. (3,479) (5,718) -------- -------- Total....................... $203,001 $250,464 ======== ========
- -------- (a) The Company has revolving credit agreements with a group of major banks, which provide committed long-term lines of credit through December 20 of 2007, 2006, 2005 and 2004 in amounts of $85,000, $15,000, $25,000 and $28,000, respectively. At the Company's option, interest is payable at the London Interbank Offered Rate plus 0.175%--0.375%, adjusted quarterly based on the Company's capitalization ratio, or a bid rate. A facility fee of 0.075%--0.175% is payable quarterly. The most restrictive debt agreements place limitations on secured and unsecured borrowings, operating leases, and contain minimum interest coverage, current assets and net worth requirements. In addition, the Company cannot be a member of any "consolidated group" for income tax purposes other than with its subsidiaries. At December 1, 2001 the Company exceeded minimum requirements for all financial covenants. Aggregate maturities of long-term debt, including obligations under capital leases, amount to $3,479, $6,276, $1,222, $5,114 and $22,216 during the five years 2002 through 2006, respectively. Senior notes of $26,000 due on December 15, 2001 are shown as long-term because they will be replaced with long-term debt. The estimated fair value of long-term debt was $209,200 and $249,052 for December 1, 2001 and December 2, 2000, respectively. The fair value of long- term debt is based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of similar maturities. The estimates presented above on long-term financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange. Note 15--Lease Commitments
Assets under capital leases 2001 2000 --------------------------- ------- ------- Land....................................................... $ 1,168 $ 1,146 Buildings and improvements................................. 2,056 4,758 Machinery and equipment.................................... 653 632 ------- ------- 3,877 6,536 Accumulated depreciation................................... (1,669) (3,729) ------- ------- Net assets under capital leases............................ $ 2,208 $ 2,807 ======= =======
35 The minimum lease payments, related to equipment and buildings, that will have to be made in each of the years indicated based on capital and operating leases in effect at December 1, 2001 are:
Fiscal year Capital Operating ----------- ------- --------- 2002....................................................... $308 $10,438 2003....................................................... 84 8,776 2004....................................................... 12 6,387 2005....................................................... -- 2,962 2006....................................................... -- 2,009 Later years................................................ -- 10,988 ---- ------- Total minimum lease payments............................... 404 $41,560 ======= Amount representing interest............................... (10) ---- Present value of minimum lease payments.................... $394 ====
Rental expense for all operating leases charged against income amounted to $16,578, $15,648 and $13,541 in 2001, 2000 and 1999, respectively. Note 16--Contingencies Legal: The Company and its subsidiaries are parties to various lawsuits and governmental proceedings. For further information on certain legal proceedings, see Item 3, Legal Proceedings. In particular, the Company is currently deemed a potentially responsible party (PRP) or defendant, generally in conjunction with numerous other parties, in a number of government enforcement and private actions associated with hazardous waste sites. As a PRP or defendant, the Company may be required to pay a share of the costs of investigation and cleanup of these sites. In some cases the Company may have rights of indemnification from other parties. The Company's liability in the future for such claims is difficult to predict because of the uncertainty as to the cost of the investigation and clean-up of the sites, the Company's responsibility for such hazardous waste and the number or financial condition of other PRPs or defendants. As is the case with other types of litigation and proceedings to which the Company is a party, based upon currently available information, it is management's opinion that none of these matters will result in material liability to the Company. Other: The Company has guaranteed bank loans to certain executives totaling $11,081 for the purchase of the Company's common stock. Note 17--Financial Instruments In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement establishes standards for recognition and measurement of derivatives and hedging activities. The Company implemented this statement in the first quarter of 2001 as required. The cumulative effect of adopting SFAS No. 133 as of December 3, 2000 was not material to the Company's consolidated financial statements. The Company is exposed to foreign currency exchange rate risk inherent in forecasted sales, cost of sales, and assets and liabilities denominated in currencies other than the U.S. dollar. The Company does not enter into any speculative positions with regard to derivative instruments. Derivatives consisted primarily of forward currency contracts (primarily to receive euros) used to manage foreign currency denominated liabilities. Because contracts outstanding were not designated as hedges, the gains and losses are recognized in the income statement of the same period as the remeasurement of the related foreign currency denominated liabilities. Notional amounts of forward currency contracts outstanding were $108,737 however, notional amounts are not a measure of the Company's exposure. As of December 1, 2001, the Company had forward currency contracts 36 maturing between December 3, 2001 and August 15, 2002. In the opinion of management, changes in market value were not material. Counterparties to the forward currency contracts are major financial institutions. Credit loss from counterparty nonperformance is not anticipated. Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of entities comprising the Company's customer base and their dispersion across many different industries and countries. As of December 1, 2001 and December 2, 2000, the Company had no significant concentrations of credit risk. Note 18--Retirement and Postretirement Benefits The Company has noncontributory defined benefit plans covering all U.S. employees. Benefits for these plans are based primarily on years of service and employees' average compensation during their five highest out of the last ten years of service. The Company's funding policy is consistent with the funding requirements of federal law and regulations. Plan assets consist principally of listed equity securities. The Company funds U.S. postretirement benefits through a Voluntary Employees' Beneficiaries Association Trust. Certain non-U.S. consolidated subsidiaries provide pension benefits for their employees consistent with local practices and regulations. These plans are defined benefit plans covering substantially all employees upon completion of a specified period of service. Benefits for these plans are generally based on years of service and annual compensation. The Company and certain of its consolidated subsidiaries provide health care and life insurance benefits for eligible retired employees and their eligible dependents. These benefits are provided through various insurance companies and health care providers. These costs are accrued during the years the employee renders the necessary service.
Pension Benefits ------------------------------------ Other Postretirement U.S. Plans Non-U.S. Plans Benefits ------------------ ---------------- ----------------- 2001 2000 2001 2000 2001 2000 -------- -------- ------- ------- -------- ------- Change in benefit obligation: Benefit obligation, September 1 of prior year................. $180,382 $178,021 $66,759 $72,095 $ 39,734 $28,216 Service cost.......... 4,735 5,613 2,491 2,675 1,360 1,027 Interest cost......... 14,018 13,513 3,575 5,041 3,089 2,119 Participant contributions........ -- -- 1,494 779 250 124 Plan amendments....... 506 13 -- -- -- -- Actuarial (gain)/loss.......... 21,057 (8,850) 6,341 (3,176) 8,029 10,935 Benefits paid......... (9,248) (7,928) (2,767) (2,689) (3,045) (2,687) Currency change effect............... -- -- 1 (7,966) -- -- -------- -------- ------- ------- -------- ------- Benefit obligation, August 31............ $211,450 $180,382 $77,894 $66,759 $ 49,417 $39,734 ======== ======== ======= ======= ======== ======= Change in plan assets: Fair value of plan assets, September 1 of prior year........ $290,329 $247,689 $50,963 $48,211 $ 78,185 $68,142 Actual return on plan assets............... (72,332) 49,695 (5,921) 6,615 (18,663) 10,852 Employer contributions........ 1,382 873 651 1,420 257 1,754 Participant contributions........ -- -- 1,494 779 250 124 Benefits paid......... (9,248) (7,928) (928) (1,024) (3,045) (2,687) Currency change effect............... -- -- (156) (5,038) -- -- -------- -------- ------- ------- -------- ------- Fair value of plan assets, August 31.... $210,131 $290,329 $46,103 $50,963 $ 56,984 $78,185 ======== ======== ======= ======= ======== =======
37
Pension Benefits --------------------------------------- Other Postretirement U.S. Plans Non-U.S. Plans Benefits ------------------- ------------------ ----------------- 2001 2000 2001 2000 2001 2000 -------- --------- -------- -------- ------- -------- Reconciliation of funded status as of November: Funded status........... $ (1,319) $ 109,947 $(31,791) $(15,796) $ 7,567 $ 38,451 Unrecognized actuarial loss (gain)............ (22,422) (145,988) 279 (10,920) 22,156 (12,253) Unrecognized prior service cost (benefit).............. 5,202 5,535 (41) (33) (7,707) (10,017) Unrecognized net transition obligation.. (69) (96) 583 628 -- -- Contributions between measurement date and fiscal year-end........ 270 190 251 -- 75 -- -------- --------- -------- -------- ------- -------- Recognized amount....... $(18,338) $ (30,412) $(30,719) $(26,121) $22,091 $ 16,181 ======== ========= ======== ======== ======= ======== Statement of financial position as of November: Prepaid benefit cost.... $ 469 $ 283 $ 1,489 $ 2,291 Accrued benefit liability.............. (18,807) (30,694) (32,208) (28,412) Additional minimum liability.............. (8,578) (5,634) (3,785) -- Intangible asset........ 3,314 3,666 -- -- Accumulated other comprehensive income - pretax................. 5,264 1,967 3,785 -- -------- --------- -------- -------- Recognized amount....... $(18,338) $ (30,412) $(30,719) $(26,121) ======== ========= ======== ========
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligation in excess of plan assets were $100,166, $90,582, and $46,660, respectively as of August 31, 2001 and $57,895, $53,552, and $24,397 as of August 31, 2000.
