UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 2, 2006

 

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 Number 001-09225

 


 

H.B. FULLER COMPANY

(Exact name of Registrant as specified in its charter)

 


 

Minnesota   41-0268370

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1200 Willow Lake Boulevard, Vadnais Heights, Minnesota   55110-5101
(Address of principal executive offices)   (Zip Code)

 

(651) 236-5900

(Registrant’s telephone number, including area code)

 


 

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x     Accelerated filer   ¨     Non- accelerated filer   ¨

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ¨     No   x

 

The number of shares outstanding of the Registrant’s Common Stock, par value $1.00 per share, was 59,632,460 as of September 29, 2006.

 



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

H.B. FULLER COMPANY AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

 

     13 Weeks Ended     39 Weeks Ended  
     September 2,
2006
    August 27,
2005
    September 2,
2006
    August 27,
2005
 

Net revenue

   $ 388,949     $ 358,091     $ 1,125,742     $ 1,099,003  

Cost of sales

     (278,610 )     (260,509 )     (805,881 )     (811,158 )
                                

Gross profit

     110,339       97,582       319,861       287,845  

Selling, general and administrative expenses

     (75,739 )     (73,460 )     (230,651 )     (232,290 )

Gains (losses) from sales of assets

     (14 )     278       831       7,076  

Other income (expense), net

     274       (25 )     280       (839 )

Interest expense

     (4,575 )     (2,942 )     (12,285 )     (9,166 )
                                

Income before income taxes, minority interests, and income from equity investments

     30,285       21,433       78,036       52,626  

Income taxes

     (7,454 )     (6,855 )     (21,779 )     (16,999 )

Minority interests in (income) loss of subsidiaries

     (259 )     312       (993 )     786  

Income from equity investments

     1,626       651       3,745       1,844  
                                

Net income

   $ 24,198     $ 15,541     $ 59,009     $ 38,257  
                                

Net earnings per share:

        

Basic

   $ 0.41     $ 0.27     $ 1.01     $ 0.67  

Diluted

   $ 0.40     $ 0.26     $ 0.99     $ 0.66  

Weighted-average shares outstanding:

        

Basic

     59,157       57,635       58,643       57,335  

Diluted

     60,281       58,864       59,876       58,349  

Dividends declared per common share

   $ 0.06250     $ 0.06125     $ 0.18625     $ 0.1800  

See accompanying notes to consolidated financial statements.

 

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H.B. FULLER COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

    

September 2,

2006


    December 3,
2005


 

Assets

                

Current assets:

                

Cash and cash equivalents

   $ 123,613     $ 157,631  

Trade receivables

     241,885       246,596  

Allowance for doubtful accounts

     (8,099 )     (8,046 )

Inventories

     157,022       142,984  

Other current assets

     56,858       43,269  
    


 


Total current assets

     571,279       582,434  

Property, plant and equipment, net

     310,672       298,852  

Restricted cash

     15,000       —    

Other assets

     126,557       128,213  

Goodwill

     196,764       80,815  

Other intangibles, net

     172,221       17,243  
    


 


Total assets

   $ 1,392,493     $ 1,107,557  
    


 


Liabilities and Stockholders’ Equity

                

Current liabilities:

                

Notes payable

   $ 10,880     $ 9,597  

Current installments of long-term debt

     25,000       25,240  

Trade payables

     164,799       135,292  

Accrued payroll and employee benefits

     44,617       47,496  

Other accrued expenses

     34,848       30,045  

Income taxes payable

     13,972       14,188  
    


 


Total current liabilities

     294,116       261,858  

Long-term debt, excluding current installments

     252,000       112,001  

Accrued pension liabilities

     101,619       96,034  

Other liabilities

     49,821       34,218  

Minority interests in consolidated subsidiaries

     17,370       16,361  
    


 


Total liabilities

     714,926       520,472  
    


 


Commitments and contingencies

                

Stockholders’ equity:

                

Preferred stock (no shares outstanding) Shares authorized – 10,045,900

     —         —    

Common stock, par value $1.00 per share, Shares authorized – 160,000,000, Shares issued and outstanding – 59,632,315 in 2006 and 29,184,754 on a pre-split basis in 2005

     59,632       29,185  

Additional paid-in capital

     82,476       58,450  

Retained earnings

     525,319       507,217  

Accumulated other comprehensive income (loss)

     10,140       (7,767 )
    


 


Total stockholders’ equity

     677,567       587,085  
    


 


Total liabilities and stockholders’ equity

   $ 1,392,493     $ 1,107,557  
    


 


 

See accompanying notes to consolidated financial statements.

 

3


H.B. FULLER COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     39 Weeks Ended  
     September 2,
2006
    August 27,
2005
 

Cash flows from operating activities:

    

Net income

   $ 59,009     $ 38,257  

Adjustments to reconcile net income to net cash used in operating activities:

    

Depreciation and amortization

     37,319       41,347  

Deferred income taxes

     (4,757 )     (1,809 )

Gains from sales of assets

     (831 )     (7,076 )

Share-based compensation

     4,483       1,324  

Excess tax benefit from share-based compensation

     (5,446 )     —    

Change in assets and liabilities, net of assets and liabilities acquired:

    

Accounts receivables, net

     25,836       20,842  

Inventories

     (962 )     (8,883 )

Other assets

     (11,431 )     (4,059 )

Accounts payables

     18,841       (20,657 )

Accrued payroll / employee benefits

     (3,825 )     7,471  

Other accrued expenses

     2,101       (14,363 )

Restructuring liability

     (240 )     (2,252 )

Income taxes payable

     5,161       7,607  

Accrued pension liabilities

     3,556       (457 )

Other liabilities

     2,375       3,246  

Other

     (1,513 )     4,378  
                

Net cash provided by operating activities

     129,676       64,916  

Cash flows from investing activities:

    

Purchased property, plant and equipment

     (12,838 )     (17,871 )

Purchased business, net of cash acquired

     (309,386 )     —    

Purchased investment

     —         (2,297 )

Proceeds from sale of business

     2,515       —    

Proceeds from sale of investment

     —         8,000  

Proceeds from sale of property, plant and equipment

     499       11,282  

Proceeds from repayment of note receivable from equity method investee

     —         9,781  
                

Net cash provided by (used in) investing activities

     (319,210 )     8,895  

Cash flows from financing activities:

    

Proceeds from long-term debt

     195,000       —    

Repayment of long-term debt

     (55,241 )     (22,740 )

Net proceeds (payments) from/on notes payable

     1,191       (75 )

Dividends paid

     (11,022 )     (10,421 )

Options exercised

     14,970       7,440  

Excess tax benefit from share-based compensation

     5,446       —    

Repurchased common stock

     (506 )     (339 )
                

Net cash provided by (used in) financing activities

     149,838       (26,135 )

Effect of exchange rate changes

     5,678       (1,929 )
                

Net change in cash and cash equivalents

     (34,018 )     45,747  

Cash and cash equivalents at beginning of period

     157,631       67,028  
                

Cash and cash equivalents at end of period

   $ 123,613     $ 112,775  
                

Supplemental disclosure of cash flow information:

    

Dividends paid with company stock

   $ 29,886     $ 40  

Cash paid for interest

   $ 9,383     $ 12,677  

Cash paid for income taxes

   $ 11,592     $ 10,321  

See accompanying notes to consolidated financial statements.

 

4


H.B. FULLER COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts)

Note 1: Accounting Policies

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, financial position, and cash flows in conformity with U.S. generally accepted accounting principles. In the opinion of management, the interim consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary for a fair presentation of the results for the periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the year ended December 3, 2005 as filed with the Securities and Exchange Commission.

The company has made certain reclassifications to the fiscal 2005 consolidated financial statements, as previously reported, to conform to current classification. These reclassifications did not change net income as previously reported. Reclassifications associated with the adoptions of SFAS 123R (see Note 3), required certain share-based awards previously reported as liabilities and contra-equity accounts to be classified as additional paid in capital.

On July 13, 2006, the company’s board of directors approved a two-for-one stock split of its common stock. The stock split was payable on August 4, 2006 to shareholders of record as of July 28, 2006. The split was in the form of a stock dividend, with shareholders receiving an additional share for each existing share held. All references in the Consolidated Financial Statements to the number of common shares and related per share amounts reflect the effect of the stock split.

On July 13, 2006, the Board of Directors of the company approved a new shareholder rights plan. The shareholder rights plan provides each holder of a share of common stock a right to purchase one one-hundredth of a share of preferred stock for $95, subject to adjustment. Only whole preferred stock shares can be issued. Preferred Shares purchased upon exercise of the rights will not be redeemable. Each preferred share will be entitled to a preferential quarterly dividend payment, a preferential liquidation payment, voting rights, and participation in any merger, consolidation or other transaction in which common shares are exchanged. These rights are not currently exercisable. However, upon the occurrence of certain events, such as (1) the acquisition of 15 percent or more of the company’s outstanding common stock by a person or group of affiliated persons (an “acquiring person”) or (2) the public announcement of a tender offer, the consummation of which would result in a person or group of affiliated persons becoming an acquiring person, each right would entitle the holder to purchase $95 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 31, 2016.

Recently Issued Accounting Pronouncements:

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47). FIN 47 clarifies that a conditional asset retirement obligation, as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of the settlement are conditional on a future event that may or may not be within the control of the entity. The Statement is effective for the company no later than December 2, 2006. The company is in the process of evaluating the impact of FIN 47 on its financial condition, results of operations and cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for income taxes by

 

5


prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is applicable beginning December 2, 2007. The cumulative effect of applying the provisions of FIN 48, if any, will be reported as an adjustment to the opening balance of retained earnings on December 2, 2007. The company is in the process of evaluating the impact of FIN 48 on its financial condition, results of operations and cash flows.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB 108 requires registrants to apply the new guidance for the first time that it identifies material errors in existence at the beginning of the first fiscal year ending after November 15, 2006 by correcting those errors through a one-time cumulative effect adjustment to beginning-of-year retained earnings. The company is currently evaluating SAB 108 and has not yet determined the impact on its results of operations or financial position.

Note 2: Acquisitions and Divestitures

Autotek Sealants, Inc.: Autotek provides bonding, sealing and coating technology to the automotive industry. The company’s 70 percent owned automotive joint venture acquired a 48 percent ownership in Autotek on May 2, 2001. On September 26, 2005, the joint venture purchased the remaining 52 percent of Autotek for $894. Consideration consisted of $500 paid in cash, $357 in the form of a promissory note and $37 from direct external costs. The company accounted for this transaction as a step acquisition and began to report 100 percent of Autotek’s net results beginning in the fourth quarter of 2005.

The acquisition of the remaining 52 percent adjusted goodwill by $149 and eliminated the minority interest liability of $856. In the fourth quarter of 2005, the company repaid the $500 of debt, which the automotive joint venture guaranteed.

In the first quarter of 2006, the company settled the promissory note to the previous owner for an amount of $316, which included adjustments for uncollected accounts receivable and an additional tax obligation paid by the company.

The following summarized unaudited pro forma consolidated results of operations are presented as if the acquisition of the remaining 52 percent of Autotek had occurred on November 28, 2004 (beginning of fiscal 2005). The unaudited pro forma results are not necessarily indicative of future earnings or earnings that would have been reported had the acquisition been completed as presented.

 

    

13 weeks ended

August 27, 2005

  

39 weeks ended

August 27, 2005

Net revenue

   $ 358,091    $ 1,099,003

Net income

   $ 15,399    $ 37,803

Net income per share:

     

Basic

   $ 0.27    $ 0.66

Diluted

   $ 0.26    $ 0.65

Sekisui-Fuller Joint Ventures : In the second quarter of 2005, the company completed its definitive agreements to enter into business-related partnerships in Japan and China with Sekisui Chemical Co., Ltd. In Japan, Sekisui and the company merged their Japanese adhesives businesses on April 1, 2005 to create Sekisui-Fuller Company, Ltd. H.B. Fuller contributed $15,629 of current assets, $11,463 of long-term assets, $8,665 of current liabilities, $10,639 of long-term liabilities – in aggregate, net assets of $7,788. The long-term assets included $2,488 of goodwill allocated from the Global Adhesives operating segment. In exchange, H.B. Fuller received a 40 percent ownership in Sekisui-Fuller Company, Ltd. with an option to purchase an additional 10 percent in 2007 for $12,000. Additionally, the joint venture agreement included provisions requiring the company to fund the operations of the joint venture in the

 

6


event such capital contributions are approved by the joint venture board of directors. The merger was accounted for as a formation of a corporate joint venture. As a result, the company’s interest in the joint venture was recorded at the carry-over basis of its Japan adhesives business. Therefore, no gain or loss was recorded on the merger. H.B. Fuller will account for this investment under the equity method. Subsequent to closing, $9,781 of intercompany debt, initially assumed by the joint venture at formation, was retired through a cash payment to the company on April 14, 2005.

With respect to China, the company received $8,000 from Sekisui on May 26, 2005 in exchange for a 20 percent investment in H.B. Fuller’s China entities and an option for Sekisui to increase its investment to 30 percent in 2007 for $4,000. As a result of the 20 percent investment sold, the company recorded a pre-tax gain of $4,665. Sekisui’s option to purchase an additional 10 percent in 2007 was initially recorded as a liability at a fair value of $688 and was subsequently marked-to-market at September 2, 2006 to $608. The company will continue to mark-to-market this liability through earnings in subsequent periods. H.B. Fuller will continue to consolidate China with the portion owned by Sekisui represented as a minority interest liability.

Roanoke Companies Group, Inc .: On January 30, 2006, the company signed an asset purchase agreement, under which it agreed to acquire substantially all the assets of Roanoke Companies Group, Inc. and assume certain operating liabilities. On March 17, 2006, the acquisition was completed. Roanoke is a leading U.S. manufacturer of “pre-mix” grouts, mortars and other products designed to enhance the installation of flooring systems with 2005 revenue of approximately $80,000. They are focused particularly on the retail home improvement market segment and are included in the company’s Full-Valu/Specialty operating segment.

The total purchase price for the acquisition was approximately $275,384, which includes direct external acquisition costs of $869. In addition, if certain profitability thresholds are met, certain continuing members of Roanoke’s senior management may receive additional cash consideration of up to $15,000 (in total), which would be paid out over a two-year period. Based on management’s review of those profitability thresholds, no amounts have been paid out or accrued as of September 2, 2006.

The company funded the transaction with $80,384 in existing cash and $195,000 in new debt. $15,000 of the purchase price was placed into escrow to cover indemnification by the seller and shareholders. This amount is recorded in long-term restricted cash and other long-term liabilities. The company utilized its revolving credit agreement to provide the initial debt financing. The credit agreement was amended to increase the commitment level to $250,000, and revise the imbedded accordion feature.

The acquired assets consist primarily of assets used by Roanoke in the operation of its business, including, without limitation, certain real property, intellectual property, equipment, accounts, contracts and intangibles. The valuation of the net assets received involved allocations of the consideration paid to $20,581 of current assets, $23,746 of property, plant and equipment, $146,900 of intangible assets, $94,894 of goodwill, $10,581 of current liabilities and $156 of long-term liabilities. All of the goodwill was assigned to the Full-Valu/Specialty operating segment and is tax deductible over 15 years. Of the $146,900 of acquired intangibles, $131,000 and $15,900 was assigned to customer relationships and trademarks / trade names that have expected lives of 20 years and 15 years, respectively.

The following summarized unaudited pro forma consolidated results of operations are presented as if the acquisition of Roanoke had occurred on November 28, 2004 (beginning of fiscal 2005). The unaudited pro forma results are not necessarily indicative of future earnings or earnings that would have been reported had the acquisition been completed as presented.

 

     13 weeks ended    39 weeks ended
     August 27, 2005    September 2, 2006    August 27, 2005

Net revenue

   $ 379,585    $ 1,149,674    $ 1,159,100

Net income

   $ 17,008    $ 59,024    $ 41,901

Net income per share:

        

Basic

   $ 0.30    $ 1.01    $ 0.73

Diluted

   $ 0.29    $ 0.99    $ 0.72

 

7


Henkel KGaA’s insulating glass sealant business : On March 27, 2006, the company signed an asset purchase agreement with Henkel KGaA, under which the company agreed to acquire Henkel’s insulating glass sealant business. On June 9, 2006, the acquisition was completed. The insulating glass sealant business manufacturers sealants for windows used in both residential and commercial construction. This business has a strong presence in Europe and an expanding presence in Asia. The acquired business is included in the company’s Full-Valu/Speciality operating segment.

The total purchase price for the acquisition was approximately $33,409, which excludes direct external acquisition costs. Direct external costs are expected to be finalized in the fourth quarter of 2006. The company funded the transaction with existing cash.

