-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mkn+T7X7ngai05k4afjYukH4jxtBEGA9DDln8qUdgmsE67oBUqSxWM3HZxEubpOv vM1GImB1cn5nggL+R1km7Q== 0000950152-97-001793.txt : 19970313 0000950152-97-001793.hdr.sgml : 19970313 ACCESSION NUMBER: 0000950152-97-001793 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970312 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHERWIN WILLIAMS CO CENTRAL INDEX KEY: 0000089800 STANDARD INDUSTRIAL CLASSIFICATION: PAINTS, VARNISHES, LACQUERS, ENAMELS & ALLIED PRODUCTS [2851] IRS NUMBER: 340526850 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-04851 FILM NUMBER: 97554930 BUSINESS ADDRESS: STREET 1: 101 PROSPECT AVE NW CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2165662200 10-K405 1 THE SHERWIN-WILLIAMS COMPANY 10-K405 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-4851 ---------------------------- THE SHERWIN-WILLIAMS COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) OHIO (State or other jurisdiction of incorporation or organization) 34-0526850 (I.R.S. Employer Identification No.) 101 PROSPECT AVENUE, N.W., CLEVELAND, OHIO (Address of principal executive offices) 44115-1075 (Zip Code) (216) 566-2000 Registrant's telephone number, including area code ------------------------------------------------------ Securities registered pursuant to Section 12(b) of the Act:
NAME OF EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED --------------------------------- ------------------------------ 9.875% Debentures due 2016 New York Stock Exchange Common Stock, Par Value $1.00 New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] At January 31, 1997, 172,155,968 shares of the Registrant's Common Stock, with a par value of $1.00 each, were outstanding, net of treasury shares. The aggregate market value of such voting stock held by non-affiliates of the Registrant at that date was $4,744,253,442. The number of shares of Common Stock has been restated to reflect the effect of the Company's two-for-one stock split to be distributed on or about March 28, 1997. DOCUMENTS INCORPORATED BY REFERENCE Definitive Proxy Statement dated March 12, 1997 relating to certain information required to be disclosed in Part III. ================================================================================ 2 THE SHERWIN-WILLIAMS COMPANY AND CONSOLIDATED SUBSIDIARIES As used in this Form 10-K, the terms "Company" and "Registrant" mean The Sherwin-Williams Company and its consolidated subsidiaries, taken as a whole, unless the context indicates otherwise. TABLE OF CONTENTS
ITEM NO. PAGE NO. - --------- -------- Part I 1. Business Segment Information 1 2. Description of Property 9 3. Legal Proceedings 10 4. Submission of Matters to a Vote of Security Holders 10 Executive Officers of the Registrant 11 Part II 5. Market for Common Equity and Related Stockholder Matters 13 6. Selected Financial Data 13 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 8. Financial Statements and Supplementary Data 20 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21 Part III 10. Directors and Executive Officers of the Registrant 22 11. Executive Compensation 22 12. Security Ownership of Certain Beneficial Owners and Management 22 13. Certain Relationships and Related Transactions 22 Part IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 23 Signatures 45 Exhibit Index 47 Consent of Independent Auditors 51
NOTE ON INCORPORATION BY REFERENCE In Part III of this Form 10-K, various information and data are incorporated by reference from the Company's Definitive Proxy Statement dated March 12, 1997 ("Proxy Statement"). Any reference in this Form 10-K to disclosures in the Proxy Statement shall constitute incorporation by reference only of that specific information and data into this Form 10-K. PRELIMINARY NOTE References contained in this Form 10-K to the number or value of shares of the Company's Common Stock (including per share data) have been restated to reflect the effect of the two-for-one stock split to be distributed on or about March 28, 1997 to shareholders of record on March 3, 1997. 3 PART I ITEM 1. BUSINESS SEGMENT INFORMATION GENERAL DEVELOPMENT OF BUSINESS The Sherwin-Williams Company, which was first incorporated under the laws of the State of Ohio eighteen years after its founding in 1866, is engaged in the manufacture, distribution and sale of coatings and related products to professional, industrial, commercial and retail customers in North and South America. PAINT STORES SEGMENT The Paint Stores Segment is the exclusive distributor of Sherwin-Williams(R) branded architectural coatings, industrial maintenance products, industrial finishes and related items produced by the Coatings Segment of the Company and others. The Paint Stores Segment is also a distributor of similar coatings and other products manufactured by third parties. Paint, wallcoverings, floorcoverings, window treatments, spray equipment and other associated products are marketed by store personnel and direct sales representatives to the do-it-yourself customer, professional painter, contractor, industrial and commercial maintenance customer, property manager, architect and manufacturer of products requiring a factory finish. Competitors of the Segment are other paint and wallpaper stores, mass merchandisers, home centers, independent hardware stores, hardware chains and manufacturer-operated outlets. Product quality, service and price determine the competitive advantage in the highly fragmented paint product market. The loss of any single customer would not have a material adverse effect on the business of the Segment. During 1996, the Paint Stores Segment integrated a number of acquired businesses. The Segment obtained 27 stores as part of the Pratt & Lambert United, Inc. (Pratt & Lambert) acquisition and also completed various other acquisitions, including Pro-Line Paint Company, Seagrave Coatings Corporation, Mercury Paint Company and Brod-Dugan Company. The Pro-Line and Seagrave acquisitions provide the Segment with expanded presence in the industrial and marine markets, while the Mercury and Brod-Dugan acquisitions add 25 stores selling well-known and respected brands to contractors and retail customers. The Segment's base business performed exceptionally well during 1996. LowTemp 35(TM) Exterior Latex Paint, a high quality exterior latex paint which can be applied in temperatures as low as 35 degrees Fahrenheit, was one of many new products introduced during 1996. This product was selected by the editors of "Today's Homeowner" magazine as one of the fifty best new products for 1997. The editorial staff of the magazine conducted a yearlong search for the best new products based on characteristics such as innovation, quality, durability, ease of use, price, warranty and environmental friendliness. LowTemp 35(TM) exhibited the desired attributes and was selected as the most innovative new paint product. After receiving this same award for its EverClean(R) product line in 1995, the Segment was especially honored to receive such high recognition for the second consecutive year. In 1997, the Segment will continue to capitalize on its achievements and product knowledge by further enhancement of existing products and continued introduction of new and innovative products. Over thirty new products will be introduced in the coming year, including a new family of interior primers under the Prep-Rite(TM) label. These primers will have labels which will clearly instruct the consumer to use the right primer based on the type of surface to be painted. Advertising campaigns will highlight many of these new products while continuing to emphasize the Segment's existing superior-quality products. In addition, following the successful print advertising campaign in 1996 which highlighted the Segment's increased wallcovering product selection and its readily-accessible customer service team, advertising will be expanded in 1997 to include national television promotion of the Segment's wallcovering product line and its low-price guarantee available at all Sherwin-Williams' stores. 1 4 COATINGS SEGMENT The five divisions within the Coatings Segment (Coatings, Consumer Brands, Automotive, Transportation Services and Diversified Brands) participate in the manufacture, distribution and/or sale of coatings and related products. The Segment has sales to certain customers that, individually, may be a significant portion of its revenues. However, the loss of any single customer would not have a material adverse effect on the overall business of the Segment. All technical expenditures are sponsored by the Company and occur in the Coatings Segment. The expenditures for research and development appear on page 29 of this report. COATINGS DIVISION In the United States, the Coatings Division manufactures paint and paint-related products for do-it-yourself customers, professional painters, contractors, industrial and commercial maintenance accounts, and manufacturers of factory finished products. Sherwin-Williams(R) branded architectural and industrial finishes are manufactured exclusively for the Paint Stores Segment. Labels, color cards, traffic paint, adhesives, private label and other branded products are manufactured for the Paint Stores Segment, the Consumer Brands Division and other divisions of the Company. Competitive factors for the Division are product innovation, manufactured product quality, service, distribution and price. Domestic competitors of the Division consist of other coatings manufacturers located throughout the United States. There are approximately 900 such manufacturers at the regional and national levels. The Coatings Division continues to strive to be the lowest cost producer of high quality coatings to gain an advantage over its competitors. Worldwide, there are many competitors in each of the foreign markets served by the Division as it manufactures, distributes and sells its products through wholly-owned subsidiaries, joint ventures and licensees of technology, trademarks and trade names. During 1996, the Division assumed the management of the architectural paints and coatings business of Globo S.A. Tintas e Pigmentos located in Brazil and the industrial coatings portion of the Stierling Group of companies located in the Republic of Chile, after the Company's acquisition of such businesses. At December 31, 1996, the Division included 9 subsidiaries and joint ventures in 8 foreign countries and 37 licensing agreements in 30 foreign countries. The majority of the sales from licensees and subsidiaries are in South America, the Division's strongest international market. New licensing agreements were signed in the Dominican Republic and Vietnam in 1996. In addition, new licensees in Argentina, China and Greece were obtained through the Pratt & Lambert acquisition. In 1997, the Division will continue to develop new business internationally by following a predetermined regional approach for the establishment of subsidiaries, joint ventures and licensees in selected countries. During 1996, the Coatings Division focused on integrating the operations of Pratt & Lambert and several smaller domestic acquisitions into its own operations. The integration benefits included the consolidation and overhead cost synergies while producing record gallon output. The Division's priorities for foreign acquisitions were to lower the cost of production through manufacturing efficiencies, better manufactured product quality, and improved service and distribution. The Division also continued to expand its powder coatings operations during 1996, completing construction of a new plant in Harrisburg, Pennsylvania and obtaining a new plant as part of the Pratt & Lambert transaction. The Division's first powder coatings plant in Fort Wayne, Indiana obtained ISO 9001 certification of its quality control system. In 1997, the Division will continue to integrate the manufacturing facilities obtained in 1996 as well as the manufacturing facility the Division obtained in January 1997 as part of the Thompson Minwax Holding Corp. (Thompson Minwax) acquisition. The integration of the acquired plants into the existing organization requires an analysis of the strategic fit of each of the Division's facilities, acquired and existing, in relation to the total manufacturing capability of the Division. Those facilities that do not fit well into the strategic plan will be closed and their production transferred to more 2 5 efficient, more strategically located plants. As part of the analysis of the strategic fit of each facility, the Coatings Division will complete the closing of certain non-strategic facilities in 1997, while increasing the capacity and efficiency of other facilities. When the rationalization is completed, the Division will undergo a complete logistics and product sourcing review to further improve the efficiency of the manufacturing and distribution network. Throughout 1997, the Division also plans to continue its heightened research and development activities through new process developments that bring the manufacturing of products closer to the end user and through increased support of new product introductions. CONSUMER BRANDS DIVISION The Consumer Brands Division is responsible for the sales and marketing of branded and private label products by a direct sales staff to unaffiliated home centers, mass merchandisers, independent dealers and distributors. Many of the country's leading retailers are among the Division's regional and national customers. The Division's competition for sales to these leading retailers comes from over 400 regional and national paint manufacturers and distributors of branded and private label paint and associated products. The competitive factors that set the leaders apart from the rest are service, brand recognition, distribution and price. The acquisition of Pratt & Lambert provided the Division sales and marketing responsibility over the Pratt & Lambert(R), Fabulon(R) and M.L. Campbell(R) brands. In addition to expanding sales of branded products through independently-owned paint and decorator stores, the acquisition enabled the Division to significantly enlarge its distribution of private label products in the mass merchandiser and home center channels. The home center channel continues to consolidate, creating competition for the business of the best regional and national home centers. The Division has been successful in targeting the majority of the strong home centers. The Division's launch of the Ralph Lauren(TM) paint line was highly successful in 1996, with distribution through both the independent store and home center channels. The Division created the color palette for this upscale paint line and provides the technical expertise for the easy-to-use textural finishes that represent a breakthrough development for the paint industry. In 1997, the Division will introduce several new products, including the launch of a new line of paints under the Martha Stewart(TM) label in early spring. In addition, the acquisition of Thompson Minwax will add the full line of Thompson's(R) exterior stains and sealants to enhance the Division's position in the market for both wood stains and concrete coatings. These products are an excellent balance with the Division's existing Cuprinol(R) wood stains and H&C(R) concrete coatings lines. The acquisition of Thompson Minwax will also assist the Division in expanding internationally, as it will add a line of interior varnishes and exterior stains under the Ronseal(TM) brand name in the United Kingdom and Ireland. Marketing programs for 1997 will target these new lines in addition to continued advertising of the Division's Dutch Boy(R), Pratt & Lambert(R) and other brands. AUTOMOTIVE DIVISION The Automotive Division develops, manufactures and markets motor vehicle finish and refinish products under the Sherwin-Williams(R) and other branded labels in the United States and Canada through its network of 135 company-operated branches at December 31, 1996. The branches are supported by a direct sales staff. Products are also marketed through independent jobbers and wholesale distributors. The Division is the sole distributor of Standox(R) branded vehicle refinishing paints in the United States and Canada for American Standox, Inc., a joint venture. The Division sells directly to independent automotive body shops, automotive dealerships, fleet owners and refinishers, production shops, body builders and manufacturers requiring a factory finish (OEM). A subsidiary in Jamaica generally markets a full line of products. Products manufactured in Kingston, Jamaica are sold through 9 stores and other dealers and by a direct sales force to independent dealers, painters, contractors, automotive body shops and industrial and commercial maintenance accounts in Jamaica. A portion of the income for the Division comes from the licensing of technology, trademarks and trade 3 6 names to foreign companies. The Division has 12 licensees in 14 foreign countries, including a new agreement signed in Indonesia in 1996. Key competitive factors for the Automotive Division are technology, product quality, distribution and service. The Automotive Division has numerous competitors in its domestic and foreign markets with broad product offerings and several others with niche products. Strong distribution and high quality products have been the Division's greatest competitive advantages. The Division's international operations grew substantially in 1996. Productos Quimicos y Pinturas, S.A. de C.V. and its affiliated companies were acquired in January 1996, expanding the Division's presence in the Mexican market with the highly recognized Excelo(TM) brand products. In May 1996, Lazzuril Tintas S/A, a Brazilian automotive coatings company, was acquired. Late in 1996, the Division assumed the management of the automotive coatings business of the Stierling Group of companies, a leading producer of automotive coatings in Chile. The addition of these businesses in Mexico and South America will positively impact the Division's name recognition in these areas, providing the opportunity for future growth. During 1996, the Division's domestic business concentrated on continued improvement in product quality and color matching technology, achieving much success. The Division also increased its presence in automotive racing circuits promoting its Ultra 7000(R) product line. The Division sponsored two high-performance dragsters which appeared in races throughout the U.S. The dragsters are painted to match the Ultra 7000(R) black and rainbow product labels, providing an opportunity for the painting technicians and fans of those racing circuits to see the Division's products. In 1997, the Division will seek to expand its OEM business through commercialization of new interior waterborne coatings and exterior accessory coatings. The Division will continue to emphasize its improved color-matching capabilities to all markets as well as its commitment to developing new technology. Recent technological advancements have also assisted the Division in the development of new products with lower volatile organic compound (VOC) content to meet new regulations which will be effective in mid-1997. The Division's sales force will receive extensive training in early 1997 on changes in product attributes of these new VOC-compliant products and related application techniques which they can provide to the Division's customers. This commitment to improved products, technology and training enhances the Division's position for continued growth. TRANSPORTATION SERVICES DIVISION The Transportation Services Division provides warehousing, truckload freight, pool assembly, freight brokerage and consolidation services primarily for the Company and for certain external manufacturers, distributors and retailers throughout the United States and Canada. This Division provides the Company with total logistics service support which allows increased delivery schedules, lower field inventory levels and fewer out-of-stocks. The Transportation Services Division has many different and diverse competitors. In the trucking industry, there are a few large carriers having small or moderate market share while thousands of other carriers compete for the balance of the market. The warehousing and distribution service market is characterized by a large number of competitors with none having dominant share. Since the primary business of the Division is to provide services for the Company's other divisions, gaining market share is not an objective. The Division spent the majority of 1996 integrating and consolidating the distribution centers obtained through the Pratt & Lambert acquisition into its existing distribution network. Consolidation efforts were successful, allowing the Division to achieve logistic and distribution synergies while continuing to meet strong demand. In its ongoing endeavor to improve distribution efficiency, a state-of-the-art truck routing software package was installed during 1996. This routing package represents a computerized fleet planning device which provides optimal loading, delivery and route information based on daily distribution requirements, thereby lowering overall costs. 4 7 In 1997, the Division will integrate the Thompson Minwax traffic functions into the existing network and continue to strive for increased productivity and efficiency in distribution by implementing a supply chain management system. This system will evaluate service quality based on criteria such as timeliness, dispatch effectiveness and service levels. When combined with the routing software package installed in 1996, the Division will be able to more efficiently monitor its distribution functions from start to finish. The Division will also continue its consolidation of distribution centers into larger regional locations. Construction of a 695,000 square foot state-of-the-art distribution service center in Reno, Nevada is scheduled to begin in early 1997, which will allow for the consolidation of four existing centers in the northern Nevada area. DIVERSIFIED BRANDS DIVISION The Diversified Brands Division competes in the following areas: retail and wholesale consumer aerosols; custom and industrial aerosols; paint applicators; and cleaning products. The Division participates in the retail and wholesale paint, automotive, homecare products, institutional, insecticide and industrial markets. A wide variety of aerosol products are filled, packaged and distributed to regional, national and international customers. Products are marketed through mass merchandisers, home centers, automotive chains and maintenance distribution channels in the United States, Canada, Mexico and Brazil. Approximately 6.2 percent of the Division's total sales in 1996 represented aerosols and paint applicators sold to the Paint Stores Segment. There are various primary competitors in each of the Division's product lines. The main competitive factors are technical know-how, quality, service and price. Superior quality products, excellent regulatory-complying products, technical leadership positions in electronic commerce and strong customer relationships have enabled the Division to distinguish itself from the competition. In 1996, the Division added consumer, industrial and janitorial cleaning products, with reputable brand names such as Cello(R) and Spring Fresh(R), to its product selection in the United States through the acquisitions of the Household and Professional Products Division of Grow Group, Inc. (Cleaning Solutions Group) and Sunshine Quality Products, Inc. The Division capitalized on these acquisitions by introducing a full line of industrial maintenance cleaners under the Sprayon(R) label at the end of 1996. This line of cleaning products represents the first full-line program of its kind to the industrial maintenance channel and complements the Division's other product lines. The Division also expanded internationally in 1996 through the acquisition of Industria Quimica Elgin Ltda., a leading producer and marketer of aerosol paint under the Colorgin(TM) brand label in Brazil. The extensive distribution network of Industria Quimica positions the Division to benefit from the emerging aerosol paint market in South America. New products will continue to be an important element for growth in 1997. Following the highly-successful 1996 introduction of Krylon(R) Living Color(R) Latex Enamel, a latex paint in aerosol form, the Division will expand its Krylon(R) Living Color(R) and Krylon(R) Decorator product lines in the 1997 season to include a complementary line of small-can enamels available in both latex and alkyd formulas. Other product launches will include a Cello(R) line of cleaning products for professional janitorial contractors and a Dupli-Color(R) automotive bulk paint and chemical line, available in 25 colors, to be marketed to retail customers. Efforts in 1997 will also be targeted toward the integration of manufacturing and marketing operations of Thompson Minwax. Product lines to be added include various interior stains and varnishes under the Minwax(R) brand name, finishing and enamel coating products under the Formby's(R) and Red Devil(R) brand names and specialty lubricants under the Tri- Flow(TM) brand name. OTHER SEGMENT The Other Segment is responsible for the acquisition, development, leasing and management of properties for use by the Company and others generally within the United States. Obtaining real estate in the proper location at the appropriate cost is a critical component for achieving the desired operating success, particularly for paint stores and distribution service centers. This Segment has 5 8 many competitors consisting of other real estate owners, developers and managers in areas where we currently hold property. The main competitive factors are the availability of property and price. At the end of 1996, the Retail Properties Division owned or leased 221 properties, representing over 1,700,000 square feet of space, which are conducive to the sale of paint and associated products. Such properties include 140 freestanding buildings, for exclusive use by the Paint Stores Segment, and 81 multi-tenant properties, utilized when the basic needs of the paint store can be met and where external rental opportunities can be profitably operated. The paint store must be easily accessible to professional painters and contractors with sufficient access to pickup and delivery areas. Multi-tenant properties are usually smaller "strip" shopping centers with adequate parking and, generally, the paint store will be located at the end of the shopping area for the most convenient access. In 1997, the Division does not anticipate significant growth in the number of owned retail properties needed by the Paint Stores Segment. The occupancy rate for external space was 86.6 percent at December 31, 1996. The Non-Retail Properties Division owned or leased 29 properties at the end of 1996 consisting of office buildings, idle manufacturing facilities, distribution service centers and vacant land. Occasionally, such properties are acquired or developed to provide the lowest cost alternative for expansion of distribution operations. Locations that have been utilized profitably in the past which can no longer contribute to the Company's future plans are offered for sale or lease. At the end of 1996, three idle or vacant properties obtained in the acquisition of Pratt & Lambert were under contract for sale, with settlement to occur in early 1997. One of the Division's largest tenants terminated its office space lease as of December 31, 1996, vacating over 300,000 square feet of office and storage space. While lease commitments have already been obtained for over 60 percent of this space, the vacancy will adversely impact the Non-Retail Properties Division in 1997. RAW MATERIALS AND PRODUCTS PURCHASED FOR RESALE With respect to the Paint Stores Segment, there are sufficient suppliers of each product purchased for resale that the Segment does not anticipate any significant sourcing problems. For the Coatings Segment, raw materials and fuel supplies are generally available from various sources in sufficient quantities that the Segment does not anticipate any significant sourcing problems during 1997. SEASONALITY The majority of the sales for the Paint Stores Segment and Coatings Segment traditionally occur during the second and third quarters. There is no significant seasonality in sales for the Other Segment. TRADEMARKS AND TRADE NAMES Customer recognition of trademarks and trade names collectively contribute significantly to the sales of the Company. The Paint Stores Segment is identified with names such as Sherwin-Williams(R), SuperPaint(R), Pro Mar(R), EverClean(R), Glas-Clad(R), Perma-Clad(R), Old Quaker(R), Con-Lux(R), Mercury(TM) and Brod-Dugan(TM). The Coatings Segment employs a variety of trade names and trademarks in marketing its products, such as Sherwin-Williams(R), Dutch Boy(R), Kem-Tone(R), Martin-Senour(R), Cuprinol(R), H&C(R), White Lightning(R), Krylon(R), Standox(R), Rust Tough(R), Excelo(TM), Lazzuril(TM), Colorgin(TM), Pratt & Lambert(R), Ralph Lauren(TM), Rubberset(R) and Dupli-Color(R). PATENTS Although patents and licenses are not of material importance to the business of the Company as a whole, the Automotive and Coatings Divisions' international operations derive a portion of their income from the license of technology, trademarks and trade names to foreign companies. 6 9 BACKLOG AND PRODUCTIVE CAPACITY Backlog orders are not significant in the business of any Segment. Sufficient productive capacity currently exists to fulfill the Company's needs for paint products through 1997. EMPLOYEES The Company employed approximately 20,800 persons at December 31, 1996. ENVIRONMENTAL COMPLIANCE See Management's Discussion and Analysis of Financial Condition and Results of Operations, on pages 14 through 19 of this report, for further details on environmental compliance. 7 10 BUSINESS SEGMENTS
(MILLIONS OF DOLLARS) 1996 1995 1994 - -------------------------------------------------------------------------------------------- NET EXTERNAL SALES Paint Stores $ 2,410 $2,131 $1,986 Coatings 1,709 1,129 1,100 Other 14 14 14 - -------------------------------------------------------------------------------------------- Segment totals $ 4,133 $3,274 $3,100 INTERSEGMENT TRANSFERS Coatings $ 924 $ 801 $ 720 Other 21 19 18 - -------------------------------------------------------------------------------------------- Segment totals $ 945 $ 820 $ 738 OPERATING PROFITS Paint Stores $ 206 $ 158 $ 141 Coatings 260 202 201 Other 13 13 8 Corporate expenses-net (104) (55) (51) - -------------------------------------------------------------------------------------------- Income before income taxes $ 375 $ 318 $ 299 IDENTIFIABLE ASSETS Paint Stores $ 634 $ 550 $ 517 Coatings 1,764 846 757 Other 45 45 44 Corporate 552 700 644 - -------------------------------------------------------------------------------------------- Consolidated totals $ 2,995 $2,141 $1,962 CAPITAL EXPENDITURES Paint Stores $ 40 $ 29 $ 26 Coatings 68 68 46 Other 3 4 1 Corporate 12 7 6 - -------------------------------------------------------------------------------------------- Consolidated totals $ 123 $ 108 $ 79 DEPRECIATION Paint Stores $ 26 $ 24 $ 23 Coatings 40 31 30 Other 3 2 3 Corporate 7 6 5 - -------------------------------------------------------------------------------------------- Consolidated totals $ 76 $ 63 $ 61
NOTES TO SEGMENT TABLE Intersegment transfers are accounted for at values comparable to normal unaffiliated customer sales. Operating profit is total revenue, including realized profit on intersegment transfers, less operating costs and expenses. Corporate expenses include interest which is unrelated to real estate leasing activities, certain provisions for disposition and termination of operations and environmental remediation which are not directly associated with or allocable to any operating segment, and other adjustments. Identifiable assets are those directly identified with each segment's operations. Corporate assets consist primarily of cash, investments, deferred pension assets and headquarters' property, plant and equipment. Export sales, sales of foreign subsidiaries and sales to any individual customer were each less than 10% of consolidated sales to unaffiliated customers during all years presented. 8 11 ITEM 2. DESCRIPTION OF PROPERTY The Company's corporate headquarters are located in Cleveland, Ohio. The Company's principal manufacturing and distribution facilities, operated by the Coatings Segment, are located as set forth below.