Pension Benefits ---------------------------------------------------- Other Postretirement U.S. Plans Non-U.S. Plans Benefits ---------------------------- ---------------------- ------------------------- 2001 2000 1999 2001 2000 1999 2001 2000 1999 -------- -------- -------- ------ ------ ------ ------- ------- ------- Net periodic cost (benefit): Service cost............ $ 4,735 $ 5,613 $ 5,987 $2,491 $2,675 $2,547 $ 1,360 $ 1,027 $ 2,033 Interest cost........... 14,018 13,513 12,011 3,575 5,041 4,237 3,089 2,119 2,667 Expected return on assets................. (24,118) (20,582) (16,538) (3,303) (4,490) (2,909) (7,317) (6,387) (5,294) Prior service cost amortization........... 839 838 724 8 8 9 (2,310) (2,310) (828) Actuarial (gain)/loss amortization........... (6,059) (2,637) (766) (406) (137) 24 (457) (942) (561) Transition amount amortization........... (27) (27) (27) 60 62 (281) -- -- -- Curtailment gain........ -- -- (1,780) -- -- (274) -- -- (74) -------- -------- -------- ------ ------ ------ ------- ------- ------- Net periodic benefit cost (benefit)......... $(10,612) $ (3,282) $ (389) $2,425 $3,159 $3,353 $(5,635) $(6,493) $(2,057) ======== ======== ======== ====== ====== ====== ======= ======= =======
38
Pension Benefits -------------------------------------- Other Postretirement U.S. Plans Non-U.S. Plans Benefits -------------------- ----------------- ----------------- Weighted-Average Assumptions, August 2001 2000 1999 2001 2000 1999 2001 2000 1999 - ------------------- ------ ------ ------ ----- ----- ----- ----- ----- ----- Discount rate .......... 7.00% 7.75% 7.50% 6.04% 6.53% 6.18% 7.00% 7.75% 7.50% Expected return on plan assets................. 10.50% 10.50% 10.50% 7.93% 7.92% 6.18% 9.50% 9.50% 9.50% Rate of compensation increase............... 4.02% 4.02% 3.78% 3.16% 3.14% 3.07% Rate of increase in healthcare cost levels: Employees under age 65................... 4.85% 5.10% 5.68% Employees age 65 and older................ 4.85% 5.10% 3.73%
The rate of increase in healthcare cost levels is expected to be 5.10% in the years 2002 and later. Beginning in 2005, the Company's dollar contribution for retiree medical coverage will remain fixed at the 2004 level for employees who retire in the year 2005 or later. Sensitivity Information: The healthcare trend rate assumption has a significant effect on the amounts reported. A one percentage point change in the healthcare cost trend rate would have the following effects on the December 2, 2000 service and interest cost and the accumulated postretirement benefit obligation at December 1, 2001:
1-Percent 1-Percent Increase Decrease --------- --------- Effect on service and interest cost components......... $ 408 $ (340) Effect on accumulated postretirement benefit obligation............................................ $4,168 $(3,544)
Note 19--Stockholders' Equity Preferred Stock: The Board of Directors is authorized to issue up to 10,000,000 additional shares of preferred stock that may be issued in one or more series and with such stated value and terms as the Board of Directors may determine. Series A Preferred Stock: There were 45,900 Series A preferred shares with a par value of $6.67 authorized and outstanding at December 1, 2001 and December 2, 2000. The holder of Series A preferred stock is entitled to cumulative dividends at the rate of $0.33 per share per annum. Common stock cash dividends may not be paid unless provision has been made for payment of Series A preferred dividends. The Series A preferred stock has multiple voting rights entitling the Series A preferred shareholder to 80 votes per share. The terms of the Series A preferred stock include the right of the Company to purchase the shares at specified times and the right of the Company to redeem all shares at par value if authorized by the shareholders. Series B Preferred Stock: In connection with the adoption of the shareholder rights plan (see below), the Board of Directors authorized a new series of preferred stock ("Series B preferred shares") that would be exchanged for the existing Series A preferred shares, if and at such time as the rights issued pursuant to the shareholder rights plan become exercisable. The Series B preferred shares have the same terms as the Series A preferred shares, except that the voting rights of the Series B preferred shares are increased proportionately according to the number of shares issued upon the exercise or exchange of rights. The Company entered into a Stock Exchange Agreement dated July 18, 1996, with the holder of the Series A preferred shares by which the Series B preferred shares would be exchanged for all Series A preferred shares on the date the rights under the shareholder rights plan become exercisable. The exchange of the Series A preferred shares for the new Series B 39 preferred shares is intended to preserve the holder's voting power, in the event any rights are exercised. No event has occurred which would cause the exchange to be effected. Common Stock: There were 80,000,000 shares of common stock with a par value of $1.00 authorized and 28,280,896 and 28,231,328 shares issued and outstanding at December 1, 2001 and December 2, 2000, respectively. On November 16, 2001, the Company issued a 2-for-1 common stock split to shareholders of record on October 26, 2001 which resulted in a transfer of $14,142,068 from retained earnings to common stock. Share and per share data (except par value) for all periods presented have been restated to reflect the stock split. Shareholder Rights Plan: The shareholder rights plan provides each holder of a share of the Company's common stock a right to purchase one additional share of common stock for $90, subject to adjustment. These rights are not currently exercisable. Upon the occurrence of certain events, such as the public announcement of a tender offer or the acquisition of 15 percent or more of the Company's outstanding common stock by a person or group (an "acquiring person"), each right entitles the holder to purchase $90 worth of common stock (or in some circumstances common stock of the acquiring person) at one half of its then market value. Rights held by an acquiring person are void. The Company may redeem or exchange the rights in certain instances. Unless extended or redeemed the rights expire on July 30, 2006. Note 20--Stock-Based Compensation Directors' Deferred Compensation Plan: The Directors' Deferred Compensation Plan reserves 150,000 shares of common stock for allocation as payment of retainer fees to its Board of Directors. Directors, who are not employees, can choose to receive all or a portion of the payment of their retainer and meeting fees in shares of Company common stock when they leave the Board rather than cash payments each year. At December 1, 2001, 32,157 shares remained available for future allocation. 1998 Directors' Stock Incentive Plan: The 1998 Directors' Stock Incentive Plan reserves 400,000 shares of common stock to offer nonemployee directors incentives to put forth maximum efforts for the success of the Company's business and to afford nonemployee directors an opportunity to acquire a proprietary interest in the Company. In 2001, 2000 and 1999, respectively, 21,020, 15,400 and 8,000 restricted shares were awarded. The market value of $556, $304 and $281 has been recorded as unearned compensation--restricted stock and is shown as a separate component of stockholders' equity. Unearned compensation is being amortized to expense over the vesting periods of generally four years and amounted to $137, $207 and $93 in 2001, 2000 and 1999, respectively. At December 1, 2001, 332,746 shares remained available for future award. Year 2000 Stock Incentive Plan: Under the Year 2000 Stock Incentive Plan 3,000,000 shares of the common stock are available for the granting of awards during a period of up to ten years from October 14, 1999. The Year 2000 Stock Incentive Plan permits the granting of (a) stock options; (b) stock appreciation rights; (c) restricted stock and restricted stock units; (d) performance awards; (e) dividend equivalents; and (f) other awards valued in whole or in part by reference to or otherwise based upon the Company's common stock. A total of 607,172 and 56,684 non-qualified stock options were granted in 2001 and 2000, respectively to officers and key employees at prices not less than fair market value at the date of grant. These non-qualified options are generally exercisable beginning one year from the date of grant in cumulative yearly amounts of 25 percent and generally have a contractual term of 10 years. At December 1, 2001, 2,396,752 shares remained available for future grants or allocations under the plan. 1992 Stock Incentive Plan: Under the 1992 Stock Incentive Plan 1,800,000 shares of common stock were available for the granting of awards during a period of up to ten years from April 16, 1992. The Stock Incentive Plan permitted the granting of (a) stock options; (b) stock appreciation rights; (c) restricted stock and restricted stock units; (d) performance awards; (e) dividend equivalents; and (f) other awards valued in whole or in part by reference to or otherwise based upon the Company's common stock. 40 A total of 2,062 restricted shares of common stock were granted to certain employees in 1999. The market value of shares awarded of $44 has been recorded as unearned compensation--restricted stock in 1999 and is shown as a separate component of stockholders' equity. Unearned compensation is being amortized to expense over the vesting periods of generally ten years and amounted to $1,060, $1,768 and $2,029 in 2001, 2000 and 1999, respectively. A total of 2,000 restricted share units of common stock were allocated to certain employees in 1999. The market value of units allocated of $43 in 1999 is generally being charged to expense over the ten-year vesting period. A total of 288,150 and 487,898 non-qualified stock options were granted in 2000 and 1999, respectively to officers and key employees at prices no less than fair market value at the date of grant. These non-qualified options are generally exercisable beginning one year from the date of grant in cumulative yearly amounts of 25 percent and generally have a contractual term of 10 years. At December 1, 2001, no shares remained available for future grants or allocations from the 1992 plan.
Exercise Summary of Non-qualified Stock Option Transactions Number Price (1) -------------------------------------------------- --------- -------- Outstanding at November 29, 1998........................ 221,982 $ 7.17 Cancelled............................................... (20,594) 20.98 Granted................................................. 487,898 22.08 Exercised............................................... (74,388) 7.17 --------- Outstanding at November 27, 1999........................ 614,898 18.54 Cancelled............................................... (81,454) 23.07 Granted................................................. 344,834 26.14 Exercised............................................... (150,248) 7.64 --------- Outstanding at December 2, 2000......................... 728,030 23.88 Cancelled............................................... (150,422) 21.62 Granted................................................. 607,172 18.63 Exercised............................................... (5,732) 21.50 --------- Outstanding at December 1, 2001......................... 1,179,048 $21.48 ========= Exercisable at December 1, 2001......................... 261,232 $23.36 Exercisable at December 2, 2000......................... 257,166 $23.50
- -------- (1) Weighted-Average
Options Options Outstanding Exercisable ----------------------------------- ---------------- Remaining Life (1) Exercise Exercise Range of Exercise Prices Shares (in years) Price (1) Shares Price (1) ------------------------ ------- ----------------- -------- ------- -------- $18.63 - 23.44.......... 929,064 8.3 $19.74 188,678 $21.45 27.38.................. 229,984 8.0 27.38 62,554 27.38 34.31.................. 20,000 7.9 34.31 10,000 34.31
- -------- (1) Weighted-Average 41 If compensation expense had been determined for the non-qualified stock option plans based on the fair value at the grant dates consistent with the method of SFAS No. 123, net income and income per share would have been adjusted to the pro forma amounts indicated below:
2001 2000 1999 ------- ------- ------- Net income: As reported........................................ $44,439 $49,163 $43,370 Pro forma.......................................... $42,952 $48,202 $42,830 Basic income per share: As reported........................................ $ 1.59 $ 1.77 $ 1.57 Pro forma.......................................... $ 1.54 $ 1.73 $ 1.55 Diluted income per share: As reported........................................ $ 1.57 $ 1.74 $ 1.55 Pro forma.......................................... $ 1.52 $ 1.71 $ 1.53
Compensation expense for pro forma purposes is reflected over the options' vesting period. The weighted-average fair value per option at the grant date for options granted in 2001, 2000 and 1999 was $7.66, $10.15 and $7.69, respectively. The fair value was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
2001 2000 1999 ------- ------- ------- Risk-free interest rate.............................. 5.66% 6.31% 4.57% Expected dividend yield.............................. 1.50% 1.50% 1.50% Expected volatility factor........................... 35.77% 30.60% 30.24% Expected option term................................. 7 years 7 years 7 years
