-----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, E922b5jcNgI6Xf4ApomaKRUALyTiNOQJ6E10XhA9LwPfzIo9lw349Tms56EzLer5 vgnpHvVkwDi0bmEgcIY0Zg== 0000950152-02-001777.txt : 20020415 0000950152-02-001777.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950152-02-001777 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020314 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04851 FILM NUMBER: 02574817 BUSINESS ADDRESS: STREET 1: 101 PROSPECT AVE NW CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2165662200 10-K 1 l92671ae10-k.txt THE SHERWIN-WILLIAMS COMPANY 10-K/12-31-01 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2001 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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- 9.875% Debentures due 2016 New York Stock Exchange Common Stock, Par Value $1.00 New York Stock Exchange Preferred Stock Purchase Rights 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. [ ] At January 31, 2002, 152,578,617 shares of common stock were outstanding, net of treasury shares. The aggregate market value of such voting stock held by non-affiliates on January 31, 2002 was $4,213,552,266. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 2001 ("2001 Annual Report") are incorporated by reference into Parts I, II and IV of this report. Portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders ("Proxy Statement") are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS The Sherwin-Williams Company, founded in 1866 and incorporated in Ohio in 1884, is engaged in the manufacture, distribution and sale of coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America. Its principal executive offices are located at 101 Prospect Avenue, N.W., Cleveland, Ohio 44115-1075, telephone (216) 566-2000. As used in this report, the terms "Sherwin-Williams" and "Company" mean The Sherwin-Williams Company and its consolidated subsidiaries unless the context indicates otherwise. BASIS OF REPORTABLE SEGMENTS The Company reports its segment information in five reportable segments -- the Paint Stores, Consumer, Automotive Finishes, International Coatings (collectively, the "Operating Segments") and Administrative Segments -- in accordance with Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires an enterprise to report segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources. The Company's chief operating decision maker has been identified as the Chief Executive Officer because he has final authority over performance assessment and resource allocation decisions. Because of the global, diverse operations of the Company, the chief operating decision maker regularly receives discrete financial information about each reportable segment as well as a significant amount of additional financial information about certain aggregated divisions, operating units and subsidiaries of the Company. The chief operating decision maker uses all such financial information for performance assessment and resource allocation decisions. Factors considered in determining the five reportable segments of the Company include the nature of the business activities, existence of managers responsible for the operating and administrative activities and information presented to the Board of Directors. The Company evaluates the performance of Operating Segments and allocates resources based on profit or loss and cash generated from operations before income taxes, excluding corporate expenses and financing gains and losses. The accounting policies of the reportable segments are the same as those described in Note 1 of the Notes to Consolidated Financial Statements on pages 33 through 35 of the 2001 Annual Report, which is incorporated herein by reference. PAINT STORES SEGMENT The Paint Stores Segment consists of 2,573 company-operated specialty paint stores in the United States, Canada, Virgin Islands, Puerto Rico and Mexico. Each division and business unit of the Segment is engaged in the related business activity of selling the Company's own manufactured coatings and related products to end-use customers. During 2001, this Segment opened or acquired 85 net new stores, remodeled 6 and relocated 38. The net new stores consisted of 83 stores in the United States, 2 in Canada, and 1 in Puerto Rico along with 1 closing in Mexico. In 2000, there were 92 net new stores opened or acquired (79 in the United States). In 1999, 73 net new stores were opened (66 in the United States). This Segment also manufactures original equipment manufacturer (OEM) product finishes sold through the paint stores and by direct outside sales representatives. In addition to stores, operations in Mexico include a manufacturing facility, distribution activities and outside selling functions to dealers and other distributors. The Paint Stores Segment is the exclusive North American marketer and seller of Sherwin-Williams(R) branded architectural coatings, industrial and marine products, OEM product finishes and related items produced by its Mexican operations, its product finishes manufacturing and by the Consumer Segment. The loss of any single customer would not have a material adverse effect on the business of this Segment. 