The acquired assets consist of inventory, manufacturing equipment, and intangibles. The preliminary analysis of the valuation of the net assets received involved allocations of the consideration paid to $3,166 of current assets, $1,393 of equipment, $13,297 of intangible assets, $15,702 of goodwill and $149 of long-term liabilities. All of the goodwill was assigned to the Full-Valu/Specialty operating segment and is tax deductible over 5 to 15 years. Of the $13,297 of acquired intangibles, $8,358 was assigned to customer relationships with an expected life of approximately 7 years and $4,939 was assigned to intellectual property and trademarks that have expected lives of 10 years. Allocation of consideration paid is expected to be finalized during the fourth quarter of 2006.

The following summarized unaudited pro forma consolidated results of operations are presented as if the acquisition had occurred on November 28, 2004 (beginning of fiscal 2005). The unaudited pro forma results are not necessarily indicative of future earnings or earnings that would have been reported had the acquisition been completed as presented.

 

     13 weeks ended    39 weeks ended
     September 2,
2006
   August 27,
2005
   September 2,
2006
   August 27,
2005

Net revenue

   $ 389,712    $ 371,108    $ 1,145,202    $ 1,139,924

Net income

   $ 24,208    $ 16,110    $ 59,250    $ 40,046

Net income per share:

           

Basic

   $ 0.41    $ 0.28    $ 1.01    $ 0.70

Diluted

   $ 0.40    $ 0.27    $ 0.99    $ 0.69

Note 3: Accounting for Share-Based Compensation

The company has various share-based compensation programs, which provide for equity awards including stock options, restricted stock and deferred compensation. These equity awards fall under several plans and are described below.

Effective December 4, 2005, the start of the first quarter of fiscal 2006, the company began recording compensation expense associated with share-based awards and other forms of equity compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment , (“SFAS 123R”) as interpreted by SEC Staff Accounting Bulletin No. 107. SFAS 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and amends SFAS No. 95, Statement of Cash Flows . Generally, the approach in SFAS 123R is similar to the approach described in SFAS No. 123 , Accounting For Stock-Based Compensation (“SFAS 123”). However, SFAS 123R requires all share-based payments to employees and non-employee directors, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant.

Historically, the company accounted for share-based compensation under the recognition and measurement principles of APB 25 and related interpretations. No compensation expense related to stock option plans was reflected in the company’s Consolidated Statements of Income as all options had an exercise price equal to the market value of the underlying common stock on the date of grant. SFAS 123 established accounting and disclosure requirements using a fair-value-based method of accounting for share-based employee compensation plans. As permitted by SFAS 123, the company elected to continue

 

8


to apply the intrinsic-value-based method of APB 25, described above, and adopted only the disclosure requirements of SFAS 123, as amended by SFAS No. 148, Accounting For Stock-Based Compensation - Transition and Disclosure .

 

The company adopted the modified prospective transition method provided for under SFAS 123R, and consequently has not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with share-based awards recognized in the third quarter of fiscal year 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of December 3, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to December 3, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.

 

Equity Compensation Plans

 

The company currently grants stock options, restricted stock and stock-based units under equity compensation and deferred compensation plans.

 

Non-qualified stock options are granted 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. Options exercised represent newly issued shares.

 

Restricted stock awards are nonvested stock awards that may include grants of restricted stock shares or restricted stock units. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. Such awards vest in either three, four or ten years from the date of grant or 25 percent per year over a four year period; depending on the grant. During the vesting period, ownership of the shares cannot be transferred. Restricted stock shares granted represent newly issued shares and have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding. Restricted stock units have dividend equivalent rights equal to the cash dividend paid on restricted stock shares. However, restricted stock units do not have voting rights of common stock and are not considered issued and outstanding. Restricted stock units become newly issued shares when vested. The company expenses the cost of the restricted stock awards, which is the grant date fair market value, ratably over the period during which the restrictions lapse. The grant date fair value is the company’s closing stock price on the date of grant.

 

Directors’ Deferred Compensation Plan: This plan allows non-employee directors to defer all or a portion of their retainer and meeting fees in a number of investment choices, including units representing shares of company common stock. The company provides a 10 percent match on deferred compensation invested in these units. These units are required to be paid out in company common stock.

 

1998 Directors’ Stock Incentive Plan: This plan offers non-employee directors incentives to put forth maximum efforts for the success of the business and to afford non-employee directors an opportunity to acquire a proprietary interest in the company. This plan permits granting of (a) restricted stock and (b) shares for amounts non-employee directors deferred under the Directors’ Deferred Compensation Plan.

 

Year 2000 Stock Incentive Plan: This plan allows for granting of awards to employees. On April 6, 2006, this plan was amended to, among other things, extend the term of the plan until January 26, 2016. The plan permits granting of (a) stock options; (b) stock appreciation rights; (c) restricted stock awards; (d) performance awards; (e) dividend equivalents; and (f) other awards based on the company’s common stock.

 

1992 Stock Incentive Plan: This plan permitted granting of (a) stock options; (b) stock appreciation rights; (c) restricted stock awards; (d) performance awards; (e) dividend equivalents; and (f) other awards based on the company’s common stock. Since inception of the Year 2000 Stock Incentive Plan, no more awards have been granted under this plan.

 

Key Employee Deferred Compensation Plan: This plan allows key employees to defer a portion of their eligible compensation in a number of investment choices, including units, representing shares of company

 

9


common stock. The company provides a 10 percent match on deferred compensation invested in these units. The company also provides a match for certain amounts specified in the plan related to matching contributions under the 401(k) plan.

A summary of shares reserved and available by plan for issuance follows:

 

     Shares Reserved   

Shares Available at

September 2, 2006

Directors’ Deferred Compensation Plan

   300,000    None

1998 Directors’ Stock Incentive Plan

   800,000    498,956

Year 2000 Stock Incentive Plan

   10,400,000    5,522,434

1992 Stock Incentive Plan

   3,600,000    None

Key Employee Deferred Compensation Plan

   400,000    99,555

Grant-Date Fair Value

The company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award. The fair value of options granted during the 13 and 39 weeks ended September 2, 2006 and August 27, 2005 were calculated using the following assumptions:

 

    

13 Weeks Ended 1,2

September 2, 2006

   39 Weeks Ended 2
        September 2, 2006   

August 27,

2005

Expected life (in years)

     5.1      5.7      7.5

Weighted-average expected volatility

     45.51%      45.72%      37.90%

Expected volatility

     45.50% - 45.62%      45.50% - 46.0%      37.62% - 37.92%

Risk-free interest rate

     4.99%      4.87%      4.30%

Expected dividend yield

     1.27%      1.31%      1.60%

Weighted-average fair value of grants

   $ 8.38    $ 8.45    $ 5.82

1 There were no options granted for the 13 week period ended August 27, 2005.
2 Share data adjusted for effect of 2-for-1 stock split effective July 28, 2006.

Expected life – The company uses historical employee exercise and option expiration data to estimate the expected life assumption for the Black-Scholes grant-date valuation. The company believes that this historical data is currently the best estimate of the expected term of a new option. The company uses a weighted-average expected life for all awards. As part of its SFAS 123R adoption, the company examined its historical pattern of option exercises in an effort to determine if there were any discernable activity patterns based on certain employee populations. From this analysis, the company identified two employee populations: executives and non-executives. The analysis showed that employees above a specific pay-grade held onto their stock options for a longer period of time as compared to non-executives. Prior to adoption of SFAS 123R, the company calculated the expected life based on one employee population.

Expected volatility – The company uses the company stock’s historical volatility for the same period of time as the expected life. The company has no reason to believe that its future volatility will differ from the past.

Risk-free interest rate – The rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the same period of time as the expected life.

Expected dividend yield – The calculation is based on the total expected annual dividend payout divided by the average stock price.

 

10


Expense

 

The company uses the straight-line attribution method to recognize expense for all option awards with graded vesting and restricted stock awards with cliff vesting. The company used the graded attribution method for restricted stock awards with graded vesting issued prior to the adoption of SFAS 123R. All share-based awards issued after the adoption of SFAS 123R will be expensed under the straight-line attribution method.

 

Some share-based awards are eligible to vest early in the event of retirement, involuntary termination, death, disability or change in control. To be eligible for retirement early vesting, an employee must meet certain age and service requirements. Option awards are eligible for early vesting under retirement if the employee is age 55 or older and has either 5 or 10 years of service, depending upon the grant. Restricted stock awards are eligible for early vesting under retirement if the employee is age 65 or older. All awards early vest in the event of death, disability or change in control. Some restricted stock awards allow for early vesting if the employee is involuntarily terminated.

 

SFAS 123R requires compensation costs associated with share-based awards to be recognized over the requisite service period, which for the company is the period between the grant date and the earlier of the award’s stated vesting term or the date the employee is eligible for retirement. The company immediately recognizes the entire amount of share-based compensation cost for employees that are eligible for retirement at the date of grant. For awards granted to employees approaching retirement eligibility, the company recognizes compensation cost on a straight-line basis over the period from grant date through the retirement eligibility date. Share-based compensation expense for employees who are not retirement eligible is recognized on a straight-line basis over the statutory vesting period of the award.

 

The amount of share-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered award. The company currently expects, based on an analysis of its historical forfeitures and known forfeitures on existing awards, that approximately 85 percent and 91 percent of its unvested outstanding options and restricted stock awards will vest, respectively. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.

 

Total share-based compensation expense of $1,588 and $4,483 has been included in the company’s Consolidated Statements of Income for the 13 and 39 week periods ended September 2, 2006, respectively. Included in this amount is $772 and $2,656 of stock option expense for the 13 and 39 week periods ended September 2, 2006, respectively, that was recognized as a result of adopting SFAS 123R. No amount of share-based compensation was capitalized. The impact of adopting SFAS 123R is as follows:

 

    

13 Weeks
Ended

September 2,
2006


   

39 Weeks
Ended

September 2,
2006


 

Selling, general and administrative expenses

   $ (772 )   $ (2,656 )
    


 


Share-based compensation expense before income taxes

     (772 )     (2,656 )

Tax benefit

     305       1,022  
    


 


Share-based compensation expense after income taxes

   $ (467 )   $ (1,634 )

Effect on:

                

Earnings per share – Basic

   $ (0.01 )   $ (0.03 )

Earnings per share – Diluted

   $ (0.01 )   $ (0.03 )

 

Prior to the adoption of SFAS 123R, benefits of tax deductions in excess of recognized compensation costs (excess tax benefits) were reported as operating cash flows. SFAS 123R requires that they be recorded as a financing cash inflow rather than a deduction of taxes paid. For the 13 and 39 weeks ended September 2, 2006, there was $290 and $5,446 of excess tax benefit recognized resulting from share-based compensation cost.

 

11


In November 2005, the FASB issued FASB Staff Position 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-based Payment Awards (“FSP 123R-3”). FSP 123R-3 provides an elective alternative transition method of calculating the additional paid in capital pool (“APIC Pool”) of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123R to the method otherwise required by paragraph 81 of SFAS 123R. The company may take up to one year from the effective date of FSP 123R-3 to evaluate its available alternatives and make its one-time election. After evaluating the alternative methods, the company believes it will elect the transitional method described in FSP 123R-3 and used this to estimate its APIC Pool upon adoption of SFAS 123R. Upon adoption of SFAS 123R, the company estimated that its APIC Pool was $993. Exercises of stock options, restricted stock lapsings and deferred compensation payouts in the 39 weeks ended September 2, 2006 increased the APIC Pool to $6,142.

 

The following table details the effect on net income and earnings per share had share-based compensation expense been recorded for the 13 and 39 weeks ended August 27, 2005 based on the fair-value method under SFAS 123. The reported and pro forma net income and earnings per share for the 13 and 39 week periods ended September 2, 2006 are the same since share-based compensation expense was calculated under the provisions of SFAS 123R.

 

    

13 Weeks
Ended

August 27,
2005


   

39 Weeks
Ended

August 27,
2005


 

Net income, as reported

     15,541       38,257  

Add back: Share-based compensation expense recorded, net of related tax effects

     435       1,134  
    


 


Net income excluding share-based compensation

     15,976       39,391  

Deduct: Total share-based compensation expense determined under fair value based method for all awards, net of related tax effects

     (1,012 )     (2,858 )
    


 


Pro forma net income

     14,964       36,533  
    


 


Basic income per share:

                

As reported

   $ 0.27     $ 0.67  

Pro forma

   $ 0.26     $ 0.64  

Diluted income per share:

                

As reported

   $ 0.26     $ 0.66  

Pro forma

   $ 0.25     $ 0.63  

 

As of September 2, 2006, there was $6,439 of unrecognized compensation costs related to unvested stock option awards, which is expected to be recognized over a weighted-average period of 2.7 years. Unrecognized compensation costs related to unvested restricted stock awards was $3,373, which is expected to be recognized over a weighted-average period of 2.0 years.

 

Share-based Activity

 

Option activity for the 39 weeks ended September 2, 2006 was as follows:

 

     Options

   

Weighted-

Average
Exercise Price


Outstanding at December 3, 2005

   4,311,226     $ 13.44

Granted

   46,100       19.36

Exercised

   (1,189,160 )     12.59

Forfeited or Cancelled

   (163,656 )     14.22
    

 

Outstanding at September 2, 2006

   3,004,510     $ 13.82

 

The fair value of options granted during the 13 weeks ended September 2, 2006 was $220. No options were granted in the third quarter of 2005. Total intrinsic value of options exercised during the 13 weeks

 

12


ended September 2, 2006 and August 27, 2005 was $300 and $2,033, respectively. Intrinsic value is the difference between the company’s closing stock price on the respective trading day and the exercise price, multiplied by the number of options exercised. The fair value of options granted during the 39 weeks ended September 2, 2006 and August 27, 2005 was $390 and $5,256, respectively. Total intrinsic value of options exercised during the 39 weeks ended September 2, 2006 and August 27, 2005 was $13,238 and $2,867, respectively. Proceeds received from option exercises during the 13 and 39 weeks ended September 2, 2006 were $464 and $14,970, respectively.

 

The following table summarizes information concerning outstanding and exercisable options as of September 2, 2006:

 

Range of

Exercise Prices


   Options Outstanding 4

   Options Exercisable 4

   Options

   Life 1

   Price 2

   Value 3

   Options

   Life 1

   Price 2

   Value 3

$5.01-$10.00

   394,798    4.1    $ 9.49    $ 3,892    394,798    4.1    $ 9.49    $ 3,892

$10.01-$15.00

   1,848,786    6.9      13.75      10,344    970,688    6.1      13.46      5,713

$15.01-$20.00

   760,926    9.3      16.21      2,400    5,122    5.8      15.31      21
    
  
  

  

  
  
  

  

     3,004,510    7.1    $ 13.82    $ 16,636    1,370,608    5.5    $ 12.33    $ 9,626

1 Represents the weighted-average remaining contractual life in years.
2 Represents the weighted-average exercise price.
3 Represents the aggregate intrinsic value based on the company’s closing stock price on the last trading day of the quarter for in-the-money options.
4 Share data adjusted for effect of 2-for-1 stock split effective July 28, 2006.

 

Nonvested restricted stock awards as of September 2, 2006 and changes during the 39 weeks ended September 2, 2006 were as follows:

 

     Units

    Shares

    Total

    Weighted-
Average
Grant Date
Fair Value


  

Weighted-
Average
Remaining
Contractual
Life

(in Years)


Nonvested at December 3, 2005

   151,530     499,820     651,350     $ 14.34    2.6

Granted

   —       12,474     12,474       21.57    3.0

Vested

   (53,470 )   (59,784 )   (113,254 )     11.79    0.5

Forfeited

   (19,984 )   (10,292 )   (30,276 )     14.21    1.6
    

 

 

 

  

Nonvested at September 2, 2006

   78,076     442,218     520,294     $ 15.07    2.0

 

Total fair value of restricted stock vested during the 13 weeks ended September 2, 2006 and August 27, 2005 was $1,325 and $1,316, respectively. Total fair value of restricted stock vested during the 39 weeks ended September 2, 2006 and August 27, 2005 was $2,957 and $1,945, respectively. The total fair value of nonvested restricted stock at September 2, 2006 was $10,068.

 

The company repurchased 7,306 and 11,348 restricted stock shares during the 13 weeks ended September 2, 2006 and August 27, 2005, respectively, in conjunction with restricted stock share vestings. The company repurchased 20,368 and 21,394 restricted stock shares during the 39 weeks ended September 2, 2006 and August 27, 2005, respectively, in conjunction with restricted stock share vestings. The repurchases relate to statutory minimum tax withholding. The company does not expect any additional restricted stock shares to be repurchased in fiscal 2006.