Leased or Manufacturing facilities Owned - --------------------------------------------- Anaheim, California Owned Baltimore, Maryland Owned Bedford Heights, Ohio Owned Bradenton, Florida Leased Buffalo, New York Leased Chicago, Illinois Owned Coffeyville, Kansas Owned Columbus, Ohio Owned Crisfield, Maryland Leased Deshler, Ohio Owned Edison, New Jersey Owned Elk Grove, Illinois Owned Emeryville, California Owned Ennis, Texas Leased Fort Wayne, Indiana Leased Fort Worth, Texas Owned Fountain Inn, South Carolina Owned Garland, Texas Owned Greensboro, North Carolina (2) Owned Harrisburg, Pennsylvania Leased Havre de Grace, Maryland Owned Holland, Michigan Owned Indianapolis, Indiana Leased Kankakee, Illinois Leased Lawrenceville, Georgia Owned Memphis, Tennessee Leased Morrow, Georgia Owned Newark, New Jersey Owned Orlando, Florida Owned Richmond, Kentucky Owned Victorville, California Owned Wichita, Kansas Owned Buenos Aires, Argentina Owned Fort Erie, Ontario, Canada Owned Kingston, Jamaica Owned Mexico City, Mexico Owned Santiago, Chile Owned Sao Bernardo, Brazil Leased Sao Bernardo, Brazil (2) Owned Tabao, Brazil Owned Texcoco, Mexico Owned
Leased or Distribution facilities Owned - --------------------------------------------- Bedford Heights, Ohio Leased Buford, Georgia Leased Dayton Valley, Nevada Owned Effingham, Illinois Leased Fredericksburg, Pennsylvania Owned Reno, Nevada Leased Richmond, Kentucky Owned Sparks, Nevada Leased Waco, Texas Leased Winter Haven, Florida Owned Buenos Aires, Argentina Owned Calgary, Alberta, Canada Leased Mexico City, Mexico Owned Mississauga, Ontario, Canada Leased Montreal, Quebec, Canada Owned Richmond Hill, Ontario, Canada Leased San Juan, Puerto Rico Leased Santiago, Chile Owned Sao Bernardo, Brazil (2) Owned Scarborough, Ontario, Canada Owned Tabao, Brazil Owned Texcoco, Mexico Owned
9 12 In addition, the Coatings Segment included 135 company-operated automotive branches, of which 1 was owned, in the United States and Canada and 9 leased stores in Jamaica at December 31, 1996. The operations of the Paint Stores Segment included 2,156 company-operated specialty paint stores in the United States, Canada and Puerto Rico at December 31, 1996. All stores are leased locations with 219 being leased from the Company's Retail Properties Division in the Other Segment. The Paint Stores Segment is divided into four separate operating divisions, each of which is responsible for the stores located within its geographical region. At the end of 1996, the Mid Western Division operated 598 stores primarily located in the midwestern and upper west coast states and western Canada, the Eastern Division operated 450 stores along the upper east coast and New England states and eastern Canada, the Southeastern Division operated 570 stores principally covering the lower east and gulf coast states and Puerto Rico, and the South Western Division operated 538 stores in the plains and the lower west coast states. The Paint Stores Segment opened 23 net new stores in 1996, added 55 stores through acquisitions (of which 11 were closed) and relocated 38. All property within the Other Segment is owned by the Company except for 4 land leases in the Retail Properties Division and 4 warehouse leases in the Non-Retail Properties Division. ITEM 3. LEGAL PROCEEDINGS On July 16, 1993, the United States Department of Justice, on behalf of the United States Environmental Protection Agency, filed a complaint against the Company in the United States District Court for the Northern District of Illinois. The complaint alleged violations under various environmental statutes concerning the Company's operations at its southeast Chicago, Illinois facility. The complaint demanded an undetermined amount of civil penalties and further demanded certain, unspecified corrective action be taken to clean up the site. Pursuant to a Consent Decree entered into recently with the United States of America, on behalf of the Administrator of the United States Environmental Protection Agency, the Company has agreed to (i) comply with applicable environmental laws and regulations, (ii) pay a civil penalty in the amount of $4,700,000, (iii) spend $1,100,000 at two environmental remediation/restoration projects located in the south side of Chicago, Illinois which are unrelated to the Company's activities, (iv) conduct an investigation at its southeast Chicago, Illinois facility to determine the nature, extent and potential impact, if any, of environmental contamination at the facility, and (v) implement selected remedial action measures, if required, to address any environmental contamination identified pursuant to the investigation. The Consent Decree is subject to Court approval. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 10 13 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the names and ages of the current Executive Officers, the positions and offices with the Company held by them as of February 28, 1997 and the date when each was first elected or appointed an Executive Officer.
Date When First Elected Name Age Present Position or Appointed - ------------------------- --- ----------------------------------- -------------- John G. Breen 62 Chairman and Chief Executive 1979 Officer, Director Thomas A. Commes 54 President and Chief Operating 1979 Officer, Director John L. Ault 51 Vice President -- Corporate 1987 Controller Frank E. Butler 61 President & General Manager, 1994 Coatings Division Christopher M. Connor 40 President & General Manager, 1994 Diversified Brands Division Conway G. Ivy 55 Vice President -- Corporate 1979 Planning and Development T. Scott King 44 President & General Manager, 1994 Consumer Brands Division Thomas Kroeger 48 Vice President -- Human Resources 1987 John C. Macatee 45 President, Paint Stores Group 1994 Larry J. Pitorak 50 Senior Vice President -- Finance, 1978 Treasurer and Chief Financial Officer Joseph M. Scaminace 43 President & General Manager, 1994 Automotive Division Louis E. Stellato 46 Vice President, General Counsel and 1989 Secretary
Following is a brief account of each Executive Officer's business experience with the Company during the last five year period: Mr. Breen has served as Chairman and Chief Executive Officer since June 1986 and has served as a Director since April 1979. Mr. Commes has served as President and Chief Operating Officer since June 1986 and has served as a Director since April 1980. Mr. Ault has served as Vice President -- Corporate Controller since January 1987. Mr. Butler has served as President & General Manager, Coatings Division since February 1992 prior to which he served as President & General Manager, Consumer Division commencing May 1984. Mr. Connor has served as President & General Manager, Diversified Brands Division since April 1994 prior to which he served as Senior Vice President -- Marketing, Paint Stores Group commencing September 1992. From June 1986 to September 1992, Mr. Connor served as President & General Manager, Western Division, Paint Stores Group. Mr. Ivy has served as Vice President -- Corporate Planning and Development since April 1992 prior to which he served as Vice President and Treasurer commencing January 1989. 11 14 Mr. King has served as President & General Manager, Consumer Brands Division since February 1992 prior to which he served as Vice President, Director of Sales and Marketing, Consumer Division commencing June 1987. Mr. Kroeger has served as Vice President -- Human Resources since October 1987. Mr. Macatee has served as President, Paint Stores Group since September 1992 prior to which he served as President & General Manager, South Central Division, Paint Stores Group commencing June 1986. Mr. Pitorak has served as Senior Vice President -- Finance, Treasurer and Chief Financial Officer since April 1992 prior to which he served as Senior Vice President -- Finance and Chief Financial Officer commencing July 1991. Mr. Scaminace has served as President & General Manager, Automotive Division since April 1994 prior to which he served as President & General Manager, Diversified Brands Division commencing September 1985. Mr. Stellato has served as Vice President, General Counsel and Secretary since July 1991. There are no family relationships between any of the persons named. 12 15 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Sherwin-Williams Common Stock is listed on the New York Stock Exchange and traded under the symbol SHW.
QUARTERLY STOCK PRICES AND DIVIDENDS* Quarter High Low Dividend -------------------------------------------- 1996 1ST $22.688 $19.500 $ .0875 2ND 23.500 20.938 .0875 3RD 23.563 21.125 .0875 4TH 28.875 22.813 .0875 1995 1st $17.438 $16.000 $ .08 2nd 19.000 16.688 .08 3rd 18.563 17.063 .08 4th 20.750 17.188 .08
The number of shareholders of record for Sherwin-Williams Common Stock, par value $1.00 per share, at January 31, 1997 was 11,887. The closing market value per share as listed on the New York Stock Exchange at the close of business on January 31, 1997 was $27.750.* * Per share data reflects the effect of the stock split described in Note 17 to the consolidated financial statements. ITEM 6. SELECTED FINANCIAL DATA (Millions of Dollars, except per share data)
1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------- OPERATIONS Net Sales $4,133 $3,274 $3,100 $2,949 $2,748 Income before cumulative effects of changes in accounting methods 229 201 187 165 145* FINANCIAL POSITION Total assets $2,995 $2,141 $1,962 $1,915 $1,730 Long-term debt 143 24 20 38 60 PER COMMON SHARE DATA** Income before cumulative effects of changes in accounting methods $ 1.33 $ 1.17 $ 1.07 $ .93 $ .82* Cash dividends .35 .32 .28 .25 .22
* Includes a reduction, beginning January 1, 1992, for the additional expense of accruing postretirement benefits. Such additional expense was $5.7 million after income taxes ($.03 per share**) in 1992. ** Per share data reflects the effect of the stock split described in Note 17 to the consolidated financial statements. 13 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION -- 1996 During 1996, the Company invested more than $670.7 million in the acquisitions of Pratt & Lambert United, Inc. (Pratt & Lambert) in January and many smaller domestic and foreign acquisitions that followed. These acquisitions were financed through the use of $267.6 million of cash and cash equivalents and short-term investments available at the beginning of 1996 plus short-term borrowings, long-term debt and excess operating cash flow generated during the year. Nearly $332.6 million in net operating cash flow was generated in 1996 providing the funds to invest in property, plant and equipment, to increase the annual dividend to shareholders and to partially finance the acquisition activity. The Company's Consolidated Balance Sheets and Statements of Consolidated Cash Flows, on pages 25 and 26 of this report, provide more detailed information on the Company's financial position and cash flows. Changes in the components of working capital included an increase in short-term borrowings incurred during the year through the use of a portion of the Company's commercial paper program, which had unused borrowing availability of $433.8 million at December 31, 1996. This program is fully backed by the Company's revolving credit agreements. Other current assets increased $113.7 million, of which approximately $56.0 million is related to a settlement receivable with certain insurance carriers pertaining to environmental-related matters, and approximately $68.0 million is related to various assets acquired, including the Company's investment in a subsidiary in Chile which was not consolidated at December 31, 1996. Increased current deferred income taxes related primarily to the tax effects of purchase accruals recorded in connection with acquisitions. Increases in other components of working capital occurred primarily due to the effects of the acquisitions and related increases in sales and manufacturing activity. The Company's current ratio declined to 1.35 at December 31, 1996. The decrease in this ratio from 2.0 at the end of 1995 occurred primarily due to the increased short-term borrowings and related decreases in cash and cash equivalents and short-term investments. Deferred pension assets, totaling $254.4 million at December 31, 1996, represent the excess fair market value of the assets in the defined benefit pension trusts over the actuarially-determined projected benefit obligations. The 1996 increase in deferred pension assets resulted primarily from net deferred pension assets acquired combined with the recognition of the net pension credit further described in Note 6 on page 32 of this report. The actual return on plan assets of the defined benefit pension plans exceeded the assumed asset earnings rate of 8.5 percent primarily due to favorable actual returns realized on equity investments. These excess earnings are deferred, decreasing the cumulative unrecognized net loss. The effect of this decrease, combined with an increased asset base, will increase the net pension credit in 1997. The increase in goodwill of $507.7 million and the increase in intangible and other long-term assets of $54.7 million primarily relates to acquisitions of $612.5 million offset by amortization expense of $27.4 million and other reductions in long-term assets from 1995. Goodwill represents the excess cost over fair value of net assets acquired in purchase business combinations, and intangible assets represent the cost of trademarks and other intangibles acquired. Net property, plant and equipment increased $93.0 million during 1996 primarily due to capital expenditures of $122.7 million and net fixed assets acquired of $55.6 million, offset partially by depreciation expense of $76.2 million and dispositions or retirements of certain assets. Capital expenditures in 1996 represented primarily the costs of upgrading or installing point-of-sale computer systems in paint stores, relocating or remodeling paint stores, new powder coatings manufacturing facilities, and upgrading distribution centers and manufacturing facilities. The increase in capital expenditures in the Paint Stores Segment in 1996 occurred primarily due to the upgrade or installation of new point-of-sale computer systems in most of the Segment's stores. In the Coatings Segment, increased capital expenditures in 1996 relating to a new Brazilian manufacturing facility in 14 17 the Coatings Division were offset by lower construction costs in the Transportation Services and Automotive Divisions due to the 1995 completion of distribution centers in Fredericksburg, Pennsylvania and Richmond, Kentucky. Capital expenditures in the Corporate area increased due to the increased cost of a replacement aircraft. In 1997, the most significant planned capital expenditures are the continued replacement of point-of-sale computer systems in the paint stores, the construction of a 695,000 square foot distribution center in Reno, Nevada and various productivity improvement projects at manufacturing facilities. The Company will continue to invest strategically in upgrading or expanding its facilities and equipment. We do not anticipate the need for any specific external financing to support these capital programs. Total assets grew to just under $3.0 billion during 1996, an increase of $853.5 million from December 31, 1995. Long-term debt increased $118.7 million to $142.7 million at December 31, 1996. The issuance of two $50.0 million floating term notes in conjunction with the purchase of Pratt & Lambert and the subsequent refinancing of their existing debt and the issuance of various fixed rate notes totaling $22.0 million in conjunction with other acquisitions accounted for the majority of the change in long-term debt. Long-term debt assumed as part of certain acquisitions and other changes in long-term debt, totaling $69.1 million, were more than offset by payments of $72.4 million. As more fully explained in Note 16 on page 43 of this report, the Company increased the aggregate principal amount of short-term debt which can be issued under its commercial paper program to $1.45 billion in January 1997. This program is fully supported by revolving credit agreements in the same aggregate amount. Proceeds from borrowings under this program were used to purchase all outstanding shares of Thompson Minwax Holding Corp. (Thompson Minwax) in January 1997. Subsequently, in February 1997, the Company issued $100.0 million of 6.25% notes due February 1, 2000, $100.0 million of 6.5% notes due February 1, 2002 and $200.0 million of 6.85% notes due February 1, 2007 under its previously existing shelf registration with the Securities and Exchange Commission. In addition, the Company issued $150.0 million of 7.375% debentures due February 1, 2027 and $150.0 million of 7.45% debentures due February 1, 2097 in a private offering not registered under the Securities Act of 1933, as amended. The net proceeds from the sale of the notes and debentures were used to refinance a portion of the Company's commercial paper outstanding. Due to the refinancing, the size of the commercial paper program and related revolving credit agreements will be re-evaluated in 1997. The Company expects to remain in a borrowing position throughout 1997. The increase in the long-term postretirement liability occurred due to the combination of postretirement liabilities assumed in acquisitions and the excess of the net postretirement expense, as determined in accordance with Statement of Financial Accounting Standards (SFAS) No. 106, over the costs for benefit claims incurred. The current portion of the accrued postretirement liability is included in other accruals. See Note 7, on page 34 of this report, for additional information concerning the Company's postretirement obligations. Other long-term liabilities include accruals for environmental-related items and other miscellaneous items. The increase of $104.9 million during 1996 occurred due primarily to adjustments made to previously recorded environmental-related accruals, liabilities assumed for environmental-related matters as a result of acquisitions and other items. In addition, the Company accrued certain additional environmental-related expenses in accordance with the early adoption of the American Institute of Certified Public Accountants Statement of Position 96-1 (SOP 96-1), "Environmental Remediation Liabilities". See Note 1, on page 28 of this report, for further information concerning the Company's adoption of SOP 96-1 and see Note 10, on page 37 of this report, for additional information concerning the Company's other long-term liabilities. The Company and certain other companies are defendants in a number of lawsuits arising from the manufacture and sale of lead pigments and lead paints. It is possible that additional lawsuits may be filed against the Company in the future with similar allegations. The various existing lawsuits seek damages for personal injuries and property damages, along with costs involving the abatement of lead related paint from buildings and medical monitoring costs. The Company believes that such lawsuits are without merit and is vigorously defending them. The Company does not believe that any potential 15 18 liability ultimately determined to be attributable to the Company arising out of such lawsuits will have a material adverse effect on the Company's business or financial condition. The operations of the Company, like those of other companies in our industry, are subject to various federal, state and local environmental laws and regulations. These laws and regulations not only govern our current operations and products, but also impose liability on the Company for past operations which were conducted utilizing practices and procedures considered acceptable under the laws and regulations existing at that time. The Company expects environmental laws and regulations to impose increasingly stringent requirements upon the Company and our industry in the future. The Company believes it conducts its operations in compliance with applicable environmental laws and regulations and has implemented various programs designed to protect the environment and promote continued compliance. Capital expenditures and other expenses related to ongoing environmental compliance measures are included in the normal operating expenses of conducting business. The Company's capital expenditures and other expenses related to ongoing environmental compliance measures were not material to the Company's financial condition or net income during 1996, and the Company does not expect such capital expenditures and other expenses to be material to the Company's financial condition or net income in the future. The Company is involved with environmental compliance and remediation activities at some of its current and former sites. The Company, together with other parties, has also been designated a potentially responsible party under federal and state environmental protection laws for the remediation of hazardous waste at a number of third-party sites, primarily Superfund sites. The Company may be similarly designated with respect to additional third-party sites in the future. The Company accrues for certain environmental remediation-related activities relating to its past operations and third-party sites, including Superfund sites, for which commitments or clean-up plans have been developed or for which costs or minimum costs can be reasonably estimated. The Company continuously assesses its potential liability for remediation-related activities and adjusts its environmental-related accruals as information becomes available upon which more accurate costs can be reasonably estimated and as additional accounting guidelines are issued, such as SOP 96-1, which require changing the estimated costs or the procedure utilized in estimating such costs. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved including, among others, the number and financial condition of parties involved with respect to any given site, the volumetric contribution which may be attributed to the Company relative to that attributable to other parties, the nature and magnitude of the wastes involved, the various technologies that can be used for remediation and the determination of acceptable remediation with respect to a particular site. Pursuant to a Consent Decree entered into with the United States of America, on behalf of the Environmental Protection Agency, which has been filed in the United States District Court for the Northern District of Illinois and which is subject to court approval, the Company has agreed, in part, to (i) conduct an investigation at its southeast Chicago, Illinois facility to determine the nature, extent and potential impact, if any, of environmental contamination at the facility, and (ii) implement remedial action measures, if required, to address any environmental contamination identified pursuant to the investigation. In addition, the Company is a defendant in a lawsuit brought by PMC, Inc. regarding one of the Company's former Chemical Division's manufacturing facilities which is located adjacent to the Company's southeast Chicago, Illinois facility. This former manufacturing facility was sold to PMC, Inc. in 1985. PMC, Inc. is seeking an undisclosed amount for environmental remediation costs and other damages based upon contractual and tort theories, and under various environmental laws. The Company is vigorously defending this lawsuit. With respect to the Company's southeast Chicago, Illinois facility and its former manufacturing facility adjacent thereto, the Company has evaluated its potential liability and, based upon its preliminary evaluation, has accrued an appropriate amount. However, due to the uncertainties surrounding these facilities, the Company's ultimate liability may result in costs that are significantly 16 19 higher than currently accrued. In such event, the recording of the liability may result in a significant impact on net income for the annual or interim period during which the additional costs are accrued. In the opinion of the Company's management, any potential liability ultimately attributed to the Company for its environmental-related matters will not have a material adverse effect on the Company's financial condition, liquidity, cash flow or, except as set forth in the preceding paragraph, net income. See Note 10, on page 37 of this report, for discussion of the environmental-related accruals included in the Company's consolidated balance sheets. Shareholders' equity increased $189.1 million during 1996 due primarily to current year net income offset partially by dividends paid to shareholders. Approximately 77,800 shares of the Company's common stock were received in exchange from the exercise of stock options during 1996. We did not acquire any of our own shares through open market purchases during this time period. Depending upon our cash position and market conditions in the future, we may acquire shares of our own stock for general corporate purposes. At a meeting held January 29, 1997, the Board of Directors declared a two-for-one common stock split and increased the quarterly dividend to $.10 per share on a post-split basis, both payable to shareholders of record on March 3, 1997. The increase in the quarterly dividend represents the eighteenth consecutive annual increase and a compounded rate of increase of 28.0 percent since the dividend was reinstated in the fourth quarter of 1979. The 1996 annual dividend of $.35 per share (on a post-split basis) marked the seventeenth consecutive year that the dividend approximated our payout ratio target of 30 percent of the prior year's earnings. The January 1997 acquisition of Thompson Minwax, for an approximate purchase price of $830 million, included funds to extinguish all of Thompson Minwax's previously-existing debt. Preliminary estimates of the fair market value of the net assets to be recorded pursuant to the acquisition will approximate $257.3 million, with approximately $572.7 million recorded as goodwill. These estimates are tentative, pending completion of final appraisals. The goodwill ultimately recorded for the purchase will be amortized over its estimated life. See Note 16, on page 43 of this report, for additional information related to the acquisition. RESULTS OF OPERATIONS -- 1996 VS 1995 Consolidated net sales increased to $4.13 billion in 1996, a 26.2 percent increase over 1995. Excluding incremental sales from Pratt & Lambert and other smaller acquisitions (collectively, Acquisitions) after date of acquisition, net sales for 1996 increased 7.5 percent. Sales in the Paint Stores Segment increased 13.1 percent over 1995, or 9.1 percent excluding Acquisitions, due primarily to increased paint gallons sold to both retail and wholesale customers. Comparable store sales were up 10.0 percent for the year. Despite selling price reductions on certain non-paint product lines in 1996, volume gains generated overall sales increases in all non-paint product lines except window treatments. Incremental sales from Acquisitions led to an external sales increase of 51.4 percent over 1995 in the Coatings Segment. Excluding Acquisitions, external sales increased 4.7 percent. Increased gallons sold to national accounts and independent dealers led to a net external sales increase excluding Acquisitions over last year in the Consumer Brands Division. In the Automotive Division, 1996 external sales gains excluding Acquisitions were generated primarily from sales growth in its branch distribution network. The addition of new products and new customers in the Diversified Brands Division during 1996 helped to achieve sales gains in its custom, automotive, hardware and industrial product lines excluding Acquisitions. Revenue generated by real estate operations in the Other Segment decreased slightly compared to 1995 due to the disposition of certain properties in late 1995 and in 1996. Lower gross profit margins from some of the Acquisitions' businesses caused consolidated gross profit as a percent of sales to decline to 41.8 percent from 42.7 percent in 1995. Excluding 17 20 Acquisitions, gross profit margins increased to 44.4 percent. Gross profit margins in the Paint Stores Segment, both including and excluding Acquisitions, were higher than last year due to increased sales of its higher margin product lines combined with increased retail sales. Stable product costs combined with a favorable sales mix led to improved gross profit margins over last year in the Coatings Segment excluding Acquisitions. Consolidated selling, general and administrative (SG&A) expenses as a percent of sales were favorable to last year, declining to 31.7 percent from 32.8 percent, due to lower-than-average expenses in the Acquisitions' businesses. Excluding Acquisitions, SG&A expenses as a percent of sales increased to 33.5 percent. The Paint Stores Segment's controlled spending throughout 1996 combined with its sales gains led to favorable SG&A expenses as a percent of sales on both an as-reported basis and excluding Acquisitions. The Coatings Segment's SG&A expenses as a percent of sales excluding Acquisitions were unfavorable to last year due primarily to increased merchandising costs, advertising and promotional expenses related to product introductions in the Consumer Brands and Diversified Brands Divisions. Consolidated operating profits increased 30.3 percent over 1995, or 19.2 percent excluding Acquisitions. Operating profits of the Paint Stores Segment increased 30.2 percent, or 28.1 percent excluding Acquisitions, due to volume gains and the continued containment of SG&A expenses. The Coatings Segment's operating profits excluding Acquisitions increased 11.9 percent due to stable raw material costs and manufacturing efficiencies resulting from volume gains. The operating profits of the Other Segment increased in comparison to 1995 primarily due to the reduction in costs associated with disposed properties. Corporate expenses increased over 1995 due to increased interest expense, decreased net investment income and increases in other costs and expenses which are not directly associated with or allocable to any individual operating segment. Refer to pages 1 through 8 of this report for additional Business Segment information. The increases in long-term debt and short-term borrowings which occurred in 1996 due to the financing of Acquisitions caused interest expense to increase significantly over 1995. Correspondingly, interest coverage decreased to 16.3 times from 126.8 times in 1995. Fixed charge coverage, which is calculated using interest and gross rent expense, declined to 3.9 times from 4.2 times in 1995. Net interest and investment income was lower than 1995 due to lower average cash and short-term investment balances offset partially by higher average yields. Other costs and expenses increased in 1996 due to increased provisions for dispositions and termination of operations and for environmental remediation-related matters and other items as more fully discussed in Note 4 on page 31 of this report. The effective income tax rate increased in 1996, as shown in Note 14, on page 41 of this report, primarily due to the increase in non-deductible tax items, primarily goodwill. Net income increased 14.2 percent in 1996 to $229.2 million from $200.7 million in 1995. Excluding Acquisitions, net income increased 12.6 percent. Net income per share increased 13.7 percent in 1996 to $1.33 from $1.17. In accordance with the consensus guidance in Emerging Issues Task Force No. 87-11, "Allocation of Purchase Price to Assets to be Sold", all 1996 results of operations exclude the results of operations of certain Pratt & Lambert subsidiaries through their respective dates of sale. These subsidiaries, which were sold during the third quarter of 1996, include essentially all operations of Pierce & Stevens Corp., a manufacturer of specialty chemicals, and Miracle Adhesives Corporation, a manufacturer of adhesives for the construction industry. The total operating profit related to these subsidiaries prior to their sale, approximately $3.0 million in 1996, has been excluded from the statement of consolidated income. The net gain realized on the sale of these subsidiaries was insignificant to the allocation of purchase price pursuant to APB Opinion No. 16. The acquisition of Thompson Minwax in January 1997 will affect our results of operations beginning in 1997. 18 21 RESULTS OF OPERATIONS -- 1995 VS 1994 Consolidated net sales increased 5.6 percent, to $3.27 billion, over 1994 due primarily to volume and price increases in the Paint Stores Segment. Sales in the Paint Stores Segment increased 7.3 percent for 1995 as all divisions achieved sales improvements, particularly in paint and paint-related product lines. Comparable store sales increased 6.5 percent. Increased paint gallons sold to wholesale customers generated the majority of the sales increase. Volume sales to retail customers remained sluggish. Selling price increases implemented to partially offset increased raw materials costs also contributed to the sales improvements. External sales in the Coatings Segment increased 2.7 percent over 1994. The Consumer Brands Division was the primary contributor to this sales increase due to increased gallon sales, particularly in its Dutch Boy(R) brand. In the Automotive Division, sales increases in the automotive branches were partially offset by declines in two of its major product lines which resulted from soft automotive aftermarket sales throughout 1995. Reduced consumer demand in the custom, automotive and industrial markets led to flat sales as compared to 1994 in the Diversified Brands Division. Revenue for the real estate operations in the Other Segment increased slightly for 1995. Consolidated gross profit as a percent of sales was slightly lower than 1994, decreasing to 42.7 percent from 42.8 percent. Gross profit margins increased slightly in the Paint Stores Segment due to gallon sales improvement combined with successful implementation of supplemental selling price increases during the year to partially offset increased costs for raw materials. The Coatings Segment's gross profit margins were lower than 1994 due to the adverse effects of raw material cost increases combined with a sales mix toward lower-margin products in the Automotive Division and production volume decreases in the Diversified Brands Division. Consolidated SG&A expenses as a percent of sales declined to 32.8 percent from 32.9 percent in 1994. The Paint Stores Segment carefully contained SG&A spending throughout 1995, leading to favorable SG&A expenses as a percent of sales. The Coatings Segment's SG&A expenses as a percent of sales were higher than 1994 primarily due to increased market penetration costs for new customers in the Consumer Brands Division and to the marginally higher sales amount. Consolidated operating profits increased 4.0 percent in 1995. In the Paint Stores Segment, operating profits increased 12.7 percent over 1994 due to increased volume and controlled SG&A spending. Operating profits in the Coatings Segment improved 0.6 percent for 1995. Increased raw material costs during 1995 combined with moderate production volume increases adversely impacted this Segment's results. The operating profits of the Other Segment increased in 1995 due primarily to reduced interest expense on average long-term debt allocable to its real estate operations combined with provisions incurred in 1994 for disposition of certain non-retail properties. Corporate expenses increased in 1995 due primarily to various environmental remediation-related and disposition provisions which are not directly associated with or allocable to any individual segment. Interest expense decreased 21.3 percent during 1995 due to reduced average long-term debt resulting from normal maturities and 1994 debt purchases. As a result, interest coverage increased to 126.8 times from 93.8 times in 1994. Our fixed charge coverage, which is calculated using interest and gross rent expense, improved to 4.2 times from 4.1 times in 1994. Interest and net investment income increased 40.1 percent in 1995 due primarily to increased investment yields. Other costs and expenses decreased in 1995 primarily due to increased dividends and a net reduction of other expenses as more fully described in Note 4 on page 31 of this report. The effective income tax rate decreased in 1995, as shown in Note 14 on page 41 of this report, primarily due to increased tax-exempt investment vehicles. Net income increased 7.5 percent in 1995 to $200.7 million from $186.6 million in 1994. Net income per share increased 9.3 percent to $1.17 from $1.07. 19 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors The Sherwin-Williams Company Cleveland, Ohio We have audited the accompanying consolidated balance sheets of The Sherwin-Williams Company and subsidiaries as of December 31, 1996, 1995 and 1994, and the related statements of consolidated income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Sherwin-Williams Company and subsidiaries at December 31, 1996, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Ernst & Young LLP Cleveland, Ohio January 23, 1997, except for Note 17, as to which the date is January 29, 1997 20 23 REPORT OF MANAGEMENT Shareholders The Sherwin-Williams Company We have prepared the accompanying consolidated financial statements and related information included herein for the years ended December 31, 1996, 1995 and 1994. The primary responsibility for the integrity of the financial information rests with management. This information is prepared in accordance with generally accepted accounting principles based upon our best estimates and judgments and giving due consideration to materiality. The Company maintains accounting and control systems which are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and which produce records adequate for preparation of financial information. There are limits inherent in all systems of internal control based on the recognition that the cost of such systems should not exceed the benefits to be derived. We believe our system provides this appropriate balance. The Board of Directors pursues its responsibility for these financial statements through the Audit Committee, composed exclusively of outside directors. The Committee meets periodically with management, internal auditors and our independent auditors to discuss the adequacy of financial controls, the quality of financial reporting and the nature, extent and results of the audit effort. Both the internal auditors and independent auditors have private and confidential access to the Audit Committee at all times. /s/ J. G. Breen /s/ L. J. Pitorak /s/ J. L. Ault J. G. Breen L. J. Pitorak J. L. Ault Chairman and Senior Vice President -- Finance, Vice President -- Chief Executive Officer Treasurer and Chief Financial Officer Corporate Controller
FINANCIAL STATEMENTS See "Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K" for the required Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 21 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 regarding Directors is contained under the caption "Election of Directors (Proposal 1)" in the Proxy Statement which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year which information under such caption is incorporated herein by reference. The information required by Item 10 regarding Executive Officers is contained under the caption "Executive Officers of the Registrant" in Part I of this Form 10-K which information under such caption is incorporated herein by reference. The information required by Item 10 regarding certain significant employees is contained under the captions "Corporate Officers of the Company" and "Operating Managers of the Company" (excluding the Executive Officers) in the Proxy Statement which information under such captions is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is contained on pages 7 through 18 of the Proxy Statement and under the captions "Directors' Fees" and "Compensation Committee Interlocks and Insider Participation" contained in the Proxy Statement which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is contained under the captions "Security Ownership of Management" and "Security Ownership of Certain Beneficial Owners" in the Proxy Statement which information under such captions is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 22 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements (i) Statements of Consolidated Income for the Years Ended December 31, 1996, 1995 and 1994 (ii) Consolidated Balance Sheets at December 31, 1996, 1995 and 1994 (iii) Statements of Consolidated Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 (iv) Statements of Consolidated Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 (v) Notes to Consolidated Financial Statements for the Years Ended December 31, 1996, 1995 and 1994 (2) Financial Statement Schedule Financial Schedule No. II for the Years Ended December 31, 1996, 1995 and 1994 -- All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) Exhibits See Exhibit Index at page 47 of this report which is incorporated herein by reference.