1 CONSUMER SEGMENT The Consumer Segment develops, manufactures and distributes a variety of paint, coatings and related products to third party customers and the Paint Stores Segment. Approximately 44 percent of the total sales of the Consumer Segment in 2001, including inter-segment transfers, represented products sold through the Paint Stores Segment. Sales and marketing of certain control-branded and private labeled products is performed by a direct sales staff. The products distributed through third party customers are intended for resale to the ultimate end-user of the product. The Consumer Segment has sales to certain customers that, individually, may be a significant portion of the sales of the Segment. However, the loss of any single customer would not have a material adverse effect on the overall profitability of the Segment. This Segment incurs most of the Company's capital expenditures related to ongoing environmental compliance measures. AUTOMOTIVE FINISHES SEGMENT The Automotive Finishes Segment develops, manufactures and distributes a variety of motor vehicle finish, refinish and touch-up products primarily throughout North and South America, the Caribbean Islands and Italy. This Segment also licenses certain technology and trade names worldwide. Sherwin-Williams(R) branded automotive finish and refinish products are distributed throughout North America solely through this Segment's network of 124 company-operated automotive branches in the United States and 17 in Canada. Additional automotive branches in Jamaica (14) and Chile (19) complete this Segment's worldwide network. At December 31, 2001, this Segment included 11 foreign wholly-owned subsidiaries in 8 foreign countries and 10 licensing agreements in 14 foreign countries. INTERNATIONAL COATINGS SEGMENT The International Coatings Segment develops, licenses, manufactures and distributes a variety of paint, coatings and related products worldwide. The majority of the sales from licensees and subsidiaries occur in South America, the Segment's most important international market. This Segment sells its products through 33 company-operated specialty paint stores in Chile and 19 in Brazil and by outside selling functions to dealers and other distributors. At December 31, 2001, this Segment included 12 foreign wholly-owned subsidiaries in 8 foreign countries, 4 foreign joint ventures and 30 licensing agreements in 21 foreign countries. ADMINISTRATIVE SEGMENT The Administrative Segment includes the administrative expenses of the Company's and certain consolidated subsidiaries' headquarters sites. This Segment includes interest expense which is unrelated to retail real estate leasing activities, investment income, certain foreign currency transaction losses related to dollar-denominated debt and foreign currency option and forward contracts, certain expenses related to closed facilities and environmental-related matters, and other expenses which are not directly associated with any Operating Segment. Administrative expenses do not include any significant foreign operations. Also included in the Administrative Segment is a real estate management unit that is responsible for the ownership, management and leasing of non-retail properties held primarily for use by the Company, including the Company's headquarters site, and disposal of idle facilities. Sales of the Administrative Segment represent external leasing revenue of excess headquarters space or leasing of facilities no longer used by the Company in its operations. Gains and losses from the sale of property are not a significant operating factor in determining the performance of this Segment. SEGMENT FINANCIAL INFORMATION For financial information regarding the Company's reportable segments, including net external sales, operating profit, identifiable assets and other information by segment, see Note 16 of the Notes to Consolidated Financial Statements on pages 44 through 46 of the 2001 Annual Report, which is incorporated herein by reference. 2 DOMESTIC AND FOREIGN OPERATIONS Financial and other information regarding domestic and foreign operations is set forth in Note 16 of the Notes to Consolidated Financial Statements on page 45 of the 2001 Annual Report, which is incorporated by reference. Additional information regarding risks attendant to foreign operations is set forth on pages 22 and 24 of the 2001 Annual Report under the caption entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation," which is incorporated herein by reference. BUSINESS DEVELOPMENTS For additional information regarding the Company's business and business developments, see page 2 and pages 8 through 15 of the 2001 Annual Report and the "Letter to Shareholders" on pages 5 through 7 of the 2001 Annual Report, which is incorporated herein by reference. RAW MATERIALS AND PRODUCTS PURCHASED FOR RESALE Raw materials and fuel supplies are generally available from various sources in sufficient quantities that none of the Segments anticipate any significant sourcing problems during 2002. There are sufficient suppliers of each product purchased for resale that none of the Segments anticipate any significant sourcing problems during 2002. SEASONALITY The majority of the sales for the Paint Stores, Consumer