 

13


Deferred compensation units are fully vested at the date of contribution. Deferred compensation units outstanding as of September 2, 2006 and changes during the 39 weeks ended September 2, 2006 were as follows:

 

     39 Weeks Ended September 2, 2006

 
     Non-employee
Directors


    Employees

    Total

 

Units outstanding December 3, 2005

   184,023     180,233     364,256  

Participant contributions

   14,708     13,190     27,898  

Company match contributions

   15,174     11,804     26,978  

Payouts

   (26,218 )   (31,097 )   (57,315 )
    

 

 

Units outstanding September 2, 2006

   187,687     174,130     361,817  

 

Note 4: Earnings Per Share:

 

A reconciliation of the common share components for the basic and diluted earnings per share calculations follows:

 

     13 Weeks Ended

   39 Weeks Ended

     September 2,
2006


   August 27,
2005


   September 2,
2006


   August 27,
2005


Weighted-average common shares – basic

   59,157,316    57,634,586    58,642,511    57,335,248

Equivalent shares from share based compensation plans

   1,123,708    1,229,834    1,233,587    1,014,040
    
  
  
  

Weighted-average common shares – diluted

   60,281,024    58,864,420    59,876,098    58,349,288
    
  
  
  

 

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the applicable period. Diluted earnings per share is based upon the weighted average number of common and common equivalent shares outstanding during the applicable period. The difference between basic and diluted earnings per share is attributable to share-based compensation awards. The company uses the treasury stock method to calculate the effect of outstanding shares, which computes total employee proceeds as the sum of (a) the amount the employee must pay upon exercise of the award, (b) the amount of unearned share-based compensation costs attributed to future services and (c) the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the award. Share-based compensation awards for which total employee proceeds exceed the average market price over the applicable period have an antidilutive effect on earnings per share, and accordingly, are excluded from the calculation of diluted earnings per share.

 

Share-based compensation awards for 46,275 and 28,520 shares, for the 13 week periods ended September 2, 2006 and August 27, 2005, respectively; and 80,583 and 39,462 shares for the 39 week periods ended September 2, 2006 and August 27, 2005, respectively were excluded from the diluted earnings per share calculation because they were antidilutive.

 

Note 5: Comprehensive Income

 

The components of total comprehensive income follows:

 

     13 Weeks Ended

    39 Weeks Ended

 
     September 2,
2006


    August 27,
2005


    September 2,
2006


   August 27,
2005


 

Net income

   $ 24,198     $ 15,541     $ 59,009    $ 38,257  

Other comprehensive income

                               

Foreign currency translation, net

     (863 )     (1,839 )     17,907      (12,844 )
    


 


 

  


Total comprehensive income

   $ 23,335     $ 13,702     $ 76,916    $ 25,413  
    


 


 

  


 

14


Components of accumulated other comprehensive income follows:

 

Accumulated Other Comprehensive Income

   September 2,
2006
    December 3,
2005
 

Foreign currency translation adjustment

   $ 38,596     $ 20,689  

Minimum pension liability

     (28,456 )     (28,456 )
                

Total accumulated other comprehensive income

   $ 10,140     $ (7,767 )
                

Note 6: Components of Net Periodic Benefit Cost related to Pension and Other Postretirement Benefit Plans:

 

     13 Weeks Ended September 2, 2006 and August 27, 2005  
     Pension Benefits    

Other

Postretirement
Benefits

 
     U.S. Plans     Non-U.S. Plans    

Net periodic cost (benefit):

   2006     2005     2006     2005     2006     2005  

Service cost

   $ 1,824     $ 1,684     $ 662     $ 473     $ 470     $ 515  

Interest cost

     4,079       3,902       1,541       1,428       978       1,057  

Expected return on assets

     (4,964 )     (5,364 )     (1,327 )     (1,006 )     (942 )     (958 )

Amortization:

            

Prior service cost

     126       143       (1 )     (1 )     (554 )     (324 )

Actuarial loss

     1,329       462       503       259       849       907  

Transition amount

     —         —         9       8       —         —    
                                                

Net periodic benefit cost

   $ 2,394     $ 827     $ 1,387     $ 1,161     $ 801     $ 1,197  
                                                

 

     39 Weeks Ended September 2, 2006 and August 27, 2005  
     Pension Benefits    

Other

Postretirement
Benefits

 
     U.S. Plans     Non-U.S. Plans    

Net periodic cost (benefit):

   2006     2005     2006     2005     2006     2005  

Service cost

   $ 5,472     $ 5,052     $ 1,917     $ 1,545     $ 1,410     $ 1,547  

Interest cost

     12,237       11,706       4,455       4,496       2,934       3,170  

Expected return on assets

     (14,892 )     (16,091 )     (3,838 )     (3,169 )     (2,826 )     (2,874 )

Amortization:

            

Prior service cost

     378       429       (2 )     9       (1,662 )     (971 )

Actuarial loss

     3,987       1,385       1,456       813       2,547       2,720  

Transition amount

     —         —         26       31       —         —    
                                                

Net periodic benefit cost

   $ 7,182     $ 2,481     $ 4,014     $ 3,725     $ 2,403     $ 3,592  
                                                

In August 2006, the company began a process to diversify its U.S. Pension asset portfolio. As of September 2, 2006, approximately 25 percent of the reinvestment process was complete. At the end of this process, 100 percent of the portfolio will be reinvested with each reinvestment reflecting a target asset allocation of approximately 80 percent equities and 20 percent fixed income securities. This process is expected to be completed by May 31, 2008.

Note 7: Inventories

The composition of inventories follows:

 

     September 2,
2006
    December 3,
2005
 

Raw materials

   $ 76,500     $ 70,738  

Finished goods

     97,894       87,721  

LIFO reserve

     (17,372 )     (15,475 )
                
   $ 157,022     $ 142,984  
                

 

15


Note 8: Derivatives

 

Derivatives consisted primarily of forward currency contracts used to manage foreign currency denominated assets and liabilities. Because derivative instruments outstanding were not designated as hedges for accounting purposes, the gains and losses related to mark-to-market adjustments were recognized as other income or expense in the income statements during the periods in which the derivative instruments were outstanding. Management does not enter into any speculative positions with regard to derivative instruments.

 

As of September 2, 2006, the company had forward foreign currency contracts maturing between September 5, 2006 and July 5, 2007. The fair value effect associated with these contracts was net unrealized gains of $15 at September 2, 2006.

 

Note 9: Commitments and Contingencies

 

Environmental: Currently the company is involved in various environmental investigations, clean-up activities and administrative proceedings or lawsuits. 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 clean-up of these sites. In addition, the company is engaged in environmental remediation and monitoring efforts at a number of current and former company operating facilities, including an investigation of environmental contamination at its Sorocaba, Brazil facility. Soil and water samples have been collected on and around the Sorocaba facility, and recent test results indicate that certain contaminants, including carbon tetrachloride and other solvents, may exist in the soil at the Sorocaba facility and in the groundwater at both the Sorocaba facility and some neighboring properties. The company is continuing to work with Brazilian regulatory authorities to determine the necessary scope of remediation at the facility and the neighboring properties. As of September 2, 2006, $2,104 was recorded as a liability for expected investigation and remediation expenses remaining for this site. Once the full scope of any necessary remediation is determined, the company may be required to record additional liabilities related to investigation and remediation costs at the Sorocaba facility.

 

As of September 2, 2006, the company had recorded $3,475 as its best probable estimate of aggregate liabilities for costs of environmental investigation and remediation, inclusive of the accrual related to the Sorocaba facility described above. These estimates are based primarily upon internal or third-party environmental studies, assessments as to the company’s responsibility, the extent of the contamination and the nature of required remedial actions. The company’s current assessment of the probable liabilities and associated expenses related to environmental matters is based on the facts and circumstances known at this time. Recorded liabilities are adjusted as further information develops or circumstances change. Based upon currently available information, management does not believe that any such lawsuits, proceedings and investigations, individually or in aggregate, will have a material adverse effect on the company’s long-term financial condition. However, adverse developments could negatively impact the company’s results of operations or cash flows in one or more future quarters.

 

Product Liability: As a participant in the chemical and construction products industries, the company faces an inherent risk of exposure to claims in the event that the failure, use or misuse of its products results in or is alleged to result in property damage and/or bodily injury. From time to time and in the ordinary course of business, the company is a party to, or a target of, lawsuits, claims, investigations and proceedings, including product liability, contract, patent and intellectual property, antitrust and employment matters.

 

A subsidiary of the company is a defendant in numerous exterior insulated finish systems (“EIFS”) related lawsuits. As of September 2, 2006, the company’s subsidiary was a defendant in approximately 36 lawsuits and claims related primarily to single-family homes. The EIFS product was used primarily in the residential construction market in the southeastern United States. Some of the lawsuits and claims involve EIFS in commercial or multi-family structures. Lawsuits and claims related to this product seek

 

16


monetary relief for water intrusion-related property damages. The company has insurance coverage for certain years with respect to this product line. During the quarter ended June 3, 2006, the company entered into agreements to settle numerous EIFS-related lawsuits and claims, including a lawsuit involving up to 186 homes. In total, the company paid $5,000 in settlement of these lawsuits and claims, of which insurers have paid $733 and are expected to pay an additional $892. As of September 2, 2006, the company had recorded $1,730 for the probable liabilities and $1,725 for insurance recoveries, including the $892 referred to above, for all remaining EIFS-related lawsuits and claims. The company continually reevaluates these amounts.

 

Based on currently available information, management does not believe that the ultimate outcome of any pending legal proceedings and claims related to this product line, individually or in aggregate, will have a material adverse effect on the company’s long-term financial condition. However, adverse developments could negatively impact the company’s results of operations or cash flows in one or more future quarters. Given the numerous uncertainties surrounding litigation and the projection of future events, such as the number of new claims to be filed each year and the average cost of disposing of each such claim, the actual costs could be higher or lower than the current estimated reserves or insurance recoveries.

 

The company and/or its subsidiaries have been named as defendants in lawsuits in which plaintiffs have alleged injury due to products containing asbestos manufactured by the company more than 20 years ago. The plaintiffs generally bring these lawsuits against multiple defendants and seek damages (both actual and punitive) in very large amounts. In many of these cases, the plaintiffs are unable to demonstrate that they have suffered any compensable injuries or that the injuries suffered were the result of exposure to products manufactured by the company or its subsidiaries. The company is typically dismissed as a defendant in these cases without payment. If the plaintiff establishes that compensable injury occurred as a result of exposure to the company’s products, the case is generally settled for an amount that reflects the seriousness of the injury, the number and solvency of other defendants in the case, and the jurisdiction in which the case has been brought.

 

As a result of bankruptcy filings by numerous defendants in asbestos-related litigation and the prospect of national and state legislative reform relating to such litigation, the rate at which plaintiffs filed asbestos-related lawsuits against various companies (including the company) increased in 2001, 2002 and the first half of 2003. In the second half of 2003 and throughout 2004 and 2005, the rate of these filings declined significantly. However, the company currently expects that asbestos-related lawsuits will continue to be filed against the company in the future.

 

A significant portion of the defense costs and settlements relating to asbestos-related litigation involving the company continues to be paid by third parties, including indemnification pursuant to the provisions of a 1976 agreement under which the company acquired a business from a third party. Historically, this third party routinely defended all cases tendered to it and paid settlement amounts resulting from those cases. In the 1990s, the third party sporadically reserved its rights, but continued to defend and settle all asbestos-related claims tendered to it by the company. In 2002, the third party rejected the tender of certain cases by the company and indicated it would seek contributions from the company for past defense costs, settlements and judgments. However, this third party has continued to defend and pay settlement amounts, under a reservation of rights, in most of the asbestos cases tendered to the third party by the company.

 

In addition to the indemnification arrangements with third parties, the company has insurance policies that generally provide coverage for asbestos liabilities (including defense costs). Historically, insurers have paid a significant portion of the defense costs and settlements in asbestos-related litigation involving the company. However, certain of the company’s insurers are insolvent. During 2005, the company and a number of its insurers entered into a cost-sharing agreement that provides for the allocation of defense costs, settlements and judgments among these insurers and the company in certain asbestos-related lawsuits. Under this agreement, the company is required to fund a share of settlements and judgments allocable to years in which the responsible insurer is insolvent. The cost-sharing agreement applies only to the asbestos litigation involving the company that is not covered by the third-party indemnification arrangements.

 

17


In 2004, the company and a group of other defendants (including the third party obligated to indemnify the company against certain asbestos-related claims) entered into negotiations with a group of plaintiffs to settle certain asbestos-related lawsuits. As previously reported and accounted for during the third quarter of 2004, the company agreed to contribute approximately $3,522 towards the settlement to be paid in these cases in exchange for a full release of claims by the plaintiffs.   Of this amount, the company’s insurers have agreed to pay approximately $1,236. The company and its insurers have transferred the required amounts into a trust established to disburse payments related to settlements. On December 1, 2005, $3,085 was paid out of the trust under the settlement. As of September 2, 2006, the amount the company and its insurers have remaining to pay out of the trust is up to $437. The company’s remaining portion of this is up to $284 and is recorded as restricted cash, which is included in other current assets. During the first nine months of 2006, the company accrued a total of $605 for settlements of asbestos-related lawsuits. The company’s insurers have paid or are expected to pay $321 of this amount.

 

To the extent the company can reasonably estimate the amount of its probable liability for pending asbestos-related claims, the company establishes a financial provision and a corresponding receivable for insurance recoveries if certain criteria are met. As of September 2, 2006, the company had $992 accrued for probable liabilities and $504 for insurance recoveries related to asbestos claims. However, the company has concluded that it is not possible to estimate the cost of disposing of other asbestos-related claims (including claims that might be filed in the future) due to its inability to project future events. Future variables include the number of new claims filed, the average cost of disposing of such claims, the uncertainty of asbestos litigation, insurance coverage and indemnification agreement issues, and the continuing solvency of certain insurance companies.

 

Because of the uncertainties described above, the company cannot accurately estimate the cost of resolving pending and future asbestos-related claims against the company. Based on currently available information, the company does not believe that asbestos-related litigation, individually or in aggregate, will have a material adverse effect on the company’s long-term financial condition. However, adverse developments in such litigation could negatively impact the company’s results of operations or cash flows in one or more future quarters.

 

In addition to product liability claims discussed above, the company and its subsidiaries are involved in other claims or legal proceedings related to its products, which it believes are not out of the ordinary in a business of its type and size.

 

With respect to EIFS and asbestos claims, as well as all other litigation, the company cannot definitively estimate its potential liabilities. While the company is unable to predict the outcome of these matters, it does not believe, based upon currently available information, that the ultimate resolution of any pending matter, including the EIFS and asbestos litigation described above, individually or in aggregate, will have a material adverse effect on its long-term financial condition. However, adverse developments could negatively impact the company’s results of operations or cash flows in one or more future quarters.

 

Guarantees: In July 2000, the Board of Directors adopted the Executive Stock Purchase Loan Program, designed to facilitate immediate and significant stock ownership by executives, especially new management employees. During certain designated periods between September 2000 and August 2001, eligible employees were allowed to purchase shares of company common stock in the open market. Under the program, the company arranged for a bank to provide full-recourse, personal loans to eligible employees electing to participate in the program. The loan interest rates were at the Applicable Federal Rate and matured over five years, with principal and interest due at that time. The loans were guaranteed by the company only in the event of the participant’s default. The final loan was repaid in the second quarter of 2006.