Note 21--Comprehensive Income Information
Total Comprehensive Income 2001 2000 1999 -------------------------- ------- ------- ------- Net income...................................... $44,439 $49,163 $43,370 Foreign currency translation adjustment......... (395) (12,034) (1,684) Foreign currency translation adjustment included in net income.................................. -- -- 136 Minimum pension liability adjustment, net of tax............................................ (4,667) (532) 23 ------- ------- ------- Total........................................... $39,377 $36,597 $41,845 ======= ======= =======
The following table shows ending balances of the components of accumulated other comprehensive income:
Accumulated Other Comprehensive Income 2001 2000 1999 -------------------------------------- -------- -------- ------- Foreign currency translation adjustment....... $(19,283) $(18,888) $(6,854) Minimum pension liability adjustment net of taxes of $3,182, $767 and $(15) in 2001, 2000 and 1999, respectively....................... (5,867) (1,200) (668) -------- -------- ------- Total accumulated other comprehensive income.. $(25,150) $(20,088) $(7,522) ======== ======== =======
Note 22--Operating Segment Information The Company's segment reporting reflects operating segments consistent with its method of internal reporting. Management organizes its business in five reportable operating segments. The adhesives, sealants and coatings (adhesives) business is broken down into four geographic segments: North America Adhesives, Europe Adhesives, Latin America Adhesives and Asia/Pacific Adhesives. The four geographic segments offer generally similar products and services to industries such as packaging, graphic arts, automotive, footwear, woodworking, window and nonwovens. The fifth reportable segment is the Specialty Group, which consists of five separate 42 operating entities, namely, TEC Specialty Products, Inc. ("TEC"); Foster Products Corporation ("Foster"); Linear Products, Inc. ("Linear"); Paints Division ("Paints") and the Global Coatings Division ("Global Coatings"). These entities provide specialty chemical products for a variety of applications such as, ceramic tile installation (TEC), HVAC insulation (Foster), powder coatings applied to metal surfaces such as office furniture, appliances and lawn and garden equipment (Global Coatings), specialty hot melt adhesives for packaging applications (Linear), and liquid paint sold through retail outlets (Paints). The Paints Division operates solely in Central America. The other four entities in the Specialty Group operate primarily in North America. Management evaluates the performance of its operating segments based on operating income which is defined as gross profit minus operating expenses ("SG&A"). Expenses resulting from restructuring initiatives are excluded from the operating segment results. Corporate expenses are fully allocated to the operating segments. Corporate assets are not allocated to the segments. Inter- segment sales are recorded at cost plus a minor markup for administrative costs. The following tables summarize the financial information about the reportable operating segments for all periods presented:
Trade Inter-Segment Operating Depreciation/ Total Capital Operating Segments Revenue Revenue Income(Loss) Amortization Assets (a) Expenditures - ------------------ ---------- ------------- ----------- ------------- ---------- ------------ North America Adhesives.............. 2001 $ 557,597 $ 18,088 $ 61,333 $18,449 $ 308,794 $ 7,086 2000 599,522 16,662 50,271 19,492 324,565 9,047 1999 591,603 26,466 60,174 20,398 344,220 17,403 Europe Adhesives........ 2001 $ 217,300 $ 5,718 $ 594 $ 9,616 $ 199,237 $ 5,577 2000 232,773 3,637 9,516 10,101 209,393 8,946 1999 257,273 3,419 16,029 11,308 237,493 18,976 Latin America Adhesives.............. 2001 $ 73,581 $ 1,178 $ (3,117) $ 3,569 $ 59,993 $ 3,064 2000 77,060 1,307 (1,374) 4,042 65,049 4,493 1999 81,073 2,411 (2,298) 3,391 69,923 4,321 Asia/Pacific Adhesives.. 2001 $ 96,737 $ 90 $ 1,155 $ 2,088 $ 72,549 $ 1,645 2000 100,992 16 2,496 2,315 73,777 2,109 1999 97,896 75 1,354 1,944 80,294 2,896 Specialty Group......... 2001 $ 328,844 $ 1,525 $ 29,706 $ 7,986 $ 213,657 $ 4,035 2000 353,614 1,682 41,292 7,809 217,239 5,198 1999 348,010 2,084 45,692 7,582 204,317 8,751 Corporate and Unallocated............ 2001 -- $(26,599) -- $11,129 $ 111,943 $ 9,318 2000 -- (23,304) -- 8,406 120,338 19,251 1999 -- (34,455) -- 6,153 89,368 3,906 Total Company........... 2001 $1,274,059 -- $ 89,671 $52,837 $ 966,173 $30,725 2000 1,363,961 -- 102,201 52,165 1,010,361 49,044 1999 1,375,855 -- 120,951 50,776 1,025,615 56,253
- -------- (a) Segment assets include primarily inventory, accounts receivables, property, plant and equipment and other miscellaneous assets. Corporate and unallocated assets include primarily corporate property, plant and equipment, deferred tax assets, certain investments and other assets. 43
Reconciliation of Operating Income to Pretax Income 2001 2000 1999 -------------------------------------------- -------- -------- -------- Operating income............................ $ 89,671 $102,201 $120,951 Restructuring related (charges) credits..... (1,564) 300 (22,961) Interest expense............................ (21,247) (23,814) (26,823) Gain from sale of assets.................... 752 4,131 6,123 Other income (expense), net................. (4,142) (5,913) (2,864) -------- -------- -------- Pretax income............................... $ 63,470 $ 76,905 $ 74,426 ======== ======== ========
Property, Plant Geographic Areas Trade Revenue and Equipment ---------------- ------------- --------------- North America............................. 2001 $ 762,402 $242,296 2000 817,855 258,230 1999 801,359 258,822 Europe.................................... 2001 $ 245,271 $ 64,623 2000 262,128 67,369 1999 287,681 79,732 Latin America............................. 2001 $ 169,649 $ 42,853 2000 182,986 45,242 1999 188,919 46,735 Asia/Pacific.............................. 2001 $ 96,737 $ 21,341 2000 100,992 23,848 1999 97,896 27,235 Total Company............................. 2001 $1,274,059 $371,113 2000 1,363,961 394,689 1999 1,375,855 412,524
Note 23--Quarterly Data (unaudited)
Net Revenue Gross Profit Operating Income ---------------------- ------------------ ----------------- 2001 2000 2001 2000 2001 2000 ---------- ---------- -------- -------- ------- -------- First quarter... $ 306,934 $ 323,630 $ 82,576 $ 93,122 $14,284 $ 23,805 Second quarter.. 328,507 350,174 88,212 99,726 23,612 31,917 Third quarter... 315,712 325,977 85,923 86,047 24,752 19,013 Fourth quarter.. 322,906 364,180 88,842 100,467 25,459 27,766 ---------- ---------- -------- -------- ------- -------- Total year...... $1,274,059 $1,363,961 $345,553 $379,362 $88,107 $102,501 ========== ========== ======== ======== ======= ======== Diluted Net Basic Net Income Income Net Revenue Per Share Per Share ---------------------- ------------------ ----------------- 2001 2000 2001 2000 2001 2000 ---------- ---------- -------- -------- ------- -------- First quarter... $ 5,049* $ 9,730 $ 0.18* $ 0.35 $ 0.18* $ 0.34 Second quarter.. 11,861 17,772 0.42 0.64 0.42 0.63 Third quarter... 14,587 7,394 0.52 0.27 0.51 0.26 Fourth quarter.. 12,942 14,267 0.46 0.51 0.46 0.51 ---------- ---------- Total year...... $ 44,439* $ 49,163 $ 1.59* $ 1.77 $ 1.57* $ 1.74 ========== ==========
- -------- * Includes an accounting change of $501 charge or $0.02 loss per share. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 44 PART III Item 10. Directors and Executive Officers of the Registrant The information under the heading "Election of Directors" (excluding the sections entitled "Compensation of Directors" and "Board Meetings and Committees") and the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" contained in the Company's Proxy Statement (the "2002 Proxy Statement") are incorporated by reference. The information contained at the end of Part I hereof under the heading "Executive Officers of the Registrant" is incorporated by reference. Item 11. Executive Compensation The section under the heading "Executive Compensation" (excluding the section entitled "Compensation Committee Report on Executive Compensation") contained in the 2002 Proxy Statement is incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information under the heading "Security Ownership of Certain Beneficial Owners and Management" contained in the 2002 Proxy Statement is incorporated by reference. Item 13. Certain Relationships and Related Transactions The section entitled "Executive Stock Purchase Loan Program" contained in the 2002 Proxy Statement is incorporated by reference. 45 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Consolidated Financial Statements Documents filed as part of this report: Statement of Consolidated Income for the years ended December 1, 2001, December 2, 2000 and November 27, 1999 Consolidated Balance Sheet as of December 1, 2001, December 2, 2000 Consolidated Statement of Stockholders' Equity for the years ended December 1, 2001, December 2, 2000 and November 27, 1999 Consolidated Statement of Cash Flows for the years ended December 1, 2001, December 2, 2000 and November 27, 1999 Notes to Consolidated Financial Statements 2. Financial Statement Schedules All financial statement schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. 3. Exhibits
Item Incorporation by Reference ---- -------------------------- 3.1 Restated Articles of Incorporation of H.B. Exhibit 3(a) to the Report on Form 10- Fuller Company, October 30, 1998 K405 for the year ended November 28, 1998. 3.2 Articles of Amendment of Articles of Incorporation of H.B. Fuller Company, October 27, 2001 3.3 By-Laws of H.B. Fuller Company as amended Exhibit 3(b) to the Report on Form 10-Q through July 14, 1999 for the quarter ended August 28, 1999. 4.1 Rights Agreement, dated as of July 18, Exhibit 4 to the Form 8A, dated July 1996, between H.B. Fuller Company and 24, 1996. Wells Fargo Bank Minnesota, National Association, as Rights Agent, which includes as an exhibit the form of Right Certificate 4.2 Amendment to Rights Agreement, dated as of Exhibit 1 to the Form 8-A / A-1, dated January 23, 2001, between H.B. Fuller February 2, 2001. Company and Wells Fargo Bank Minnesota, National Association, as Rights Agent 4.4 Stock Exchange Agreement, dated July 18, Exhibit 10 to the Form 8-K, dated July 1996, between H.B. Fuller Company and 24, 1996. Elmer L. Andersen, including Designations for Series B Preferred Stock 4.5 Agreement dated as of June 2, 1998 between Exhibit 4(a) to the Report on Form 10-Q H.B. Fuller Company and a group of for the quarter ended August 29, 1998. investors, primarily insurance companies, including the form of Notes
46
Item Incorporation by Reference ---- -------------------------- 4.6 H.B. Fuller Company Executive Stock Exhibit 4.7 to the Registration Purchase Loan Program Statement on Form S-8 (Commission File No. 333-44496) filed August 25, 2000 and the Registration Statement on Form S-8 (Commission File No. 333-48418) filed October 23, 2000. *10.1 H.B. Fuller Company 1992 Stock Incentive Exhibit 10(a) to the Report on Form 10- Plan K for the year ended November 30, 1992. *10.2 H.B. Fuller Company Restricted Stock Plan Exhibit 10(c) to the Report on Form 10- K for the year ended November 30, 1993. *10.3 H.B. Fuller Company Restricted Stock Unit Exhibit 10(d) to the Report on Form 10- Plan K for the year ended November 30, 1993. *10.4 H.B. Fuller Company Directors' Deferred Compensation Plan as Amended December 1, 2001 *10.5 H.B. Fuller Company 2000 Stock Incentive Registration Statement on Form S-8 Plan (Commission File No. 333-48420) filed August 25, 2000. *10.6 H.B. Fuller Company 1998 Directors' Stock Exhibit 10(c) to the Report on Form 10- Incentive Plan Q for the quarter ended May 30, 1998. *10.7 H.B. Fuller Company Supplemental Executive Exhibit 10(j) to the Report on Form 10- Retirement Plan--1998 Revision K405 for the year ended November 28, 1998. *10.8 First Amendment to H.B. Fuller Company Exhibit 10(x) to the Report on Form 10- Supplemental Executive Retirement Plan K405 for the year ended November 28, dated November 4, 1998 1998. *10.9 H.B. Fuller Company Executive Benefit Exhibit 10(k) to the Report on Form 10- Trust dated October 25, 1993 between H.B. K for the year ended November 29, 1997. Fuller Company and First Trust National Association, as Trustee, relating to the H.B. Fuller Company Supplemental Executive Retirement Plan *10.10 Amendments to H.B. Fuller Company Exhibit 10(k) to the Report on Form 10- Executive Benefit Trust, dated October 1, K405 for the year ended November 28, 1997 and March 2, 1998, between H.B. 1998. Fuller Company and First Trust National Association, as Trustee, relating to the H.B. Fuller Company Supplemental Executive Retirement Plan *10.11 H.B. Fuller Company Directors Benefit Exhibit 10(w) to the Report on Form 10- Trust, dated February 10, 1999, between K for the year ended November 27, 1999. H.B. Fuller Company and U.S. Bank National Association, as Trustee, relating to the Retirement Plan for Directors *10.12 H.B. Fuller Company Key Employee Deferred Exhibit 4.1 to the Registration Compensation Plan Statement on Form S-8 (Commission File No. 333-89453) filed October 21, 1999.