and Automotive Finishes Segments traditionally occur during the second and third quarters. The International Coatings Segment's fourth quarter sales have traditionally been greater than the sales for any of the first three quarters. There is no significant seasonality in sales for the Administrative Segment. TRADEMARKS AND TRADE NAMES Customer recognition of Company trademarks and trade names collectively contribute significantly to the sales of the Company. The major trademarks and tradenames used by each Operating Segment are set forth below. Paint Stores Segment: Sherwin-Williams(R), Old Quaker(TM), Mautz(R), Pro-Line(R), SeaGuard(R), Con-Lux(R), Mercury(R), Brod-Dugan(R), ArmorSeal(R), Kem(R) Hi-Temp, Cook(TM), Sher-Wood(R), Powdura(R), Polane(R) and Kem Aqua(R). Consumer Segment: Thompson's(R), Dutch Boy(R), Martin Senour(R), Cuprinol(R), Pratt & Lambert(R), H&C(TM), Rubberset(R), Dupli-Color(R), Minwax(R), White Lightning(R), Krylon(R), Formby's(R) and Red Devil(R). Automotive Finishes Segment: Sherwin-Williams(R), Martin Senour(R), Western(R), Lazzuril(TM), Excelo(TM), Baco(TM) and ScottWarren(TM). International Coatings Segment: Sherwin-Williams(R), Dutch Boy(R), Krylon(R), Kem-Tone(R), Pratt & Lambert(R), Minwax(R), Ronseal(TM), Colorgin(TM), Globo(TM), Pulverlack(R), Sumare(TM), Andina(TM), Marson(TM) and Martin Senour(R). PATENTS Although patents and licenses are not of material importance to the business of the Company as a whole or any Segment, the International Coatings Segment and the international operations of the Automotive Finishes Segment derive a portion of their income from the licensing of technology, trademarks and trade names to foreign companies. 3 BACKLOG AND PRODUCTIVE CAPACITY Backlog orders are not significant in the business of any Segment since there is normally a short period of time between the placing of an order and shipment. Sufficient productive capacity currently exists to fulfill the Company's needs for paint and coatings products through 2002. RESEARCH AND DEVELOPMENT For information regarding costs of research and development included in technical expenditures, see Note 1 of the Notes to Consolidated Financial Statements on page 34 of the 2001 Annual Report, which is incorporated herein by reference. COMPETITION The Company experiences competition from many local, regional, national and international competitors of various sizes in the manufacture, distribution and sale of its coatings and related products. The Company is a leading manufacturer and retailer of coatings and related products to professional, industrial, commercial and retail customers, however, the Company's competitive position varies for its different products and markets. In the Paint Stores Segment, competitors include other paint and wallpaper stores, mass merchandisers, home centers, independent hardware stores, hardware chains and manufacturer-operated direct outlets. Product quality, service and price determine the competitive advantage for this Segment. In the Consumer and International Coatings Segments, domestic and foreign competitors include manufacturers and distributors of branded and private labeled coatings products. Technology, product quality, product innovation, breadth of product line, technical expertise, distribution, service and price are the key competitive factors for these Segments. The Automotive Finishes Segment has numerous competitors in its domestic and foreign markets with broad product offerings and several others with niche products. Key competitive factors for this Segment include technology, product quality, distribution, service and price. The Administrative Segment has many competitors consisting of other real estate owners, developers and managers in areas in which this Segment owns property. The main competitive factors are the availability of property and price. EMPLOYEES The Company employed 25,789 persons at December 31, 2001. ENVIRONMENTAL COMPLIANCE For additional information regarding environmental-related matters, see pages 22 through 24 of the 2001 Annual Report under the caption entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1, 4 and 9 of the Notes to Consolidated Financial Statements on pages 34, 35 and 39, respectively, of the 2001 Annual Report, which is incorporated herein by reference. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Certain statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based upon management's current expectations, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), expected growth and future business plans. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as "expects," "anticipates," "believes," "will likely result," "will continue," "plans to" and similar expressions. Readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control 4 of the Company, that could cause actual results to differ materially from such statements. These risks, uncertainties and other factors include such things as: general business conditions, strengths of retail economies and the growth in the coatings industry; competitive factors, including pricing pressures and product innovation and quality; changes in raw material availability and pricing; changes in the Company's relationships with customers and suppliers; the ability of the Company to successfully integrate past and future acquisitions into its existing operations, as well as the performance of the businesses acquired; the ability of the Company to successfully complete planned divestitures; changes in general domestic economic conditions such as inflation rates, interest rates and tax rates; risks and uncertainties associated with the Company's expansion into foreign markets, including inflation rates, recessions, foreign currency exchange rates, foreign investment and repatriation restrictions and other external economic and political factors; the achievement of growth in developing markets, such as Mexico and South America; increasingly stringent domestic and foreign governmental regulations including those affecting the environment; inherent uncertainties involved in assessing the Company's potential liability for environmental remediation-related activities; the nature, cost, quantity and outcome of pending and future litigation and other claims, including the lead pigment and lead-based paint litigation and the affect of any legislation and administrative regulations relating thereto; and unusual weather conditions. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. ITEM 2. DESCRIPTION OF PROPERTY The Company owns its world headquarters located in Cleveland, Ohio, which includes the world headquarters for the Paint Stores, Consumer and International Coatings Segments. The Company also owns the world headquarters for the Automotive Finishes Segment located in Warrensville Heights, Ohio. The Company's principal manufacturing and distribution facilities are located as set forth below. The Company believes its manufacturing and distribution facilities are well-maintained and are suitable and adequate, and have sufficient productive capacity, to meet its current needs. PAINT STORES SEGMENT Manufacturing Facilities ------------------------ Arlington, Texas Owned Calgary, Alberta, Canada Leased Cincinnati, Ohio Owned Columbus, Ohio Owned Greensboro, North Carolina Owned Grimsby, Ontario, Canada Owned Harrisburg, Pennsylvania Leased Memphis, Tennessee Owned Mexico City, Mexico Owned Ontario, California Leased Rockford, Illinois Leased San Diego, California Leased Spartanburg, South Carolina Leased Sylmar, California Leased Wichita, Kansas Owned Distribution Facilities ----------------------- Mexico City, Mexico Owned Vancouver, Alberta, Canada Leased CONSUMER SEGMENT Manufacturing Facilities ------------------------ Baltimore, Maryland Owned Bedford Heights, Ohio Owned Chicago, Illinois Owned Coffeyville, Kansas Owned Crisfield, Maryland Leased Deshler, Ohio Owned Elk Grove, Illinois Owned Emeryville, California Owned Ennis, Texas Leased Flora, Illinois Owned 5 Fort Erie, Ontario, Canada Owned Garland, Texas Owned Greensboro, North Carolina Owned Holland, Michigan Owned Lawrenceville, Georgia Owned Morrow, Georgia Owned Olive Branch, Mississippi Owned Orlando, Florida Owned Victorville, California Owned Distribution Facilities ----------------------- Bedford Heights, Ohio Leased Buford, Georgia Leased Effingham, Illinois Leased Fredericksburg, Pennsylvania Owned Reno, Nevada Owned San Juan, Puerto Rico Leased Vaughan, Ontario, Canada Leased Waco, Texas Leased Winter Haven, Florida Owned AUTOMOTIVE FINISHES SEGMENT Manufacturing Facilities ------------------------ Aprilia, Italy Leased Arica, Chile Owned Kingston, Jamaica Owned Richmond, Kentucky Owned Santiago, Chile* Owned Sao Paulo, Brazil Owned Texcocco, Mexico Owned Distribution Facilities ----------------------- Aprilia, Italy Leased Kingston, Jamaica Owned Reno, Nevada Leased Richmond, Kentucky Owned Santiago, Chile* Owned Sao Paulo, Brazil Owned Zaragoza, Mexico Owned INTERNATIONAL COATINGS SEGMENT Manufacturing Facilities ------------------------ Buenos Aires, Argentina Owned Santa Catarina, Brazil Owned Santiago, Chile* Owned Sao Paulo, Brazil(3) Owned Sheffield, England Owned Distribution Facilities ----------------------- Buenos Aires, Argentina Owned Dublin, Ireland Owned Santa Catarina, Brazil Leased Santiago, Chile* Owned Santiago, Chile Leased Sao Paulo, Brazil(3) Owned Lima, Peru Leased * This facility is shared between the Automotive Finishes and International Coatings Segments. The operations of the Paint Stores Segment included 2,573 company-operated paint stores, of which 211 were owned, in the United States, Canada, Virgin Islands, Puerto Rico and Mexico at December 31, 2001. These paint stores are divided into four separate operating divisions, each of which is responsible for the paint stores located within its geographical region, and operations in Mexico. At the end of 2001, the Mid Western Division operated 712 paint stores primarily located in the midwestern and upper west coast states, the Eastern Division operated 514 paint stores along the upper east coast and New England states and Canada, the Southeastern Division operated 617 paint stores principally covering the lower east and gulf coast states, Puerto Rico and the U.S. Virgin Islands, and the South Western Division operated 653 paint stores in the plains and the lower west coast states. The Paint Stores Segment also included 77 