 

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Note 10: Restructuring and Other Related Costs:

 

The remaining liabilities accrued as part of prior years’ restructuring plans were $116 and $343 as of September 2, 2006 and December 3, 2005, respectively. Details of the activity for fiscal 2006 are as follows:

 

Total liabilities at December 3, 2005

   $ 343  

Currency change effect

     6  

Cash payments

     (233 )
    


Total liabilities at September 2, 2006

     116  

Long-term portion of liabilities

     (39 )
    


Current liabilities at September 2, 2006

   $ 77  
    


 

Note 11: Operating Segments

 

Management evaluates the performance of its operating segments based on operating income which is defined as gross profit less SG&A expenses and excluding the gains (losses) on sales of assets. Corporate expenses are fully allocated to the operating segments. Segment data for the quarter follows:

 

     13 Weeks Ended

     September 2, 2006

   August 27, 2005

    

Trade

Revenue


  

Inter-

Segment

Revenue


  

Operating

Income


  

Trade

Revenue


  

Inter-

Segment

Revenue


  

Operating

Income


Global Adhesives

   $ 247,543    $ 5,019    $ 23,469    $ 248,299    $ 3,522    $ 16,036

Full-Valu/Specialty

     141,406      830      11,131      109,792      525      8,086
    

         

  

         

Total

   $ 388,949           $ 34,600    $ 358,091           $ 24,122
    

         

  

         

 

     39 Weeks Ended

     September 2, 2006

   August 27, 2005

    

Trade

Revenue


  

Inter-

Segment

Revenue


  

Operating

Income


  

Trade

Revenue


  

Inter-

Segment

Revenue


  

Operating

Income


Global Adhesives

   $ 746,537    $ 7,757    $ 63,503    $ 772,123    $ 6,705    $ 36,652

Full-Valu/Specialty

     379,205      1,367      25,707      326,880      873      18,903
    

         

  

         

Total

   $ 1,125,742           $ 89,210    $ 1,099,003           $ 55,555
    

         

  

         

 

Reconciliation of Operating Income to Income before Income Taxes, Minority Interests and Income from Equity Investments:

 

     13 Weeks Ended

    39 Weeks Ended

 
     September 2,
2006


    August 27,
2005


    September 2,
2006


    August 27,
2005


 

Operating income

   $ 34,600     $ 24,122     $ 89,210     $ 55,555  

Gains (losses) from sales of assets

     (14 )     278       831       7,076  

Interest expense

     (4,575 )     (2,942 )     (12,285 )     (9,166 )

Other income (expense), net

     274       (25 )     280       (839 )
    


 


 


 


Income before income taxes, minority interests, and income from equity investments

   $ 30,285     $ 21,433     $ 78,036     $ 52,626  
    


 


 


 


 

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Note 12: Subsequent Event

 

On September 5, 2006, the company acquired Carolina Polymers’ polymer and adhesive technology for the multi-wall bag industry. The company acquired inventory, accounts receivable, personal property, intellectual property and customer lists. No other assets or liabilities were purchased. The total initial cash payment was $4,950 and was funded through existing cash. Carolina Polymers is also entitled to an earn-out of up to $1,700 based on the company’s shipment volume from September 5, 2006 to September 5, 2007. The acquisition will be recorded in the Global Adhesives operating segment.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

The Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the MD&A included in the company’s Annual Report on Form 10-K for the year ended December 3, 2005 for important background information related to the company’s business.

 

Net income of $24.2 million in the third quarter of 2006 was 55.7 percent higher than the net income of $15.5 million in the third quarter of 2005. The net income increase resulted primarily from management’s continuing emphasis on repositioning its product portfolio to a more profitable mix of business. Productivity gains and an ongoing focus on process improvements also contributed to the profitability improvement. The gross profit margin of 28.4 percent was 1.1 percentage points above last year’s margin of 27.3 percent. Net earnings per share, on a diluted basis, was $0.40 in the third quarter of 2006 as compared to $0.26 in the third quarter of 2005.

 

On June 9, 2006 the company acquired the insulating glass sealant business of Henkel KGaA. The results for the third quarter of 2006 include twelve weeks of the Henkel operations.

 

Effective December 4, 2005, the company adopted the fair value recognition provisions of SFAS 123R, Share-Based Payments (“SFAS 123R”) using the modified prospective transition method, and therefore has not restated prior periods’ results. All share-based compensation expense is recorded as selling, general and administrative expense. Total share-based compensation expense recorded in the third quarter and nine months year-to-date of 2006 was $1.6 million ($1.0 million, net of tax) and $4.5 million ($2.8 million, net of tax), respectively. Included in these amounts are $0.8 million ($0.5 million, net of tax) and $2.7 million ($1.6 million, net of tax) of share-based compensation expense for the third quarter and nine months year-to-date 2006, respectively, which represent additional expense recorded as a result of adopting SFAS 123R. Share-based compensation expense recorded for the third quarter and nine months year-to-date for 2005 was $0.7 million ($0.4 million, net of tax) and $1.8 million ($1.1 million, net of tax), respectively. These amounts would have been $1.7 million ($1.0 million, net of tax) and $4.7 million ($2.9 million, net of tax) for the third quarter and nine months year-to-date 2005, respectively, had the company recognized share-based expense in the Consolidated Statements of Income under SFAS 123, Accounting for Stock-Based Compensation (“SFAS 123”). Unrecognized compensation expense from unvested share-based awards was $9.8 million as of September 2, 2006 and is expected to be recognized over a weighted-average period of 2.4 years. See Note 3 for more details.

 

Critical Accounting Policies and Significant Estimates

 

Management’s discussion and analysis of its results of operations and financial condition are based upon consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 pension and other postretirement plan assumptions; goodwill recoverability; product, environmental and other litigation liabilities; and income tax accounting. Except with respect to changes in the manner in which we account for share-based compensation, as discussed below, there have been no material changes to the critical accounting policies as discussed in greater detail in the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the company’s Annual Report on Form 10-K for the fiscal year ended December 3, 2005.

 

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Share-based Compensation: The company has granted stock options, restricted stock and deferred compensation awards to certain employees and non-employee directors. The company recognizes compensation expense for all share-based payments granted after December 3, 2005 and prior to but not yet vested as of December 3, 2005, in accordance with SFAS 123R. Under the fair value recognition provisions of SFAS 123R, the company recognizes share-based compensation net of an estimated forfeiture rate and only recognizes compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the award (normally the vesting period). Prior to SFAS 123R adoption, the company accounted for share-based payments under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and accordingly, only recognized compensation expense for restricted stock awards, which had a grant date intrinsic value.

Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The company uses the Black-Scholes model to value its stock option awards. Management believes that future volatility will not materially differ from its historical volatility. Thus, the company uses the historical volatility of the company’s common stock over the expected life of the award. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different in the future. In addition, the company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If the actual forfeiture rate is materially different from the estimate, share-based compensation expense could be significantly different from what has been recorded in the current period. See Note 3 to the Consolidated Financial Statements for a further discussion on share-based compensation.

Pension and Other Postretirement Plan Assumptions: In August 2006, the company began a process to diversify its U.S. Pension asset portfolio. As of September 2, 2006, approximately 25 percent of the reinvestment process was complete. At the end of this process, 100 percent of the portfolio will be reinvested with each reinvestment reflecting a target asset allocation of approximately 80 percent equities and 20 percent fixed income securities. This process is expected to be completed by May 31, 2008. Management will assess the impact of the asset reallocation on the expected return on assets assumption for fiscal 2007, which is based on the company’s August 31, 2006 measurement date.

Results of Operations

Net Revenue: Net revenue in the third quarter of 2006 of $388.9 million was $30.9 million or 8.6 percent above the net revenue of $358.1 million in the third quarter of 2005. The net revenue increase was driven by the net effect of acquisitions and divestitures, which contributed an increase of $30 million or 8.4 percent to the net revenue variance compared to last year. The impact on net revenue from foreign currency translation was a positive 1.4 percent as compared to the third quarter of 2005. Increases in selling prices accounted for a net revenue increase of 5.8 percent in the third quarter while sales volume, excluding acquisitions and divestitures, decreased 7.0 percent. The volume decreases and selling price increases were consistent with the company’s strategy to reposition its product portfolio.

Through nine months of 2006, net revenue of $1,125.7 million increased $26.7 million or 2.4 percent over the first nine months of 2005. The net impact of acquisitions and divestitures accounted for net revenue increases of 2.9 percent while the currency effects accounted for decreases of 0.6 percent. Increases in selling prices contributed a positive 6.7 percent to the net revenue variance to last year and decreases in sales volume accounted for a negative impact of 6.6 percent.

Cost of Sales: The cost of sales of $278.6 million in the third quarter of 2006 was $18.1 million or 6.9 percent higher than the cost of sales in the third quarter of 2005. The cost of sales from businesses acquired added approximately $24 million to the third quarter of 2006 as compared to last year. Raw material costs continued to increase in the third quarter of 2006 as oil prices hit record levels during the quarter. Lower sales volume combined with process improvements resulting from the company’s Lean

 

21


Six Sigma SM initiatives helped mitigate the impact of the higher raw material prices. Through nine months of 2006, the cost of sales of $805.9 million was $5.3 million or 0.7 percent less than the first nine months of 2005. Similar to the third quarter, reduced sales volume and productivity improvements mitigated the impact from increases in raw material costs.

 

As a percent of net revenue, the cost of sales in both the third quarter and first nine months of 2006 was 71.6. In 2005, the cost of sales as a percent of net revenue was 72.7 percent in the third quarter and 73.8 percent for the first nine months.

 

Gross Profit Margin: The gross profit margin was 28.4 percent in the third quarter of 2006 and 27.3 percent in the third quarter of 2005. A shift in mix to more profitable products, selling price increases, productivity improvements and cost reductions in the manufacturing operations all contributed to the improved margin.

 

For the first nine months of 2006 the gross profit margin was 28.4 percent as compared to 26.2 percent for the first nine months of 2005.

 

Selling, General and Administrative (SG&A) Expenses: SG&A expenses of $75.7 million in the third quarter of 2006 were $2.3 million or 3.1 percent higher than in the third quarter of 2005. The SG&A expenses from businesses acquired during 2006 were $5.3 million in the third quarter. The expensing of stock options in accordance with SFAS 123R added $0.8 million in the third quarter of 2006. SG&A decreases resulted from lower payroll-related costs due to reduced headcount as well as process improvements resulting from the company’s Lean Six Sigma SM initiatives.

 

Through the first nine months of 2006 SG&A expenses of $230.7 million were $1.6 million or 0.7 percent less than the first nine months of 2005. Expense increases related to businesses acquired, stock options and pension costs were more than offset by savings related to reduced headcount, lower depreciation expense and reduction in expenses resulting from the 2005 formation of the joint venture in Japan with Sekisui Chemical.

 

Gains (Losses) from Sales of Assets: Gains (losses) from sales of assets were losses of $14 thousand in the third quarter of 2006 and gains of $0.3 million in the third quarter of 2005. Last years gains resulted primarily from the sale of a vacant property in Australia. Through nine months of 2006 the gains (losses) from sales of assets were $0.8 million with the most significant transaction being the sale of a small adhesives product line and associated assets in the first quarter of this year. Through nine months of 2005, the gains (losses) from sales of assets were gains of $7.1 million. Included in this figure was a $4.7 million gain related to the sale of a 20 percent equity interest in the company’s China operations to Sekisui Chemical. In addition to the China-related gain, last year’s first nine months included a $1.7 million gain on the sale of a European facility that had been closed as part of a previous restructuring initiative.

 

Other Income (Expense), Net: Other income (expense), net was income of $0.3 million in the third quarter of 2006 and expense of $25 thousand in the third quarter of 2005. Through nine months of 2006 other income (expense), net was income of $0.3 million as compared to expense of $0.8 million in 2005. Interest income increased $1.2 million in the first nine months of 2006 as compared to last year primarily due to the higher average cash and cash equivalents balance in 2006 versus 2005.

 

Interest Expense: Interest expense of $4.6 million in the third quarter of 2006 increased $1.6 million from the third quarter of 2005. The increased debt related to the Roanoke acquisition in the second quarter of 2006 resulted in the higher interest expense in 2006. Through nine months, interest expense of $12.3 million in 2006 was $3.1 million more than the $9.2 million in 2005.

 

Income Taxes: The effective tax rate was 24.6 percent in the third quarter of 2006 and 32.0 percent in the third quarter of 2005. During the third quarter of 2006, the rate was lowered from 30.0 percent at the end of the second quarter of 2006 to 29.0 percent. The lower rate in 2006 was primarily due to the changes in geographic mix of pretax earnings generation. In addition, the third quarter of 2006 included a credit to income tax expense of $0.9 million related to favorable settlements on tax audits. Through nine months of 2006 the effective tax rate was 27.9 percent as compared to 32.3 percent for the first nine months of 2005.

 

22


Minority Interests in (Income) Loss of Subsidiaries: Minority interests in (income) loss of subsidiaries was an expense of $0.3 million in the third quarter of 2006 and income of $0.3 million in the third quarter of 2005. The 2006 expense was the result of the profitability of the company’s North American automotive joint venture of which it owns 70 percent and the Chinese adhesives business of which it owns 80 percent. The minority interest income in 2005 resulted from losses at the automotive joint venture. Through nine months of 2006 the minority interests was an expense of $1.0 million and in the first nine months of 2005 was income of $0.8 million.

 

Income from Equity Investments: Income from equity investments was $1.6 million in the third quarter and $3.7 million in the first nine months of 2006 as compared to $0.7 million and $1.8 million for the same periods of 2005, respectively. The increases in 2006 as compared to 2005 were due to the improved performance of the company’s 30 percent ownership in a European automotive joint venture and its 40 percent ownership in the Japanese joint venture with Sekisui Chemical. 2006 included nine months of results from the Japanese joint venture while 2005 included only five months. The Japanese joint venture was formed on April 1, 2005.

 

Net Income: Net income of $24.2 million in the third quarter of 2006 was 55.7 percent more than the net income of $15.5 million in the third quarter of 2005. The diluted earnings per share improved to $0.40 in the third quarter of 2006 from $0.26 in the third quarter of 2005. The net income for the first nine months of 2006 of $59.0 million increased 54.2 percent from the first nine months of 2005. The diluted earnings per share of $0.99 in the first nine months of 2006 increased 50 percent from last year’s diluted earnings per share of $0.66.

 

Operating Segment Results

 

Note: Management evaluates the performance of its operating segments based on operating income which is defined as gross profit less SG&A expenses and excluding the gains/(losses) on sales of assets. Corporate expenses are fully allocated to the operating segments.

 

Global Adhesives: Net revenue in the Global Adhesives operating segment of $247.5 million in the third quarter of 2006 was 0.3 percent less than the net revenue of $248.3 million in the third quarter of 2005. The net effect of lower sales volume and higher average selling prices accounted for a reduction in net revenue of 2.0 percent for the quarter as compared to last year. The impact from foreign currencies was a positive 2.0 percent as the euro strengthened in the third quarter of 2006 as compared to last year. Divestitures of certain product lines in previous quarters resulted in a net revenue decrease of 0.3 percent in the third quarter of 2006 as compared to last year. Management continues to focus on repositioning the Global Adhesives product portfolio to a more profitable mix. Through the first nine months of 2006 net revenue decreased 3.3 percent from the same period in 2005. The net effect from pricing, volume and sales mix was a negative 0.4 percent as compared to the first nine months of 2005. The effects of divestitures and the 2005 deconsolidation of the Japanese adhesive business was a negative 2.1 percent. The impact from currency fluctuations was a reduction in net revenue of 0.8 percent.

 

Operating income of $23.5 million in the third quarter of 2006 was 46.3 percent higher than last year’s operating income of $16.0 million. Increases in average selling prices combined with efficiency improvements in the manufacturing areas resulting from Lean Six Sigma SM projects allowed the Global Adhesives segment to offset the effects of higher raw material costs and lower sales volume. Through nine months of 2006 the Global Adhesives operating income increased 73.3 percent from the first nine months of 2005. As a percent of net revenue, 2006 operating income was 9.5 percent in the third quarter and 8.5 percent in the first nine months. For the same periods of 2005 the operating income as a percent of net revenue was 6.5 percent and 4.7 percent, respectively.

 

Full-Valu/Specialty: Net revenue in the third quarter of 2006 for the Full-Valu/Specialty segment of $141.4 million was 28.8 percent above the net revenue recorded in the third quarter of 2005 of $109.8 million. The acquisitions made during 2006 added $30.7 million or 28.0 percent to the 2006 net revenue. The net effect of selling price increases and volume decreases increased net revenue in the third quarter of 2006 by 0.5 percent as compared to last year while currency fluctuations accounted for a 0.3 percent increase. Through nine months of 2006, net revenue increased 16.0 percent as compared to last year with the acquisitions

 

23


contributing increases of 14.6 percent. The net impact of increases in selling prices and decreases in sales volume contributed 1.6 percent to the net revenue variance through nine months of 2006. Changes in currency rates resulted in a net revenue decrease of 0.2 percent as compared to the first nine months of 2005.

 

Operating income in the third quarter of 2006 of $11.1 million was $3.0 million or 37.7 percent higher than the third quarter of 2005. As a percent of net revenue the operating income was 7.9 percent in the third quarter of 2006 as compared to 7.4 percent in the third quarter of 2005. The increase in operating income was accomplished despite the costs incurred associated with the integration and transition of the two acquisitions. For the first nine months of 2006, operating income increased 36 percent as compared to the first nine months of 2005 to $25.7 million. Savings from cost structure changes implemented in 2005, selling price increases and sales growth in key product lines all contributed to the 2006 operating income growth through the first nine months. As a percent of net revenue, operating income was 6.8 percent in the first nine months of 2006 and 5.8 percent in the first nine months of 2005.