(b) Reports on Form 8-K -- Current Report on Form 8-K dated November 22, 1996 reporting, under Item 5, the signing of a definitive agreement to purchase Thompson Minwax Holding Corp. 23 26 STATEMENTS OF CONSOLIDATED INCOME (Thousands of Dollars Except Per Share Data)
Year ended December 31, - ----------------------------------------------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------------------------- Net sales $4,132,879 $3,273,819 $3,100,069 Costs and expenses: Cost of goods sold 2,405,178 1,877,083 1,772,671 Selling, general and administrative expenses 1,309,086 1,075,442 1,018,470 Interest expense 24,537 2,532 3,217 Interest and net investment income (6,819) (11,518) (8,222) Other 25,520 11,782 15,420 - ----------------------------------------------------------------------------------------- 3,757,502 2,955,321 2,801,556 - ----------------------------------------------------------------------------------------- Income before income taxes 375,377 318,498 298,513 Income taxes 146,220 117,844 111,942 - ----------------------------------------------------------------------------------------- Net income $ 229,157 $ 200,654 $ 186,571 ========================================================================================= Net income per share* $ 1.33 $ 1.17 $ 1.07 =========================================================================================
*Per share data reflects the effect of the stock split described in Note 17. See notes to consolidated financial statements. 24 27 CONSOLIDATED BALANCE SHEETS (Thousands of Dollars)
December 31, - ---------------------------------------------------------------------------------------------- 1996 1995 1994 - ---------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 1,880 $ 249,484 $ 251,415 Short-term investments 20,000 Accounts receivable, less allowance 452,421 334,304 310,984 Inventories: Finished goods 529,148 395,817 396,299 Work in process and raw materials 113,539 67,270 62,921 - ---------------------------------------------------------------------------------------------- 642,687 463,087 459,220 Deferred income taxes 105,065 71,583 73,956 Other current assets 214,134 100,440 93,049 - ---------------------------------------------------------------------------------------------- Total current assets 1,416,187 1,238,898 1,188,624 Deferred pension assets 254,376 233,574 225,962 Goodwill 546,461 38,792 19,538 Intangibles and other assets 228,175 173,432 118,705 Property, plant and equipment: Land 53,705 45,203 42,211 Buildings 312,954 282,011 227,390 Machinery and equipment 716,015 629,786 596,878 Construction in progress 51,258 30,434 26,074 - ---------------------------------------------------------------------------------------------- 1,133,932 987,434 892,553 Less allowances for depreciation 584,541 531,077 483,351 - ---------------------------------------------------------------------------------------------- 549,391 456,357 409,202 - ---------------------------------------------------------------------------------------------- Total Assets $2,994,590 $2,141,053 $1,962,031 ============================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 168,001 Accounts payable 385,928 $ 276,863 $ 258,930 Compensation and taxes withheld 103,353 78,148 79,110 Other accruals 327,768 232,035 218,240 Accrued taxes 65,957 31,891 40,768 - ---------------------------------------------------------------------------------------------- Total current liabilities 1,051,007 618,937 597,048 Long-term debt 142,679 24,018 20,465 Postretirement benefits other than pensions 184,551 175,766 172,114 Other long-term liabilities 215,121 110,206 119,060 Shareholders' equity: Common stock -- $1.00 par value*: 171,831,178, 170,909,626 and 169,651,660 shares outstanding at December 31, 1996, 1995 and 1994, respectively 101,650 101,110 100,370 Other capital 203,223 182,311 159,562 Retained earnings 1,411,295 1,242,167 1,096,066 Cumulative foreign currency translation adjustment (18,982) (20,657) (20,006) Treasury stock, at cost (295,954) (292,805) (282,648) - ---------------------------------------------------------------------------------------------- Total shareholders' equity 1,401,232 1,212,126 1,053,344 - ---------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $2,994,590 $2,141,053 $1,962,031 ==============================================================================================
*Common share amounts reflect the effect of the stock split described in Note 17. See notes to consolidated financial statements. 25 28 STATEMENTS OF CONSOLIDATED CASH FLOWS (Thousands of Dollars)
Year Ended December 31, - -------------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------------- OPERATIONS Net income $ 229,157 $ 200,654 $ 186,571 Non-cash adjustments: Depreciation 76,176 62,947 60,571 Deferred income tax expense (14,215) (3,316) (18,329) Provisions for disposition of operations 17,366 6,267 5,712 Provisions for environmental remediation 15,494 10,136 14,400 Amortization of intangible assets 27,447 14,971 13,153 Defined benefit pension plans net credit (15,298) (7,612) (11,379) Net increase in postretirement liability 3,258 3,652 5,139 Other 1,658 10,077 15,099 Change in current items-net: Increase in accounts receivable (20,338) (19,571) (13,836) Decrease (increase) in inventories (85,911) 3,922 (28,748) Increase in accounts payable 60,410 17,283 3,933 Increase (decrease) in accrued taxes 33,147 (8,877) 964 Increase in accrued employee welfare costs 9,779 8,246 6,991 Other current items (6,893) (13,066) 19,751 Costs incurred for disposition of operations (6,993) (4,704) (5,840) Other 8,321 1,716 (3,629) - -------------------------------------------------------------------------------------- Net operating cash 332,565 282,725 250,523 - -------------------------------------------------------------------------------------- INVESTING Capital expenditures (122,720) (108,392) (78,660) Decrease (increase) in short-term investments 20,000 (20,000) 39,700 Acquisitions of assets (670,755) (72,349) (9,215) Decrease (increase) in other investments 37,829 (49,833) (2,397) Other 15,898 5,824 8,744 - -------------------------------------------------------------------------------------- Net investing cash (719,748) (244,750) (41,828) - -------------------------------------------------------------------------------------- FINANCING Net increase in short-term borrowings 134,654 Increase in long-term debt 101,792 Payments of long-term debt (72,426) (804) (19,607) Payments of cash dividends (60,029) (54,553) (48,363) Proceeds from stock options exercised 12,800 11,104 6,301 Treasury stock acquired (3,149) (17,367) (128,148) Other financing of acquisitions 22,000 18,948 1,459 Other 3,937 2,766 986 - -------------------------------------------------------------------------------------- Net financing cash 139,579 (39,906) (187,372) - -------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (247,604) (1,931) 21,323 Cash and cash equivalents at beginning of year 249,484 251,415 230,092 - -------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 1,880 $ 249,484 $ 251,415 ====================================================================================== Taxes paid on income $ 144,359 $ 122,687 $ 132,573 Interest paid on debt 22,950 2,526 3,314 - --------------------------------------------------------------------------------------
See notes to consolidated financial statements. 26 29 STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (Thousands of Dollars Except Per Share Data)
Cumulative Common Other Retained Translation Treasury Stock Capital Earnings Adjustment Stock - ------------------------------------------------------------------------------------------------ Balance at January 1, 1994 $ 99,994 $150,203 $ 957,858 $(20,384) $(154,500) Treasury stock acquired (126,794) Stock issued 376 9,359 (1,354) Net income 186,571 Cash dividends -- $.28 per share* (48,363) Current year translation adjustment 378 - ------------------------------------------------------------------------------------------------ Balance at December 31, 1994 100,370 159,562 1,096,066 (20,006) (282,648) Treasury stock acquired (14,404) Stock issued 740 22,749 4,247 Net income 200,654 Cash dividends -- $.32 per share* (54,553) Current year translation adjustment (651) - ------------------------------------------------------------------------------------------------ Balance at December 31, 1995 101,110 182,311 1,242,167 (20,657) (292,805) Stock issued 540 20,912 (3,149) Net income 229,157 Cash dividends -- $.35 per share* (60,029) Current year translation adjustment 1,675 - ------------------------------------------------------------------------------------------------ Balance at December 31, 1996 $101,650 $203,223 $1,411,295 $(18,982) $(295,954) ================================================================================================
*Per share data reflects the effect of the stock split described in Note 17. See notes to consolidated financial statements. 27 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars Unless Otherwise Indicated) (All common share amounts and per share data reflect the effect of the stock split described in Note 17.) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES Consolidation. The consolidated financial statements include all significant controlled subsidiaries. Inter-company accounts and transactions have been eliminated. Business segments. Business segment information appears on pages 1 through 8 of this report. Foreign currency translation. All consolidated non-highly inflationary foreign operations use the local currency of the country of operation as the functional currency and translate the local currency asset and liability accounts at year-end exchange rates while income and expense accounts are translated at average exchange rates. The resulting translation adjustments are accumulated as a separate component of Shareholders' Equity titled "Cumulative foreign currency translation adjustment". All consolidated highly inflationary foreign operations use the Company's currency as the functional currency. Cash flows. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Nature of operations. The Company is engaged in the manufacture, distribution and sale of coatings and related products to professional, industrial, commercial and retail customers in North and South America. Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Environmental matters. Capital expenditures for ongoing environmental compliance measures are recorded in the consolidated balance sheets and related expenses are included in the normal operating expenses of conducting business. The Company is involved with environmental compliance and remediation activities at some of its current and former sites and at a number of third-party sites. The Company accrues for certain environmental remediation-related activities for which commitments or clean-up plans have been developed or for which costs or minimum costs can be reasonably estimated. All accrued amounts are recorded on an undiscounted basis. In 1996, the Company adopted American Institute of Certified Public Accountants Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities". SOP 96-1 proscribes that accrued environmental remediation-related expenses include direct costs of remediation and indirect costs related to the remediation effort. Although the Company previously accrued for the direct costs of remediation and certain indirect costs, additional indirect costs were required to be accrued by the Company at the time of adopting SOP 96-1 such as compensation and benefits for employees directly involved in the remediation activities and fees paid to outside engineering, consulting and law firms. The effect of initially applying the provisions of SOP 96-1 has been treated as a change in accounting estimate and is not material to the accompanying financial statements. See Note 4 and Note 10 for discussions of the environmental remediation-related expense and accruals included in the financial statements. Stock-based compensation. The Company uses the intrinsic value method of accounting for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25. See Note 13 for pro forma disclosure of net income and earnings per share under the fair value method of accounting for stock-based compensation as proscribed by Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123. 28 31 Property, plant and equipment. Property, plant and equipment is stated on the basis of cost. Depreciation is provided principally by the straight-line method. The major classes of assets and ranges of depreciation rates are as follows: Buildings 2% - 6 2/3% Machinery and equipment 4% - 20% Furniture and fixtures 5% - 20% Automobiles and trucks 10% - 33 1/3%
Investment in life insurance. The Company invests in broad-based corporate owned life insurance. The cash surrender values of the policies, net of policy loans, are included in Other Assets. The net expense associated with such investment is included in Other Costs and Expenses. Such expense is immaterial to income before income taxes. Goodwill. Goodwill represents the cost in excess of fair value of net assets acquired in purchase transactions and is amortized on a straight-line basis over periods not exceeding 40 years. The Company evaluates the recoverability of goodwill at each balance sheet date and would record an impairment if necessary. Accumulated amortization of goodwill was $18,186, $3,821 and $2,714 at December 31, 1996, 1995 and 1994, respectively. Intangibles. Intangible assets were $104,206, $84,070 and $86,283, net of accumulated amortization of $74,450, $61,293 and $60,030 at December 31, 1996, 1995 and 1994, respectively. These assets are amortized by the straight-line method over the expected period of benefit. The Company reviews such assets for impairment and revises the related estimated remaining lives if necessary. Technical expenditures. Total technical expenditures include research and development costs, quality control, product formulation expenditures and other similar items. Research and development costs included in technical expenditures were $18,661, $17,238 and $16,319 for 1996, 1995 and 1994, respectively. Advertising expenses. The cost of advertising is expensed as incurred. The Company incurred $212,448, $152,588 and $148,973 in advertising costs during 1996, 1995 and 1994, respectively. Net income per share. Net income per share was computed based on the average number of shares and share equivalents outstanding during the year after adjustment for the effect of the two-for-one stock split described in Note 17. See computation on page 49 of this report. Letters of credit. The Company occasionally enters into standby letter of credit agreements to guarantee various operating activities. These agreements, which expire in 1997, provide credit availability to the various beneficiaries if certain contractual events occur. Amounts outstanding under these agreements totaled $17,092, $17,075 and $20,091 at December 31, 1996, 1995 and 1994, respectively. Fair value of financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate fair value. Short-term investments: The carrying amounts reported in the consolidated balance sheets for marketable debt and equity securities are based on quoted market prices and approximate fair value. Investments in securities: The Company maintains certain long-term investments, classified as available for sale securities, in a fund to provide for payment of health care benefits of certain qualified employees. The estimated fair values of these securities, included in other assets, of $31,785, $34,709 and $37,668 at December 31, 1996, 1995 and 1994, respectively, are based on quoted market prices. 29 32 Long-term debt (including current portion): The fair values of the Company's publicly traded debentures, shown below, are based on quoted market prices. The fair values of the Company's non-traded debt, also shown below, are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
December 31, ------------------------------------------------------------------------------------------ 1996 1995 1994 ------------------------------------------------------------------------------------------ CARRYING FAIR Carrying Fair Carrying Fair AMOUNT VALUE Amount Value Amount Value ------------------------------------------------------------------------------------------ Publicly traded debt $ 15,900 $ 18,670 $15,900 $20,065 $16,077 $17,643 Non-traded debt 130,460 110,295 8,715 6,162 5,083 3,243 ------------------------------------------------------------------------------------------
Interest rate swaps: The Company occasionally enters into interest rate swaps primarily to hedge against interest rate risks. These agreements generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Counterparties to these agreements are major financial institutions. Management believes the risk of incurring losses related to credit risk is remote. The fair values for the Company's off-balance-sheet instruments, shown below, are based on pricing models or formulas using current assumptions for comparable instruments.
December 31, ---------------------------------------------------------------------------------------- 1996 1995 1994 ---------------------------------------------------------------------------------------- Carrying amount $ (808) $(1,275) $(1,802) Fair value 770 (943) (1,996) Notional amount 109,669 9,711 9,446 Number of agreements outstanding 3 1 1 ----------------------------------------------------------------------------------------
Non-traded investments: It was not practicable to estimate the fair value of the Company's investment in certain non-traded investments because of the lack of quoted market prices and the inability to estimate fair values without incurring excessive costs. The carrying amounts, included in other assets, of $100,797, $31,491 and $18,829 at December 31, 1996, 1995 and 1994, respectively, represent the Company's best estimate of current economic values of these investments. Reclassification. Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform with the 1996 presentation. NOTE 2 -- ACQUISITIONS AND MERGERS Effective January 10, 1996, the Company, through its wholly-owned subsidiary, SWACQ, Inc., acquired all outstanding stock and completed its merger with Pratt & Lambert United, Inc. (Pratt & Lambert) for a total cash purchase price of approximately $400,000. The excess purchase price over the fair value of the net assets acquired is being amortized over 40 years using the straight-line method. For financial statement purposes, the acquisition is being accounted for under the purchase method of accounting. Accordingly, the results of operations of Pratt & Lambert since the date of acquisition are included in the Company's statements of consolidated income. The following unaudited pro forma combined condensed statement of consolidated income for the year ended December 31, 1995 was prepared in accordance with Accounting Principles Board Opinion No. 16 and assumes the merger had occurred on January 1, 1995. The following pro forma data reflects adjustments for interest expense, net investment income, depreciation expense and amortization of intangible assets. In management's opinion, the pro forma financial information is not indicative of the results of operations which would have occurred had the acquisition of Pratt & Lambert taken 30 33 place on January 1, 1995 or of future results of operations of the combined companies under the ownership and operation of the Company. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF CONSOLIDATED INCOME ---------------------------------------------------------
1995 ---------- Net sales $3,670,181 ========== Net income $ 183,806 ========== Net income per share $ 1.07 ==========
In addition, during the three-year period ended December 31, 1996, the Company also purchased various domestic automotive and retail paint distributors, coatings manufacturers, and aerosol and liquid filling businesses. Various foreign architectural and automotive paint manufacturing and aerosol filling businesses located in South America were also acquired during the period. The results of operations of these businesses were not material to consolidated pro forma results. NOTE 3 -- INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined principally on the last-in, first-out (LIFO) method which provides a better matching of current costs and revenues. The following presents the effect on inventories, net income and net income per share had the Company used the first-in, first-out (FIFO) and average cost methods of inventory valuation adjusted for income taxes at the statutory rate and assuming no other adjustments. This information is presented to enable the reader to make comparisons with companies using the FIFO method of inventory valuation.
1996 1995 1994 - ----------------------------------------------------------------------------------------------- Percentage of total inventories on LIFO 96% 97% 97% Excess of FIFO and average cost over LIFO $ 94,138 $ 102,725 $ 80,199 Increase (decrease) in net income due to LIFO 4,698 (14,642) (68) Increase (decrease) in net income per share due to LIFO .03 (.09) -- - -----------------------------------------------------------------------------------------------
NOTE 4 -- OTHER COSTS AND EXPENSES A summary of significant items included in Other Costs and Expenses is as follows:
1996 1995 1994 - ----------------------------------------------------------------------------------------------- Dividend and royalty income $ (5,127) $ (10,433) $ (7,500) Net expense of financing and investing activities 13,226 9,376 12,660 Provisions for environmental matters -- net (see Note 10) 15,494 10,136 4,700 Provisions for disposition and termination of operations (see Note 5) 5,506 1,007 1,812 Miscellaneous (3,579) 1,696 3,748 - ----------------------------------------------------------------------------------------------- $ 25,520 $ 11,782 $ 15,420 ===============================================================================================
The net expense of financing and investing activities represents the realized gains or losses associated with disposing of fixed assets, the net gain or loss associated with the investment of certain long-term asset funds and the net pre-tax expense associated with the Company's investment in broad-based corporate owned life insurance. 31 34 During the year ended December 31, 1996, provisions for environmental matters reflect the increased estimated costs of environmental remediation at current, former and third-party sites, and certain additional costs relating to the early adoption of SOP 96-1 (see Note 1), which were partially offset by a settlement of $56,000 with certain insurance carriers pertaining to environmental-related matters. For the years ended December 31, 1995 and 1994, the provisions for environmental remediation reflect only the increased estimated environmental remediation costs at such sites. NOTE 5 -- DISPOSITION AND TERMINATION OF OPERATIONS The Company is continually re-evaluating its operating facilities with regard to the long-term strategic goals established by management and the board of directors. Operating facilities which are not expected to sufficiently contribute to the Company's future plans are closed or sold. At the time of the decision to close or sell a facility, a provision is made and the expense included in Other Costs and Expenses to reduce property, plant and equipment to its estimated net realizable value. Similarly, provisions are made which reduce all other assets to their estimated net realizable values and provide for all qualified exit costs such as lease cancellation penalties, post-closure rent expenses and incremental post-closure expenses, and the estimated costs of employee termination benefits if management has approved a termination plan and communicated such plan to the affected employees. The expenses associated with the provisions for such exit costs and termination benefits are included in Cost of Goods Sold. Adjustments to all previous accruals, as closure or disposition occurs, are included in Other Costs and Expenses. The provisions made during 1996, charged to current operations, provided for the reduction to net realizable value of certain assets and exit costs related to one manufacturing facility and consolidations of certain redundant distribution and administrative facilities. The 1995 provisions represent the reduction to net realizable value for certain assets and exit costs associated with closing certain warehouses due to distribution consolidation. In 1994, provisions were made for the closing of certain warehouses which were replaced during 1995 by larger, more efficient facilities. A summary of the financial data related to the closing or sale of the facilities is as follows:
1996 1995 1994 - ----------------------------------------------------------------------------------------------- Beginning accruals -- January 1 $ 27,545 $ 25,982 $ 26,110 Provisions included in cost of goods sold 11,860 5,260 3,900 Provisions and adjustments to prior accruals included in costs and expenses -- other 5,506 1,007 1,812 - ----------------------------------------------------------------------------------------------- Total provisions charged to current operations 17,366 6,267 5,712 Accruals related to acquired sites 22,626 Actual expenditures (6,993) (4,704) (5,840) - ----------------------------------------------------------------------------------------------- Ending accruals -- December 31 $ 60,544 $ 27,545 $ 25,982 =============================================================================================== Net after-tax provision charged to current operations $ 11,288 $ 4,073 $ 3,713 Net after-tax provision per share $ .07 $ .03 $ .02 - -----------------------------------------------------------------------------------------------
NOTE 6 -- PENSION BENEFITS Substantially all employees of the Company participate in noncontributory defined benefit or defined contribution pension plans. Defined benefit plans covering salaried employees provide benefits that are based primarily on years of service and employees' compensation. The defined benefit plan covering hourly employees generally provides benefits of stated amounts for each year of service. Multi-employer plans are primarily defined benefit plans which provide benefits of stated amounts for union employees. The Company's funding policy for defined benefit pension plans is to 32 35 fund at least the minimum annual contribution required by applicable regulations. Plan assets consist primarily of cash, equity investments and fixed-income securities. There were 1,938,800 shares of the Company's stock included in these assets at December 31, 1996, 1995 and 1994. At December 31, 1995, the assumed discount rate was changed due to decreased rates of high-quality long-term investments, increasing the projected benefit obligation. The decreased interest rates during 1995 positively impacted the return on plan assets in the defined benefit pension trusts. The effect of the change in the assumed discount rate and the increased earnings on plan assets resulted in a net decrease in the unrecognized net loss, whose amortization was reduced beginning in 1996 thereby increasing the net pension credit. A change in the assumed discount rate and rate of return on plan assets at December 31, 1994 previously increased the unrecognized net loss, whose amortization in 1995 reduced the net pension credit. The net pension credit for defined benefit plans and its components was as follows:
1996 1995 1994 - ----------------------------------------------------------------------------------------------- Service cost $ 3,516 $ 2,401 $ 2,800 Interest cost 10,933 8,929 8,402 Actual return on plan assets (49,923) (53,926) 7,418 Net amortization and deferral 20,176 34,984 (29,999) - ----------------------------------------------------------------------------------------------- Net pension credit $ (15,298) $ (7,612) $ (11,379) ===============================================================================================
Based on the latest actuarial information available, the following table sets forth the funded status and amounts recognized in the Company's consolidated balance sheets for the defined benefit pension plans. Certain defined benefit plans formerly sponsored by Pratt & Lambert United, Inc. and its subsidiaries are included beginning in 1996.