47
Item Incorporation by Reference ---- -------------------------- *10.13 First Declaration of Amendment to the Exhibit 10(v) to the Report on Form 10- Retirement Plan for Directors of H.B. K for the year ended November 27, 1999. Fuller Company dated February 10, 1999 *10.14 Performance Unit Plan Exhibit 10(a) to the Report on Form 10- Q for the quarter ended February 27, 1999. *10.15 Form of Employment Agreement signed by Exhibit 10(e) to the Report on Form 10- executive officers K for the year ended November 30, 1990. *10.16 Employment Agreement, dated April 16, Exhibit 10(a) to the Report on Form 10- 1998, between H.B. Fuller Company and Q for the quarter ended May 30, 1998. Albert Stroucken *10.17 Restricted Stock Award Agreement, dated Exhibit 10(d) to the Report on Form 10- April 23, 1998, between H.B. Fuller Q for the quarter ended May 30, 1998. Company and Lee R. Mitau *10.18 Managing Director Agreement with Peter Exhibit 10(p) to the Report on Form 10- Koxholt signed October 15, 1998 K for the year ended November 27, 1999. *10.19 International Service Agreement with Peter Exhibit 10(a) to the Report on Form 10- Koxholt dated May 1, 2001 Q for the quarter ended June 2, 2001. *10.20 Letter to Peter Koxholt dated May 1, 2001 Exhibit 10(b) to the Report on Form 10- Q for the quarter ended June 2, 2001. *10.21 Form of Change in Control Agreement dated Exhibit 10(y) to the Report on Form 10- April 8, 1998 between H.B. Fuller Company K405 for the year ended November 28, and each of its executive officers, other 1998. than Peter Koxholt and Albert Stroucken *10.22 Change in Control Agreement dated October Exhibit 10(q) to the Report on Form 10- 15, 1998 between H.B. Fuller Company and K for the year ended November 27, 1999. Peter Koxholt *10.23 Employment Agreement dated May 6, 1999 Exhibit 10(a) to the Report on Form 10- between H.B. Fuller Company and Raymond A. Q for the quarter ended August 28, Tucker 1999. 21 List of Subsidiaries 23 Consent of PricewaterhouseCoopers LLP 24 Powers of Attorney
* Asterisked items are management contracts or compensatory plans or arrangements required to be filed. (b) Reports on Form 8-K One report on Form 8-K was filed during the quarter ended December 1, 2001 reporting the Company's financial results for the third quarter of 2001. (c) See Exhibit Index and Exhibits attached to this Form 10-K. 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. H.B. FULLER COMPANY /s/ Albert P.L. Stroucken Dated: March 1, 2002 By___________________________________ ALBERT P.L. STROUCKEN Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title /s/ Albert P.L. Stroucken Chairman of the Board, President and _____________________________________ Chief Executive Officer and Director ALBERT P.L. STROUCKEN (Principal Executive Officer) /s/ Raymond A. Tucker Senior Vice President, and Chief _____________________________________ Financial Officer (Principal RAYMOND A. TUCKER Financial Officer) /s/ James C. McCreary, Jr. Vice President and Controller _____________________________________ (Principal Accounting Officer) JAMES C. MCCREARY, JR. * Edward L. Bronstien, Jr. * Norbert R. Berg _____________________________________ _____________________________________ EDWARD L. BRONSTIEN JR., Director NORBERT R. BERG, Director * Gail D. Fosler * Freeman A. Ford _____________________________________ _____________________________________ GAIL D. FOSLER, Director FREEMAN A. FORD, Director * Knut Kleedehn * Reatha Clark King _____________________________________ _____________________________________ KNUT KLEEDEHN, Director, REATHA CLARK KING, Director * John J. Mauriel, Jr. * J. Michael Losh _____________________________________ _____________________________________ JOHN J. MAURIEL, JR., Director J. MICHAEL LOSH, Director * R. William Van Sant * Lee R. Mitau _____________________________________ _____________________________________ R. WILLIAM VAN SANT, Director LEE MITAU, Director /s/ Richard C. Baker Dated: March 1, 2002 *By__________________________________ RICHARD C. BAKER Attorney in Fact 49 EXHIBIT INDEX
Item Incorporation by Reference ---- -------------------------- 3.1 Restated Articles of Incorporation of H.B. Exhibit 3(a) to the Report on Form 10- Fuller Company, October 30, 1998 K405 for the year ended November 28, 1998. 3.2 Articles of Amendment of Articles of Incorporation of H.B. Fuller Company, October 27, 2001 3.3 By-Laws of H.B. Fuller Company as amended Exhibit 3(b) to the Report on Form 10-Q through July 14, 1999 for the quarter ended August 28, 1999. 4.1 Rights Agreement, dated as of July 18, Exhibit 4 to the Form 8A, dated July 1996, between H.B. Fuller Company and 24, 1996. Wells Fargo Bank Minnesota, National Association, as Rights Agent, which includes as an exhibit the form of Right Certificate 4.2 Amendment to Rights Agreement, dated as of Exhibit 1 to the Form 8-A / A-1, dated January 23, 2001, between H.B. Fuller February 2, 2001. Company and Wells Fargo Bank Minnesota, National Association, as Rights Agent 4.4 Stock Exchange Agreement, dated July 18, Exhibit 10 to the Form 8-K, dated July 1996, between H.B. Fuller Company and 24, 1996. Elmer L. Andersen, including Designations for Series B Preferred Stock 4.5 Agreement dated as of June 2, 1998 between Exhibit 4(a) to the Report on Form 10-Q H.B. Fuller Company and a group of for the quarter ended August 29, 1998. investors, primarily insurance companies, including the form of Notes 4.6 H.B. Fuller Company Executive Stock Exhibit 4.7 to the Registration Purchase Loan Program Statement on Form S-8 (Commission File No. 333-44496) filed August 25, 2000 and the Registration Statement on Form S-8 (Commission File No. 333-48418) filed October 23, 2000. *10.1 H.B. Fuller Company 1992 Stock Incentive Exhibit 10(a) to the Report on Form 10- Plan K for the year ended November 30, 1992. *10.2 H.B. Fuller Company Restricted Stock Plan Exhibit 10(c) to the Report on Form 10- K for the year ended November 30, 1993. *10.3 H.B. Fuller Company Restricted Stock Unit Exhibit 10(d) to the Report on Form 10- Plan K for the year ended November 30, 1993. *10.4 H.B. Fuller Company Directors' Deferred Compensation Plan as Amended December 1, 2001 *10.5 H.B. Fuller Company 2000 Stock Incentive Registration Statement on Form S-8 Plan (Commission File No. 333-48420) filed August 25, 2000. *10.6 H.B. Fuller Company 1998 Directors' Stock Exhibit 10(c) to the Report on Form 10- Incentive Plan Q for the quarter ended May 30, 1998. *10.7 H.B. Fuller Company Supplemental Executive Exhibit 10(j) to the Report on Form 10- Retirement Plan--1998 Revision K405 for the year ended November 28, 1998.
Item Incorporation by Reference ---- -------------------------- *10.8 First Amendment to H.B. Fuller Company Exhibit 10(x) to the Report on Form 10- Supplemental Executive Retirement Plan K405 for the year ended November 28, dated November 4, 1998 1998. *10.9 H.B. Fuller Company Executive Benefit Exhibit 10(k) to the Report on Form 10- Trust dated October 25, 1993 between H.B. K for the year ended November 29, 1997. Fuller Company and First Trust National Association, as Trustee, relating to the H.B. Fuller Company Supplemental Executive Retirement Plan *10.10 Amendments to H.B. Fuller Company Exhibit 10(k) to the Report on Form 10- Executive Benefit Trust, dated October 1, K405 for the year ended November 28, 1997 and March 2, 1998, between H.B. 1998. Fuller Company and First Trust National Association, as Trustee, relating to the H.B. Fuller Company Supplemental Executive Retirement Plan *10.11 H.B. Fuller Company Directors Benefit Exhibit 10(w) to the Report on Form 10- Trust, dated February 10, 1999, between K for the year ended November 27, 1999. H.B. Fuller Company and U.S. Bank National Association, as Trustee, relating to the Retirement Plan for Directors *10.12 H.B. Fuller Company Key Employee Deferred Exhibit 4.1 to the Registration Compensation Plan Statement on Form S-8 (Commission File No. 333-89453) filed October 21, 1999. *10.13 First Declaration of Amendment to the Exhibit 10(v) to the Report on Form 10- Retirement Plan for Directors of H.B. K for the year ended November 27, 1999. Fuller Company dated February 10, 1999 *10.14 Performance Unit Plan Exhibit 10(a) to the Report on Form 10- Q for the quarter ended February 27, 1999. *10.15 Form of Employment Agreement signed by Exhibit 10(e) to the Report on Form 10- executive officers K for the year ended November 30, 1990. *10.16 Employment Agreement, dated April 16, Exhibit 10(a) to the Report on Form 10- 1998, between H.B. Fuller Company and Q for the quarter ended May 30, 1998. Albert Stroucken *10.17 Restricted Stock Award Agreement, dated Exhibit 10(d) to the Report on Form 10- April 23, 1998, between H.B. Fuller Q for the quarter ended May 30, 1998. Company and Lee R. Mitau *10.18 Managing Director Agreement with Peter Exhibit 10(p) to the Report on Form 10- Koxholt signed October 15, 1998 K for the year ended November 27, 1999. *10.19 International Service Agreement with Peter Exhibit 10(a) to the Report on Form 10- Koxholt dated May 1, 2001 Q for the quarter ended June 2, 2001. *10.20 Letter to Peter Koxholt dated May 1, 2001 Exhibit 10(b) to the Report on Form 10- Q for the quarter ended June 2, 2001. *10.21 Form of Change in Control Agreement dated Exhibit 10(y) to the Report on Form 10- April 8, 1998 between H.B. Fuller Company K405 for the year ended November 28, and each of its executive officers, other 1998. than Peter Koxholt and Albert Stroucken
Item Incorporation by Reference ---- -------------------------- *10.22 Change in Control Agreement dated October Exhibit 10(q) to the Report on Form 10- 15, 1998 between H.B. Fuller Company and K for the year ended November 27, 1999. Peter Koxholt *10.23 Employment Agreement dated May 6, 1999 Exhibit 10(a) to the Report on Form 10- between H.B. Fuller Company and Raymond A. Q for the quarter ended August 28, Tucker 1999. 21 List of Subsidiaries 23 Consent of PricewaterhouseCoopers LLP 24 Powers of Attorney
* Asterisked items are management contracts or compensatory plans or arrangements required to be filed. EX-3.2 3 dex32.txt AMEND. OF ARTICLES OF INCORPORATION Exhibit 3.2 ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION OF H.B. FULLER COMPANY The undersigned, Steven E. Suckow, Assistant Secretary of H.B. Fuller Company, a Minnesota corporation (the "Company"), hereby certifies: (i) that the first sentence of Article III of the Company's Articles of Incorporation has been amended to read in its entirety as follows: ARTICLE III The aggregate number of shares of capital stock which the Corporation shall have authority to issue is ninety million forty-five thousand nine hundred (90,045,900) shares, consisting of eighty million (80,000,000) shares of common stock, par value $1.00 per share (the "Common Stock"), and ten million forty five thousand nine hundred (10,045,900) shares of preferred stock (the "Preferred Stock"). (ii) that such amendment has been adopted in accordance with the requirements of, and pursuant to, Chapter 302A of the Minnesota Statutes; (iii) that such amendment was adopted pursuant to Section 302A.402 of the Minnesota Statutes in connection with a division of the Common Stock; and (iv) that such amendment will not adversely affect the rights or preferences of the holders of outstanding shares of any class or series of the Company and will not result in the percentage of authorized shares that remains unissued after such division exceeding the percentage of authorized shares that were unissued before the division. The division giving rise to the amendment set forth above concerns a two for one split of the Common Stock. Such division is being effected as follows: (i) on the date these Articles of Amendment are filed with the Secretary of State of the State of Minnesota (the "Effective Date"), each share of Common Stock then outstanding will be split and converted into two shares of Common Stock; and (ii) commencing on November 16, 2001, the Company's transfer agent and registrar will sign and register a certificate or certificates representing one share of the authorized but unissued Common Stock of the Company for every one share of Common Stock held of record by each common stockholder of record as of the Effective Date, and will deliver or mail such certificates to each holder. IN WITNESS WHEREOF, I have subscribed my name this 26th day of October, 2001. /s/ Steven E. Suckow ----------------------------------------- Steven E. Suckow, Assistant Secretary EX-10.4 4 dex104.txt DIRECTORS' DEFERRED COMPENSATION PLAN Exhibit 10.4 H.B. FULLER COMPANY AMENDED AND RESTATED DIRECTORS' DEFERRED COMPENSATION PLAN H.B. Fuller Company, a Minnesota corporation, maintains the H.B. Fuller Company Directors' Deferred Compensation Plan (originally known as the H.B. Fuller Company Directors' Stock Plan), effective as of April 20, 1989, and as amended from time to time. The Plan is hereby amended and restated in its entirety effective December 1, 2001 to provide investment options in addition to Company Common Stock and improved administrative capabilities. ARTICLE I DEFINITIONS ----------- Section 1.1 - Definitions. When used in this document with initial capital letters, the following terms have the meanings indicated unless a different meaning is plainly required by the context: (a) "Account" or "Accounts" means the account or accounts established and maintained for a Participant pursuant to Article III of the Plan. A Participant's Accounts shall consist of the Participant's Deferred Compensation Account and the Participant's Company Stock Account. (b) "Allocation Request Form" means such form or forms as may be approved by the Company from time to time for use by a Participant to request: (i) an allocation of certain deferred compensation and/or an allocation or reallocation of a Participant's Deferred Compensation Account among available investment options pursuant to Section 6.2(c), and (ii) that certain deferred compensation be allocated to the Participant's Company Stock Account pursuant to Section 6.1. (c) "Board of Directors" means the Board of Directors of H.B. Fuller Company. (d) "Change in Control" means: (i) a change in the control of the Company of a nature that would be required to be reported in accordance with Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; or (ii) a public announcement (which, for purposes hereof, shall include, without limitation, a report filed pursuant to section 13(d) of the Exchange Act) that any