 

Restructuring and Other Related Costs

 

The remaining liabilities accrued as part of the 2002 restructuring plan were $0.1 million and $0.3 million as of September 2, 2006 and December 3, 2005, respectively. Details of the activity for fiscal 2006 are as follows:

 

(in thousands)


      

Total liabilities at December 3, 2005

   $ 343  

Currency change effect

     6  

Cash payments

     (233 )
    


Total liabilities at September 2, 2006

     116  

Long-term portion of liabilities

     (39 )
    


Current liabilities at September 2, 2006

   $ 77  
    


 

Liquidity and Capital Resources

 

The company made two significant acquisitions in the first nine months of 2006. During the second quarter, the Roanoke acquisition was completed with a purchase price of approximately $275 million. The Roanoke acquisition was funded with $195 million of debt and approximately $80 million of cash. In the third quarter of 2006 the company made an asset purchase of the insulating glass sealant business from Henkel KGaA for approximately $34 million. The Henkel transaction was funded with cash on hand.

 

The company’s capitalization ratio, defined as total debt divided by total debt plus total stockholders’ equity was 29.8 percent as of September 2, 2006 as compared to 20.0 percent at December 3, 2005. Total debt was $287.9 million as of September 2, 2006 as compared to $146.8 million at December 3, 2005. Cash and cash equivalents were $123.6 million as of September 2, 2006 and $157.6 million at December 3, 2005.

 

Cash Flows from Operating Activities: Cash provided from operating activities was $129.7 million in the first nine months of 2006 as compared to $64.9 million in the first nine months of 2005. Improved profitability and a strong focus on working capital management were the main reasons for the increase in cash flows from operating activities. A key metric monitored by management is net working capital as a percentage of annualized net revenue (current quarter multiplied by four). Net working capital is defined as trade receivables, net of allowance for doubtful accounts plus inventory minus trade payables. That percentage was 14.5 percent at the end of the third quarter of 2006 versus 16.0 percent at year-end 2005 and 17.9 percent at the end of the third quarter of 2005. Increases in trade payables had the most significant impact on reducing the net working capital as a percentage of net revenue. Changes in payables resulted in a source of cash of $18.8 million in the first nine months of 2006 as compared to a use of cash of $20.7 million for the same period of 2005. This quarter’s trade payables balance included a temporary increase of approximately $8 million from an acquisition-related payable. Reductions in inventory days on hand also contributed to the improvement in the net working capital percentage.

 

24


Cash Flows from Investing Activities: Primarily due to the two acquisitions in 2006, investing activities resulted in a use of cash of $319.2 million in the first nine months of 2006. The Roanoke acquisition accounted for approximately $275 million and the acquisition of the insulated glass sealant business was approximately $34 million. Purchases of property, plant and equipment of $12.8 million were partially offset by approximately $2.5 million of cash proceeds from the sales of businesses. The proceeds resulted primarily from the sale of a small adhesives product line which included a facility and certain other related assets. In the first nine months of 2005 investing activities resulted in a positive cash flow of $8.9 million. The most significant transactions were the sale of an idle European manufacturing site that resulted in $10.2 million of cash proceeds and the sale of a 20 percent interest in the China operations for $8 million. Purchases of property, plant and equipment were $17.9 million in the first nine months of 2005.

 

For the full year of 2006 purchases of property, plant and equipment are expected to approximate $20 to $25 million as compared to $25.5 million for the full year of 2005.

 

Cash Flows from Financing Activities: Financing activities resulted in a source of cash of $149.8 million in the first nine months of 2006 driven by the $195 million of debt proceeds used to fund the Roanoke acquisition. Strong cash flow from operating activities allowed management to pay down $30 million of the new debt during the third quarter of 2006. A $25 million payment was also made in the second quarter of 2006 for the retirement of private placement debt. Cash generated from the exercise of stock options was $15.0 million in the first nine months of 2006. For the same period in 2005, cash generated from stock options was $7.4 million. Financing activity in the first nine months of 2005 resulted in cash used of $26.1 million with the main transaction being the repayment of $22 million of the company’s 1994 private placement debt. Cash dividends paid were $11.0 million in the first nine months of 2006 and $10.4 million in the first nine months of 2005.

 

On June 19, 2006, the company entered into a term loan agreement for $75 million with a consortium of financial institutions. The applicable interest rate is based on LIBOR plus 0.625 percent and is payable quarterly. Amounts due under the term loan will be paid in quarterly installments beginning in September 2010 and will mature on June 19, 2013. The company used the proceeds from the term loan to pay down a portion of its outstanding revolving credit agreement balance.

 

Management anticipates that cash flows from operating activities will again be positive in the fourth quarter and there will be sufficient cash to fund all fourth quarter cash requirements without the utilization of the line of credit. Management believes the company’s ongoing operating cash flows will continue to provide sufficient amounts of cash to fund all other expected investments and capital expenditures.

 

Forward-Looking Statements and Risk Factors

 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In this Quarterly Report on Form 10-Q, the company discusses expectations regarding future performance of the company which include anticipated financial performance, savings from restructuring and process initiatives, global economic conditions, liquidity requirements, the impact of litigation and environmental matters, the effect of new accounting pronouncements and one-time accounting charges and credits, and similar matters. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words like “plan,” “expect,” “aim,” “believe,” “project,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could” (including the negative or variations thereof) and other expressions that indicate future events and trends. These plans and expectations are based upon certain underlying assumptions, including those mentioned with the specific statements. Such assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, management plans and strategies, economic conditions and other factors. These plans and expectations and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. In addition to the factors described in this report, Part II, Item 1A. Risk Factors in this report and Part I, Item 1A. Risk Factors in the company’s Annual Report on Form 10-K for the fiscal year ended December 3, 2005, identify some of the important factors that could cause the

 

25


company’s actual results to differ materially from those in any such forward-looking statements. This list of important factors does not include all such factors nor necessarily present them in order of importance. In order to comply with the terms of the safe harbor, the company has identified these important factors which could affect the company’s financial performance and could cause the company’s actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. 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 revenues 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, product mix and delivery charges, combined. These factors should be considered, together with any similar risk factors or other cautionary language, which may be made elsewhere in this Quarterly Report on Form 10-Q.

 

The company may refer to Part II, Item 1A. Risk Factors and this section of the Form 10-Q to identify risk factors related to other forward looking statements made in oral presentations, including investor conferences and/or webcasts open to the public.

 

This disclosure, including that under “Forward-Looking Statements and Risk Factors,” and other forward-looking statements and related disclosures made by the company in this report and elsewhere from time to time, represents management’s best judgment as of the date the information is given. The company does not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. Investors are advised, however, to consult any further public company disclosures (such as in filings with the Securities and Exchange Commission or in company press releases) on related subjects.

 

Item 3. 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, such as interest rates and foreign currency exchange rates.

 

Interest Rate Risk: Exposure to changes in interest rates result primarily from borrowing activities used to fund operations. Committed floating rate credit facilities are used to fund a portion of operations.

 

Management believes that probable near-term changes in interest rates would not materially affect financial condition, results of operations or cash flows. The annual impact on net income of a one-percentage point interest rate change on the outstanding balance of its variable rate debt as of September 2, 2006 would be approximately $1.8 million.

 

Foreign Exchange Risk: As a result of being a global enterprise, there is exposure to market risks from changes in foreign currency exchange rates, which may adversely affect operating results and financial condition. Approximately 49 percent of net revenue was generated outside of the United States in the first nine months of 2006. Principal foreign currency exposures relate to the euro, British pound sterling, Japanese yen, Australian dollar, Canadian dollar, Argentine peso, Brazilian real and Chinese renminbi.

 

Management’s objective is to balance, where possible, local currency denominated assets to 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 takes steps to minimize risks from foreign currency exchange rate fluctuations through normal operating and financing activities and, when deemed appropriate, through the use of derivative instruments. Management does not enter into any speculative positions with regard to derivative instruments.

 

26


From a sensitivity analysis viewpoint, based on the financial results of the first nine months of 2006, a hypothetical overall 10 percent change in the U.S. dollar would have resulted in a change in net income of approximately $3.4 million.

 

Raw Materials: The principal raw materials used to manufacture products include resins, polymers, synthetic rubbers, vinyl acetate monomer and plasticizers. The company generally avoids sole source supplier arrangements for raw materials. While alternate supplies of most key raw materials are available, sustained strong economical growth in North America and China coupled with unplanned supplier production outages have led to strained supply-demand situations for several key feedstocks (such as ethylene and propylene), some of their derivatives, several polymers and other petroleum derivatives such as waxes.

 

Management’s objective is to purchase raw materials that meet both its quality standards and production needs at the lowest total cost. Most raw materials are purchased on the open market or under contracts that 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 leverage of having substitute raw materials approved for use wherever possible is used to minimize the impact of possible price increases.

 

Item 4. Controls and Procedures

 

(a) Controls and procedures

 

As of the end of the period covered by this report, the company conducted an evaluation, under the supervision and with the participation of the company’s chief executive officer and chief financial officer, of the company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, the chief executive officer and chief financial officer concluded that, as of September 2, 2006, the company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

 

(b) Change in internal control over financial reporting

 

There were no changes in the company’s internal control over financial reporting during its most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect its internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Environmental Matters. From time to time, the company is identified as a “potentially responsible party” under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and/or similar state laws that impose liability for costs relating to the cleanup of contamination resulting from past spills, disposal or other release of hazardous substances. The company is also subject to similar laws in some of the countries where current and former plants are located. The company’s environmental, health and safety department monitors compliance with all applicable laws on a global basis.

 

Currently the company is involved in various environmental investigations, clean-up activities and administrative proceedings and lawsuits. In many of these matters, the company has entered into participation agreements, consent decrees or tolling agreements. One of these environmental matters involves the investigation and remediation of environmental contamination at the company’s Sorocaba, Brazil facility. Soil and water samples have been collected on and around the Sorocaba facility, and recent test results indicate that certain contaminants, including carbon tetrachloride and other solvents, may exist in the soil at the Sorocaba facility and in the groundwater at both the Sorocaba facility and some neighboring properties. The company is continuing to work with Brazilian regulatory authorities to

 

27


determine the necessary scope of remediation at the facility and the neighboring properties. As of September 2, 2006, $2.1 million was recorded as a liability for expected investigation and remediation expenses remaining for this site. Once the full scope of any necessary remediation is determined, the company may be required to record additional liabilities related to investigation and remediation costs at the Sorocaba facility.

 

The company’s management reviews the circumstances of each individual site, considering the number of parties involved, the level of potential liability or contribution of the company relative to the other parties, the nature and magnitude of the hazardous wastes involved, the method and extent of remediation, the estimated legal and consulting expense with respect to each site and the time period over which any costs would likely be incurred. The company accrues appropriate reserves for potential environmental liabilities, which are continually reviewed and adjusted as additional information becomes available. As of September 2, 2006, the company had reserved $3.5 million, which represents its best estimate of probable liabilities with respect to environmental matters, inclusive of the accrual related to the Sorocaba facility as described above. However, the full extent of the company’s future liability for environmental matters is difficult to predict because of uncertainty as to the cost of investigation and clean-up of the sites, the company’s responsibility for such hazardous waste and the number of and financial condition of other potentially responsible parties.

 

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 $0.1 million or more (exclusive of interest and litigation costs).

 

While uncertainties exist with respect to the amounts and timing of the company’s ultimate environmental liabilities, based on currently available information, management does not believe that these matters, individually or in aggregate, will have a material adverse effect on the company’s long-term financial condition. However, adverse developments could negatively impact the company’s results of operations or cash flows in one or more future quarters.

 

Other Legal Proceedings. From time to time and in the ordinary course of business, the company is a party to, or a target of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, commercial contract, patent and intellectual property, antitrust, health and safety and employment matters. While the company is unable to predict the outcome of these matters, it does not believe, based upon currently available information, that the ultimate resolution of any pending matter, individually or in aggregate, including the EIFS and asbestos litigation described in the following paragraphs, will have a material adverse effect on the company’s long-term financial condition. However, adverse developments could negatively impact the company’s results of operations or cash flows in one or more future quarters.

 

A subsidiary of the company is a defendant in numerous exterior insulated finish systems (“EIFS”) related lawsuits. As of September 2, 2006, the company’s subsidiary was a defendant in approximately 36 lawsuits and claims related primarily to single-family homes. The EIFS product was used primarily in the residential construction market in the southeastern United States. Some of the lawsuits and claims involve EIFS in commercial or multi-family structures. Lawsuits and claims related to this product line seek monetary relief for water intrusion-related property damages. The company has insurance coverage for certain years with respect to this product line. During the quarter ended June 3, 2006, the company entered into agreements to settle numerous EIFS-related lawsuits and claims, including a lawsuit involving up to 186 homes. In total, the company paid $5.0 million in settlement of these lawsuits and claims, of which insurers have paid $0.7 million and are expected to pay an additional $0.9 million. As of September 2, 2006, the company had recorded $1.7 million for the probable liabilities and $1.7 million for insurance recoveries, including the $0.9 million referred to above, for all remaining EIFS-related lawsuits and claims. The company continually reevaluates these amounts.

 

Based on currently available information, management does not believe that the ultimate outcome of any pending legal proceedings and claims related to this product line, individually or in aggregate, will have a material adverse effect on the company’s long-term financial condition. However, adverse developments

 

28


could negatively impact the company’s results of operations or cash flows in one or more future quarters. Given the numerous uncertainties surrounding litigation and the projection of future events, such as the number of new claims to be filed each year and the average cost of disposing of each such claim, the actual costs could be higher or lower than the current estimated reserves or insurance recoveries.

 

The company and/or its subsidiaries have been named as defendants in lawsuits in which plaintiffs have alleged injury due to products containing asbestos manufactured by the company more than 20 years ago. The plaintiffs generally bring these lawsuits against multiple defendants and seek damages (both actual and punitive) in very large amounts. In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable injuries or that the injuries suffered were the result of exposure to products manufactured by the company or its subsidiaries. The company is typically dismissed as a defendant in these cases without payment. If the plaintiff establishes that compensable injury occurred as a result of exposure to the company’s products, the case is generally settled for an amount that reflects the seriousness of the injury, the number and solvency of other defendants in the case, and the jurisdiction in which the case has been brought.

 

As a result of bankruptcy filings by numerous defendants in asbestos-related litigation and the prospect of national and state legislative reform relating to such litigation, the rate at which plaintiffs filed asbestos-related lawsuits against various companies (including the company) increased in 2001, 2002 and the first half of 2003. In the second half of 2003 and throughout 2004 and 2005, the rate of these filings declined significantly. However, the company expects that asbestos-related lawsuits will continue to be filed against the company in the future.

 

A significant portion of the defense costs and settlements relating to asbestos-related litigation involving the company continues to be paid by third parties, including indemnification pursuant to the provisions of a 1976 agreement under which the company acquired a business from a third party. Historically, this third party routinely defended all cases tendered to it and paid settlement amounts resulting from those cases. In the 1990s, the third party sporadically reserved its rights, but continued to defend and settle all asbestos-related claims tendered to it by the company. In 2002, the third party rejected the tender of certain cases by the company and indicated it would seek contributions from the company for past defense costs, settlements and judgments. However, this third party has continued to defend and pay settlement amounts, under a reservation of rights, in most of the asbestos cases tendered to the third party by the company.

 

In addition to the indemnification arrangements with third parties, the company has insurance policies that generally provide coverage for asbestos liabilities (including defense costs). Historically, insurers have paid a significant portion of the defense costs and settlements in asbestos-related litigation involving the company. However, certain of the company’s insurers are insolvent. During 2005, the company and a number of its insurers entered into a cost-sharing agreement that provides for the allocation of defense costs, settlements and judgments among these insurers and the company in certain asbestos-related lawsuits. Under this agreement, the company is required to fund a share of settlements and judgments allocable to years in which the responsible insurer is insolvent. The cost-sharing agreement applies only to the asbestos litigation involving the company that is not covered by the third-party indemnification arrangements.

 

In 2004, the company and a group of other defendants (including the third party obligated to indemnify the company against certain asbestos-related claims) entered into negotiations with a group of plaintiffs to settle certain asbestos-related lawsuits. As previously reported and accounted for during the third quarter of 2004, the company agreed to contribute approximately $3.5 million towards the settlement to be paid in these cases in exchange for a full release of claims by the plaintiffs.   Of this amount, the company’s insurers have agreed to pay approximately $1.2 million. The company and its insurers have transferred the required amounts into a trust established to disburse payments related to settlements. On December 1, 2005, $3.1 million was paid out of this trust under the settlement. As of September 2, 2006, the amount the company and its insurers have remaining to pay out of trust is up to $0.4 million. The company’s remaining portion of this is up to $0.3 million and is recorded as restricted cash, which is included in other current assets. During the first nine months of 2006, the company accrued a total of $0.6 million for settlements of asbestos-related lawsuits. The company’s insurers have paid or are expected to pay $0.3 million of this amount.