1996 1995 1994 - ----------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $ (148,534) $ (116,335) $ (103,860) Accumulated benefit obligation $ (151,376) $ (118,585) $ (105,480) Projected benefit obligation $ (158,876) $ (128,335) $ (111,650) Plan assets at fair value 391,865 323,216 277,841 - ----------------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 232,989 194,881 166,191 Unrecognized net asset at January 1, 1986, net of amortization (6,943) (9,865) (12,787) Unrecognized prior service cost 858 393 441 Unrecognized net loss 27,472 48,165 72,117 - ----------------------------------------------------------------------------------------------- Deferred pension assets recognized in the consolidated balance sheets $ 254,376 $ 233,574 $ 225,962 =============================================================================================== Assumptions used in determining actuarial present value of benefit obligations: Discount rate 7.25% 7.25% 8.25% Weighted-average rate of increase in future compensation levels 5.00% 5.00% 5.00% Long-term rate of return on plan assets 8.50% 8.50% 8.50% - -----------------------------------------------------------------------------------------------
The Company's annual contribution for its defined contribution pension plans, which is based on a level percentage of compensation for covered employees, offset the pension credit by $24,730 for 33 36 1996, $20,326 for 1995 and $20,193 for 1994. The cost of multiemployer and foreign plans charged to income was immaterial for the three years ended December 31, 1996. NOTE 7 -- BENEFITS OTHER THAN PENSIONS In addition to providing pension benefits, the Company provides certain health care and life insurance benefits under company-sponsored plans for active and retired employees. Beginning in 1996, these plans include certain health care and postretirement benefit plans formerly sponsored by Pratt & Lambert United, Inc. and its subsidiaries. The health care plans are contributory and contain cost-sharing features such as deductibles and coinsurance. There were 16,935, 14,823 and 14,160 active employees entitled to receive benefits under these plans as of December 31, 1996, 1995 and 1994, respectively. The cost of these benefits for active employees is recognized as claims are incurred and amounted to $44,221, $37,194 and $32,694 for 1996, 1995 and 1994, respectively. The Company has a fund, to which it no longer intends to contribute, that provides for payment of health care benefits of certain qualified employees. Distributions from the fund amounted to $4,618 in 1996, $5,265 in 1995 and $4,662 in 1994. Substantially all employees of the Company who were hired prior to January 1, 1993 and who are not members of a collective bargaining unit are eligible for certain health care and life insurance benefits upon retirement from active service with the Company. There were 4,152, 4,008 and 4,093 retired employees entitled to receive benefits as of December 31, 1996, 1995 and 1994, respectively. The plans are unfunded. The assumed discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation was 7.25% in 1996 and 1995, and 8.25% in 1994. The change in the assumed discount rate at December 31, 1995, caused by decreased interest rates of high-quality long-term investments, increased the accumulated postretirement benefit obligation, the effect of which increased the unrecognized net loss. The assumed weighted-average annual rate of increase in the per capita cost of covered benefits (i.e., the health care cost trend rate) is 7.75 percent for 1997 and decreases gradually to 5.5 percent for 2003 and thereafter. The health care cost trend rate has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by $10,450 and the aggregate service and interest cost components of net periodic postretirement benefit cost for 1996 by $885. 34 37 Based on the latest actuarial information available, the following table sets forth the amounts recognized in the Company's consolidated balance sheets for postretirement benefits other than pensions:
1996 1995 1994 - ----------------------------------------------------------------------------------------------- Actuarial present value of accumulated postretirement benefit obligation: Retirees $ (109,116) $ (105,200) $ (93,049) Fully eligible active participants (20,486) (17,590) (14,240) Other active participants (53,577) (49,120) (41,811) - ----------------------------------------------------------------------------------------------- (183,179) (171,910) (149,100) Effect of changes in the accumulated postretirement benefit obligation to be amortized over future years: Unrecognized prior service credit (21,570) (24,268) (26,961) Unrecognized net (gain) loss 11,288 12,262 (4,203) - ----------------------------------------------------------------------------------------------- Total accrued postretirement benefit liability $ (193,461) $ (183,916) $ (180,264) =============================================================================================== Accrued postretirement benefit liabilities recognized in the consolidated balance sheets: Amount included in current liabilities $ (8,910) $ (8,150) $ (8,150) Amount of long-term postretirement benefits other than pensions (184,551) (175,766) (172,114) - ----------------------------------------------------------------------------------------------- Total accrued postretirement benefit liability $ (193,461) $ (183,916) $ (180,264) =============================================================================================== The expense for postretirement benefit plans and its components was as follows: Service cost $ 3,327 $ 2,723 $ 3,112 Interest cost 12,483 11,998 11,459 Net amortization of unrecognized prior service credit (2,696) (2,693) (2,693) Net amortization and deferral 61 - ----------------------------------------------------------------------------------------------- Net postretirement benefit expense $ 13,114 $ 12,028 $ 11,939 ===============================================================================================
35 38 NOTE 8 -- LONG-TERM DEBT
Sinking Fund/ Interim Payments Amount Outstanding --------------------- ---------------------------------- Due Date Amount Commence 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Floating Rate Notes Through $100,000 1999 9.875% Debentures 2016 $5,000 2007 15,900 $ 15,900 $ 15,900 6% Promissory Notes Through 11,233 2002 8% to 8.5% Promissory Notes Through Varies Payable 6,985 5,328 1,000 2004 currently 7% Promissory Notes Through Varies Payable 4,400 2000 currently 8% to 12% Promissory Notes Through Varies Payable 3,242 2,632 3,365 partially secured by 2005 currently certain land and buildings and other 4.75% Promissory Note 2000 800 Other Obligations 119 158 200 - ---------------------------------------------------------------------------------------------------------------- $142,679 $ 24,018 $ 20,465 ================================================================================================================
Maturities of long-term debt are as follows for the next five years: $3,800 in 1997; $53,805 in 1998; $59,094 in 1999; $5,799 in 2000; and $3,861 in 2001. Interest expense on long-term debt amounted to $8,602, $2,387 and $2,768 for 1996, 1995 and 1994, respectively. There were no interest charges capitalized during the periods presented. The Company had other financing arrangements available at December 31, 1996 as outlined below. Effective August 31, 1995, the Company entered into 364-day and five year revolving credit agreements with a group of banks to borrow up to an aggregate of $600,000. There were no outstanding borrowings under these agreements at the end of 1996 or 1995. In 1997, the Company terminated these agreements and entered into new revolving credit agreements as more fully explained in Note 16. Under a shelf registration with the Securities and Exchange Commission covering $450,000 of unsecured debt securities with maturities greater than nine months from the date of issue, the Company may issue securities from time to time in one or more series and will offer the securities on terms determined at the time of sale. In 1997, the Company issued debt securities under this shelf registration as more fully explained in Note 16. Effective January 24, 1996, the Company increased the aggregate principal amount of unsecured short-term notes which can be issued under its commercial paper program to $600,000. In 1997, the Company increased the aggregate principal amount of such notes to $1,450,000 as more fully explained in Note 16. At December 31, 1996, outstanding borrowings under this program totaled $166,246 and are included in short-term borrowings on the balance sheet. The weighted-average interest rate related to these borrowings was 5.71% at December 31, 1996. NOTE 9 -- LEASES The Company leases certain stores, warehouses, office space and equipment. Renewal options are available on the majority of leases and, under certain conditions, options exist to purchase some properties. Rental expense for operating leases was $104,894, $95,536 and $93,637 for 1996, 1995 and 1994, respectively. Certain store leases require the payment of contingent rentals based on sales in excess of specified minimums. Contingent rentals included in rent expense were $9,877 in 1996, $9,102 36 39 in 1995 and $8,985 in 1994. Rental income, as lessor, from real estate leasing activities and sublease rental income for all years presented was not significant. Following is a schedule, by year and in the aggregate, of future minimum lease payments under noncancellable operating leases having initial or remaining terms in excess of one year at December 31, 1996: 1997 $ 79,190 1998 65,032 1999 50,590 2000 37,980 2001 25,361 Later years 74,012 -------- Total minimum lease payments $332,165 ========
NOTE 10 -- OTHER LONG-TERM LIABILITIES Other long-term liabilities consist of the following:
1996 1995 1994 - -------------------------------------------------------------------------------------------- Environmental-related $139,057 $ 70,310 $ 71,049 Other 76,064 39,896 48,011 - -------------------------------------------------------------------------------------------- $215,121 $110,206 $119,060 ============================================================================================
The long-term liability for environmental-related items represents the Company's provision for the estimated costs associated with environmental remediation-related activities at some of its current and former sites. Also, the Company, together with other parties, has been designated a potentially responsible party under federal and state environmental protection laws for the remediation of hazardous waste at a number of third-party sites, primarily Superfund sites. In general, these laws provide that potentially responsible parties may be held jointly and severally liable for investigation and remediation costs regardless of fault. The Company provides for, and includes in long-term liabilities, its estimated potential liability for investigation and remediation costs with respect to such third-party sites. The Company initially provides for the estimated cost of certain environmental-related activities relating to its current, former and third-party sites when minimum costs can be reasonably estimated. These estimates are determined based on currently-available facts regarding each site. If the best estimate of costs can only be identified within a range and no specific amount within that range can be determined more likely than any other amount within the range, the minimum of the range is accrued. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved. The Company estimates the cost of similar environmental-related activities at sites obtained through acquisition on the same basis as described above. The Company believes that any additional liability in excess of amounts provided which may result from the resolution of such matters will not have a material adverse effect on the financial condition, liquidity or cash flow of the Company. The increase in environmental-related liabilities in 1996 reflects adjustments to previously recorded estimated costs resulting from the ongoing evaluation of environmental matters at certain current, former and third-party sites, liabilities recorded relating to certain sites acquired in connection with 1996 acquisitions, and the accrual of certain additional costs relating to the early adoption of SOP 96-1 (see Note 1). 37 40 In addition to the long-term portion of environmental-related accruals shown above, current accruals for certain environmental-related liabilities are included in other accruals in current liabilities on the consolidated balance sheets. During 1996, taxes associated with acquisitions and other events significantly increased other long-term liabilities. NOTE 11 -- STOCK PURCHASE PLAN As of December 31, 1996, 12,373 employees participated through regular payroll deductions in the Company's Employee Stock Purchase and Savings Plan. The Company's contribution charged to income amounted to $29,935, $26,795 and $22,242 for 1996, 1995 and 1994, respectively. Additionally, the Company made contributions on behalf of participating employees, which represent salary reductions for income tax purposes, amounting to $15,282 in 1996, $12,775 in 1995 and $11,456 in 1994. At December 31, 1996, there were 26,267,922 shares of the Company's stock being held by this plan, representing 15.3 percent of the total number of shares outstanding. Shares of company stock credited to each member's account under the plan are voted by the trustee under confidential instructions from each individual plan member. Shares for which no instructions are received are voted by the trustee in the same proportion as those for which instructions are received. NOTE 12 -- CAPITAL STOCK
Shares Shares in Treasury Outstanding - ------------------------------------------------------------------------------------------- Balance at January 1, 1994 22,975,962 177,012,674 Stock issued upon: Exercise of stock options 84,584 638,248 Conversion of 6.25% Convertible Subordinated Debentures 40,338 Cancellation of restricted stock grants (12,000) Treasury stock acquired 8,027,600 (8,027,600) - ------------------------------------------------------------------------------------------- Balance at December 31, 1994 31,088,146 169,651,660 Stock issued upon: Exercise of stock options 171,226 1,042,086 Conversion of 6.25% Convertible Subordinated Debentures 123,336 Restricted stock grants 144,000 Treasury Stock: Acquired 822,600 (822,600) Issued for acquisition (771,144) 771,144 - ------------------------------------------------------------------------------------------- Balance at December 31, 1995 31,310,828 170,909,626 Stock issued upon: Exercise of stock options 158,688 918,552 Restricted stock grants 3,000 - ------------------------------------------------------------------------------------------- Balance at December 31, 1996 31,469,516 171,831,178 ===========================================================================================
An aggregate of 8,686,286, 9,779,730 and 11,327,544 shares of stock at December 31, 1996, 1995 and 1994, respectively, were reserved for future restricted stock grants, the exercise and future grants of stock options, and, prior to their expiration in February 1995, the conversion of convertible subordinated debentures. At December 31, 1996, there were 300,000,000 shares of common stock and 30,000,000 shares of serial preferred stock authorized for issuance. 38 41 The Company has a shareholders' rights plan which designates 1,000,000 shares of the authorized serial preferred stock as cumulative redeemable serial preferred stock which may be issued if the Company becomes the target of coercive and unfair takeover tactics. NOTE 13 -- STOCK PLAN The Company's stock plan permits the granting of stock options, stock appreciation rights and restricted stock to eligible employees. The 1994 Stock Plan succeeded the 1984 Stock Plan which expired on February 15, 1994. Although no further grants may be made under the 1984 Stock Plan, all rights granted under such plan remain. The 1994 Stock Plan authorized an additional 4,000,000 shares to be added to authorized shares of the 1984 Stock Plan which were not granted as of the 1984 Stock Plan's expiration date. Non-qualified and incentive stock options have been granted to certain officers and key employees under the plans at prices not less than fair market value of the shares, as defined by the plans, at the date of grant. The options generally become exercisable to the extent of one-third of the optioned shares for each full year of employment following the date of grant and generally expire ten years after the date of grant. Restricted stock grants, with an outstanding balance of 375,000 shares at December 31, 1996, were awarded to certain officers and key employees which require four years of continuous employment from the date of grant before vesting and receiving the shares without restriction. The number of shares to be received without restriction is based on the Company's performance relative to a peer group of companies. There were 208,000 shares issued pursuant to these grants during 1995. No shares were issued during 1996 and 1994. Unamortized deferred compensation expense with respect to the restricted stock amounted to $2,962, $4,024 and $1,612 at December 31, 1996, 1995 and 1994, respectively, and is being amortized over the four-year vesting period. Deferred compensation expense aggregated $3,983, $1,563 and $1,416 in 1996, 1995 and 1994, respectively. No stock appreciation rights have been granted. A summary of restricted stock granted during 1996 and 1995 is as follows:
1996 1995 -------------------------------------------------------- Shares granted 3,000 196,000 Weighted-average fair value of options granted during year $ 20.72 $16.35
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APBO No. 25), and related interpretations, in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS No. 123), requires use of highly subjective assumptions in option valuation models. Under APBO No. 25, because the exercise price of the Company's employee stock options is not less than fair market price of the shares at the date of grant, no compensation expense is recognized in the financial statements. Pro forma information regarding net income and earnings per share, determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123, is required by that statement for 1996 and 1995. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for all options granted in 1996 and 1995:
1996 1995 ----------------------------------------------------------------- Risk-free interest rate 5.99% 6.25% Expected life of option 3 YEARS 3 years Expected dividend yield of stock 2.00% 2.00% Expected volatility of stock 0.201 0.221
39 42 The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, it is management's opinion that the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The amounts below represent the pro forma information calculated through use of the Black-Scholes model. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
1996 1995 ----------------------------------------------------------------- Pro forma net income $ 228,126 $ 200,229 Pro forma earnings per share: Primary $1.33 $1.17 Fully Diluted $1.32 $1.17
Due to the required phase-in provisions, the effects of applying SFAS No. 123 to arrive at the above pro forma amounts are not representative of the expected effects on pro forma net income or earnings per share in future years. A summary of the Company's stock option activity, and related information for the years ended December 31, 1996, 1995 and 1994, is shown in the following table in accordance with SFAS No. 123 beginning in 1995:
1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ Weighted- Weighted- Average Average Optioned Exercise Optioned Exercise Optioned Shares Price Shares Price Shares Price Range - ------------------------------------------------------------------------------------------------------------------ Outstanding beginning of year 4,976,268 $ 12.77 5,212,918 $ 11.23 5,343,090 $ 3.86-$17.94 Granted 1,648,500 20.82 1,008,400 16.39 668,800 16.10- 17.53 Exercised (1,077,240) 11.28 (1,213,312) 9.19 (722,832) 3.86- 15.82 Canceled (112,932) 18.36 (31,738) 15.72 (76,140) 6.28- 16.63 - ------------------------------------------------------------------------------------------------------------------ Outstanding end of year 5,434,596 $ 14.91 4,976,268 $ 12.35 5,212,918 $ 5.47-$17.94 ================================================================================================================== Exercisable at end of year 3,011,242 $ 11.99 3,342,388 $ 11.03 3,939,138 Weighted-average fair value of options granted during year $3.57 $3.50 Reserved for future grants 3,251,686 4,803,462 5,991,260
Exercise prices for optioned shares outstanding as of December 31, 1996 ranged from $6.28 to $25.63. A summary of these options by range of exercise prices is shown as follows:
Outstanding Exercisable ---------------------- ---------------------- Weighted- Weighted- Weighted- Average Average Average Remaining Range of Optioned Exercise Optioned Exercise Contractual Exercise Prices Shares Price Shares Price Life (years) - --------------------------------------------------------------------------------------------------- < $ 8.00 246,752 $ 6.81 246,752 $ 6.81 1.50 $ 8.00-$11.99 1,348,220 9.31 1,348,220 9.31 3.75 $12.00-$18.00 2,216,476 15.79 1,405,226 15.42 6.83 > $18.00 1,623,148 20.87 11,044 18.05 9.00 - --------------------------------------------------------------------------------------------------- 5,434,596 $ 14.91 3,011,242 $ 11.99 6.50 ===================================================================================================
40 43 NOTE 14 -- INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are currently in effect. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994 - ------------------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation $ 24,393 $ 21,630 $ 23,829 Deferred employee benefit items 27,873 26,360 26,494 - ------------------------------------------------------------------------------------------- Total deferred tax liabilities $ 52,266 $ 47,990 $ 50,323 =========================================================================================== Deferred tax assets: Dispositions, environmental and other similar items $ 55,143 $ 32,425 $ 36,076 Other items (each less than 5% of total assets) 100,679 82,193 77,013 - ------------------------------------------------------------------------------------------- Total deferred tax assets $155,822 $114,618 $113,089 ===========================================================================================
Significant components of the provisions for income taxes are as follows:
1996 1995 1994 - ------------------------------------------------------------------------------------------- Current: Federal $124,847 $ 97,936 $106,132 Foreign 8,542 2,470 1,775 State and Local 27,046 20,754 22,364 - ------------------------------------------------------------------------------------------- Total Current 160,435 121,160 130,271 Deferred: Federal (12,169) (3,062) (15,465) State and Local (2,046) (254) (2,864) - ------------------------------------------------------------------------------------------- Total Deferred (14,215) (3,316) (18,329) - ------------------------------------------------------------------------------------------- Total income tax expense $146,220 $117,844 $111,942 ===========================================================================================
For financial reporting purposes, income before income taxes include the following components:
1996 1995 1994 - ----------------------------------------------------------------------------------------------- Domestic $ 343,445 $ 309,467 $ 290,768 Foreign 31,932 9,031 7,745 - ----------------------------------------------------------------------------------------------- $ 375,377 $ 318,498 $ 298,513 ===============================================================================================
41 44 A reconciliation of the statutory federal income tax rate and the effective tax rate follows:
1996 1995 1994 - --------------------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% Effect of: State and local taxes 4.3 4.2 4.2 Investment vehicles (2.9) (2.6) (2.0) Other, net 2.6 0.4 0.3 - --------------------------------------------------------------------------------------- Effective tax rate 39.0% 37.0% 37.5% =======================================================================================
The provision includes estimated taxes payable on that portion of retained earnings of foreign subsidiaries expected to be received by the Company. No provision was made with respect to $9,063 of retained earnings at December 31, 1996 that have been invested by foreign subsidiaries. It is not practicable to estimate the amount of unrecognized deferred tax liability for the undistributed foreign earnings. Included in the Company's deferred tax assets are valuation reserves of $19,158, $17,784 and $14,021 at December 31, 1996, 1995 and 1994, respectively, resulting from the uncertainty as to future recognition of certain foreign net operating losses and other foreign assets. NOTE 15--SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
1996 - ---------------------------------------------------------------------- NET NET GROSS NET INCOME QUARTER SALES PROFIT INCOME PER SHARE - ---------------------------------------------------------------------- 1ST $ 857,771 $ 337,493 $ 19,593 $ .12 2ND 1,145,254 469,981 81,902 .48 3RD 1,171,010 492,237 88,550 .51 4TH 958,844 427,990 39,112 .23
Net income during the fourth quarter decreased by $1,176 (no per share effect) due to net before-tax adjustments of $1,809. Cost of goods sold decreased by a net of $9,516 ($6,185 after-tax, $.04 per share) as a result of physical inventory adjustments of $17,380 ($11,297 after-tax, $.07 per share) which were partially offset by provisions for the closing costs associated with certain operations of $7,560 ($4,914 after-tax, $.03 per share) and other year-end adjustments of $304 ($198 after-tax, no per share effect). Administrative expenses were reduced by $5,623 ($3,655 after-tax, $.02 per share) due to other year-end adjustments. Other costs and expenses increased $16,948 ($11,017 after-tax, $.07 per share) due to the provision of $11,621 ($7,554 after-tax, $.05 per share) for environmental remediation-related matters at current, former and third-party sites and to the provision of $5,327 ($3,463 after-tax, $.02 per share) for the adjustment to net realizable value of certain net fixed assets.