paint stores in Mexico. The Paint Stores Segment opened or acquired 85 net new paint stores in 2001 and relocated 38. The Automotive Finishes Segment included 124 company-operated automotive branches, of which one was owned, in the United States and 50 leased company-operated stores and branches in Canada (17), Chile (19) and Jamaica (14) at December 31, 2001. The International Coatings Segment included 52 company-operated specialty 6 paint stores, of which 24 were owned, in Chile (33) and Brazil (19). All real property within the Administrative Segment is owned by the Company except for one warehouse lease. For additional information regarding real property within the Administrative Segment, see the information set forth in Item 1 of this report, which is incorporated herein by reference. For additional information regarding real property leases, see Note 8 of the Notes to Consolidated Financial Statements on page 39 of the 2001 Annual Report, which is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS For information regarding environmental-related matters and other legal proceedings, see pages 22 through 24 of the 2001 Annual Report under the caption entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1, 4 and 9 of the Notes to Consolidated Financial Statements on pages 34, 35 and 39, respectively, of the 2001 Annual Report, which is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of 2001. 7 EXECUTIVE OFFICERS OF THE REGISTRANT The following is the name, age and present position of each of the Executive Officers on March 14, 2002, as well as all prior positions held by each during the last five years and the date when each was first elected or appointed as an Executive Officer. Executive Officers are generally elected annually by the Board of Directors and hold office until their successors are elected and qualified or until their earlier death, resignation or removal.
Date When First Elected Name Age Present Position or Appointed ---- --- ---------------- ------------- Christopher M. Connor 45 Chairman and Chief Executive Officer, 1994 Director Joseph M. Scaminace 48 President and Chief Operating Officer, 1994 Director Sean P. Hennessy 44 Senior Vice President -- Finance, 2001 Treasurer and Chief Financial Officer Thomas E. Hopkins 44 Senior Vice President -- Human 1997 Resources Conway G. Ivy 60 Senior Vice President -- Corporate 1979 Planning and Development John L. Ault 56 Vice President -- Corporate Controller 1987 Michael A. Galasso 54 President & General Manager, 1997 International Division John G. Morikis 38 President, Paint Stores Group 1999 Ronald P. Nandor 42 President & General Manager, Automotive 2000 Division Thomas W. Seitz 53 President & General Manager, Consumer 1999 Division Louis E. Stellato 51 Vice President, General Counsel and 1989 Secretary
Mr. Connor has served as Chairman since April 2000 and Chief Executive Officer since October 1999. Mr. Connor served as Vice Chairman from October 1999 to April 2000, President, Paint Stores Group from August 1997 to October 1999 and President & General Manager, Diversified Brands Division from April 1994 to August 1997. Mr. Connor has served as a Director since October 1999. Mr. Connor has been employed with the Company since January 1983. Mr. Scaminace has served as President and Chief Operating Officer since October 1999. Mr. Scaminace served as President, Consumer Group from July 1998 to October 1999, President & General Manager, Coatings Division from June 1997 to July 1998, and President & General Manager, Automotive Division from April 1994 to June 1997. Mr. Scaminace has served as a Director since October 1999. Mr. Scaminace has been employed with the Company since April 1983. Mr. Hennessy has served as Senior Vice President -- Finance, Treasurer and Chief Financial Officer since August 2001. Mr. Hennessy served as Vice President -- Controller, Consumer Group from February 2000 to August 2001, Senior Vice President & Director, Chemical Coatings, Paint Stores Group from February 1999 to February 2000, Vice President & Director, Chemical Coatings, Paint Stores Group from August 1997 to February 1999 and Vice President -- Controller, Coatings Division from September 1996 to August 1997. Mr. Hennessy has been employed with the Company since September 1984. Mr. Hopkins has served as Senior Vice President -- Human Resources since February 2002. Mr. Hopkins served as Vice President -- Human Resources from August 1997 to February 2002 and Vice President -- Human Resources, Paint Stores Group from February 1996 to August 1997. Mr. Hopkins has been employed with the Company since September 1981. 