 

29


To the extent the company can reasonably estimate the amount of its probable liabilities for pending asbestos-related claims, the company establishes a financial provision and a corresponding receivable for insurance recoveries if certain criteria are met. As of September 2, 2006, the company had $1.0 million accrued for probable liabilities and $0.5 million for insurance recoveries related to asbestos claims. However, the company has concluded that it is not possible to estimate the cost of disposing of other asbestos-related claims (including claims that might be filed in the future) due to its inability to project future events. Future variables include the number of new claims filed, the average cost of disposing of such claims, the uncertainty of asbestos litigation, insurance coverage and indemnification agreement issues, and the continuing solvency of certain insurance companies.

 

Because of the uncertainties described above, the company cannot accurately estimate the cost of resolving pending and future asbestos-related claims against the company. Based on currently available information, the company does not believe that asbestos-related litigation, individually or in aggregate, will have a material adverse effect on the company’s long-term financial condition. However, adverse developments in such litigation could negatively impact the company’s results of operations or cash flows in one or more future quarters.

 

Item 1A. Risk Factors

 

This Form 10-Q contains forward-looking statements concerning our future programs, products, expenses, revenue, liquidity and cash needs as well as our plans and strategies. These forward-looking statements are based on current expectations and the company assumes no obligation to update this information. Numerous factors could cause actual results to differ significantly from the results described in these forward-looking statements, including the risk factors identified under Part I, Item 1A. Risk Factors contained in the company’s Annual Report on Form 10-K for the fiscal year ended December 3, 2005. There have been no material changes in the risk factors disclosed by the company under Part I, Item 1A. Risk Factors contained in the Annual Report on Form 10-K for the fiscal year ended December 3, 2005.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

Upon vesting of restricted stock awarded by the company to employees, shares are withheld to cover the employees’ withholding taxes. Information on the company’s purchases of equity securities during the quarter follows:

 

Period


  

(a)

Total
Number
of Shares
Purchased


   (b)
Average
Price
Paid
per Share


  

(c)

Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs


  

(d)

Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs (at
end of period)


June 4, 2006 – July 8, 2006

   6,476    $ 23.39    —      N/A

July 9, 2006 – August 5, 2006

   830    $ 23.94    —      N/A

August 6, 2006 – September 2, 2006

   —        —      —      N/A

 

30


Item 6.

 

Exhibits

   
3.1   Restated Articles of Incorporation of H.B. Fuller Company, as amended to date
12   Computation of Ratios
31.1   Form of 302 Certification - Albert P.L. Stroucken
31.2   Form of 302 Certification - John A. Feenan
32.1   Form of 906 Certification - Albert P.L. Stroucken
32.2   Form of 906 Certification - John A. Feenan

 

Lean Six Sigma SM is a registered service mark of The George Group Incorporated.

 

31


SIGNATURES

 

Pursuant to the requirements 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
Dated: October 6, 2006      

/s/ John A. Feenan


        John A. Feenan
        Senior Vice President and
        Chief Financial Officer

 

32


Exhibit Index

 

Exhibits

   
3.1  

Restated Articles of Incorporation of H.B. Fuller Company, as amended to date

12  

Computation of Ratios

31.1  

Form of 302 Certification - Albert P.L. Stroucken

31.2  

Form of 302 Certification - John A. Feenan

32.1  

Form of 906 Certification - Albert P.L. Stroucken

32.2  

Form of 906 Certification - John A. Feenan

Exhibit 3.1

 

ARTICLES OF AMENDMENT

TO THE

RESTATED ARTICLES OF INCORPORATION

OF

H.B. FULLER COMPANY

 

1. The name of the corporation is H.B. Fuller Company.

 

2. The following is the full text of the amendment to Article III of the Restated Articles of Incorporation of H.B. Fuller Company:

 

NOW, THEREFORE, BE IT RESOLVED, that the first sentence of Article III of the Restated Articles of Incorporation of H.B. Fuller Company is hereby amended in its entirety to read as follows:

 

ARTICLE III

 

The aggregate number of shares of capital stock which the Corporation shall have authority to issue is one hundred seventy million forty-five thousand nine hundred (170,045,900) shares, consisting of one hundred sixty million (160,000,000) 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”).

 

3. The foregoing amendment was adopted by the Board of Directors of H.B. Fuller Company (the “Company”) at a meeting held on July 13, 2006.

 

4. The foregoing amendment was adopted pursuant to Chapter 302A of the Minnesota Statutes in connection with a division of the Common Stock.

 

5. The foregoing 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 the division exceeding the percentage of authorized shares that were unissued before such division.

 

6. 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:

 

  (a) 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

 

  (b) commencing on August 4, 2006, 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, the undersigned, General Counsel and Corporate Secretary of the Company, being duly authorized on behalf of such corporation, has executed these Articles of Amendment this 28 th day of July, 2006.

 

/s/ Timothy J. Keenan


Timothy J. Keenan
General Counsel and Corporate Secretary


ARTICLES OF AMENDMENT OF

ARTICLES OF INCORPORATION OF

 

H.B. FULLER COMPANY

 

INCIDENT TO STOCK SPLIT BY BOARD

 

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 (80,000,00) 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 26 th day of October 2001.

 

/s/ Steven E. Suckow


Steven E. Suckow, Assistant Secretary
 


RESTATED ARTICLES OF INCORPORATION

OF

H.B. FULLER COMPANY

 

ARTICLE I

 

The name of the corporation shall be H.B. FULLER COMPANY.

 

ARTICLE II

 

The address of the registered office of the Corporation in the state is 1200 Willow Lake Boulevard, St. Paul, Minnesota 55110-5101 (mailing address: P.O. Box 64683, St. Paul, MN 55164-0683).

 

ARTICLE III

 

The aggregate number of shares of capital stock which the Corporation shall have authority to issue is fifty million forty-five thousand nine hundred (50,045,900) shares, consisting of forty million (40,000,000) 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 (“Preferred Stock”). A description of the Preferred Stock and the Common Stock and a statement of the relative rights, voting power, preferences and restrictions granted to or imposed upon the shares of each class thereof are as follows:

 

1. No Cumulative Voting. The shareholders of the Corporation shall have no right to cumulate votes in the election of directors.

 

2. Common Stock. The holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of funds legally available therefor, dividends payable either in cash, in property or in shares of the capital stock of the Corporation. Each holder of record of the Common Stock shall have one vote for each share of Common Stock registered in the holder’s name on the books of the Corporation and entitled to vote. No holders of Common Stock shall have any preemptive or preferential right of subscription to any shares of capital stock of the Corporation or to any obligations convertible into such shares. The Common Stock shall have no special powers, preferences or rights, or qualifications, limitations or restrictions thereof.

 

3. Preferred Stock

 

(a) Forty-five thousand nine hundred (45,900) of the shares of Preferred Stock, par value $6.6667, are hereby designated as “Series A Preferred Stock.” The holders of Series A Preferred Stock shall have the following rights and preferences:

 

(i) The holders of Series A Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors, from funds legally available therefore, cumulative cash dividends at the rate of $0.50 per share per annum from March 1, 1992 to and including April 30, 1992, and $0.3333 per share per annum thereafter, payable quarter-annually on dates to be determined by the Board of Directors.

 

(ii) So long as any of the Series A Preferred Stock remains outstanding, no dividend shall be paid or declared, or any distribution be made on the Common Stock of the Corporation, unless the amount of the dividends on the then outstanding Series A Preferred Stock equal to $0.3333 per share per annum from the date of issuance of said Series A Preferred Stock to the end of the current dividend period shall be declared and paid or declared and set apart for payment on such Series A Preferred Stock.


(iii) Subject to the foregoing, such dividends as may be determined by the Board of Directors may be declared and paid on the Common Stock from funds legally available for the payment of dividends, and the Series A Preferred Stock shall not be entitled to participate in any such dividends, whether payable in cash, stock or otherwise.

 

(iv) At the option of the Board of Directors, the Corporation may, effective at the end of any quarter-annual dividend period, purchase the whole or any part of the Series A Preferred Stock then outstanding, or may, when authorized by affirmative vote of a majority of all the votes then represented by the outstanding shares of the Corporation, redeem all, but not less than all, of the outstanding Series A Preferred Stock upon thirty (30) days’ notice duly given by registered or certified mail to the holders of record of the shares of Series A Preferred Stock. The redemption price per share shall be the par value of each share together with all accrued and unpaid dividends, such dividends to be accrued to the redemption date.

 

(v) Upon the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, or upon any distribution of its capital other than by redemption or purchase of Series A Preferred Stock, the holders of Series A Preferred Stock shall first be paid $6.6667 per share together with all unpaid cumulated dividends, whether or not earned or declared, and no more, before any distribution or payment shall be made to the holders of the Common Stock. The words “liquidation, dissolution or winding up” as used herein shall not apply to or include transactions incident to a consolidation, merger or sale of all or substantially all of the Corporation’s assets.

 

(vi) Except as otherwise required by law or other provisions of these Amended and Restated Articles of Incorporation, all Series A Preferred Stock shall vote with the Common Stock as a single class and for voting purposes shall be of equal rank, except that each share of Common Stock shall have one (1) vote and each share of Series A Preferred Stock shall have eighty (80) votes. Notwithstanding the foregoing, the voting rights of any share of Series A Preferred Stock shall be reduced to one (1) vote if and when said share shall not be owned beneficially by one or more members of the class described below, and the voting rights of all of the Series A Preferred Stock shall be reduced to one (1) vote per share if and when a majority of the Series A Preferred Stock outstanding shall not be owned beneficially by one or more members of the class consisting of:

 

(A) the original beneficial owners of the Series A Preferred Stock;

 

(B) the spouses of the original beneficial owners of the Series A Preferred Stock;

 

(C) the children and more remote issue of the original beneficial owners of the Series A Preferred Stock (including those sustaining that relationship by reason of adoption) and their respective spouses,

 

and said voting rights, if so reduced, shall not again be increased. Series A Preferred Stock held directly or indirectly by or for a person, including stock held in an estate or trust (to the extent of such person’s interest as beneficiary of such estate or trust) shall be deemed to be owned beneficially by such person.

 

(vii) No holder of Series A Preferred Stock shall have any preemptive or preferential right of subscription to any shares of the Corporation, or to any obligations convertible into such shares.

 

(b) The balance of ten million (10,000,000) shares of Preferred Stock may be issued from time to time in one or more series as the Board of Directors may determine, as hereinafter provided. The Board of Directors is hereby authorized, by resolution or resolutions, to provide from time to time for series of Preferred Stock out of the unissued series of Preferred Stock not then allocated to any series of Preferred Stock. Before any shares of any such series of Preferred Stock are issued, the Board of Directors shall fix and determine, and is hereby expressly empowered to fix and determine, by resolution or


resolutions, the designations, powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, including without limiting the generality of the foregoing, any of the following provisions with respect to which the Board of Directors shall determine to make affirmative provision:

 

(i) the designation and name of such series and the number of shares that shall constitute such series;

 

(ii) the annual dividend rate or rates payable on shares of such series, the date or dates from which such dividends shall commence to accrue and the dividend payment dates for such dividends;

 

(iii) whether dividends on such series are to be cumulative or noncumulative, and the participating or other special rights, if any, with respect to the payment of dividends;

 

(iv) whether such series shall be subject to redemption and, if so, the manner of redemption, the redemption price or prices and the terms and conditions on which shares of such series may be redeemed;

 

(v) whether such series shall have a sinking fund or other retirement provisions for the redemption or purchase of shares of such series and, if so, the terms and amount of such sinking fund or other retirement provisions and the extent to which the charges therefor are to have priority over the payment of dividends on, or the making of sinking fund payments or other like retirement provisions for, shares of any other series or over dividends on the Common Stock;

 

(vi) the amounts payable on shares of such series on voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation and the extent to which such payment shall have priority over the payment of any amount on voluntary or involuntary dissolution, liquidation or winding up of affairs of the Corporation, on shares of any other series or on the Common Stock;

 

(vii) the terms and conditions, if any, on which shares of such series may be converted into, or exchanged for, shares of any other series or of the Common Stock;

 

(viii) the extent of the voting powers, if any, of the shares of such series;

 

(ix) the stated value, if any, for the shares of such series, the consideration for which shares of such series may be issued and the amount of such consideration that shall be credited to the capital account; and

 

(x) any other preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of the shares of such series.

 

The Board of Directors is expressly authorized to vary the provisions relating to the foregoing matters among the various series of Preferred Stock.

 

All shares of Preferred Stock of any one series shall be identical in all respects with all other shares of such series, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall be payable and, if cumulative, shall cumulate.

 

Shares of any series of Preferred Stock that shall be issued and thereafter acquired by the Corporation through purchase, redemption (whether through the operation of a sinking fund or otherwise), conversion, exchange or otherwise, shall, upon appropriate filing and recording to the extent required by law, have the status of authorized and unissued shares of Preferred Stock and may be reissued as part of such series or as part of any other series of Preferred Stock. Unless otherwise provided in the resolution or resolutions of the Board of Directors providing for the issue thereof, the number of authorized shares of stock


of any series of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by resolution or resolutions of the Board of Directors and appropriate filing and recording to the extent required by law. In case the number of shares of any such series of Preferred Stock shall be decreased, the shares representing such decrease shall, unless otherwise provided in the resolution or resolutions of the Board of Directors providing for the issuance thereof, resume the status of authorized but unissued shares of Preferred Stock, undesignated as to series.

 

ARTICLE IV

 

1. Number of Directors. In addition to any directors who may be elected by the holders of any one or more series of Preferred Stock voting separately as such (the “Series Directors”), the holders of the shares of Common Stock and of any other shares of capital stock entitled to vote as a single class with the shares of Common Stock shall elect that number of directors, not to exceed fifteen (15), fixed from time to time exclusively by the affirmative vote of a majority of the directors (other than Series Directors) then in office.

 

2. Classified Board. The directors to be elected by the holders of the shares of Common Stock and of any other shares of capital stock entitled to vote as a single class with the shares of Common Stock shall be divided into three classes designated Class I, Class II and Class III. The term of one class of directors shall expire each year. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors fixed pursuant to Section 1 of this Article IV. At each Annual Meeting of Shareholders, the directors elected to succeed those directors whose terms expire shall be elected for a term expiring three years after the date of their election and until their successors are duly elected and qualified. If the number of directors fixed pursuant to Section 1 of this Article IV is changed, any increase or decrease shall be apportioned among the three classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class but in no case will a decrease in the number of directors shorten the term of any incumbent director. Subject to the rights of the holders of any class or series of the then outstanding capital stock of the Corporation entitled to vote generally in the election of directors (other than Series Directors), newly created directorships resulting from any increase in the number of directors fixed pursuant to Section 1 of this Article IV or any vacancies in any class resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors (other than Series Directors) then in office, although less than a quorum. Directors so elected shall hold office for a term expiring at the time at which the term of office of the class to which they have been elected expires and until their successors are duly elected and qualified.

 

3. Removal. Any directors, or the entire Board of Directors, may be removed from office at any time for good cause by the affirmative vote of the holders of two-thirds of the combined voting power of the shares of the classes or series of capital stock of the Corporation present and voting together as a single class. A director named by the Board of Directors to fill a vacancy may be removed from office at any time, with or without cause, by the affirmative vote of a majority of the remaining directors if the shareholders have not elected directors in the interim between the time of the appointment to fill such vacancy and the time of removal. In the event that any one or more directors or the entire Board is removed at a shareholders’ meeting, a new director or new directors shall be elected at the same meeting.

 

4. Amendment of Article IV. Notwithstanding anything contained in these Amended and Restated Articles of Incorporation to the contrary, any amendment, alteration, change or repeal of this Article IV shall require the affirmative vote of the holders of two-thirds of the combined voting power of the shares of the capital stock of the Corporation present and voting together as a single class.

 

ARTICLE V

 

1. (a) In addition to any affirmative vote required by law or under any other provision of these Amended and Restated Articles of Incorporation, and except as otherwise expressly provided in Section 2 of this Article V:

 

(i) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with or into (A) any 20% Shareholder (as hereinafter defined) or (B) any other corporation or other person or entity (whether or not itself a 20% Shareholder) which, after such merger or consolidation, would be an Affiliate (as hereinafter defined) of a 20% Shareholder;


(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of related transactions) to or with any 20% Shareholder of any assets of the Corporation or any Subsidiary having an aggregate fair market value of $5,000,000 or more;

 

(iii) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of related transactions) of any securities of the Corporation or any Subsidiary to any 20% Shareholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate fair market value of $5,000,000 or more;

 

(iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation; or

 

(v) any reclassification of securities (including any reverse stock split), recapitalization, reorganization, merger or consolidation of the Corporation with any of its Subsidiaries or any similar transaction (whether or not with or into or otherwise involving a 20% Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any 20% Shareholder, shall require the affirmative vote of the holders of at least 95% of the outstanding voting power of the Corporation voting as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that some lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise.