1995 - --------------------------------------------------------------------- Net Net Gross Net Income Quarter Sales Profit Income per Share - --------------------------------------------------------------------- 1st $ 716,796 $292,559 $ 18,733 $ .11 2nd 904,729 387,947 73,207 .43 3rd 911,387 390,498 74,948 .44 4th 740,907 325,732 33,766 .20
Year-end adjustments during the fourth quarter of $1,565 increased net income by $1,017 (no per share effect). Cost of goods sold decreased by a net of $8,268 ($5,374 after-tax, $.03 per share) as a result of physical inventory adjustments of $13,528 ($8,793 after-tax, $.05 per share) which were 42 45 partially offset by certain provisions for the disposition and termination of operations of $5,260 ($3,419 after-tax, $.02 per share). Administrative expenses were increased by $60 ($39 after-tax, no per share effect) due to other year-end adjustments. Other costs and expenses increased $6,643 ($4,318 after-tax, $.03 per share) due to the provisions for environmental-related matters at certain current, former and third-party sites of $7,136 ($4,638 after-tax, $.03 per share) which were partially offset by reductions to prior accruals for the disposition and termination of operations of $493 ($320 after-tax, no per share effect). NOTE 16 -- SUBSEQUENT EVENTS Effective January 7, 1997, the Company acquired all outstanding shares of stock of Thompson Minwax Holding Corp. (Thompson Minwax) pursuant to a definitive stock purchase agreement dated November 22, 1996 among the Company, Silver Acquisition Corp. (a wholly-owned subsidiary of the Company) and Forstman Little & Co. and its affiliates. The total amount of funds required to acquire the shares and pay off certain indebtedness of Thompson Minwax was approximately $830 million, subject to adjustment based on the closing date shareholders' equity of Thompson Minwax. The acquisition was financed with proceeds from the Company's commercial paper program. Effective January 3, 1997, the Company increased the aggregate principal amount of unsecured short-term notes which can be issued under this program to $1,450,000. The Company's commercial paper program is supported by the following new revolving credit agreements dated January 3, 1997: (1) a 364-day revolving credit agreement with a group of 30 banks, under which the Company may borrow up to $290,000; and (2) a five-year revolving credit agreement with the same group of 30 banks, under which the Company may borrow up to $1,160,000. Thompson Minwax is a major producer and marketer in the United States of interior stains and varnishes under the Minwax(R) brand name, exterior water sealers and stains under the Thompson's(R) brand name, finishing and enamel coating products under the Formby's(R) and Red Devil(R) brand names, and high-performance specialty lubricants under the Tri-Flow(TM) brand name. Ronseal Limited, a subsidiary of Thompson Minwax, is a major producer and seller of interior and exterior stains in Ireland and the United Kingdom under the Ronseal(TM) brand name. The acquisition will be accounted for under the purchase method of accounting, and the results of operations of Thompson Minwax will be included in the results of operations of the Company beginning in 1997. The annual sales of Thompson Minwax during 1996 were approximately $364,000. On February 10, 1997, the Company issued $400,000 of debt securities under its shelf registration with the Securities and Exchange Commission consisting of $100,000 of 6.25% notes due February 1, 2000, $100,000 of 6.5% notes due February 1, 2002 and $200,000 of 6.85% notes due February 1, 2007. In addition, on February 10, 1997, the Company issued $150,000 of 7.375% debentures due February 1, 2027 and $150,000 of 7.45% debentures due February 1, 2097 in a private offering not registered under the Securities Act of 1933, as amended. Each of the notes and debentures are senior unsecured securities of the Company. The net proceeds from the sale of such notes and debentures were used to refinance a portion of the Company's commercial paper debt outstanding. NOTE 17 -- STOCK SPLIT On January 29, 1997, the Company's board of directors declared a two-for-one common stock split to be effected in the form of a 100 percent stock dividend to be distributed on or about March 28, 1997 to holders of record on March 3, 1997. Accordingly, all numbers of common shares and per share data have been restated to reflect the stock split. The par value of the additional shares of common stock to be issued in connection with the stock split will be credited to common stock and a like amount charged to other capital in 1997. 43 46 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (SCHEDULE II) Changes in the allowance for doubtful accounts are as follows:
1996 1995 1994 - ------------------------------------------------------------------------------------------------ Beginning balance $ 15,154 $ 10,820 $ 8,589 Bad debt expense 19,095 13,793 11,801 Net uncollectible accounts written off (11,618) (9,459) (9,570) - ------------------------------------------------------------------------------------------------ Ending balance $ 22,631 $ 15,154 $ 10,820 ================================================================================================
Activity related to other asset reserves:
1996 1995 1994 - ----------------------------------------------------------------------------------------------- Beginning balance $ 83,897 $ 80,853 $ 54,079 Charges to expense 28,838 15,672 20,850 Other additions (deductions) (814) (12,628) 5,924 - ----------------------------------------------------------------------------------------------- Ending balance $ 111,921 $ 83,897 $ 80,853 ===============================================================================================
Charges to expense consist primarily of amortization of goodwill and intangibles and, in 1994, adjustments to reduce certain assets to their estimated net realizable values. Other additions (deductions) consist primarily of actual costs incurred and balance sheet reclassifications and, in 1995, removal of fully-amortized items. 44 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cleveland, and State of Ohio, on the 12th day of March, 1997. THE SHERWIN-WILLIAMS COMPANY By: /s/ L. E. STELLATO ------------------------------------ L. E. Stellato, Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities indicated on March 12, 1997.
SIGNATURE --------- * J. G. BREEN Chairman and Chief Executive Officer, - ------------------------------------------------- Director (Principal Executive Officer) J. G. Breen * T. A. COMMES President and Chief Operating Officer, - ------------------------------------------------- Director T. A. Commes * L. J. PITORAK Senior Vice President -- Finance, - ------------------------------------------------- Treasurer and Chief Financial Officer L. J. Pitorak (Principal Financial Officer) * J. L. AULT Vice President -- Corporate Controller - ------------------------------------------------- (Principal Accounting Officer) J. L. Ault * J. M. BIGGAR Director - ------------------------------------------------- J. M. Biggar * D. E. COLLINS Director - ------------------------------------------------- D. E. Collins * D. E. EVANS Director - ------------------------------------------------- D. E. Evans * R. W. MAHONEY Director - ------------------------------------------------- R. W. Mahoney * W. G. MITCHELL Director - ------------------------------------------------- W. G. Mitchell * A. M. MIXON, III Director - ------------------------------------------------- A. M. Mixon, III
45 48
SIGNATURE --------- * C. E. MOLL Director - ------------------------------------------------- C. E. Moll * H. O. PETRAUSKAS Director - ------------------------------------------------- H. O. Petrauskas * R. K. SMUCKER Director - ------------------------------------------------- R. K. Smucker
* The undersigned, by signing his name hereto, does sign this report on behalf of the designated Officers and Directors of The Sherwin-Williams Company pursuant to Powers of Attorney executed on behalf of each such Officer and Director. By: /s/ L. E. STELLATO March 12, 1997 --------------------------------------------- L. E. Stellato, Attorney-in-fact
46 49 EXHIBIT INDEX 3. (a) Amended Articles of Incorporation, as amended April 28, 1993, filed as Exhibit 4(a) to Form S-8 Registration Statement No. 33-52227, dated February 10, 1994, and incorporated herein by reference. (b) Regulations of the Company, as amended, dated April 27, 1988, filed as Exhibit 4(b) to Post-Effective Amendment No. 1, dated April 29, 1988, to Form S-8 Registration Statement Number 2-91401, and incorporated herein by reference. 4. (a) Indenture between the Company and Chemical Bank, as Trustee, dated as of February 1, 1996, filed as Exhibit 4(a) to Form S-3 Registration Statement Number 333-01093, dated February 20, 1996 (also deemed to be filed as Exhibit 4(b) to Form S-3 Registration Statement Number 33-22705, dated June 24, 1988), and incorporated herein by reference. (b) 364-Day Revolving Credit Agreement, dated January 3, 1997, between the Company, Texas Commerce Bank National Association, as Administrative Agent, The Chase Manhattan Bank, as Competitive Advance Facility Agent, and the financial institutions which are signatories thereto, filed as Exhibit 99.2 to Form 8-K, dated January 7, 1997, and incorporated herein by reference. (c) Five Year Revolving Credit Agreement, dated January 3, 1997, between the Company, Texas Commerce Bank National Association, as Administrative Agent, The Chase Manhattan Bank, as Competitive Advance Facility Agent, and the financial institutions which are signatories thereto, filed as Exhibit 99.1 to Form 8-K, dated January 7, 1997, and incorporated herein by reference. (d) Term Loan/Bankers' Acceptance Agreement, by and between the Company and SunTrust Bank, Atlanta, dated January 9, 1996, filed as Exhibit 4(e) to Form 10-K, dated March 13, 1996, and incorporated herein by reference. (e) Term Loan/Bankers' Acceptance Agreement, by and between the Company and SunTrust Bank, Atlanta, dated February 1, 1996, filed as Exhibit 4(f) to Form 10-K, dated March 13, 1996, and incorporated herein by reference. (f) Indenture between Sherwin-Williams Development Corporation, as issuer, the Company, as guarantor, and Harris Trust and Savings Bank, as Trustee, dated June 15, 1986, filed as Exhibit 4(b) to Form S-3 Registration Statement Number 33-6626, dated June 20, 1986, and incorporated herein by reference. (g) Rights Agreement between the Company and Ameritrust Company National Association, dated January 25, 1989, filed as Exhibit 2.1 to Form 8-A, dated January 26, 1989, and incorporated herein by reference. 10. *(a) Form of Director and Officer Indemnification Agreement filed as Exhibit 28(a) to Form S-3 Registration Statement Number 33-22705, dated June 24, 1988, and incorporated herein by reference. *(b) Employment Agreements with J.G. Breen, T.A. Commes and C.G. Ivy filed as Exhibit 28(b) to Form S-3 Registration Statement Number 33-22705, dated June 24, 1988, and incorporated herein by reference. *(c) Amendments to Employment Agreements with J.G. Breen, T.A. Commes and C.G. Ivy filed as Exhibit 10(c) to Form 10-K, dated March 13, 1996, and incorporated herein by reference. *(d) Form of Severance Pay Agreements filed as Exhibit 10(c) to Form 10-K, dated March 13, 1990, and incorporated herein by reference. *(e) The Sherwin-Williams Company Deferred Compensation Savings Plan filed as Exhibit 10(d) to Form 10-K, dated March 13, 1992, and incorporated herein by reference.
47 50 *(f) Amendment No. 1 to The Sherwin-Williams Company Deferred Compensation Plan filed as Exhibit 10(f) to Form 10-K, dated March 13, 1996, and incorporated herein by reference. *(g) The Sherwin-Williams Company Key Management Deferred Compensation Plan (1994 Amendment and Restatement) filed as Exhibit 10(g) to Form 10-K, dated March 13, 1996, and incorporated herein by reference. *(h) Form of Executive Disability Income Plan filed as Exhibit 10(g) to Form 10-K, dated March 13, 1992, and incorporated herein by reference. *(i) Form of Executive Life Insurance Plan filed as Exhibit 10(h) to Form 10-K, dated March 13, 1992, and incorporated herein by reference. *(j) Form of Directors' Deferred Fee Plan filed as Exhibit 10(i) to Form 10-K, dated March 13, 1992, and incorporated herein by reference. (k) License Agreement, dated February 1, 1991, as amended, between the Company and SWIMC, Inc. filed as Exhibit 10(j) to Form 10-K, dated March 15, 1993, and incorporated herein by reference. (l) License Agreement, dated February 1, 1991, as amended, between the Company and DIMC, Inc. filed as Exhibit 10(k) to Form 10-K, dated March 15, 1993, and incorporated herein by reference. *(m) Form of The Sherwin-Williams Company Management Compensation Program filed as Exhibit 10(l) to Form 10-K, dated March 15, 1995, and incorporated herein by reference. *(n) The Sherwin-Williams Company 1994 Stock Plan, as amended and restated in its entirety, effective January 29, 1997 (filed herewith). (o) Agreement and Plan of Merger, dated as of November 4, 1995, among the Company, SWACQ, Inc. and Pratt & Lambert United, Inc., filed as Exhibit(c)(1) to the Tender Offer Statement on Schedule 14D-1/Schedule 13D, filed November 9, 1995, as amended, and incorporated herein by reference. (p) Stock Purchase Agreement, dated November 22, 1996, among the Company, Silver Acquisition Corp., Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership -- V, L.P., MTF Partners, L.P. and certain individual shareholders who are signatories thereto, filed as Exhibit 2 to Form 8-K, dated January 7, 1997, and incorporated herein by reference. *(q) Split-Dollar Agreement, dated March 25, 1996, among the Company, National City Bank and John G. and Mary Breen (filed herewith). *(r) The Sherwin-Williams Company Estate Protection Plan Trust, dated November 15, 1996, between the Company and National City Bank (filed herewith). 11. Computation of Net Income Per Share -- Page 49. 21. Subsidiaries -- Page 50. 23. Consent of Independent Auditors -- Page 51. 24. Powers of Attorney (filed herewith). 27. Financial Data Schedule. *Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
48 EX-10.N 2 EXHIBIT 10(N) 1 EXHIBIT 10(n) THE SHERWIN-WILLIAMS COMPANY 1994 STOCK PLAN (AMENDED AND RESTATED JANUARY 29, 1997) The Sherwin-Williams Company 1994 Stock Plan (the "Plan") is amended and restated effective as of January 29, 1997. The Plan was established effective as of 12:00:01 a.m. on February 16, 1994. The purpose of the Plan is to attract and retain key executive, managerial, technical and professional personnel for The Sherwin-Williams Company and its subsidiaries by providing incentives and rewards for superior performance by such personnel. ARTICLE I DEFINITIONS As used herein, the following terms shall have the following respective meanings unless the context clearly indicates otherwise: 1.01 Appreciation Right. A right to receive from the Company, upon surrender of the related stock option, an amount equal to the Spread in accordance with Article IV. 1.02 Board of Directors. The Board of Directors of the Company. 1.03 Code. The Internal Revenue Code of 1986, as the same has been or may be amended from time-to-time. 1.04 Committee. The Compensation and Management Development Committee of the Board of Directors or such other committee composed of not less than three (3) non-employee directors appointed by the Board of Directors. 1.05 Common Stock. Common Stock of the Company or any security into which such Common Stock may be changed by reason of any transaction or event of the type described in Article VIII. 1.06 Company. The Sherwin-Williams Company, or its corporate successor or successors. 1.07 Date of Grant. The date specified by the Board of Directors on which a grant of Option Rights or Appreciation Rights or a grant or sale of Restricted Stock shall become effective 1 2 (which date shall not be earlier than the date on which the Board of Directors takes action with respect thereto). 1.08 Eligible Employees. Persons who are selected by the Board of Directors and who are, at the time such persons are selected, officers (including officers who are members of the Board of Directors) or other key employees of the Company or any of its subsidiaries. 1.09 Fair Market Value. The average between the highest and the lowest quoted selling price of the Company's Common Stock on the New York Stock Exchange or any successor exchange. 1.10 ISO. An "incentive stock option" within the meaning of section 422 of the Code. 1.11 Option Right. The right to purchase a share of Common Stock upon exercise of an option granted pursuant to Article III. 1.12 Participant. An Eligible Employee named in an agreement evidencing an outstanding Option Right, Appreciation Right, sale or grant of Restricted Stock or stock option granted under any stock option plan heretofore or hereafter approved by the shareholders of the Company. 1.13 Plan. The Sherwin-Williams Company 1994 Stock Plan, as the same may be amended from time-to-time. 1.14 Restricted Stock. Shares of Common Stock granted or sold pursuant to Article V as to which neither the substantial risk of forfeiture nor the prohibition or restriction on transfer referenced to therein has lapsed, terminated or been cancelled. 1.15 Section 16. Section 16 of the Securities Exchange Act of 1934, as the same has been and may be amended from time-to-time. 1.16 Spread. The excess of the Fair Market Value per share of Common Stock on the date when an Appreciation Right is exercised over the option price provided for in the related stock option. 1.17 Subsidiary. Any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Option Right, Appreciation Right or the grant or sale of Restricted Stock, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 1.18 Tax Date. The date upon which the tax is first determinable. 2 3 ARTICLE II COMMON STOCK AVAILABLE 2.01 Number of Shares. The shares of Common Stock which may be (a) sold upon the exercise of Option Rights, (b) delivered upon the exercise of Appreciation Rights, or (c) awarded or sold as Restricted Stock and released from substantial risks of forfeiture thereof shall not exceed in the aggregate 2,000,000 shares plus the number of shares of Common Stock authorized pursuant to the 1984 Stock Plan which are not granted pursuant to the 1984 Stock Plan as of the expiration thereof, all subject to adjustment as provided in Articles VII and VIII. Such shares may be shares of original issuance or treasury shares or a combination of the foregoing. 2.02 Reuse of Shares. If an Option Right or portion thereof shall expire or terminate for any reason without having been exercised in full, or if the rights of a Participant in Restricted Stock shall terminate prior to the lapse of the substantial risk of forfeiture relating thereto, the shares covered by such Option Right or Restricted Stock grant not transferred to the Participant shall be available for future grants of Option Rights and/or Restricted Stock. In the event of a cancellation or amendment of Option Rights or Restricted Stock grants, the Board of Directors may authorize the granting of new Option Rights or Restricted Stock (which may or may not cover the same number of shares which had been the subject of the prior grant) in such manner, at such price and subject to the same terms, conditions and discretions as, under the Plan, would have been applicable had the cancelled Option Rights or Restricted Stock not been granted. ARTICLE III OPTION RIGHTS 3.01 Authorization and Terms. The Board of Directors may, from time-to-time and upon such terms and conditions as it may determine, consistent with the terms of the Plan, authorize the granting of options to Eligible Employees to purchase shares of Common Stock. Each such grant may utilize any or all of the authorizations and shall be subject to all of the applicable limitations set forth in the Plan, including the following: (A) Each grant shall specify the number of shares of Common Stock to which it pertains; (B) Each grant shall specify an option price per share equal to the Fair Market Value per share on the Date of Grant, and that such option price shall be payable in full at the time of exercise of the option either (i) in cash, (ii) by exchanging for the shares to be issued hereunder pursuant to the exercise of the option previously acquired shares of the Company's Common Stock held for such period of time, if any, as the Board of Directors may require and reflect in the stock option certificate (valued at an amount equal to the Fair Market Value of such stock on the date of exercise), or (iii) by a combination of the payment methods specified in clauses (i) and (ii) hereof. The proceeds of sale of 3 4 Common Stock subject to Option Rights are to be added to the general funds of the Company or to the shares of the Common Stock held in treasury and used for the Company's corporate purposes as the Board of Directors shall determine; (C) Successive grants may be made to the same Eligible Employee whether or not any Option Rights previously granted to such Eligible Employee remain unexercised; (D) Each grant shall specify the period or periods of continuous employment by the Participant with the Company or any Subsidiary which is necessary before the Option Rights or installments thereof will become exercisable; (E) The Option Rights may be either (i) options which are intended to qualify under particular provisions of the Code, as in effect from time-to-time, including, but not limited to, ISOs, (ii) options which are not intended to so qualify or (iii) any combination of separate grants of both (i) and (ii) above; (F) The aggregate Fair Market Value of the stock (determined as of the time the option with respect to such stock is granted) for which any Eligible Employee may be granted options which are intended to qualify as ISOs and which are exercisable for the first time by such Participants during any calendar year (under all plans of the Company and its parent and Subsidiary corporations, if any) shall not exceed $100,000; (G) No Option Right shall be exercisable more than ten years from the Date of Grant; (H) Each grant of Option Rights shall be evidenced by an agreement executed on behalf of the Company by an officer and delivered to and accepted by the Eligible Employee and containing such terms and provisions, consistent with the Plan, as the Board of Directors may approve; and (I) The maximum number of shares for which Option Rights may be granted to any Eligible Employee during any calendar year shall not exceed 500,000. ARTICLE IV APPRECIATION RIGHTS 4.01 Generally. The Board of Directors may from time-to-time grant Appreciation Rights in respect of any or all stock options heretofore or hereafter granted (including stock options simultaneously granted) pursuant to any stock option plan or employment agreement of the Company now or hereafter in effect, whether or not such stock options are at such time exercisable, to the extent that such stock options at such time have not been exercised and have not been terminated. The Board of Directors may define the terms and provisions of such Appreciation Rights, subject to the limitations and provisions of the Plan. The amount which may 4 5 be due the Participant at the time of the exercise of an Appreciation Right may be paid by the Company in whole shares of Common Stock (taken at their fair market value at the time of exercise), in cash or a combination thereof, as the Board of Directors shall determine. 4.02 Exercise of Appreciation Rights. An Appreciation Right may be exercised at any time when the related stock option may be exercised by the surrender to the Company, unexercised, of the related stock option. Shares covered by stock options so surrendered shall not be available for the granting of further stock options under any stock option plan of the Company or a Subsidiary, anything in such plan to the contrary notwithstanding. 4.03 Limitation on Payments. The amount payable on the exercise of any Appreciation Rights may not exceed 100% (or such lesser percentage as the Board of Directors may determine) of the excess of (i) the Fair Market Value of the shares of Common Stock covered by the related option as determined on the date such Appreciation Right is exercised over (ii) the aggregate option price provided for in the related stock option. 4.04 Termination of Appreciation Right. An Appreciation Right shall terminate and may no longer be exercised upon the earlier of (i) exercise or termination of the related stock option or (ii) any termination date specified by the Board of Directors at the time of grant of such Appreciation Right. 4.05 Limitation on Number of Appreciation Rights. The maximum number of shares for which Appreciation Rights may be granted to any Eligible Employee during any calendar year shall not exceed 500,000. ARTICLE V RESTRICTED STOCK 5.01 Authorization and Terms. The Board of Directors may, from time-to-time and upon such terms and conditions as it may determine, authorize the granting or sale to Eligible Employees of Restricted Stock. Each grant or sale may utilize any or all of the authorizations and shall be subject to all of the following limitations: (A) Each such grant or sale shall constitute an immediate transfer of the ownership of shares of Common Stock to the Participant in consideration of the performance of services and shall entitle such Participant to voting, dividend and other ownership rights, as the Board of Directors may determine, subject, however, to a substantial risk of forfeiture and restrictions on transfer as the Board of Directors may determine; (B) Each such grant or sale may be made without additional consideration or in consideration of a payment by such Participant that is less than the Fair Market Value per share at the Date of Grant; 5 6 (C) Each such grant or sale shall provide that the shares of Restricted Stock covered by such grant or sale are subject to a "substantial risk of forfeiture" within the meaning of Section 83 of the Code and the regulations thereunder; (D) Each such grant or sale shall provide that during the period for which the substantial risk of forfeiture is to continue, the transferability of the Restricted Stock shall be prohibited or restricted in the manner and to the extent prescribed by the Board of Directors at the Date of Grant; and (E) Each grant or sale of Restricted Stock shall be evidenced by an agreement executed on behalf of the Company by an officer and delivered to and accepted by the Participant and shall contain such terms and provisions, consistent with the Plan, as the Board of Directors may approve. (F) Each grant or sale shall be subject to a vesting requirement. The percentage of the number of shares of Restricted Stock granted to any Participant that such Participant shall be entitled to receive without restriction shall be based upon a comparison of the average return on average equity of the Company and a group of other companies. The number of shares of Restricted Stock which a Participant shall be entitled to receive without restriction shall be determined in accordance with the following table:
Average Return on Average Equity Percentile Ranking of the Company Compared Percentage of to Group of Other Companies Shares Vesting --------------------------- -------------- 80th to 100th Percentile ..................................... 100% 75th to 80th Percentile ...................................... 90% 70th to 75th Percentile ...................................... 80% 65th to 70th Percentile ...................................... 70% 60th to 65th Percentile ...................................... 60% 55th to 60th Percentile ...................................... 50% 50th to 55th Percentile ...................................... 40% Less than 50th Percentile .................................... 0%
The maximum number of shares of Restricted Stock that may be granted to any Eligible Employee during any calendar year shall not exceed 500,000. 6 7 ARTICLE VI ADMINISTRATION OF THE PLAN 6.01 Generally. The Plan shall be administered by the Board of Directors, which may from time-to-time delegate all or any part of its authority under the Plan to a Committee. The members of the Committee shall not be eligible and shall not have been eligible for a period of at least one year prior to their appointment, to participate in the Plan. A majority of the Board of Directors or the Committee, if applicable, shall constitute a quorum, and the action of the members present at any meeting at which a quorum is present, or acts unanimously approved in writing, shall be the acts of the Board of Directors or the Committee, as applicable. No Restricted Stock, Option Right or Appreciation Right shall be granted or sold under the Plan to any member of the Committee so long as his membership continues. 6.02 Interpretation and Construction. The interpretation and construction by the Board of Directors of any provision of the Plan or of any agreement, notification or document evidencing the grant of Restricted Stock, Option Rights or Appreciation Rights and any determination by the Board of Directors pursuant to any provision of the Plan or of any such agreement, notification or document, made in good faith, shall be final and conclusive. No member of the Board of Directors shall be liable for any such action or determination made in good faith. ARTICLE VII AMENDMENT AND TERMINATION 7.01 Amendment of the Plan. The Plan may be amended from time-to-time by the Board of Directors without further approval by the shareholders of the Company unless such amendment (i) increases the maximum number of shares specified in Article II (except that adjustments authorized by Section 8.02 shall not be limited by this provision), (ii) changes the definition of "Eligible Employees" or (iii) causes Rule 16b-3 issued under the Securities Exchange Act of 1934 (or any successor rule to the same effect) to cease to be applicable to the Plan. 7.02 Amendment of the Agreements. The Board of Directors may cancel or amend any agreement evidencing Restricted Stock, Option Rights or Appreciation Rights granted under the Plan provided that the terms and conditions of each such agreement as amended are not inconsistent with the Plan. 7.03 Automatic Termination. The Plan will terminate at midnight on February 16, 2003; provided, however, that Option Rights and Appreciation Rights granted on or before that date may extend beyond that date and restrictions imposed on Restricted Stock transferred on or before that date may extend beyond such date. 7 8 ARTICLE VIII MISCELLANEOUS 8.01 Transferability. No Option Right or Appreciation Right shall be transferable by a Participant other than by will or the laws of descent and distribution. Option Rights and Appreciation Rights shall be exercisable during the Participant's lifetime only by the Participant. No right or interest of any Participant granted under the Plan shall be subject to alienation, anticipation, encumbrance, garnishment, attachment, any lien, obligation or liability of such Participant, or execution or levy of any kind, voluntary or involuntary, except as provided herein or required by law. 8.02 Adjustments. The Board of Directors may make or provide for such adjustments in the exercise price, sale price and the number or kind of shares of the Company's Common Stock or other securities covered by outstanding Option Rights, Appreciation Rights or Restricted Stock grants as such Board of Directors in its sole discretion, exercised in good faith, may determine is equitably required to prevent dilution or enlargement of the rights of Participants that would otherwise result from (i) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (ii) any merger, consolidation, separation, reorganization or partial or complete liquidation, or (iii) any other corporate transaction or event having an effect similar to any of the foregoing. The Board of Directors may also make or provide for such adjustments in the number or kind or shares of the Company's Common Stock or other securities which may be sold or transferred under the Plan and in the maximum number of shares that may be purchased or received by any person, as such Board of Directors in its sole discretion, exercised in good faith, may determine is appropriate to reflect any event of the type described in clauses (i) and/or (ii) of the preceding sentence. 8.03 Fractional Shares. The Company shall not be required to sell or transfer any fractional share of Common Stock pursuant to the Plan. The Board of Directors may provide for the elimination of fractions or for the settlement of fractions in cash. 8.04 Withholding Taxes. The Company shall have the right to deduct from any transfer of shares or other payment under this Plan an amount equal to the Federal, state and local income taxes and employment taxes required to be withheld by it with respect to such transfer and payment and, if the cash portion of any such payment is less than the amount of taxes required to be withheld, to require the Participant or other person receiving such transfer or payment, to pay to the Company the balance of such taxes so required to be withheld. Notwithstanding the foregoing, when a Participant is required to pay to the Company an amount required to be withheld under applicable income and employment tax laws, the Participant may elect to satisfy the obligation, in whole or in part, by electing to have withheld, from the shares required to be delivered to the Participant, shares of Common Stock having a value equal to the amount required to be withheld (except in the case of Restricted Stock where an election under Section 83(b) of the Code has been made), or by delivering to the Company other shares of Common Stock held by such Participant. The shares used for tax withholding settlement will be valued at an amount 8 9 equal to the Fair Market Value of such Common Stock on the Tax Date. Election by a Participant to have shares withheld or to deliver other shares of Common Stock for this purpose will be subject to the following restrictions: (i) such election must be made prior to the Tax Date, (ii) such election will be irrevocable, and (iii) such election will be subject to the disapproval of the Board of Directors. 8.05 Not an Employment Contract. This Plan shall not confer upon any Eligible Employee or Participant any right with respect to continuance of employment with the Company or any Subsidiary, nor shall it interfere in any way with any right such Eligible Employee, Participant, the Company or any Subsidiary would otherwise have to terminate such Participant or Eligible Employee's employment at any time. 8.06 Invalidity of Provisions. Should any part of the Plan for any reason be declared by any court of competent jurisdiction to be invalid, such decision shall not affect the validity of any remaining portion, which remaining portion shall continue in full force and effect as if the Plan had been adopted with the invalid portion hereof eliminated, it being the intention of the Company that it would have adopted the remaining portion of the Plan without including any such part, parts or portion which may for any reason be hereafter declared invalid. 8.07 Effective Date. The Plan became effective at 12:00:01 a.m. on February 16, 1994 following its approval at the April 28, 1993 Annual Meeting of Shareholders of the Company by the affirmative vote of the holders of a majority of the shares of Common Stock present, in person or by proxy, and entitled to vote thereat. The Plan shall be deemed to have been adopted on the date of such meeting. 9 EX-10.Q 3 EXHIBIT 10(Q) 1 EXHIBIT 10(q) SPLIT-DOLLAR AGREEMENT THIS AGREEMENT made and entered into this 25th day of March, 1996, by and among The Sherwin Williams Company, an Ohio corporation, with principal offices and place of business in the State of Ohio (hereinafter referred to as the "Corporation"), John G. Breen, an individual residing in the State of Ohio (hereinafter referred to as the "Employee"), and National City Bank, Trustee under Trust Agreement dated March 2, 1996, with John G. Breen and Mary J. Breen as Grantors (hereinafter referred to as the "Owner"), WITNESSETH THAT: WHEREAS, the Employee is employed by the Corporation; and WHEREAS, the Employee wishes to provide life insurance protection for his family, under policies of life insurance (hereinafter referred to jointly as the "Policies" and individually as a "Policy"), insuring his life and the life of his wife (hereinafter jointly referred to as the "Insureds"), which Policies are described in Exhibit A attached hereto and by this reference made a part hereof, and which are being issued by The Guardian Life Insurance Company of America (hereinafter referred to as the "Insurer"); and WHEREAS, the Corporation is willing to pay a portion of the premiums due on the Policies as an additional employment benefit for the Employee, on the terms and conditions hereinafter set forth; and WHEREAS, Owner is the owner of the Policies and, as such, possesses all incidents of ownership in and to the Policies; and 2 WHEREAS, the Corporation wishes to have the Policies collaterally assigned to it by the Owner, in order to secure the repayment of the amounts which it will pay toward the premiums on the Policies; and NOW, THEREFORE, in consideration of the premises and of the mutual promises contained herein, the parties hereto agree as follows: 1. PURCHASE OF POLICIES. The Owner will contemporaneously purchase the Policies from the Insurer in the total aggregate face amount of $12,000,000. The parties hereto agree that they will take all necessary action to cause the Insurer to issue the Policies, and shall take any further action which may be necessary to cause the Policies to conform to the provisions of this Agreement. The parties hereto agree that the Policies shall be subject to the terms and conditions of this Agreement and of the collateral assignments filed with the Insurer relating to the Policies. 2. OWNERSHIP OF POLICIES. The Owner shall be the sole and absolute owner of the Policies, and may exercise all ownership rights granted to the owner thereof by the terms of the Policies, except as may otherwise be provided herein. 3. POLICY DIVIDENDS. Any dividend declared on either Policy shall be applied to purchase paid-up additional insurance on the lives of the Insureds. The parties hereto agree that the dividend election provisions of the Policies shall conform to the provisions hereof. 4. PAYMENT OF PREMIUMS. On or before the due date of each Policy premium, or within the grace period provided therein, the Corporation shall pay the full amount of the premium to the Insurer, and shall, upon request, promptly furnish the Employee 2 3 and the Owner notice of timely payment of such premium. The Corporation shall annually furnish the Employee a statement of the amount of income reportable by the Employee for federal and state income tax purposes, if any, as a result of the insurance protection provided the Owner as the beneficiary of the Policies. 5. COLLATERAL ASSIGNMENT. To secure the repayment to the Corporation of the amount of the premiums on the Policies paid by it hereunder, the Owner has, contemporaneously herewith, assigned the Policies to the Corporation as collateral, under the form used by the Insurer for such assignments. The collateral assignments of the Policies to the Corporation hereunder shall not be terminated, altered or amended by the Owner, without the express written consent of the Corporation. The parties hereto agree to take all action necessary to cause such collateral assignments to conform to the provisions of this Agreement. 6. LIMITATIONS ON OWNER'S RIGHTS IN POLICIES. Except as otherwise provided herein, the Owner shall not sell, assign, transfer, borrow against, surrender or cancel either Policy, change the beneficiary designation provision thereof, nor terminate the dividend election thereof without, in any such case, the express written consent of the Corporation. 7. COLLECTION OF DEATH PROCEEDS. a. Upon the death of the survivor of the Insureds, the Corporation and the Owner shall cooperate to take whatever action is necessary to collect the death benefit provided under the Policies; when such benefits have been collected and paid as provided herein, this Agreement shall thereupon terminate. b. Upon the death of the survivor of the Insureds, the Corporation shall have the unqualified right to receive a portion of the death benefit of each Policy equal to 3 4 the total amount of the premiums paid by it hereunder with respect to such Policy (which amount shall be calculated subject to the provisions of paragraph c below), reduced by any outstanding indebtedness which was incurred by the Corporation and secured by such Policy, including any interest due on such indebtedness. The balance of the death benefit provided under such Policy, if any, shall be paid directly to the Owner in the manner and in the amount or amounts provided in the beneficiary designation provision of such Policy. In no event shall the amount payable to the Corporation hereunder with respect to any one Policy exceed the death benefit of such Policy payable as a result of the maturity of such Policy as a death claim. No amount shall be paid from such death benefit to the Owner until the full amount due the Corporation hereunder has been paid. The parties hereto agree that the beneficiary designation provision of the Policies shall conform to the provisions hereof. c. For purposes of calculating the total amount of premiums paid by the Corporation hereunder with respect to a Policy, the Owner shall be deemed to have contributed toward each annual premium payment due with respect to such Policy (and the Corporation shall not be deemed to have contributed) an amount equal to the annual cost of current life insurance protection on the joint lives of the Insureds, measured by the U.S. Life Table 38, while both are alive and thereafter measured by the lower of the PS 58 rate, set forth in Revenue Ruling 55-747 (or the corresponding applicable provision of any future Revenue Ruling), or the Insurer's current published premium rate for annually renewable term insurance for standard risks. d. Notwithstanding any provision hereof to the contrary, in the event that, for any reason whatsoever, no death benefit is payable under a Policy upon the 4 5 death of the survivor of the Insureds and in lieu thereof the Insurer refunds all or any part of the premiums paid for such Policy, the Corporation and the Owner shall have the unqualified right to share such premiums based on their respective cumulative contributions thereto. 8. TERMINATION OF THE AGREEMENT DURING THE LIFETIME OF THE INSUREDS. This Agreement shall terminate, while either of the Insureds is alive, upon the mutual written consent of the parties. 9. DISPOSITION OF THE POLICIES ON TERMINATION OF THE AGREEMENT DURING THE LIFETIME OF THE INSUREDS. a. For sixty (60) days after the date of the termination of this Agreement during the lifetime of the Insureds, the Owner shall have the option of obtaining the release of the collateral assignment of either or both of the Policies to the Corporation. To obtain such release with respect to a Policy, the Owner shall repay to the Corporation the greater of (1) the then cash surrender value of such Policy, or (2) the total amount of the premium payments made by the Corporation hereunder with respect to such Policy (which amount shall be calculated subject to the provisions of paragraph c below), less, in either case, any indebtedness secured by such Policy which was incurred by the Corporation and remains outstanding as of the date of such termination, including any interest due on such indebtedness. Upon receipt of such amount, the Corporation shall release the collateral assignment of such Policy, by the execution and delivery of an appropriate instrument of release. b. If the Owner fails to exercise such option within such sixty (60) day period with respect to one or both of the Policies, then, at the request of the Corporation, the Owner shall execute any document or documents required by the Insurer to transfer to the 5 6 Corporation the interest of the Owner in those Policies for which a release of the collateral assignment was not obtained. Alternatively, the Corporation may enforce its right to be repaid the amount of the premiums on any such Policy paid by it (which amount shall be calculated subject to the provisions of paragraph c below) from the cash surrender value of such Policy under the collateral assignment of such Policy; provided that in the event the cash surrender value of such Policy exceeds the amount due the Corporation, such excess shall be paid to the Owner. Thereafter, neither the Owner nor the Owner's successors, assigns or beneficiaries shall have any further interest in and to any such Policy, either under the terms thereof or under this Agreement. c. For purposes of calculating the total amount of premiums paid by the Corporation hereunder with respect to a Policy, the Owner shall be deemed to have contributed toward each annual premium payment due with respect to such Policy (and the Corporation shall not be deemed to have contributed) an amount equal to the annual cost of current life insurance protection on the joint lives of the Insureds, measured by the U.S. Life Table 38, while both are alive and thereafter measured by the lower of the PS 58 rate, set forth in Revenue Ruling 55-747 (or the corresponding applicable provision of any future Revenue Ruling), or the Insurer's current published premium rate for annually renewable term insurance for standard risks. 10. INSURER NOT A PARTY. The Insurer shall be fully discharged from its obligations under the Policies by payment of the death benefit of the Policies to the beneficiary or beneficiaries named in the Policies, subject to the terms and conditions of the Policies. In no event shall the Insurer be considered a party to this Agreement, or any modification or 6 7 amendment hereof. No provision of this Agreement, nor of any modification or amendment hereof, shall in any way be construed as enlarging, changing, varying, or in any other way affecting the obligations of the Insurer as expressly provided in the Policies, except insofar as the provisions hereof are made a part of a Policy by the collateral assignment executed by the Owner and filed with the Insurer in connection herewith. 11. NAMED FIDUCIARY, DETERMINATION OF BENEFITS, CLAIMS PROCEDURE AND ADMINISTRATION. a. The Corporation is hereby designated as the named fiduciary under this Agreement. The named fiduciary shall have authority to control and manage the operation and administration of this Agreement, and it shall be responsible for establishing and carrying out a funding policy and method consistent with the objectives of this Agreement. b. As a participant in the Plan you are guaranteed certain rights and protection under the Employee Retirement Income Security Act of 1974. ERISA provides that all Plan participants shall be entitled to: (1) Examine, without charge, at the principal place of business of the Corporation, all documents filed by the Plan with the U.S. Department of Labor, such as annual reports and Plan descriptions; (2) Obtain copies of all non-confidential Plan documents and other Plan information upon written request to the Corporation. The Corporation may make a reasonable charge for the copies; and (3) File suit in a federal court if any materials requested are not received within 30 days of your written request, unless the materials were not sent due to 7 8 matters beyond the control of the Corporation. The court may require the Corporation to pay up to $100 a day until the materials are received. c. In addition to creating rights for Plan participants, ERISA also imposes obligations upon the persons responsible for the operation of the employee benefit plan. These persons are referred to as "fiduciaries" in the law. Fiduciaries must act solely in the interest of the Plan participants, and they must exercise prudence in the performance of their Plan duties. Fiduciaries who violate ERISA may be removed and required to make good any losses they have caused this Plan or the Corporation. d. If your claim for a benefit is denied in whole or in part, you must receive a written explanation of the reason for the denial. You have the right to have the Plan review and reconsider your claim. Under ERISA, there are steps you can take to enforce the above rights. e. Your employer may not fire or discriminate against you to prevent you from obtaining a benefit or exercising your rights under ERISA. f. If you have a claim for benefits which is denied or ignored, in whole or in part, you may file suit in a state or federal court. If the Corporation misuses the Plan's money, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor or file suit in a federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees if it finds your claim is frivolous or for such other reasons as the court may determine. 8 9 g. If you have any questions about your Plan, you should contact the Secretary Corporation. If you have any questions about this statement or about your rights under ERISA, you should contact the nearest Area Office of the U.S. Labor-Management Services Administration, Department of Labor. h. CLAIMS PROCEDURE. Any Participant who believes that he or she is entitled to a benefit under the Plan which he or she has not received because the Corporation has denied the benefit in whole or in part, may file with the Corporation a written claim specifying the basis of his or her complaint and the facts upon which he or she relies in making such claim. Such claim must be witnessed by the claimant or his or her authorized representative and shall be deemed filed when received by the Corporation. Unless such claim is allowed in total by the Corporation, the Corporation shall respond in writing to the claimant advising him or her of the total or partial denial of his or her claim. Such notice shall include: (1) The reasons for denial of the claim; (2) Reference to the provisions of the Plan upon which the denial of the claim was based; (3) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material and information is necessary; and (4) An explanation of the review procedure. Within six (6) months after the mailing of such notice of denial, the claimant can appeal such denial by filing with a special review committee appointed by the Corporation his or her written request for review of said claim. A special review committee shall consist of no less 9 10 than three (3) disinterest parties to the claimant. If an appeal is so filed within the six (6) month period, the special review committee shall conduct a full and fair review of such claim and mail to the claimant not later than sixty (60) days after receipt of a request for review a written decision of the matter based upon the facts and pertinent provisions of the Plan. Such decision shall state the reason for the decision as well as references to the pertinent Plan provisions in which the decision is based. During the full review, the claimant shall be given the opportunity to review documents that are pertinent to his or her claim and to submit issues and comments in writing to the special review committee, or, if he or she requests a hearing, to present his or her case in person or by an authorized representative at a hearing scheduled by the special review committee. In the event the claimant requests a hearing, the time period for the special review committee to tender a decision upon a claim shall be extended from sixty (60) to one hundred twenty (120) days after receipt of request for review. i. Notwithstanding any other provisions of this Plan, a Participant or Beneficiary, who has decision make or other administrative authority with respect to the Plan may not decide matters affecting his or her own benefits under the Plan as a Participant functioning in such capacity. j. Neither the establishment of the Plan or any modification thereof, or the creation of any fund or account, or the payment of any benefits shall be construed as giving to any Participant or other person any legal or equitable right against the Corporation or any officer or employee thereof, except as provided by law or by any Plan provisions. The Corporation does not in any way guarantee the Participant's benefits from loss or depreciation. In no event shall the Corporation's employees, officers, directors or stockholders be liable to 10 11 any person on account of any claim arising by reason of the provisions of the Plan or of any instrument or instruments implementing its provisions, or for the failure of any Participant, Beneficiary or other person to be entitled to any particular tax consequences with respect to the Plan, any contribution thereto or distribution therefrom. 