8 Mr. Ivy has served as Senior Vice President -- Corporate Planning and Development since February 2002. Mr. Ivy served as Vice President -- Corporate Planning and Development from April 1992 to February 2002. Mr. Ivy has been employed with the Company since March 1979. Mr. Ault has served as Vice President -- Corporate Controller since January 1987. Mr. Ault has been employed with the Company since June 1976. Mr. Galasso has served as President & General Manager, International Division since September 2000. Mr. Galasso served as President & General Manager, Automotive Division from June 1997 to September 2000 and Vice President & Director -- Operations, Automotive Division from May 1992 to June 1997. Mr. Galasso has been employed with the Company since June 1971. Mr. Morikis has served as President, Paint Stores Group since October 1999. Mr. Morikis served as President & General Manager, Eastern Division, Paint Stores Group from July 1998 to October 1999, Senior Vice President & Director -- Marketing, Paint Stores Group from September 1997 to July 1998 and Division Vice President -- Sales, Eastern Division, Paint Stores Group from April 1994 to September 1997. Mr. Morikis has been employed with the Company since December 1984. Mr. Nandor has served as President & General Manager, Automotive Division since September 2000. Mr. Nandor served as Executive Vice President -- Marketing, Paint Stores Group from August 1998 to September 2000 and Vice President and Director -- Marketing, Automotive Division from November 1996 to August 1998. Mr. Nandor has been employed with the Company since November 1996. Mr. Seitz has served as President & General Manager, Consumer Division since January 2001. Mr. Seitz served as President, Consumer Group from October 1999 to January 2001, Vice President of Operations, Consumer Group from July 1998 to October 1999 and Vice President of Operations, Coatings Division from December 1995 to July 1998. Mr. Seitz has been employed with the Company since June 1970. Mr. Stellato has served as Vice President, General Counsel and Secretary since July 1991. Mr. Stellato has been employed with the Company since July 1981. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Sherwin-Williams common stock is listed on the New York Stock Exchange and traded under the symbol SHW. The number of shareholders of record at February 25, 2002 was 10,229. Information regarding market prices and dividend information with respect to Sherwin-Williams common stock is set forth on page 48 of the 2001 Annual Report, which is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA (Millions of Dollars, except per share data)
2001 2000 1999 1998 1997 - -------------------------------------------------------------------------- OPERATIONS Net sales $5,066 $5,212 $5,004 $4,934 $4,881 Net income 263 16(a) 304 273 261 FINANCIAL POSITION Total assets $3,628 $3,751(a) $4,033 $4,051 $4,036 Long-term debt 504 621 622 730 844 Ratio of earnings to fixed charges(b) 5.2X 2.4x(a) 5.8x 5.0x 4.6x PER COMMON SHARE DATA Net income -- basic $ 1.69 $ .10(a) $ 1.81 $ 1.58 $ 1.51 Net income -- diluted 1.68 .10(a) 1.80 1.57 1.50 Cash dividends .58 .54 .48 .45 .40
9 (a) Amount includes an impairment of long-lived assets charge of $294 million ($1.80 per share) after tax. See Note 2 of the Notes to Consolidated Financial Statements on page 35 of the 2001 Annual Report, which is incorporated herein by reference. (b) For purposes of calculating the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed charges. Fixed charges consist of interest expense, net, including amortization of discount and financing costs and the portion of operating rental expense which management believes is representative of the interest component of rent expense. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is set forth on pages 21 through 27 of the 2001 Annual Report under the caption entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risk associated with interest rates and foreign currency exposure. The Company utilizes derivative instruments as part of its overall financial risk management policy, but does not use derivative instruments for speculative or trading purposes. The Company has partially hedged risks associated with fixed interest rate debt by entering into various interest rate swap agreements. Interest rate swap agreements are described in detail in Note 7 of the Notes to Consolidated Financial Statements on page 38 of the 2001 Annual Report. The Company does not believe that any potential loss related to interest rate exposure will have a material adverse effect on the Company's financial condition, results of operations or cash flows. The Company also entered into foreign currency option and forward contracts to hedge against value changes in foreign currency. Foreign currency option and forward contracts are described in detail in Note 4 of the Notes to Consolidated Financial Statements on pages 35 and 36 of the 2001 Annual Report. The Company believes it may experience continuing losses from foreign currency translation. However, the Company does not expect currency translation, transaction or hedging contract losses to have a material adverse effect on the Company's financial condition, results of operations or cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item is set forth on pages 29 through 46 of the 2001 Annual Report under the captions entitled "Statements of Consolidated Income," "Consolidated Balance Sheets," "Statements of Consolidated Cash Flows," "Statements of Consolidated Shareholders' Equity," and "Notes to Consolidated Financial Statements," which is incorporated herein by reference. Unaudited quarterly data is set forth in Note 14 of the Notes to Consolidated Financial Statements on page 43 of the 2001 Annual Report, which is incorporated herein by reference. The Report of Independent Auditors is set forth on page 12 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding Directors is set forth under the caption entitled "Election of Directors" in the Proxy Statement, which is incorporated herein by reference. The information regarding Executive Officers is set forth under the caption entitled "Executive Officers of the Registrant" in Part I of this report, which is incorporated herein by reference. 