 

(b) The term “Business Combination” as used in this Article V shall mean any transaction, which is referred to in any one or more of clauses (i) through (v) of subsection (a) of this Section 1.

 

2. The provisions of Section 1 of this Article V shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of these Amended and Restated Articles of Incorporation, if either such Business Combination shall have been authorized and approved by the Board of Directors of the Corporation at a time when such Board of Directors shall consist only of Continuing Directors (as hereinafter defined) or all of the following conditions shall have been satisfied:

 

(a) The ratio of:

 

(i) the aggregate amount of the cash and the fair market value of other consideration to be received per share by holders of Common Stock of the Corporation in such Business Combination, to

 

(ii) the market price of the Common Stock immediately prior to the announcement of such Business Combination is at least as great as the ratio of:

 

(A) the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers’ fees) which such 20% Shareholder or any of its Affiliates has paid for any shares of Common Stock acquired by it within the three-year period prior to the Business Combination, to


(B) the market price of the Common Stock immediately prior to the initial acquisition by such 20% Shareholder or any of its Affiliates of any Common Stock.

 

(b) The aggregate amount of the cash and fair market value of other consideration to be received per share by holders of Common Stock in such Business Combination:

 

(i) is not less than the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers’ fees) paid by such 20% Shareholder or any of its Affiliates in acquiring any of its holdings of Common Stock; and

 

(ii) is not less than the earnings per share of Common Stock for the four full consecutive fiscal quarters immediately preceding the record date for solicitation of votes on such Business Combination multiplied by the then price/earnings multiple (if any) of such 20% Shareholder as customarily computed and reported in the financial community (provided that this subparagraph (ii) shall not be applicable if such 20% Shareholder does not then have outstanding Common Stock which is publicly traded in the United States).

 

(c) The consideration to be received by holders of Common Stock in such Business Combination shall be in the same form and of the same kind as the consideration paid by the 20% Shareholder in acquiring the shares of Common Stock already owned by it.

 

(d) After such 20% Shareholder has acquired ownership of not less than 20% of the voting power of the Corporation (a “20% Interest”) and prior to the consummation of such Business Combination:

 

(i) the 20% Shareholder shall have taken steps to ensure that the Corporation’s Board of Directors included at all times representation by Continuing Director(s) approximately proportionate to the ratio that the voting power which from time to time is held by persons who are not 20% Shareholders (“Public Holders”) bears to the entire voting power of all outstanding shares of capital stock of the Corporation at such respective times;

 

(ii) there shall have been no reduction in the rate of dividends payable on the Common Stock except as necessary to ensure that a quarterly dividend payment does not exceed 15% of the net income of the Corporation for the four full consecutive fiscal quarters immediately preceding the declaration date of such dividend, or except as may have been approved by a unanimous vote of all directors which the Corporation would have if there were no vacancies (the “Whole Board”);

 

(iii) such 20% Shareholder shall not have acquired any newly issued shares of stock, directly or indirectly, from the Corporation (except upon conversion of convertible securities acquired by it prior to obtaining a 20% Interest or as a result of a pro rata stock dividend or stock split); and

 

(iv) such 20% Shareholder shall not have acquired any additional shares of the Corporation’s outstanding Common Stock or securities convertible into or exchangeable for Common Stock, except as part of the transaction which resulted in such 20% Shareholder acquiring its 20% Interest.

 

(e) Prior to the consummation of such Business Combination, such 20% Shareholder shall not have:

 

(i) received the benefit directly or indirectly (except proportionately as a shareholder) of any loans, advances, guarantees, pledges or other financial assistance or tax credits provided by the Corporation; or


(ii) made any major change in the Corporation’s business or equity capital structure without the unanimous approval of the Whole Board.

 

(f) A proxy statement responsive to the requirements of the Securities Exchange Act of 1934 shall have been mailed to all holders of Common Stock and all series of Preferred Stock then outstanding for the purpose of soliciting shareholder approval of such Business Combination. Such proxy statement shall contain at the front thereof, in a prominent place, any recommendations as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors, or any of them, may have furnished in writing and, if deemed advisable by a majority of the Continuing Directors, an opinion of a reputable investment banking firm as to the fairness (or lack of fairness) of the terms of such Business Combination, from the point of view of the Shareholders other than any 20% Shareholder (such investment banking firm to be selected by a majority of the Continuing Directors, to be furnished with all information it reasonably requests, and to be paid a reasonable fee for its services upon receipt by the Corporation of such opinion).

 

3. For the purposes of this Article V:

 

(a) A “person” shall mean any individual, firm, corporation or other entity.

 

(b) “20% Shareholder” shall mean, in respect of any Business Combination, any person (other than the Corporation or any Subsidiary) who or which, as of the record date for the determination of shareholders entitled to notice of and to vote on such Business Combination, or immediately prior to the consummation of any such transaction:

 

(i) is the beneficial owner, directly or indirectly, of not less than 20% of the voting power of the Corporation;

 

(ii) is an Affiliate of the Corporation and at any time within three (3) years prior thereto was the beneficial owner, directly or indirectly, of not less than 20% of the voting power of the Corporation; or

 

(iii) is an assignee of or has otherwise succeeded to any shares of the capital stock of the Corporation which were at any time within three (3) years prior thereto beneficially owned by any 20% Shareholder, and such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933.

 

(c) A person shall be the “beneficial owner” of any shares of Common Stock or any series of Preferred Stock:

 

(i) which such person or any of its Affiliates and Associates (as hereinafter defined) beneficially own, directly or indirectly;

 

(ii) which such person or any of its Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement or understanding; or

 

(iii) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of the Corporation.


(d) The outstanding voting power of the Corporation shall include shares deemed owned through application of subsection (c) above but shall not include any other shares which may be issuable pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise.

 

(e) “Continuing Director” shall mean a person who was a member of the Board of Directors of the Corporation and who was elected by the Public Holders prior to the date as of which any 20% Shareholder acquired in excess of 7.5% of the then outstanding voting power of the Corporation, or a person designated (before his initial election as a director) as a continuing director by a majority of the then outstanding directors.

 

(f) “Other consideration to be received” shall include, but not be limited to, Common Stock of the Corporation retained by its Public Holders in the event of a Business Combination in which the Corporation is the surviving corporation.

 

(g) “Affiliate” and “Associate” shall have the respective meanings given those terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 1979.

 

(h) “Subsidiary” means any corporation of which a majority of any class of equity security (as defined in Rule 3a11-1 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 1979) is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of 20% Shareholder set forth in subsection (b) of this Section 3, the term “Subsidiary” shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation.

 

4. A majority of the Continuing Directors shall have the power and duty to determine for the purposes of this Article V, on the basis of information known to them, (a) the number of shares of Common Stock and all series of Preferred Stock beneficially owned by any person, (b) whether a person is an Affiliate or Associate of another, (c) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in subsection (c) of Section 3, or (d) whether the assets subject to any Business Combination have an aggregate fair market value of $5,000,000 or more.

 

5. Notwithstanding the provisions of Article V of these Amended and Restated Articles of Incorporation, any amendment, alteration, change or repeal of this Article V shall require the affirmative vote of the holders of at least 95% of the then outstanding voting power of the Corporation voting as a single class, provided that this Section 5 shall not apply to, and such 95% vote shall not be required for, any amendment, alteration, change or repeal recommended to the stockholders by a majority of the Whole Board, but only if all members of the Whole Board are Continuing Directors.

 

6. Nothing contained in this Article V shall be construed to relieve any 20% Shareholder from any fiduciary obligation imposed by law.

 

7. Notwithstanding anything contained in this Article V, the following persons shall not, either individually or in the aggregate, be considered to be a 20% Shareholder:

 

(a) the original beneficial owners of the Series A Preferred Stock;

 

(b) the spouses of the original beneficial owners of the Series A Preferred Stock; and

 

(c) the children and more remote issue of the original beneficial owners of the Series A Preferred Stock (including those sustaining that relationship by reason of adoption) and their respective spouses.


ARTICLE VI

 

A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for (a) liability based upon a breach of the duty of loyalty to the Corporation or the shareholders; (b) liability for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (c) liability based upon the payment of an improper dividend or an improper repurchase of the Corporation’s stock under Section 559 of the Minnesota Business Corporation Act (Minnesota Statutes, Chap. 302A) or upon violations of federal or state securities laws; (d) liability for any transaction from which the director derived an improper personal benefit; or (e) liability for any act or omission occurring prior to the date this Article VI becomes effective. If the Minnesota Business Corporation Act hereafter is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the Minnesota Business Corporation Act. Any repeal or modification of this Article by the shareholders of the Corporation shall be prospective only, shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification, and shall be made only upon the affirmative vote of 95.5% of votes represented by shares of the Common Stock and all series of Preferred Stock then outstanding voting as a single class of the Corporation present, in person or by proxy, at a meeting of shareholders duly called for such purpose.

 

ARTICLE VII

 

1. Notwithstanding any other provision of these Amended and Restated Articles of Incorporation to the contrary, all shares of capital stock acquired by an Acquiring Person (as defined in Section 7 of this Article VII) in a Control Share Acquisition (as defined in Section 7 of this Article VII) that exceed the threshold of voting power of any of the ranges specified in clause (d) of Section 2 of this Article VII, shall have only the voting rights as shall be accorded to them pursuant to Section 5 of this Article VII.

 

2. An Acquiring Person shall deliver to the Corporation at its principal executive office a statement (the “Information Statement”) containing all of the following: (a) the identity and background of the Acquiring Person, including the identity and background of each member of any partnership, limited partnership, syndicate or other group constituting the Acquiring Person, and the identity and background of each Affiliate and Associate (as defined in Section 7 of this Article VII) of the Acquiring Person, including the identity and background of each Affiliate and Associate of each member of such partnership, syndicate or other group; provided, however, that with respect to a limited partnership, the information need only be given with respect to a partner who is denominated or functions as a general partner and each Affiliate and Associate of the general partner; (b) a reference that the Information Statement is made under Minnesota Statutes, Section 302A.671; (c) the number and class or series of shares of the Corporation beneficially owned, directly or indirectly, before the Control Share Acquisition by each of the persons identified pursuant to clause (a) of Section 2 of this Article VII; (d) the number and class or series of shares of the Corporation acquired pursuant to the Control Share Acquisition or proposed to be acquired pursuant to the proposed Control Share Acquisition by each of the persons identified pursuant to clause (a) of Section 2 of this Article VII and specification of which of the following ranges of voting power in the election of directors that, except for the provisions of this Article VII, resulted or would result from consummation of the Control Share Acquisition: (i) at least 20% but less than 33  1 / 3 %, (ii) at least 33  1 / 3 % but less than a majority, or (iii) at least a majority; and (e) the terms of the Control Share Acquisition or proposed Control Share Acquisition, including, but not limited to, the source of funds or other consideration and the material terms of the financial arrangements for the Control Share Acquisition or proposed Control Share Acquisition, any plans or proposals of the Acquiring Person (including plans or proposals under consideration) to liquidate or dissolve the Corporation, to sell all or a substantial part of its assets, or merge it or exchange its shares with any other person, to change the location of its principal place of business or its principal executive office or of a material portion of its business activities, to change materially its management or policies of employment, to change materially its charitable or community contributions or its policies, programs or practices relating thereto, to change materially its relationship with suppliers or customers or the communities in which it operates, or make any other material change in its business, corporate structure, management or personnel, and other


objective facts as would be substantially likely to affect the decision of a shareholder with respect to voting on the Control Share Acquisition or proposed Control Share Acquisition. If any material change occurs in the facts set forth in the Information Statement, including but not limited to any material increase or decrease in the number of shares of the Corporation acquired or proposed to be acquired by the persons identified pursuant to clause (a) of Section 2 of this Article VII, the Acquiring Person shall promptly deliver to the Corporation at its principal executive office an amendment to the Information Statement containing information relating to the material change. An increase or decrease or proposed increase or decrease equal, in the aggregate for all persons identified pursuant to clause (a) of Section 2 of this Article VII, to 1% or more of the total number of outstanding shares of any class or series of the Corporation shall be deemed “material” for purposes of this Section; an increase or decrease or proposed increase or decrease of less than this amount may be material, depending upon the facts and circumstances.

 

3. If the Acquiring Person so requests in writing at the time of delivery of an Information Statement pursuant to Section 2 of this Article VII and has made, or has made a bona fide written offer to make, a Control Share Acquisition and gives a written undertaking to pay or reimburse the Corporation’s expenses of a special meeting, except the expenses of the Corporation in opposing according voting rights with respect to shares acquired in the Control Share Acquisition or to be acquired in the proposed Control Share Acquisition, within ten days after receipt by the Corporation of the Information Statement, a special meeting of the shareholders of the Corporation shall be called for the sole purpose of considering the voting rights to be accorded to shares referred to in Section 1 of this Article VII acquired or to be acquired pursuant to the proposed Control Share Acquisition. The special meeting shall be held no later than 55 days after receipt of the Information Statement and written undertaking to pay or reimburse the Corporation’s expenses of the special meeting, unless the Acquiring Person agrees to a later date. If the Acquiring Person so requests in writing at the time of delivery of the Information Statement, the special meeting shall not be held sooner than 30 days after receipt by the Corporation of the Information Statement. The record date for the meeting must be at least 30 days prior to the date of the special meeting. If no request for a special meeting is made, consideration of the voting rights to be accorded to shares referred to in Section 1 of this Article VII acquired pursuant to the Control Share Acquisition or to be acquired pursuant to the proposed Control Share Acquisition shall be presented at the next special or annual meeting of the shareholders, unless prior thereto the matter of the voting rights becomes moot. The notice of the special meeting shall at a minimum be accompanied by a copy of the Information Statement (and a copy of any amendment to the Information Statement previously delivered to the Corporation) and a statement disclosing that the Board of Directors of the Corporation recommends approval of, expresses no opinion and is remaining neutral toward, recommends rejection of, or is unable to take a position with respect to according voting rights to shares referred to in Section 1 of this Article VII acquired in the Control Share Acquisition or to be acquired in the proposed Control Share Acquisition. The notice of meeting shall be given at least ten days prior to the meeting. Any amendments to the Information Statement received after mailing of the notice of the special meeting must be mailed promptly to the shareholders by the Corporation. A proxy relating to a meeting of shareholders required under this Section 3 must be solicited separately from any offer to purchase or solicitation of an offer to sell shares of the Corporation.

 

4. Notwithstanding anything to the contrary contained in this Article VII, no call of a special meeting of the shareholders of the Corporation shall be made pursuant to Section 3 of this Article VII and no consideration of the voting rights to be accorded to shares referred to in Section 1 of this Article VII acquired pursuant to the Control Share Acquisition or to be acquired pursuant to the proposed Control Share Acquisition shall be presented at any special or annual meeting of the shareholders of the Corporation unless at the time of delivery of the Information Statement pursuant to Section 2 of this Article VII, the Acquiring Person shall have entered into, and shall deliver to the Corporation a copy or copies of, a definitive financing agreement or definitive financing agreements, with one or more responsible financial institutions or other entities having the necessary financial capacity, for any financing of the Control Share Acquisition or proposed Control Share Acquisition not to be provided by funds of the Acquiring Person. A financing agreement is not deemed not definitive for purposes of this Section 4 of this Article VII solely because it contains conditions or contingencies customarily contained in term loan agreements with financial institutions.

 

5. (a) Shares referred to in Section 1 of this Article VII acquired in a Control Share Acquisition shall have the same voting rights as other shares of the same class or series only if approved by resolution of shareholders of the Corporation at a special or annual meeting of shareholders pursuant to Section 3 of this Article VII.


(b) The resolution of shareholders must be approved by (i) the affirmative vote of the holders of a majority of the voting power of all shares entitled to vote, including all shares held by the Acquiring Person and (ii) the affirmative vote of the holders of a majority of the voting power of all shares entitled to vote, excluding all interested shares (as defined in Section 7 of this Article VII). A class or series of shares of the Corporation is entitled to vote separately as a class or series if any provision of the Control Share Acquisition would, if contained in a proposed amendment to these Amended and Restated Articles of Incorporation, entitle the class or series to vote separately as a class or series.

 

(c) To have the voting rights accorded by approval of a resolution of shareholders, any proposed Control Share Acquisition not consummated prior to the time of the shareholder approval must be consummated within 180 days after the shareholder approval.