12. AMENDMENT. This Agreement may not be amended, altered or modified, except by a written instrument signed by the parties hereto, or their respective successors or assigns, and may not be otherwise terminated except as provided herein. 13. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Corporation and its successors and assigns, and the Employee, the Owner, and their respective successors, assigns, heirs, executors, administrators and beneficiaries. 14. NOTICE. Any notice, consent or demand required or permitted to be given under the provisions of this Agreement shall be in writing, and shall be signed by the party giving or making the same. If such notice, consent or demand is mailed to a party hereto, it shall be sent by United States certified mail, postage prepaid, addressed to such party's last known address as shown on the records of the Corporation. The date of such mailing shall be deemed the date of notice, consent or demand. 11 12 15. GOVERNING LAW. This Agreement, and the rights of the parties hereunder, shall be governed by and construed in accordance with the laws of the State of Ohio. IN WITNESS WHEREOF, the parties hereto have executed multiple original copies of this Agreement, as of the day and year first above written. The Sherwin-Williams Company By /s/ ----------------------------- Title: --------------------- ATTEST: /s/ - --------------------------- Secretary "Corporation" /s/ ------------------------------- John G. Breen, "Employee" Trust Agreement dated March 2,1996 with John G. Breen and Mary J. Breen as Grantors By /s/ ------------------------------ National City Bank, Trustee "Owner" /s/ ------------------------------- 12 EX-10.R 4 EXHIBIT 10(R) 1 EXHIBIT 10(r) THE SHERWIN-WILLIAMS COMPANY ESTATE PROTECTION PLAN TRUST This Trust Agreement ("Agreement") is made and entered into this 15th day of November, 1996, by and between THE SHERWIN-WILLIAMS COMPANY ("Company") and NATIONAL CITY BANK, N.A. ("Trustee"). RECITALS: A. Company has adopted the Estate Protection Plan ("Plan") attached hereto as Appendix A; B. Company has incurred or expects to incur liability under the terms of such Plan with respect to the individual participating in such Plan; C. Company wishes to establish a trust (hereinafter called "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of Company's creditors in the event of Company's Insolvency, as herein defined, until paid to the Plan participant and his beneficiaries in such manner and at such times as specified in the Plan; D. It is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); and E. It is the intention of Company to make contributions to the Trust to provide itself with a source of funds to assist it in satisfying any of its liabilities under the Plan; NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows; SECTION 1. ESTABLISHMENT OF TRUST (a) Company hereby deposits with Trustee in trust $100.00 in cash, which shall be held uninvested by Trustee prior to a Potential Change in Control, as defined in this Agreement. (b) The Trust hereby established shall be irrevocable. (c) The Trust is intended to be a grantor trust, of which Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended ("Code"), and shall be construed accordingly. 2 (d) The contributions to the Trust, and any earnings thereon shall be held separate and apart from other funds of Company and shall be used exclusively for the uses and purposes of the Plan participant and general creditors as herein set forth. The Plan participant and his beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan and this Agreement shall be mere unsecured contractual rights of the Plan participant and his beneficiaries against Company. Any assets held by the Trust will be subject to the claims of Company's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. (e) Upon a Potential Change in Control, Company shall, as soon as possible, but in no event longer than 30 days following the Potential Change in Control, as defined herein: (i) make a contribution to the Trust of the Company's entire interest in the cash value of the life insurance plan used to fund the Estate Protection Plan, and (ii) make a contribution to the Trust in an amount not less than 100%, but not more than 110%, of the present value of the Company's future premium payment obligations due on the life insurance policy used to fund the Estate Protection Plan. The future premium payments are the payments necessary to endow the life insurance policy when Mr. John G. Breen attains age 95, as determined at the time of the Potential Change in Control by the issuing life insurance Company's actuaries, using guaranteed dividend and insurance change assumptions. The interest rate used for purposes of determining the present value of the Company's future premium payment obligations shall be the weekly average interest rate reported for five-year treasury notes (as published in the Wallstreet Journal) as of the close of the business week immediately preceding the date such contribution is made to the Trust. Such contribution shall be invested as provided in this Agreement. If a Change in Control (as defined herein) occurs, and the Trustee receives written notice of such event from the Board of Directors of the Company, the Trustee will begin to make scheduled premium payments to the issuing insurance company of the life insurance policy used to fund the Estate Protection Plan. If a Change in Control does not occur within one year of a Potential Change in Control, then all Trust Corpus, less the original $100.00, shall be returned to the Company. Notwithstanding anything in this Trust to the contrary, in the event Company shall fail to fund the Trust under the circumstances and within the time specified in this Section 1(e), Company shall indemnify Trustee for its reasonable costs and expenses (including reasonable attorneys' fees) actually incurred to enforce Company's funding obligation. SECTION 2. PAYMENTS WITH RESPECT TO THE PLAN PARTICIPANT AND HIS BENEFICIARIES. (a) Company shall deliver to Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of the Plan participant (and his beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan), the party to whom such payments are to be paid, and the time of commencement for payment of such amounts. Except as otherwise provided herein, Trustee shall make payments with respect to the Plan participant and his 2 3 beneficiaries in accordance with such Payment Schedule. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by Company. (b) The entitlement of a Plan participant or his or her beneficiaries to benefits under the Plan shall be determined by Company or such party as it shall designate under the Plan, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan. (c) Company may make payment of benefits directly to the Plan participant or his beneficiaries as they become due under the terms of the Plan. Company shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to the Plan participant or his beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan, Company shall make the balance of each such payment as it falls due. Trustee shall notify Company where principal and earnings are not sufficient. SECTION 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN COMPANY IS INSOLVENT. (a) Trustee shall cease payment of benefits to the Plan participant and his beneficiaries if the Company is Insolvent. Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay its debts as they become due, or (ii) Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of Company under federal and state law as set forth below. (1) The Board of Directors of Company shall have the duty to inform Trustee in writing of Company's Insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become Insolvent, Trustee shall determine whether Company is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits to the Plan participant or his beneficiaries. (2) Unless Trustee has actual knowledge of Company's Insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is Insolvent, Trustee shall have no duty to inquire whether Company is Insolvent. Trustee may in all events rely on such evidence concerning Company's solvency as may be furnished to Trustee and that provides Trustee 3 4 with a reasonable basis for making a determination concerning Company's solvency. (3) If at any time Trustee has determined that Company is Insolvent, Trustee shall discontinue payments to the Plan participant or his beneficiaries and shall hold the assets of the Trust for the benefit of Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of the Plan participant or his beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Plan or otherwise. (4) Trustee shall resume the payment of benefits to the Plan participant or his beneficiaries in accordance with Section 2 of this Trust Agreement only after Trustee has determined that Company is not Insolvent (or is no longer Insolvent). (c) Provided there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to the Plan participant or his beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to the Plan participant or his beneficiaries by Company in lieu of the payments provided for hereunder during any such period of discontinuance. SECTION 4. PAYMENTS TO COMPANY. Except as provided in Sections 1(e) or 3 hereof, Company shall have no right or power to direct Trustee to return to Company or to divert to others any of the Trust assets before all payment of benefits have been made to the Plan participant and his beneficiaries pursuant to the terms of the Plan. SECTION 5. INVESTMENT AUTHORITY. With respect to the Trust and subject to any investment guidelines as agreed to in writing by the Trustee and Company, Trustee may invest in securities (including stock or rights to acquire stock) or obligations issued by Company. All rights associated with assets of the Trust shall be exercised by Trustee or the person designated by Trustee, and shall in no event be exercisable by or rest with the Plan participant. Company shall have the right, at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This right is exercisable by Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. 4 5 SECTION 6. DISPOSITION OF INCOME. During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. SECTION 7. ACCOUNTING BY TRUSTEE. Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Company and Trustee. Within 30 days following the close of each calendar year and within 30 days after the removal or resignation of Trustee, Trustee shall deliver to Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. SECTION 8. RESPONSIBILITY OF TRUSTEE. (a) Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by Company which is contemplated by, and in conformity with, the terms of the Plan or this Trust and is given in writing by Company. In the event of a dispute between Company and a party, Trustee may apply, at its own expense, to a court of competent jurisdiction to resolve the dispute. (b) Trustee may hire, at its own expense, agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its usual and customary duties or obligations hereunder. (c) Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. 5 6 (d) Notwithstanding any powers granted to Trustee pursuant to this Agreement or to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Code. SECTION 9. COMPENSATION AND EXPENSES OF TRUSTEE. Company shall pay all reasonable administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the Trust. SECTION 10. RESIGNATION AND REMOVAL OF TRUSTEE. (a) Trustee may resign at any time by written notice to Company, which shall be effective no sooner than 30 days after receipt of such notice unless Company and Trustee agree otherwise. (b) Trustee may be removed by Company on 30 days notice or upon shorter notice accepted by Trustee. (c) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within 30 days after receipt of notice or resignation, removal or transfer, unless Company extends the time limit. (d) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under paragraph (a) or (b) of this section. If no such appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. SECTION 11. APPOINTMENT OF SUCCESSOR. If Trustee resigns or is removed in accordance with Section 10(a) or (b) hereof, Company may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by Company or the successor Trustee to evidence the transfer. 6 7 SECTION 12. AMENDMENT OR TERMINATION. (a) This Trust Agreement may be amended by a written instrument executed by Trustee and Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan or shall make the Trust revocable after it has become irrevocable in accordance with Section 1(b) hereof. (b) The Trust shall not terminate until the date on which the Plan participant and his beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan. Upon termination of the Trust any assets remaining in the Trust shall be returned to Company. SECTION 13. MISCELLANEOUS. (a) Any provision of this Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to the Plan participant and his beneficiaries under this Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio. (d) For purposes of this Agreement, the term "Change in Control" shall be deemed to have occurred if: (i) there shall be consummated (I) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's common stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's common stock immediately prior to the merger have substantially the same proportionate ownership of common stock of the surviving, corporation, immediately after the merger, or (II) any sale, lease, exchange or transfer (in one transaction or a series of related transactions) of fifty percent (50%) or more of the assets or earning power of the Company; (ii) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended, hereinafter the "Exchange Act") other than the Company or any employee benefit or stock ownership plan sponsored by the Company, or any person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan, shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from 7 8 rights accruing in special circumstances) having the right to vote in the election of directors, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise; or (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof. Notwithstanding subsections (i) through (iii) above, with respect to the transactions set forth in subsections (i) and (ii) above, a Change of Control shall not be deemed to have occurred if any such transaction (x) is approved by a vote of at least two-thirds (2/3) of the directors, and (y) at the time of such vote, at least two-thirds (2/3) of the directors then in office were members of the Board of Directors immediately prior to such transaction. Any such approval pursuant to the preceding sentence shall provide that such approval is being given for the purpose of not triggering the benefits under this Agreement. For purposes of this Trust, "Potential Change in Control" shall mean any steps taken by a third party reasonably calculated to effect a Change in Control. SECTION 14. EFFECTIVE DATE. The effective date of this Trust Agreement shall be November 15, 1996. IN WITNESS WHEREOF, the Company and the Trustee have caused this Agreement to be executed on their behalf by their respective officers thereunto duly authorized, the day and year first above written. ATTEST/WITNESS: THE SHERWIN-WILLIAMS COMPANY /s/ By: /s/ - ---------------------------- ---------------------------- /s/ Its: - ---------------------------- ---------------------------- ATTEST/WITNESS: NATIONAL CITY BANK, N.A. /s/ By: /s/ - ---------------------------- ---------------------------- /s/ Its: - ---------------------------- ---------------------------- /s/ By: /s/ - ---------------------------- ---------------------------- /s/ Its: - ---------------------------- ---------------------------- 8 EX-11 5 EXHIBIT 11 1 EXHIBIT 11 COMPUTATION OF NET INCOME PER SHARE(1) (Thousands of Dollars Except Per Share Data)
1996 1995 1994 - -------------------------------------------------------------------------------------------- FULLY DILUTED Average shares outstanding 171,492,390 170,378,812 172,591,028 Options -- treasury stock method 1,766,388 1,272,556 1,159,848 Assumed conversion of 6.25% Convertible Subordinated Debentures 7,942 141,740 - -------------------------------------------------------------------------------------------- Average fully diluted shares 173,258,778 171,659,310 173,892,616 ============================================================================================ Net income $229,157 $200,654 $186,571 Add 6.25% Convertible Subordinated Debentures interest -- net of tax(2) 8 ============================================================================================ Net income applicable to fully diluted shares $229,157 $200,654 $186,579 ============================================================================================ Net income per share $1.33 $1.17 $1.07 ============================================================================================ PRIMARY Average shares outstanding 171,492,390 170,378,812 172,591,028 Options -- treasury stock method 1,408,386 1,107,734 1,132,444 - -------------------------------------------------------------------------------------------- Average shares and equivalents 172,900,776 171,486,546 173,723,472 =========================================================================================== Net income applicable to shares and equivalents $229,157 $200,654 $186,571 ============================================================================================ Net income per share $1.33 $1.17 $1.07 ============================================================================================
(1)All common share amounts and per share data reflect the effect of the stock split described in Note 17 to the consolidated financial statements. (2)All 6.25% Convertible Subordinated Debentures outstanding at December 31, 1994 were converted to common stock during the first quarter of 1995 without incurring further interest. 49 EX-21 6 EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES FOREIGN SUBSIDIARIES Compania Sherwin-Williams, S.A. de C.V.* Distribuidora Excelo, S.A. de C.V. Industria Quimica Elgin Ltda. Lazzuril Tintas S/A Corporation Pinturas Excelo, S.A. de C.V. Productos Quimicos y Pinturas, S.A. de C.V. Proquipsa, S.A. de C.V. Quetzal Pinturas, S.A. de C.V. Sherwin-Williams Argentina I.y C.S.A.* Sherwin-Williams do Brasil Industria e Comercio Ltda. Sherwin-Williams Canada Inc. Sherwin-Williams Cayman Islands Limited* Sherwin-Williams Chile S.A.* Sherwin-Williams Foreign Sales Corporation Limited Sherwin-Williams (Caribbean) N.V. Sherwin-Williams (West Indies) Limited The Sherwin-Williams Company Resources Limited 147926 Canada Inc. UNITED STATES SUBSIDIARIES Contract Transportation Systems Co. DIMC, Inc. Dupli-Color Products Company INCO International Company Rubberset Company Sherwin-Williams Automotive Finishes Corp. Sherwin-Williams Diversified Brands, Inc. SWIMC, Inc. The Sherwin-Williams Acceptance Corporation *Unconsolidated 50 EX-23 7 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated January 23, 1997, except for Note 17, as to which the date is January 29, 1997, with respect to the consolidated financial statements and schedule of The Sherwin-Williams Company included in the Annual Report (Form 10-K) for the year ended December 31, 1996, in the following registration statements and related prospectuses:
REGISTRATION NUMBER DESCRIPTION - ------------ -------------------------------------------------------------- 333-01093 The Sherwin-Williams Company Form S-3 Registration Statement 333-00725 The Sherwin-Williams Company Form S-4 Registration Statement 33-64543 The Sherwin-Williams Company Form S-3 Registration Statement 33-62229 The Sherwin-Williams Company Employee Stock Purchase and Savings Plan Form S-8 Registration Statement 2-80510 Post-Effective Amendment Number 5 to Form S-8 Registration Statement relating to The Sherwin-Williams Company Employee Stock Purchase and Savings Plan 33-52227 The Sherwin-Williams Company 1994 Stock Plan Form S-8 Registration Statement 33-28585 The Sherwin-Williams Company 1984 Stock Plan Form S-8 Registration Statement 33-22705 The Sherwin-Williams Company Form S-3 Registration Statement
Cleveland, Ohio March 10, 1997 ERNST & YOUNG LLP 51 EX-24 8 EXHIBIT 24 1 EXHIBIT 24 ---------- POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Officer and Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, a Form 10-K for the fiscal year ended December 31, 1996, hereby constitutes and appoints T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said proposed Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 24, 1997 /s/ J.G. Breen ------------------------- -------------------------------- J.G. Breen Chairman and Chief Executive Officer, Director 2 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Officer and Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, a Form 10-K for the fiscal year ended December 31, 1996, hereby constitutes and appoints J.G. Breen, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said proposed Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 29, 1997 /s/ T.A. Commes --------------------------- ----------------------------------- T.A. Commes President and Chief Operating Officer, Director 3 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Officer of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, a Form 10-K for the fiscal year ended December 31, 1996, hereby constitutes and appoints J.G. Breen, T.A. Commes and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said proposed Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 25, 1997 /s/ L.J. Pitorak -------------------------- ------------------------------------ L.J. Pitorak Senior Vice President - Finance, Treasurer and Chief Financial Officer 4 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Officer of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, a Form 10-K for the fiscal year ended December 31, 1996, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said proposed Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 29, 1997 /s/ J.L. Ault -------------------------- ---------------------------------- J.L. Ault Vice President - Corporate Controller 5 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, a Form 10-K for the fiscal year ended December 31, 1996, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said proposed Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 28, 1997 /s/ James M. Biggar --------------------------- ------------------------------------ J.M. Biggar Director 6 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, a Form 10-K for the fiscal year ended December 31, 1996, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said proposed Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 31, 1997 /s/ D.E. Collins --------------------------- ------------------------------------ D.E. Collins Director 7 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, a Form 10-K for the fiscal year ended December 31, 1996, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said proposed Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 24, 1997 /s/ D.E. Evans --------------------------- ----------------------------------- D.E. Evans Director 8 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, a Form 10-K for the fiscal year ended December 31, 1996, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said proposed Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 24, 1997 /s/ R.W. Mahoney ------------------------- ------------------------------------- R.W. Mahoney Director 9 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, a Form 10-K for the fiscal year ended December 31, 1996, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said proposed Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 29, 1997 /s/ W.G. Mitchell -------------------------- ------------------------------------- W.G. Mitchell Director 10 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, a Form 10-K for the fiscal year ended December 31, 1996, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said proposed Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 29, 1997 /s/ A.M. Mixon ------------------------- ---------------------------------- A.M. Mixon Director 11 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, a Form 10-K for the fiscal year ended December 31, 1996, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said proposed Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: February 5, 1997 /s/ Curtis E. Moll --------------------------- ------------------------------------ C.E. Moll Director 12 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, a Form 10-K for the fiscal year ended December 31, 1996, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said proposed Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 29, 1997 /s/ H.O. Petrauskas -------------------------- ------------------------------------- H.O. Petrauskas Director 13 POWER OF ATTORNEY THE SHERWIN-WILLIAMS COMPANY ---------------------------- The undersigned Director of The Sherwin-Williams Company, an Ohio corporation, which corporation anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, a Form 10-K for the fiscal year ended December 31, 1996, hereby constitutes and appoints J.G. Breen, T.A. Commes, L.J. Pitorak and L.E. Stellato, or any of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for me and in my name, in the capacities indicated below, said proposed Form 10-K and any and all amendments, supplements, and exhibits thereto, and any and all applications or other documents to be filed with the Securities and Exchange Commission or any national securities exchange pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. Executed the date set opposite my name. Date: January 29, 1997 /s/ R.K. Smucker -------------------------- ------------------------------------- R.K. Smucker Director EX-27 9 EXHIBIT 27
5 0000089800 THE SHERWIN-WILLIAMS COMPANY 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1,880 0 475,053 22,632 642,687 1,416,187 1,133,932 584,541 2,994,590 1,051,007 142,679 0 0 101,650 1,299,582 2,994,590 4,132,879 4,132,879 2,405,178 2,405,178 25,520 19,095 24,537 375,377 146,220 229,157 0 0 0 229,157 1.33 1.33
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