individual, corporation, partnership, association, trust or other entity becomes the beneficial owner (as defined in Rule 13(d)(3) promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 15% or more of the Voting Power of the Company then outstanding; or (iii) the individuals who, as of the effective date of this amendment and restatement, are members of the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board (provided, however, that if the election or nomination for election by the Company's shareholders of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall be considered to be a member of the Incumbent Board); or (iv) the approval of the shareholders of the Company of (A) any consolidation, merger or statutory share exchange of the Company with any person in which the surviving entity would not have as its directors at least 60% of the Incumbent Board and as a result of which those persons who were shareholders of the Company immediately prior to such transaction would not hold, immediately after such transaction, at least 60% of the Voting Power of the Company then outstanding or the combined voting power of the surviving entity's then outstanding voting securities; (B) any sale, lease, exchange or other transfer in one transaction or series of related transactions of substantially all of the assets of the 1 Company; or (C) the adoption of any plan or proposal for the complete or partial liquidation or dissolution of the Company; or (v) a determination by a majority of the members of the Incumbent Board, in their sole and absolute discretion, that there has been a change in control of the Company. For purposes of this definition, "Voting Power" when used with reference to the Company shall mean the voting power of all classes and series of capital stock of the Company now or hereafter authorized other than the voting power of any of the shares of Series A Preferred Stock outstanding as of the date of this amendment and restatement of the Plan. (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Common Stock" means the Common Stock, par value $1.00 per share, of the Company as such stock may be reclassified, converted or exchanged by reorganization, merger or otherwise. (g) "Company" means the H.B. Fuller Company, a Minnesota corporation. (h) "Company Stock Account" means the Account established and maintained for a Participant as a record of the Participant's hypothetical investments in units of Company Common Stock. (i) "Compensation Committee" means the Compensation Committee of the Board of Directors, or such other persons or committee as may be designated by the Board of Directors. (j) "Deferral Election Form" means such form or forms as may be approved by the Company from time to time for use by a Participant to elect to defer compensation under the Plan. (k) "Deferred Compensation Account" means the Account established and maintained for a Participant as a record of the amounts deferred by the Participant under the Plan and the Participant's hypothetical investments in available investment options. (l) "Director" means a member of the Board of Directors of Company. (m) "Disability" means that, based on evidence reasonably satisfactory to the Compensation Committee, the Participant is totally and permanently disabled. (n) "Distributable Event" means an event identified as such in Section 5.1. (o) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (p) "Meeting Fees" means any amounts that would have been paid to a Director during a calendar year with respect to attendance at a meeting of the Board of Directors or a committee thereof had deferral for such year not been timely elected. In no event does the term "Meeting Fees" include any per diem amounts paid with respect to attendance at any meeting of the Board of Directors (including any committee thereof). (q) "Participant" means an individual identified as such under Article II of the Plan. (r) "Plan" means the H.B. Fuller Company Amended and Restated Directors' Deferred Compensation Plan, as of its original effective date, including any amendments thereto, which is unfunded and maintained by H.B. Fuller Company primarily for the purpose of providing Directors with a means of deferring their Meeting Fees and Retainer Fees. (s) "Retainer Fees" means any of the following amounts with respect to a calendar year: (i) two-thirds (2/3) of the retainer fee amount that would be paid to a Participant in March of the calendar year in question had deferral for such year not been timely elected such two-thirds (2/3) amount representing retainer fee amounts earned in January and February of such year; (ii) the entire retainer fee amount that would be paid to a Participant in June, September, and December of the calendar year in question had deferral for such year not 2 been elected; and (iii) one-third (1/3) of the retainer fee amount that would be paid to a Participant in March of the next calendar year had deferral for the previous calendar year not been timely elected, such one-third (1/3) amount representing the retainer fee amount earned in December of such previous calendar year. (t) "Retirement" means the voluntary or involuntary resignation of a Director, the removal of a Director with or without cause, or the conclusion of a Director's term of office where the Director is not reelected by the shareholders of the Company to a succeeding term. (u) "Rollover Amount" means the amount determined in accordance with Section 3.4. (v) "Trust" means the Trust or Trusts described in Section 11.4. Any such Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan. Participants and their beneficiaries shall have no beneficial ownership interest in any assets of any such Trust. (w) "Trustee" means the corporation or person or persons selected by the Company to serve as Trustee for a Trust or Trusts. (x) "Vested" means an interest in the benefit described under the Plan which may be payable to or on behalf of the Participant in accordance with the terms of the Plan. ARTICLE II ELIGIBILITY AND PARTICIPATION ----------------------------- Section 2.1 - Eligibility. Any present or future Director who is not an employee of the Company or any of its affiliates shall be eligible to participate in the Plan. Section 2.2 - Participation. An individual eligible to participate in the Plan shall become a Participant upon the filing with the Compensation Committee of a completed Deferral Election Form and acceptance of such form by the Compensation Committee. The name of each individual eligible to participate in the Plan and the date on which such individual becomes a Participant in the Plan shall be recorded on Exhibit A, which exhibit is attached hereto and incorporated herein by reference and which shall be revised by the Compensation Committee from time to time to reflect the operation of the Plan. Once an individual becomes a Participant in the Plan, the individual shall remain a Participant until the benefits which may be payable to the individual under the Plan have been distributed to or on behalf of the individual. Section 2.3 - Suspension of Eligibility. The Compensation Committee may in its discretion determine that a Participant will no longer be eligible to participate in the Plan and in such event, the Participant's compensation deferral election made in accordance with Article III will immediately terminate and no additional amounts shall be credited to his or her Accounts under Sections 6.1(a), 6.1(b) or 6.2(a) until such time as the individual is again determined to be eligible to participate in the Plan by the Compensation Committee and makes a new election under Article III. However, the Accounts of such Participant shall continue to be adjusted by the other provisions of Sections 6.1 and 6.2 until fully distributed. ARTICLE III BENEFITS -------- Section 3.1 - Deferred Compensation. A Participant may elect to defer receipt of part or all of any one or more of the following items of compensation: (a) Retainer Fees; and (b) Meeting Fees. A Participant may defer an item of compensation only to the extent that the Participant is entitled to receive such item of compensation. Upon such deferral, the Participant will have no further right to such deferred compensation other than as provided under the Plan. Such deferred compensation shall be the record of the value of such deferred compensation credited to a Participant's Account and shall be used solely for accounting purposes. 3 Section 3.2 - Form and Effectiveness of Deferral Elections. (a) Each year a Participant may elect to defer all or any percentage of the Retainer Fees and Meeting Fees which the Participant has the opportunity to earn during the next succeeding calendar year through service as a Director of Company. The Participant is required to file his or her deferral election before December 31 specifying the portion of the Retainer Fees and Meeting Fees to be earned in the succeeding calendar year that is to be deferred. (b) An election by a Participant to defer a portion of his or her Retainer Fees and Meeting Fees pursuant to subsection (a) must be made by the Participant for the calendar year beginning after the calendar year in which occurs the date of said election and the amounts so deferred shall be paid only as provided in the Plan. Such an election must be irrevocable and must be made in the form and manner prescribed by the Compensation Committee and shall not be effective unless accepted by the Compensation Committee. The Participant may change the amount of, or suspend, future deferrals with respect to Retainer Fees and Meeting Fees otherwise payable to him or her for calendar years beginning after the date of change or suspension, as he or she may specify by written notice to the Compensation Committee. If a Participant elects to change the amount of, or suspend, deferrals, the Participant may make a new deferral election provided that any new election to defer payment of Retainer Fees and Meeting Fees must be made before the beginning of the period of service for which such compensation is payable, which period is the calendar year. The election to defer shall be irrevocable as to the deferred Retainer Fees and Meeting Fees for the period for which the election is made and shall not be effective unless accepted by the Compensation Committee. Section 3.3 - Matching Amounts. If for any year a Participant makes an election under Section 3.2 to defer all or any percentage of his or her Retainer Fees and Meeting Fees and to have a portion or all of such deferred compensation allocated to his or her Company Stock Account and measured by the value of Company Common Stock, then the Company will credit the Participant's Company Stock Account with a number of units (including fractions thereof) that is equal to 10% of the number of units (including fractions thereof) that were deferred to the Participant's Company Stock Account. Section 3.4 - Rollover Amount. With respect to Participants who participated in the Plan prior to this amendment and restatement, an amount equal to their "Account" as set forth in the Plan prior to this amendment and restatement, valued as of the effective date of this amendment and restatement, shall be the Rollover Amount. The Rollover Amount, which is comprised of elective deferrals and Company matching contributions accumulated under the Plan, shall be credited to the Participant's Company Stock Account on the effective date of this amendment and restatement and shall be subject to the terms and conditions of the Plan as amended and restated. Any Participant with a Rollover Amount shall have no right to demand distribution of such amounts other than as specifically provided for herein. Section 3.5 - Participant Accounts. A Company Stock Account and a Deferred Compensation Account shall be established and maintained for each Participant. The Company Stock Account shall be credited with units which shall be measured by the value of the shares of Common Stock. The Deferred Compensation Account shall be credited with amounts which shall be measured in dollars. The Company Stock Account shall be credited with (i) the Rollover Amount; (ii) deferred amounts attributable to Retainer Fees and Meeting Fees as may be allocated to the Company Stock Account pursuant to Section 6.1; and (iii) the matching amounts determined under Section 6.1. The Deferred Compensation Account shall be credited as described in Section 6.2 for any deferred amounts attributable to such amounts of Retainer Fees and Meeting Fees as may be allocated to the Deferred Compensation Account pursuant to Section 6.2. ARTICLE IV VESTING ------- Section 4.1 - Vested Benefit. A Participant shall be considered to be 100% Vested in the units and amounts credited to his or her Accounts under the Plan. Section 4.2 - Limitation on Benefits. The benefits that may be payable to or on behalf of a Participant under the Plan shall not exceed a cash payment equal to the value of the amounts credited to the Participant's Deferred Compensation Account and a distribution of that number of shares of Common Stock equal to the number of units credited to the Participant's Company Stock Account (with any fractional unit being rounded to the next highest whole unit). 