10 The information regarding compliance with Section 16 of the Securities Exchange Act of 1934 is set forth under the caption entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement, which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth on pages 7 through 16 of the Proxy Statement and under the caption entitled "Compensation of Directors" in the Proxy Statement, which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth under the captions entitled "Security Ownership of Management" and "Security Ownership of Certain Beneficial Owners" in the Proxy Statement, which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth under the captions entitled "Certain Relationships and Related Transactions," "Compensation of Directors" and "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement, which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements The following consolidated financial statements of the Company included in the 2001 Annual Report are incorporated by reference in Item 8. The Report of Independent Auditors is set forth on page 12 of this report. (i) Statements of Consolidated Income for the years ended December 31, 2001, 2000 and 1999 (page 29 of the 2001 Annual Report) (ii) Consolidated Balance Sheets at December 31, 2001, 2000 and 1999 (page 30 of the 2001 Annual Report) (iii) Statements of Consolidated Cash Flows for the years ended December 31, 2001, 2000 and 1999 (page 31 of the 2001 Annual Report) (iv) Statements of Consolidated Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 (page 32 of the 2001 Annual Report) (v) Notes to Consolidated Financial Statements for the years ended December 31, 2001, 2000 and 1999 (pages 33 through 46 of the 2001 Annual Report) (2) Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2001, 2000 and 1999 is set forth on page 12 of this report. 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 the Exhibit Index on pages 15 and 16 of this report.
(b) Reports on Form 8-K -- The Company did not file any Reports on Form 8-K during the fourth quarter of 2001. 11 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors The Sherwin-Williams Company Cleveland, Ohio We have audited the consolidated balance sheets of The Sherwin-Williams Company and subsidiaries as of December 31, 2001, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001 incorporated by reference from the Company's Annual Report. Our audits also included the financial statement schedule listed in the Index 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 auditing standards generally accepted in the United States. 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, 2001, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. 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 25, 2002 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (SCHEDULE II) Changes in the allowance for doubtful accounts are as follows:
2001 2000 1999 - -------------------------------------------------------------------------------------------- Beginning balance $ 21,818 $ 23,592 $ 25,393 Bad debt expense 24,620 29,387 32,819 Net uncollectible accounts written off (20,527) (31,161) (34,620) - -------------------------------------------------------------------------------------------- Ending balance $ 25,911 $ 21,818 $ 23,592 - -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------
Activity related to other asset reserves is as follows:
2001 2000 1999 - -------------------------------------------------------------------------------------------- Beginning balance $246,386 $247,810 $203,606 Charges to expense 38,911 58,169 53,063 Removal of fully amortized items (52,588) (616) Impairment charges (58,518) Other additions (deductions) (25,212) (459) (8,859) - -------------------------------------------------------------------------------------------- Ending balance $207,497 $246,386 $247,810 - -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------
Charges to expense consist primarily of amortization of goodwill and intangibles. Other additions (deductions) consist primarily of actual costs incurred, balance sheet reclassifications, and foreign currency translation adjustments. See Note 2 of the Notes to Consolidated Financial Statements on page 35 of the 2001 Annual Report for information on Impairment charges in 2000, which is incorporated herein by reference. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of March, 2002. 