 

(d) Any shares referred to in Section 1 of this Article VII acquired in a Control Share Acquisition that do not have voting rights accorded to them by approval of a resolution of shareholders shall regain their voting rights upon transfer to a person other than the Acquiring Person or any Affiliate or Associate of the Acquiring Person, unless the acquisition of the shares by the other person constitutes a Control Share Acquisition, in which case the voting rights of the shares are subject to the provisions of this Article VII.

 

6. The Corporation shall have the option to call for redemption all but not less than all shares referred to in Section 1 of this Article VII acquired in a Control Share Acquisition at a redemption price equal to the market value of the shares at the time the call for redemption is given, in the event (a) an Information Statement has not been delivered to the Corporation by the Acquiring Person by the tenth day after the Control Share Acquisition or (b) an Information Statement has been delivered but the shareholders have voted not to accord voting rights to such shares pursuant to Section 5 of this Article VII. The call for redemption shall be given by the Corporation within 30 days after the event giving the Corporation the option to call the shares for redemption and the shares shall be redeemed within 60 days after the call is given.

 

7. For purposes of this Article VII:

 

(a) “Acquiring Person” shall mean a person that makes or proposes to make a Control Share Acquisition. When two or more persons act as a partnership, limited partnership, syndicate or other group pursuant to any written or oral agreement, arrangement, relationship, understanding or otherwise for the purposes of acquiring, owning or voting shares of the Corporation, all members of the partnership, syndicate or other group constitute a “person.”

 

“Acquiring Person” does not include (i) a licensed broker-dealer or licensed underwriter who (A) purchases shares of the Corporation solely for purposes of resale to the public and (B) is not acting in concert with an Acquiring Person, or (ii) a person who becomes entitled to exercise or direct the exercise of a new range of voting power within any of the ranges specified in clause (d) of Section 2 of this Article VII solely as a result of a purchase of shares by, or recapitalization of, the Corporation or similar action unless (1) the repurchase, recapitalization or similar action was proposed by or on behalf of, or pursuant to any written action or oral agreement, arrangement, relationship, understanding or otherwise with, the person or any Affiliate or Associate of the person or (2) the person thereafter acquires beneficial ownership, directly or indirectly, of outstanding shares entitled to vote of the Corporation and, immediately after the acquisition, is entitled to exercise or direct the exercise of the same or a higher range of voting power under clause (d) of Section 2 of this Article VII as the person became entitled to exercise as a result of the repurchase, recapitalization or similar action.

 

(b) “Affiliate” shall mean a person that directly or indirectly controls, is controlled by, or is under common control with, a specified person.


(c) “Associate,” when used to indicate a relationship with any person, shall mean any of the following:

 

(i) any corporation or organization of which the person is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class or series of shares entitled to vote or other equity interest;

 

(ii) any trust or estate in which the person has a substantial beneficial interest or as to which the person serves as trustee or executor or in a similar fiduciary capacity; and

 

(iii) any relative or spouse of the person, or any relative of the spouse, residing in the home of the person.

 

(d) (i) “Beneficial owner,” with respect to shares or other securities, shall include, but shall not be limited to, any person who, directly or indirectly through any written or oral agreement, arrangement, relationship, understanding or otherwise, has or shares the power to vote, or direct the voting of, the shares or securities or has or shares the power to dispose of, or direct the disposition of, the shares or securities, except that:

 

(A) a person shall not be deemed the beneficial owner of shares or securities tendered pursuant to a tender or exchange offer made by the person or any of the person’s Affiliates or Associates until the tendered shares or securities are accepted for purchase or exchange; and

 

(B) a person shall not be deemed the beneficial owner of shares or securities with respect to which the person has the power to vote or direct the voting arising solely from a revocable proxy given in response to a proxy solicitation required to be made and made in accordance with the applicable rules and regulations under the Securities Exchange Act of 1934 and is not then reportable under that Act on a Schedule 13D or comparable report, or, if the Corporation is not then subject to the rules and regulations under the Securities Exchange Act of 1934, would have been required to be made and would not have been reportable if the Corporation had been subject to the rules and regulations.

 

(ii) “Beneficial ownership” shall include, but shall not be limited to, the right to acquire shares or securities through the exercise of options, warrants or rights, or the conversion of convertible securities, or otherwise. The shares or securities subject to the options, warrants, rights or conversion privileges held by a person shall be deemed to be outstanding for the purpose of computing the percentage of outstanding shares or securities of the class or series owned by the person, but shall not be deemed to be outstanding for the purpose of computing the percentage of the class or series owned by any other person. A person shall be deemed the beneficial owner of shares and securities beneficially owned by any relative or spouse of the person, or any relative of the spouse, residing in the home of the person, any trust or estate in which the person owns 10% or more of the total beneficial interest or serves as trustee or executor or in a similar capacity, any corporation or entity in which the person owns 10% or more of the equity, and any Affiliate of the person.

 

(iii) When two or more persons act or agree to act as a partnership, limited partnership, syndicate or other group for the purposes of acquiring, owning or voting shares or other securities of the Corporation, all members of the partnership, syndicate or other group are deemed to constitute a “person” and to have acquired beneficial ownership, as of the date they first so act or agree to act together, of all shares or securities of the Corporation beneficially owned by the person.

 

(e) “Control Share Acquisition” shall mean an acquisition, directly or indirectly, by an Acquiring Person of beneficial ownership of shares of the Corporation that, except for this Article VII,


would, when added to all other shares of the Corporation beneficially owned by the Acquiring Person, entitle the Acquiring Person, immediately after the acquisition, to exercise or direct the exercise of a new range of voting power within any of the ranges specified in clause (d) of Section 2 of this Article VII, but does not include any of the following:

 

(i) an acquisition by a donee pursuant to an inter vivos gift not made to avoid this Article VII or by a distributee as defined in Section 524.1-201, clause (10), of the Minnesota Statutes, as in effect on the date this Article VII is approved by shareholders of the Corporation;

 

(ii) an acquisition pursuant to a security agreement not created to avoid this Article VII;

 

(iii) an acquisition under Sections 302A.601 to 302A.661 of the Minnesota Statutes, as in effect on the date this Article VII is approved by shareholders, if the Corporation is a party to the transaction;

 

(iv) an acquisition from the Corporation;

 

(v) an acquisition for the benefit of others by a person acting in good faith and not made to avoid this Article VII, to the extent that the person may not exercise or direct the exercise of the voting power or disposition of the shares except upon the instruction of others; or

 

(vi) an acquisition pursuant to a savings, employee stock ownership or other employee benefit plan of the Corporation or any of its subsidiaries, or by a fiduciary of the plan acting in a fiduciary capacity pursuant to the plan.

 

For purposes of this clause (e) of Section 7 of this Article VII, shares beneficially owned by a plan described in clause (e)(vi) of Section 7 of this Article VII, or by a fiduciary of a plan described in such clause (e)(vi) pursuant to the plan, are not deemed to be beneficially owned by a person who is a fiduciary of the plan. All shares the beneficial ownership of which is acquired within a 120-day period, and all shares the beneficial ownership of which is acquired pursuant to a plan to make a Control Share Acquisition, shall be deemed to have been acquired in the same acquisition.

 

(f) “Interested shares” shall mean the shares of the Corporation beneficially owned by any of the following persons: (i) the Acquiring Person, (ii) any officer of the Corporation, or (iii) any employee of the Corporation who is also a director of the Corporation.

 

8. If any term, provision or restriction contained in this Article VII is held by a court or agency of competent jurisdiction to be invalid, void or unenforceable, then such term, provision or restriction shall be modified or stricken to the minimum degree necessary to avoid being invalid, void or unenforceable and the remainder of this Article VII shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

 

9. Any amendment to, or modification or repeal of, this Article VII shall require the affirmative vote of 78.7% of votes represented by shares of the Common Stock and all series of Preferred Stock then outstanding voting as a single class of the Corporation present, in person or by proxy, at a meeting of the shareholders duly called and held for that purpose.

 

Filed with Minnesota Secretary of State: October 30, 1998


CERTIFICATE OF DESIGNATIONS

OF

SERIES A JUNIOR PARTICIPATING PREFERRED STOCK

OF

H.B. FULLER COMPANY

 

The undersigned hereby certifies that the Board of Directors of H.B. Fuller Company (the “ Corporation ”), a corporation organized and existing under the Minnesota Business Corporation Act, duly adopted the following resolution on July 13, 2006:

 

RESOLVED , that a series of preferred stock of the Corporation is hereby created, and the designation and amount thereof and the relative rights and preferences of the shares of such series, are as follows:

 

Section 1. Designation and Amount . The shares of such series shall be designated as “Series A Junior Participating Preferred Stock” (the “ Preferred Shares ”) and the number of shares constituting the Preferred Shares shall be 1,600,000. Such number of shares may be increased or decreased by resolution of the Board of Directors and any necessary shareholder approval; provided, however , that no decrease shall reduce the number of shares of Preferred Shares to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Preferred Shares.

 

Section 2. Dividends and Distributions .

 

(a) Subject to the rights of the holders of any shares of any series of preferred stock (or any similar stock) ranking prior and superior to the Preferred Shares with respect to dividends, the holders of Preferred Shares, in preference to the holders of Common Stock, $1.00 par value per share (the “ Common Stock ”), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a “ Quarterly Dividend Payment Date ”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Preferred Shares, in an amount per share (rounded to the nearest cent) equal to the greater of (i) $1.00 or (ii) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Preferred Shares. In the event the Corporation shall at any time after July 31, 2006, declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Preferred Shares were entitled immediately prior to such event under clause (ii) of this Section 2(a) shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

 

(b) The Corporation shall declare a dividend or distribution on the Preferred Shares as provided in Section 2(a) immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock or a subdivision of the outstanding Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Preferred Shares shall nevertheless be payable, out of funds legally available for such purpose, on such subsequent Quarterly Dividend Payment Date.


(c) Dividends shall begin to accrue and be cumulative on outstanding shares of Preferred Shares from their date of issue. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Preferred Shares in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Preferred Shares entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof.

 

Section 3. Voting Rights .

 

(a) Subject to the provision for adjustment hereinafter set forth, each Preferred Share shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time after July 31, 2006, declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Preferred Shares were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

 

(b) Except as otherwise provided herein or by law, the holders of Preferred Shares and the holders of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation.

 

(c) Except as set forth herein or required by law, holders of Preferred Shares shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.

 

Section 4: Certain Restrictions

 

(a) Whenever quarterly dividends or other dividends or distributions payable on the Preferred Shares as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Preferred Shares outstanding shall have been paid in full, the Corporation shall not:

 

(i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) with the Preferred Shares;

 

(ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Preferred Shares, except dividends paid ratably on the Preferred Shares and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;

 

(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Preferred Shares; provided, however , that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Preferred Shares; or

 

(iv) redeem or purchase or otherwise acquire for consideration any Preferred Shares, or any stock ranking on a parity with the Preferred Shares, except in accordance with a purchase


offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.

 

(b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under Section 4(a), purchase or otherwise acquire such shares at such time and in such manner.

 

Section 5. Reacquired Shares . Any Preferred Shares purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of preferred stock and may be reissued as part of a new series of preferred stock subject to the conditions and restrictions on issuance set forth herein, in the Articles of Incorporation, or in any other certificate of designation creating a series of preferred stock or any similar stock or as otherwise required by law.

 

Section 6. Liquidation, Dissolution or Winding Up . Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Preferred Shares unless, prior thereto, the holders of Preferred Shares shall have received the greater of (i) $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, or (ii) an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, or (2) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Preferred Shares, except distributions made ratably on the Preferred Shares and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time after July 31, 2006, declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Preferred Shares were entitled immediately prior to such event under Section 6(1)(i) shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

 

Section 7. Consolidation, Merger, etc . In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Preferred Shares shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after July 31, 2006, declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Preferred Shares shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

 

Section 8. No Redemption . The Preferred Shares shall not be redeemable.

 

Section 9. Rank . The Preferred Shares shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation’s preferred stock.


Section 10. Fractional Shares . Preferred Shares may be issued in fractions of a share which are integral multiples of one one-hundredth of a share which shall entitle the holder, in proportion to such holder’s fractional shares, to receive dividends, participate in distributions and to have the benefit of all other rights of holders of Preferred Shares.

 

Section 11. Amendment . The Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or rights of the Preferred Shares so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Preferred Shares, voting together as a single class.

 

IN WITNESS WHEREOF , I have subscribed my name this 13 th day of July, 2006.

 

H.B. FULLER COMPANY
By:  

/s/ Timothy J. Keenan


    Secretary

Exhibit 12

 

H.B. FULLER COMPANY

Computations of Ratios of Earnings to Fixed Charges and

Ratios of Earnings to Fixed Charges and Preferred Stock Dividends

 

(Thousands of Dollars)

 

    

Nine Months
Ended

September 2,

2006


   Fiscal Year

        2005

   2004

   2003

   2002

   2001

Ratio of Earnings to Fixed Charges:

                                         

Earnings:

                                         

Income before income taxes, minority interests, equity investments and accounting change

   $ 78,036    $ 82,401    $ 48,298    $ 50,808    $ 40,312    $ 61,302

Add:

                                         

Interest expense

     12,929      13,191      14,650      15,500      18,389      22,379

Interest portion of rental expense

     847      1,364      1,361      1,412      1,702      1,326

Distributed earnings of 20-50% owned companies

     845      522      365      469      —        1,240
    

  

  

  

  

  

Total Earnings Available for Fixed Charges

   $ 92,657    $ 97,478    $ 64,674    $ 68,189    $ 60,403    $ 86,247
    

  

  

  

  

  

Fixed charges:

                                         

Interest on debt

   $ 12,770    $ 12,674    $ 14,490    $ 14,683    $ 17,559    $ 21,678

Interest portion of rental expense

     847      1,364      1,361      1,412      1,702      1,326
    

  

  

  

  

  

Total fixed charges

   $ 13,617    $ 14,038    $ 15,851    $ 16,095    $ 19,261    $ 23,004
    

  

  

  

  

  

Ratio of earnings to fixed charges

     6.8      6.9      4.1      4.2      3.1      3.7

Ratio of Earnings to Fixed Charges and Preferred Stock Dividends:

                                         

Total fixed charges, as above

   $ 13,617    $ 14,038    $ 15,851    $ 16,095    $ 19,261    $ 23,004

Dividends on preferred stock (pre-tax basis)

     —        —        —        —        11      23
    

  

  

  

  

  

Total fixed charges and preferred stock dividends

   $ 13,617    $ 14,038    $ 15,851    $ 16,095    $ 19,272    $ 23,027
    

  

  

  

  

  

Earnings available for fixed charges and preferred stock dividends

   $ 92,657    $ 97,478    $ 64,674    $ 68,189    $ 60,403    $ 86,247
    

  

  

  

  

  

Ratio of earnings to fixed charges and preferred stock dividends

     6.8      6.9      4.1      4.2      3.1      3.7

Exhibit 31.1

 

CERTIFICATION

 

I, Albert P.L. Stroucken, certify that:

 

1. I have reviewed this report on Form 10-Q of H.B. Fuller Company;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)–15(f)) for the registrant and we have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of registrant’s Board of Directors (or persons performing the equivalent function):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: October 6, 2006

 

/s/ Albert P.L. Stroucken


Albert P.L. Stroucken
Chairman, President and Chief Executive Officer

Exhibit 31.2

 

CERTIFICATION

 

I, John A. Feenan, certify that:

 

1. I have reviewed this report on Form 10-Q of H.B. Fuller Company;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)–15(f)) for the registrant and we have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of registrant’s Board of Directors (or persons performing the equivalent function):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: October 6, 2006

/s/ John A. Feenan


John A. Feenan
Senior Vice President and Chief Financial Officer

Exhibit 32.1

 

CERTIFICATION

 

I, Albert P.L. Stroucken, in connection with the Quarterly Report of H.B. Fuller Company on Form 10-Q for the quarter ended September 2, 2006 (the “Report”), hereby certify that:

 

  (a) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), and

 

  (b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of H.B. Fuller Company.

 

Date: October 6, 2006

 

/s/ Albert P.L. Stroucken


Albert P.L. Stroucken
Chairman, President and Chief Executive Officer

Exhibit 32.2

 

CERTIFICATION

 

I, John A. Feenan, in connection with the Quarterly Report of H.B. Fuller Company on Form 10-Q for the quarter ended September 2, 2006 (the “Report”), hereby certify that:

 

  (a) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), and

 

  (b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of H.B. Fuller Company.

 

Date: October 6, 2006

 

/s/ John A. Feenan


John A. Feenan
Senior Vice President and Chief Financial Officer