4 ARTICLE V DISTRIBUTIONS ------------- Section 5.1 - Distributable Events. A Participant's Distributable Event shall be the first to occur of the following events: (a) The later of the date of the Participant's Retirement or such other date as elected and specified by the Participant in a Distribution of Benefits Form, which election is subject to approval by the Compensation Committee and which shall be made only at the time of the Participant's initial elections on such form and if the election is approved, it shall be irrevocable; (b) Disability (as defined in Section 1.1(m); (c) The Participant's death; (d) A Change in Control; or (e) The effective date of the termination of the Plan pursuant to Section 13.1. Section 5.2 - Distribution of Benefits. (a) Distribution Commencement Date. Distribution of a Participant's Plan benefit shall commence as of the first day of the second calendar month immediately following the calendar month in which the Participant's applicable Distributable Event occurs. (b) Form of Distribution. Benefits attributable to the value of the Deferred Compensation Account shall be delivered to the Participant in dollars. Benefits attributable to the Company Stock Account shall be delivered to the Participant in the form of shares of Common Stock. To the extent that the distribution is in the form of shares of Common Stock, such delivery shall be subject to all federal or state securities laws or other rules and regulations as determined by the Company to be applicable. (c) Payment Options. In the event a Participant becomes eligible to receive a payment of benefits under the Plan, the benefits payable to the Participant or, in the event of the Participant's death, to the Participant's designated beneficiary under the Plan shall be paid in accordance with one of the payment options available under the Plan as elected by the Participant on the Participant's Deferral Election Form. The Participant may not elect separate payment options with respect to the Deferred Compensation Account and the Company Stock Account. A Participant may change payment options by electing another payment option available under the Plan on a subsequent Deferral Election Form, but such change in payment option will not be effective until the lapse of a period of twelve (12) months following the date on which the Deferral Election Form was accepted by the Compensation Committee. Further, in no event will any such change in payment option be effective if such change is elected during the calendar year in which the Distributable Event occurs and no further elections may be made once a Distributable Event occurs. The payment options include installment payments over a period certain, a lump sum payment, and such other payment method as may be specified by the Participant and accepted by the Compensation Committee. The Compensation Committee may, in its sole discretion, reduce the payment period over which payments would have been made pursuant to the payment option elected by the Participant (including consolidation into a lump sum); provided, that in the event of a Change in Control, no reduction of a payment period may be made prior to the fifth anniversary of such Change in Control. Absent a payment option election, the Compensation Committee shall direct the payment of any benefits payable under the Plan to or on behalf of the Participant in eleven (11) annual installment payments to the Participant, or in the event of the Participant's death, to the Participant's designated beneficiary under the Plan. (d) Application for Distribution. A Participant shall not be required to make application to receive payment. Distribution shall not be made to any beneficiary, however, until such beneficiary shall have filed a written application for benefits in a form acceptable to the Compensation Committee and such application shall have been approved by the Compensation Committee. 5 Section 5.3 - Distributions As a Result of Tax Determination. Notwithstanding any provision in the Plan to the contrary, if, at any time, a court or the Internal Revenue Service determines that any amounts or units credited to a Participant's Accounts under the Plan are includable in the gross income of the Participant and subject to tax, the Compensation Committee may, in its sole discretion, permit a lump sum distribution of an amount equal to the amounts or units determined to be includable in the Participant's gross income. Section 5.4 - Early Withdrawals. Notwithstanding any provision in the Plan to the contrary, a Participant may request, by providing a written request to the Compensation Committee, a withdrawal prior to the distribution date under the Plan of all or any portion of his or her benefits from any of his or her Accounts under the Plan in increments of twenty-five (25) percent (of aggregate Account value). If such a request is approved by the Compensation Committee, which decision by the Compensation Committee shall be made in its sole discretion on a case by case basis, a distribution of such benefits may be made to the Participant subject to a penalty for such an early withdrawal at any point equal to a six month period of nonparticipation (during which no additional amounts will be credited to the Participant's Accounts under Sections 6.1(a), 6.1(b) or 6.2(a) of the Plan) for each twenty-five (25) percent increment withdrawn. The nonparticipation period would begin as of the date on which the request made by the Participant is approved by the Compensation Committee. As a result, a Participant withdrawing his or her entire benefit from all of his or her Accounts would be excluded from eligibility to participate in the Plan for a twenty-four (24) month period beginning as of the date of such approval by the Compensation Committee. In addition, a penalty of ten (10) percent of the amount withdrawn will be imposed on any withdrawal made pursuant to this Section 5.4. ARTICLE VI VALUATION OF BENEFITS --------------------- Section 6.1 - Company Stock Account. (a) Deferred Amounts. If a Participant elects to defer compensation in accordance with Section 3.2, the Participant may make an irrevocable election pursuant to this Section 6.1(a) to have a portion or all of such deferred compensation allocated to the Company Stock Account and measured by the value of Company Common Stock. This irrevocable election must be made at the time the deferral elections are made under Section 3.2 in the form and manner prescribed by the Compensation Committee, and will not be effective unless accepted by the Compensation Committee. If the Participant makes an election pursuant to this Section 6.1(a) to have a portion or all of such deferred compensation allocated to the Company Stock Account and measured by the value of Common Stock, the Participant's Company Stock Account shall be credited with the number of units (including fractions thereof) equal to the number of shares (including fractions thereof) of Common Stock that could have been purchased with the dollar amount of such deferred compensation determined as of the date on which such compensation is earned, based on the last sale price as reported on the NASDAQ Stock Market (or such other registered securities exchange or market as the Common Stock may be traded on in the future) on such date. For this purpose, a Participant's Retainer Fees are deemed to be earned on March 1 (January and February amounts), June 1 (March through May amounts), September 1 (June through August amounts), December 1 (September through November amounts) and the next March 1 (December amount). Meeting Fees are deemed to be earned when they would have otherwise been paid if a deferral had not been elected. Each unit credited to the Company Stock Account shall be measured by the value of one share of Common Stock and treated as though invested in a share of Common Stock. Subject to subsection (e) of this Section 6.1, the liability of the Company under the Plan with respect to the units credited to the Company Stock Account shall be satisfied only in shares of Company Common Stock. (b) Matching Amounts. (i) When a Participant's Company Stock Account is to be credited with matching units pursuant to Section 3.3, said Account shall be credited with that number of units (including fractions thereof) that shall be equal to ten percent (10%) of the number of units (including fractions thereof) that were credited to the Participant's Company Stock Account under Section 6.1(a) determined as of the date on which such compensation is earned, based on the last sale price as reported on the NASDAQ Stock Market (or such other registered securities exchange or market as the Common Stock may be traded on in the future) on such date. 6 (ii) Each unit credited to the Company Stock Account shall be measured by the value of one share of Common Stock and treated as though invested in a share of Common Stock. Subject to subsection (e) of this Section 6.1, the liability of the Company under the Plan with respect to the units credited to the Company Stock Account shall be satisfied only in shares of Company Common Stock. (c) Dividends. A Participant's Company Stock Account shall be credited on each Common Stock dividend payment date with that number of units equal to the number of shares which would have been acquired based upon the dividends paid by the Company on shares of Common Stock equal to the number of units credited to the Company Stock Account as of the record date for such dividend. (d) Stock Dividends. The number of units credited to the Company Stock Account shall be adjusted to reflect any change in the outstanding Common Stock by reason of any stock dividend or split, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change. (e) Transfer Upon Change in Control. In the event of a Change in Control, effective as of the close of business on the date of the Change in Control, each Participant's Deferred Compensation Account shall be credited with an amount measured in dollars equal to the value of such Participant's Company Stock Account based upon the fair market value of the Company Common Stock on such date and the Participant's Company Stock Account shall be closed and the Participant shall have no further interest in the said Account. Section 6.2 - Deferred Compensation Account. (a) Deferred Amounts. When a Participant's Deferred Compensation Account is to be credited with a deferred amount, that amount measured in dollars equal to such deferred amount shall be credited to the Deferred Compensation Account as of the close of business on the date that such amount would have been earned. For this purpose, a Participant's Retainer Fees are deemed to be earned on March 1 (January and February amounts), June 1 (March through May amounts), September 1 (June through August amounts), December 1 (September through November amounts) and the next March 1 (December amount). Meeting Fees are deemed to be earned when they would have otherwise been paid if a deferral had not been elected. (b) Interest. Subject to Section 6.2(c), as of the close of each business day, each Participant's Deferred Compensation Account shall be valued by calculating the product of (i) the average daily balance in such Deferred Compensation Account for the quarter, multiplied by (ii) one-twelfth (1/12) of the annual prime rate for corporate borrowers quoted at the beginning of the month by the Wall Street Journal (or such other comparable interest rate as the Compensation Committee may designate from time to time). (c) Investment Options. The Compensation Committee may permit a Participant to allocate the Participant's Deferred Compensation Account among one or more investment options for purposes of measuring the value of the benefit. To the extent that the Deferred Compensation Account is allocated to an investment option, it shall not be credited with interest under Section 6.2(b). That portion of the Deferred Compensation Account allocated to an investment option shall be deemed to be invested in such investment option and shall be valued as if so invested, reflecting all earnings, losses and other distributions or charges and changes in value which would have been incurred through such an investment. The determination of which investment options, if any to make available, and the continued availability of selected investment options rests in the Compensation Committee's sole discretion; provided, that subsequent to a Change in Control, the Company shall maintain the availability of those investment options in place at the time of the Change in Control (or substantially equivalent investment options). (d) Participant Allocation Request. A Participant's request to allocate or reallocate among investment options must be in writing on an Allocation Request Form in such increments as the Compensation Committee may require. All such requests are subject to acceptance by the Compensation Committee at its discretion. If accepted by the Compensation Committee, an allocation request will be effective as of the close of business on the allocation date (as defined in Section 6.3). 7 Section 6.3 - Allocation Date. Upon acceptance of an allocation request pursuant to Section 6.2, the Compensation Committee will process the request as soon as reasonably administratively practicable. The request shall be implemented and reflected in the Participant's Account as of the close of business on such date as may be determined by the Compensation Committee in its reasonable discretion (the "allocation date"). Section 6.4 - Hypothetical Accounts. The Accounts established under the Plan shall be hypothetical in nature and shall be maintained for bookkeeping purposes only. Neither the Plan nor any of the Accounts (or sub-accounts) shall hold or be required to hold any actual funds or assets. ARTICLE VII NONTRANSFERABILITY ------------------ Section 7.1 - Anti-Alienation of Benefits. Any benefits which may be credited to a Participant's Accounts under the Plan, and any rights or privileges pertaining thereto, may not be anticipated, alienated, sold, transferred, assigned, pledged, encumbered, or subjected to any charge or legal process; and no interest or right to receive a benefit may be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. Section 7.2 - Incompetent Participants. If any person who may be eligible to receive a payment under the Plan has been legally declared incompetent and a conservator or other person legally charged with the care of such person or of his or her estate has been appointed, any payment under the Plan to which the person is eligible to receive shall be paid to such conservator or other person legally charged with the care of the person or his or her estate. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company and the Plan therefor. Section 7.3 - Designated Beneficiary. In the event of a Participant's death prior to the payment of all or a portion of any benefits which may be payable with respect to the Participant under the Plan, the payment of any benefits payable on behalf of the Participant under the Plan shall be made to the Participant's beneficiary designated on a "Beneficiary Designation Form," which form shall be approved by the Compensation Committee. If no such beneficiary has been designated, payment shall be made as required under the Participant's will; or, in the event that there shall be no functioning will under applicable state law, then to such persons as, at the date of the Participant's death, would be entitled to share in the distribution of such deceased Participant's personal estate under the provisions of the applicable statute then in force governing the decedent's intestate property, in the proportions specified in such statute. ARTICLE VIII WITHHOLDING ----------- Section 8.1 - Withholding. The amounts payable pursuant to the Plan may be reduced by the amount of any federal, state or local taxes required by law to be withheld with respect to such payments. ARTICLE IX VOTING ------ Section 9.1 - Voting of Company Stock. No Participant shall be entitled to any voting rights with respect to any units credited to his or her Company Stock Account. ARTICLE X ADMINISTRATION OF THE PLAN -------------------------- Section 10.1 - Administrator. The administrator of the Plan shall be the Company. However, the Compensation Committee shall act on behalf of the Company with respect to the administration of the Plan and may delegate authority with respect to the administration of the Plan to such other committee, person or persons as it deems necessary or appropriate for the administration and operation of the Plan. Section 10.2 - Authority of Administrator. The Compensation Committee shall have the authority, duty and power to interpret and construe the provisions of the Plan as it deems appropriate, to adopt, establish and revise rules, procedures and regulations relating to the Plan, to determine the conditions subject to which any benefits may be payable, to resolve all questions concerning the status and rights of the Participants and others under the Plan, including, but not limited to, eligibility for benefits and to make any other determinations 8 which it believes necessary or advisable for the administration of the Plan. The Compensation Committee shall have the duty and responsibility of maintaining records, making the requisite calculations and disbursing payments hereunder. The determinations, interpretations, regulations and calculations of the Compensation Committee shall be final and binding on all persons and parties concerned. The Secretary of the Company shall be the agent of the Plan for the service of legal process in accordance with section 502 of ERISA. Section 10.3 - Operation of Plan and Claims Procedures. The Compensation Committee shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof. The Company shall be responsible for the expenses incurred in the administration of the Plan. The Compensation Committee shall be responsible for determining eligibility for payments and the amounts payable pursuant to the Plan. The Compensation Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Compensation Committee with respect to the Plan. The procedures for filing claims for payments under the Plan are described below. For claims procedures purposes, the "Claims Manager" shall be the Company. (a) Claims Forms. It is the intent of the Company to make payments under the Plan without the Participant having to complete or submit any claims forms. However, a Participant who believes he or she is entitled to a payment under the Plan may submit a claim for payments in writing to the Claims Manager. Any claim for payments under the Plan must be made by the Participant or his or her beneficiary in writing and state the claimant's name and the nature of benefits payable under the Plan on a form acceptable to the Claims Manager. If for any reason a claim for payments under the Plan is denied by the Compensation Committee, the Claims Manager shall deliver to the claimant a written explanation setting forth the specific reasons for the denial, specific references to the pertinent provisions of the Plan on which the denial is based, a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary, and information on the procedures to be followed by the claimant in obtaining a review of his or her claim, all written in a manner calculated to be understood by the claimant. For this purpose: (i) The claimant's claim shall be deemed to be filed when presented orally or in writing to the Claims Manager. (ii) The Claims Manager's explanation shall be in writing delivered to the claimant within ninety (90) days of the date the claim is filed. (b) Review. The claimant shall have sixty (60) days following his or her receipt of the denial of the claim to file with the Claims Manager a written request for review of the denial. For such review, the claimant or the claimant's representative may review pertinent documents and submit written issues and comments. (c) Decision on Review. The Compensation Committee shall decide the issue on review and furnish the claimant with a copy within sixty (60) days of receipt of the claimant's request for review of the claimant's claim. The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, as well as specific references to the pertinent provisions in the Plan on which the decision is based. If a copy of the decision is not so furnished to the claimant within such sixty (60) days, the claim shall be deemed denied on review. In no event may a claimant commence legal action for benefits the claimant believes are due the claimant until the claimant has exhausted all of the remedies and procedures afforded the claimant by this Section 10.3. (d) Deadline to File Claim. To be considered timely under the Plan's claim and review procedure, a claim must be filed with the Claims Manager within one (1) year after the claimant knew or reasonably should have known of the principal facts upon which the claim is based. (e) Exhaustion of Administrative Remedies. The exhaustion of the claim and review procedure is mandatory for resolving every claim and dispute arising under the Plan. As to such claims and disputes: (j) no claimant shall be permitted to commence any legal action to recover Plan benefits or to enforce or clarify rights under the Plan under section 502 or section 510 of ERISA or under 9 any other provision of law, whether or not statutory, until the claim and review procedures set forth herein have been exhausted in their entirety; and (ii) in any such legal action all explicit and all implicit determinations by the Compensation Committee (including, but not limited to, determinations as to whether the claim, or a request for a review of a denied claim, was timely filed) shall be afforded the maximum deference permitted by law. (f) Deadline to File Legal Action. No legal action to recover Plan benefits or to enforce or clarify rights under the Plan under Section 502 or section 510 of ERISA or under any other provision of law, whether or not statutory, may be brought by any claimant on any matter pertaining to the Plan unless the legal action is commenced in the proper forum before the earlier of: (i) thirty (30) months after the claimant knew or reasonably should have known of the principal facts on which the claim is based, or (ii) six (6) months after the claimant has exhausted the claim and review procedure. (g) Knowledge of Facts by Participant Imputed to Beneficiary. Knowledge of all facts that a Participant knew or reasonably should have known shall be imputed to every claimant who is or claims to be a beneficiary of the Participant or otherwise claims to derive an entitlement by reference to the Participant for purpose of applying the previously specified periods. Section 10.4 - Participant's Address. Each Participant shall keep the Company informed of his or her current address and the current address of his or her beneficiary. The Company shall not be obligated to search for any person. If the location of a Participant is not made known to the Company within three (3) years after the date on which payment of the Participant's benefits payable under the Plan may be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one (1) additional year after such three-year period has elapsed, or, within three (3) years after the actual death of a Participant, the Company is unable to locate any designated beneficiary of the Participant, then Company shall not have any further obligation to pay any benefit under the Plan to or on behalf of such Participant or designated beneficiary and such benefit shall be irrevocably forfeited. ARTICLE XI MISCELLANEOUS PROVISIONS ------------------------ Section 11.1 - No Future Director Terms. Nothing in the Plan nor any action taken under the Plan shall obligate a Participant to continue as a Director or to accept any nomination for a future term as a Director of the Company or require the Company to nominate or cause the nomination of the Director for future term as a Director. Section 11.2 - Participants Should Consult Advisors. Neither the Company, nor its Directors, officers, employees or agents makes any representation or warranty with respect to the federal, state or other tax, financial, estate planning, or the securities or other legal implications of participation in the Plan. Participants should consult with their own tax, financial and legal advisors with respect to their participation in the Plan. Section 11.3 - Unfunded and Unsecured. The Plan shall at all times be considered entirely unfunded both for tax purposes and for purposes of Title I of the ERISA and no provision shall at any time be made with respect to segregating assets of the Company for payment of any amounts under the Plan. Any funds invested under the Plan allocable to the Company shall continue for all purposes to be part of the respective general assets of the Company and available to the general creditors of the Company in the event of a bankruptcy (involvement in a pending proceeding under the Federal Bankruptcy Code) or insolvency (inability to pay debts as they mature) of the Company. The Company shall promptly notify the Trustee and the applicable Participants of such bankruptcy or insolvency. No Participant or any other person shall have any interests in any particular assets of the Company by reason of the right to receive a benefit under the Plan and to the extent the Participant or any other person acquires a right to receive benefits under the Plan, such right shall be no greater than the right of any general unsecured creditor of the Company. The Plan constitutes a mere promise by the Company to make payments to the Participants in the future. Nothing contained in the Plan shall constitute a guaranty by 10 the Company or any other person or entity that any funds in any trust or the assets of the Company will be sufficient to pay any benefit under the Plan. Furthermore, no Participant shall have any right to a benefit under the Plan except in accordance with the terms of the Plan. Section 11.4 - The Trust. (a) Establishment of Trust. In order to provide assets from which to fulfill the obligations to the Participants and their beneficiaries under the Plan, the Company may establish a Trust by a trust agreement with a third party, the Trustee, to which the Company may, in its discretion, contribute cash or other property, including securities issued by the Company, to provide for the benefit payments under the Plan. The Trustee for the Trust will have the duty to invest the Trust assets and funds in accordance with the terms of the Trust. The Company shall be entitled at any time, and from time to time, in its sole discretion, to substitute assets of at least equal fair market value for any assets held in the Trust established by the Company. All rights associated with the assets of each the Trust will be exercised by the Trustee of the Trust or the person designated by the Trustee, and will in no event be exercisable by or rest with Participants or their beneficiaries. The Trust shall provide that in the event of the insolvency of the Company, the Trustee shall hold the assets for the benefit of the general creditors of the Company. The Trust shall be based on the model trust contained in Internal Revenue Service Revenue Procedure 92-64. (b) Contribution Upon Change in Control. If as of the close of business on the date of a Change in Control, the aggregate value of the Participant Accounts exceeds the value of the assets held in the Trust established under subsection (a), then within thirty (30) days of such Change in Control, the Company if it has established a Trust shall contribute to the Trust assets having a value at least equal to the amount of such excess. Section 11.5 - Plan Provisions. Except when otherwise required by the context, any singular terminology shall include the plural. Section 11.6 - Severability. If a provision of the Plan shall be held to be illegal or invalid, the illegality or invalidity shall not affect the remaining parts of the Plan and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. Section 11.7 - Applicable Law. To the extent not preempted by the laws of the United States, the laws of the State of Minnesota shall apply with respect to the Plan. Section 11.8 - Stock Subject to Plan. Subject to and in accordance with the terms of the Plan, the maximum number of shares of Common Stock that shall be made available for purposes of satisfying the obligations of the Company under the Plan is 75,000 shares, subject to adjustment by reason of any stock dividend or split, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change. ARTICLE XII AMENDMENTS ---------- Section 12.1 - Amendment of the Plan. The Company reserves the power to alter, amend or wholly revise the Plan at any time and from time to time by the action of the Compensation Committee and the interest of each Participant is subject to the powers so reserved; provided, however, that no amendment made subsequent to a Change in Control shall be effective to the extent that it would have a materially adverse impact on a Participant's reasonably expected economic benefit attributable to compensation deferred by the Participant prior to the Change in Control. An amendment shall be authorized by the Compensation Committee and shall be stated in an instrument in writing signed in the name of the Company by a person or persons authorized by the Compensation Committee. After the instrument has been so executed, the Plan shall be deemed to have been amended in the manner therein set forth, and all parties interested herein shall be bound thereby. No amendment to the Plan may alter, impair, or reduce the benefits credited to any Accounts prior to the effective date of such amendment without the written consent of any affected Participant. 11 ARTICLE XIII TERM OF PLAN ------------ Section 13.1 - Term of the Plan. The Company may at any time terminate the Plan by action of the Compensation Committee with such termination being effective as of the date that all Participant Accounts have been distributed to Participants in accordance with and subject to the provisions of Article V. Effective as of the date of the Compensation Committee action (or such later date as may be specified therein) all compensation deferral elections will terminate and no further amounts shall be credited to any Accounts of any Participant under Sections 6.1(a), 6.1(b) and 6.2(a) after such date. However, the Participants' Accounts shall continue to be adjusted by the other provisions of Sections 6.1 and 6.2 until all benefits are distributed to the Participants or to the Participants' beneficiaries. Dated as of this 27 day of September, 2001. -- --------- H.B. FULLER COMPANY By: /s/ Norbert R. Berg --------------------------------- Title: Chair - Compensation Committee ------------------------------- 12 EX-21 5 dex21.txt LIST OF SUBSIDIARIES Exhibit 21 ---------- H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES AS OF DECEMBER 1, 2001
- ------------------------------------------------------------------------------------------------------------------------- JURISDICTION OF % SUBSIDIARY ORGANIZATION OWNERSHIP OWNED - ------------------------------------------------------------------------------------------------------------------------- UNITED STATES --------------------- H.B. Fuller Company United States * Aireline, Inc. United States H.B. Fuller Company 100.0 H.B. Fuller International Inc. United States H.B. Fuller Company 100.0 * F.A.I. Trading Company United States H.B. Fuller Company 100.0 Fiber-Resin Corp. United States H.B. Fuller Company 100.0 * H.B. Fuller Company Puerto Rico United States H.B. Fuller Company 100.0 Foster Products Corporation United States H.B. Fuller Company 100.0 TEC Specialty Products, Inc. United States H.B. Fuller Company 100.0 H.B. Fuller Licensing & Financing, Inc. United States H.B. Fuller Company 100.0 Linear Products, Inc. United States H.B. Fuller Company 100.0 Stratyc, Inc. United States H.B. Fuller Company 100.0 Stratyc LLC United States H.B. Fuller Company 99.0 Stratyc, Inc. 1.0 H.B. Fuller Automotive Company United States H.B. Fuller Company 100.0 EFTEC --------------------- EFTEC North America, LLC United States H.B. Fuller Automotive Company 70.0 EFTEC Latin America Panama EFTEC North America, LLC 88.5 EFTEC Brasil Ltda. Brazil EFTEC Latin America 99.9 EFTEC North America, LLC 0.1 Grupo Placosa EFTEC, S.A. de C.V. Mexico EFTEC Latin America 33.3 EFTEC Europe Holding AG Switzerland EFTEC North America, LLC 30.0 EFTEC AG Switzerland EFTEC Europe Holding AG 100.0 EFTEC Sarl France EFTEC Europe Holding AG 100.0 EFTEC AB Sweden EFTEC Europe Holding AG 100.0 EFTEC Ltd. U.K. EFTEC Europe Holding AG 100.0 EFTEC NV. Belgium EFTEC Europe Holding AG 100.0 EFTEC S.A. Spain EFTEC Europe Holding AG 100.0 EFTEC GmbH Germany EFTEC Europe Holding AG 100.0 EFTEC Asia Pte. Ltd. Singapore EFTEC Europe Holding AG 60.0 H.B. Fuller Automotive Company 20.0 EFTEC (Thailand) Co., Ltd. Thailand EFTEC Europe Holding AG 100.0 Changchun EFTEC Chemical Products Ltd. China EFTEC Europe Holding AG 25.0 Shanghai EFTEC Chemical Products Ltd. China EFTEC Europe Holding AG 60.0 CANADA/MEXICO --------------------- H.B. Fuller Canada Holding Co. Canada H.B. Fuller Company 100.0 H.B. Fuller Canada Investment Co. Canada H.B. Fuller Canada Holding Co. 100.0 H.B. Fuller Canada (partnership) Canada H.B. Fuller Canada Holding Co. 99.99 H.B. Fuller Canada Investment Co. 0.01 H.B. Fuller Mexico, S.A. Mexico H.B. Fuller Company 100.0 EUROPE --------------------- H.B. Fuller Benelux B.V. Netherlands H.B. Fuller Canada Holding Co. 100.0 H.B. Fuller Austria GesmbH Austria H.B. Fuller Benelux B.V. 90.0 H.B. Fuller Company 10.0 H.B. Fuller Austria Sales & Marketing GsmbH Austria H.B. Fuller Benelux B.V. 100.0 H.B. Fuller Belgium N.V./S.A. Belgium H.B. Fuller Company 99.8 H.B. Fuller Deutschland Produktions GmbH 0.2 H.B. Fuller Deutschland Holding GmbH Germany H.B. Fuller Benelux B.V. 100.0 H.B. Fuller Deutschland Produktions GmbH Germany H.B. Fuller Deutschland Holding GmbH 90.0 H.B. Fuller Company 10.0 H.B. Fuller Deutschland GmbH (commissionaire) Germany H.B. Fuller Deutschland Holding GmbH 100.0
Page 1 of 4 Exhibit 21 ---------- H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES AS OF DECEMBER 1, 2001
- ------------------------------------------------------------------------------------------------------------------------- JURISDICTION OF % SUBSIDIARY ORGANIZATION OWNERSHIP OWNED - ------------------------------------------------------------------------------------------------------------------------- * Isar-Rakoll Chemie, GmbH Germany H.B. Fuller Deutschland Produktions GmbH 100.0 H.B. Fuller France S.A. France H.B. Fuller Benelux B.V. 99.9 H.B. Fuller Finance (Ireland) Ireland H.B. Fuller Europe GmbH 100.0 H.B. Fuller Italia Holding s.r.l. Italy H.B. Fuller Benelux B.V. 100.0 H.B. Fuller Italia s.r.l. Italy H.B. Fuller Benelux B.V. 100.0 H.B. Fuller Italia Sales s.r.l. Italy H.B. Fuller Italia Holding s.r.l. 100.0 H.B. Fuller Sverige AB Sweden H.B. Fuller Benelux B.V. 100.0 H.B. Fuller Espana, S.A. Spain H.B. Fuller Company 100.0 * H.B. Fuller Schweiz AG Switzerland H.B. Fuller Deutschland Produktions GmbH 100.0 H.B. Fuller Europe GmbH Switzerland H.B. Fuller Benelux B.V. 99.0 H.B. Fuller Canada Holding Co. 1.0 H.B. Fuller Holdings Limited U.K. H.B. Fuller Company 100.0 H.B. Fuller Group Limited U.K. H.B. Fuller Holdings Limited 100.0 H.B. Fuller U.K. Operations Ltd. U.K. H.B.Fuller Group Ltd 100.0 H.B. Fuller U.K. Limited U.K. H.B. Fuller U.K. Operations Ltd. 100.0 Industrial Adhesives Limited U.K. H.B. Fuller U.K. Operations Ltd. 100.0 H.B. Fuller Coatings Limited U.K. H.B. Fuller U.K. Operations Ltd. 100.0 Branches: Dubai, UAE Powderstore Limited U.K. H.B. Fuller U.K. Operations Ltd. 100.0 Datac Ltd. U.K. H.B. Fuller U.K. Operations Ltd. 100.0 H.B. Fuller U.K. Manufacturing Limited U.K. H.B. Fuller U.K. Operations Ltd. 100.0 ASIA-PACIFIC --------------------- H.B. Fuller Company Australia Pty. Ltd. Australia H.B. Fuller Company 100.0 H.B. Fuller (China) Adhesives Ltd. China H.B. Fuller Company 99.0 * H.B. Fuller India Private Limited India H.B. Fuller Company 99.9 H.B. Fuller Japan Company, Ltd. Japan H.B. Fuller Company 100.0 H.B. Fuller Korea, Ltd. Korea H.B. Fuller Company 100.0 H.B. Fuller (Malaysia) Sdn. Bhd. Malaysia H.B. Fuller Company 100.0 H.B. Fuller Company (N.Z.) Ltd. New Zealand H.B. Fuller Company 99.9 H.B. Fuller (Philippines), Inc. Philippines H.B. Fuller Company 93.68 HBF Realty Corporation Philippines H.B. Fuller Company 40.0 H.B. Fuller Taiwan Co., Ltd. Taiwan H.B. Fuller Company 100.0 H.B. Fuller (Thailand) Co., Ltd. Thailand H.B. Fuller Company 99.9 * Multi-Clean Products Pty. Ltd. Australia H.B. Fuller Company 100.0 * Multi-Clean (Lebanon) S.A.R.L. Lebanon H.B. Fuller Company 100.0 * H.B. Fuller Lebanon S.A.R.L. Lebanon H.B. Fuller Company 100.0 LATIN AMERICA --------------------- Glidden Avenida Nacional, S.A. Panama H.B. Fuller Company 100.0 Fabrica de Pinturas Glidden, S.A. Panama H.B. Fuller Company 100.0 H.B. Fuller Holding Panama Co. Panama H.B. Fuller Company 100.0 Glidden Panama S.A. Panama H.B. Fuller Holding Panama Co. 100.0 H.B. Fuller Comercial, S.A. Panama H.B. Fuller Holding Panama Co. 100.0 * Adhesivos Industriales, S.A. Panama H.B. Fuller Holding Panama Co. 100.0 * Distribuidora Americana, S.A. Ecuador H.B. Fuller Company 100.0 Kativo Chemical Industries, S.A. Panama H.B. Fuller Company 99.999
Page 2 of 4 Exhibit 21 ---------- H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES AS OF DECEMBER 1, 2001
- ------------------------------------------------------------------------------------------------------------------------- JURISDICTION OF % SUBSIDIARY ORGANIZATION OWNERSHIP OWNED - ------------------------------------------------------------------------------------------------------------------------- Kativo Consolidated Subsidiaries -------------------------------- H.B. Fuller Argentina, S.A. Argentina Kativo Chemical Industries, S.A. 99.99 H.B. Fuller Company 0.01 H.B. Fuller Bolivia, Ltda. Bolivia Kativo Chemical Industries, S.A. 50.00 Chemical Supply Corporation 50.00 H.B. Fuller Brazil, Ltda. Brazil Chemical Supply Corporation 85.87 Kativo Chemical Industries, S.A. 14.11 Kativo de Panama, S.A. 0.02 * Adhesivos H.B. Fuller (Sul) Ltda. Brazil Chemical Supply Corporation 99.81 note b Kativo Chemical Industries, S.A. 0.15 H.B. Fuller Brazil, Ltda. 0.04 H.B. Fuller Chile, S.A. Chile Kativo Chemical Industries, S.A. 99.99 Minority 0.01 H.B. Fuller Colombia, Ltda. Colombia Kativo Chemical Industries, S.A. 98.00 Minority 2.00 Kativo Costa Rica, S.A. Costa Rica Kativo Chemical Industries, S.A. 100.00 Reca Quimica, S.A. Costa Rica Kativo Chemical Industries, S.A. 100.00 H.B. Fuller Centroamerica, S.A. Costa Rica Kativo Chemical Industries, S.A. 100.00 * Resistol, S.A. Costa Rica Kativo Chemical Industries, S.A. 100.00 H.B. Fuller Caribe, S.A. Dominican Republic Kativo Chemical Industries, S.A. 90.60 Chemical Supply Corporation 8.82 Kativo Panama, S.A. 0.01 Kativo Honduras, S.A. 0.01 H.B. Fuller Centroamerica, S.A. 0.01 Olga Ferrer 0.54 Juan Bancalari 0.01 H.B. Fuller Ecuador, S.A. Ecuador Kativo Chemical Industries, S.A. 50.00 Chemical Supply Corporation 50.00 Kativo Industrial de El Salvador, S.A. El Salvador Kativo Chemical Industries, S.A. 80.00 Chemical Supply Corporation 20.00 * H.B. Fuller El Salvador, S.A. El Salvador Kativo Chemical Industries, S.A. 80.00 Chemical Supply Corporation 20.00 * Deco Tintas de El Salvador, S.A. El Salvador Kativo Chemical Industries, S.A. 80.00 note b Chemical Supply Corporation 20.00 Kativo Comercial de Guatemala, S.A. Guatemala Kativo Chemical Industries, S.A. 80.00 Chemical Supply Corporation 20.00 * H.B. Fuller Guatemala, S.A. Guatemala Chemical Supply Corporation 100.00 * Resistol, S.A. Guatemala H.B. Fuller Guatemala, S.A. 100.00
Page 3 of 4 Exhibit 21 ---------- H.B. FULLER COMPANY AND CONSOLIDATED SUBSIDIARIES AS OF DECEMBER 1, 2001
- ------------------------------------------------------------------------------------------------------------------------- JURISDICTION OF % SUBSIDIARY ORGANIZATION OWNERSHIP OWNED - ------------------------------------------------------------------------------------------------------------------------- Kativo de Honduras, S.A. Honduras Kativo Chemical Industries, S.A. 69.29 Fuller Istmena, S.A. 30.65 H.B. Fuller Panama, S.A. 0.02 Kativo de Panama, S.A. 0.02 Chemical Supply Corporation 0.02 Aerosoles de Centroamerica, S.A. Honduras Kativo Chemical Industries, S.A. 99.88 H.B. Fuller Panama, S.A. 0.09 Chemical Supply Corporation 0.01 Papeleria e Imprenta Calderon 0.01 Teodorica Sierra 0.01 * H.B. Fuller Honduras, S.A. Honduras Kativo Chemical Industries, S.A. 20.00 note b Fuller Istmena, S.A. 20.00 Kativo de Panama, S.A. 20.00 H.B. Fuller Panama, S.A. 20.00 Chemical Supply Corporation 20.00 Industrias Kativo de Nicaragua, S.A. Nicaragua Kativo Chemical Industries, S.A. 99.99 Minority 0.01 * H.B. Fuller Nicaragua, S.A. Nicaragua Kativo Chemical Industries, S.A. 99.80 Minority 0.20 Chemical Supply Corporation Panama Kativo Chemical Industries, S.A. 100.00 * Kativo de Panama, S.A. Panama Kativo Chemical Industries, S.A. 100.00 note b * Fuller Istmena, S.A. Panama Kativo de Panama, S.A. 100.00 note b * Deco Tintas Comerciales, S.A. Panama Kativo Chemical Industries, S.A. 100.00 note b * H.B. Fuller Panama, S.A. Panama Kativo Chemical Industries, S.A. 100.00 note b * Deco Tintas de Panama, S.A. Panama Kativo Chemical Industries, S.A. 100.00 note b * Sistemas Integrados, S.A. Panama H.B. Fuller Panama, S.A. 100.00 note b * Chemical Supply Peruana, S.A. Peru Chemical Supply Corporation 99.99 note a Minority 0.01 H.B. Fuller Peru, S.A. Peru Kativo Chemical Industries, S.A. 99.00 Minority (Peru atty) 1.00 H.B. Fuller Caribbean Puerto Rico H.B. Fuller Caribe (Dominicana) 100.00 H.B. Fuller Uruguay, S.A. Uruguay H.B. Fuller Argentina, S.A. 100.00 * H.B. Fuller Venezuela, C.A. Venezuela Kativo Chemical Industries, S.A. 100.00 note b
* -- Inactive Entities a -- Liquidation process has begun. b -- To be liquidated or merged Page 4 of 4 EX-23 6 dex23.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-73650, 33-50786, 333-24703, 333-50005, 333-50827, 333-89453, 333-48420, 333-44496, and 333-48418) and Form S-3 (No. 33-53387) of H.B. Fuller Company of our report dated January 15, 2002 relating to the consolidated financial statements, which appear in this Form 10-K. /s/ PricewaterhouseCoopers LLP - ---------------------------------- PricewaterhouseCoopers LLP Minneapolis, Minnesota March 1, 2002 EX-24 7 dex24.txt POWERS OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors of H.B. FULLER COMPANY, a Minnesota corporation, which proposes to file with the Securities and Exchange Commission, Washington D.C. 20549, under the provisions of the Securities Exchange Act of 1934, as amended, a Form 10-K Annual Report for the Company's fiscal year ended December 1, 2001, hereby constitute and appoint ALBERT P.L. STROUCKEN, RAYMOND A. TUCKER AND RICHARD C. BAKER his/her true and lawful attorneys-in-fact and agents, and each of them, with full power to act without the other, for him/her and in his/her name, place and stead to sign such annual report with power, where appropriate, to affix the corporate seal of said Company thereto, and to attest said seal, and to file such annual report so signed, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission and with the appropriate office of any state, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he/she might do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the 15th day of November, 2001. /s/ Norbert R. Berg /s/ J. Michael Losh - ---------------------------------- ----------------------------------------- NORBERT R. BERG J. MICHAEL LOSH Director Director /s/ Edward L. Bronstien, Jr. /s/ John J. Mauriel, Jr. - ---------------------------------- ----------------------------------------- EDWARD L. BRONSTIEN, JR. JOHN J. MAURIEL, JR. Director Director /s/ Freeman A. Ford /s/ Lee R. Mitau - ---------------------------------- ----------------------------------------- FREEMAN A. FORD LEE R. MITAU Director Director /s/ Gail D. Fosler /s/ Albert P.L. Stroucken - ---------------------------------- ----------------------------------------- GAIL D. FOSLER ALBERT P.L. STROUCKEN Director Chairman of the Board, President, Chief Executive Officer /s/ Reatha Clark King /s/ R. William Van Sant - ---------------------------------- ----------------------------------------- REATHA CLARK KING R. WILLIAM VAN SANT Director Director /s/ Knut Kleedehn - ---------------------------------- KNUT KLEEDEHN Director -----END PRIVACY-ENHANCED MESSAGE-----