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 14, 2002. * C. M. CONNOR Chairman and Chief Executive Officer, - ----------------------------------------------------------- Director (Principal Executive Officer) C. M. Connor * J. M. SCAMINACE President and Chief Operating Officer, - ----------------------------------------------------------- Director J. M. Scaminace * S. P. HENNESSY Senior Vice President -- Finance, - ----------------------------------------------------------- Treasurer and Chief Financial Officer S. P. Hennessy (Principal Financial Officer) * J. L. AULT Vice President -- Corporate Controller - ----------------------------------------------------------- (Principal Accounting Officer) J. L. Ault * J. C. BOLAND Director - ----------------------------------------------------------- J. C. Boland * J. G. BREEN Director - ----------------------------------------------------------- J. G. Breen * D. E. COLLINS Director - ----------------------------------------------------------- D. E. Collins * D. E. EVANS Director - ----------------------------------------------------------- D. E. Evans * R. W. MAHONEY Director - ----------------------------------------------------------- R. W. Mahoney * G. E. McCULLOUGH Director - ----------------------------------------------------------- G. E. McCullough * A. M. MIXON, III Director - ----------------------------------------------------------- A. M. Mixon, III * C. E. MOLL Director - ----------------------------------------------------------- C. E. Moll
13 * 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 and filed as exhibits to this report. By: /s/ L. E. STELLATO March 14, 2002 - ----------------------------------------------------------- L. E. Stellato, Attorney-in-fact
14 EXHIBIT INDEX 3. (a) Amended and Restated Articles of Incorporation of the Company, as amended through May 1, 2001 (filed herewith). (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 333-01093, dated February 20, 1996, and incorporated herein by reference. (b) Amended and Restated 364-Day Revolving Credit Agreement, dated December 31, 1999, among the Company, The Chase Manhattan Bank, as Administrative Agent and Competitive Advance Facility Agent, and the financial institutions which are signatories thereto, filed as Exhibit 4(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, and incorporated herein by reference. (c) Amendment No. 1 to Amended and Restated 364-Day Revolving Credit Agreement, dated December 1, 2000, among the Company, The Chase Manhattan Bank, as Administrative Agent and Competitive Advance Facility Agent, and the financial institutions which are signatories thereto, filed as Exhibit 4(c) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference. (d) Amendment No. 2 to Amended and Restated 364-Day Revolving Credit Agreement, dated December 28, 2001, among the Company, The Chase Manhattan Bank, as Administrative Agent and Competitive Advance Facility Agent, and the financial institutions which are signatories thereto (filed herewith). (e) Amended and Restated Five Year Revolving Credit Agreement, dated January 3, 2000, among the Company, The Chase Manhattan Bank, as Administrative Agent and Competitive Advance Facility Agent, and the financial institutions which are signatories thereto, filed as Exhibit 4(c) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, and incorporated herein by reference. (f) Amendment No. 1 to Amended and Restated Five Year Revolving Credit Agreement, dated December 1, 2000, among the Company, The Chase Manhattan Bank, as Administrative Agent and Competitive Advance Facility Agent, and the financial institutions which are signatories thereto, filed as Exhibit 4(e) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by reference. (g) 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. (h) Rights Agreement between the Company and The Bank of New York, as successor Rights Agent to KeyBank National Association, dated April 23, 1997, filed as Exhibit 1 to Form 8-A, dated April 24, 1997, and incorporated herein by reference. 10. *(a) Form of Director and Corporate Officer Indemnity Agreement filed as Exhibit 10(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference. *(b) Employment Agreement between C.G. Ivy and the Company filed as Exhibit 28(b) to Form S-3 Registration Statement Number 33-22705, dated June 24, 1988, and incorporated herein by reference. *(c) Amendment to Employment Agreement between C.G. Ivy and the Company filed as Exhibit 10(c) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference.
15 *(d) Forms of Severance Pay Agreements, filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997, and incorporated herein by reference. *(e) Schedule of Certain Executive Officers who are Parties to the Severance Pay Agreements in the forms referred to in Exhibit 10(d) filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001, and incorporated herein by reference. *(f) The Sherwin-Williams Company Deferred Compensation Savings Plan (1997/1999 Amendment and Restatement) filed as Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, and incorporated herein by reference. *(g) The Sherwin-Williams Company Key Management Deferred Compensation Plan (1997/1999 Amendment and Restatement) filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, and incorporated herein by reference. *(h) Form of Executive Disability Income Plan filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference. *(i) Form of Executive Life Insurance Plan filed as Exhibit 10(h) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference. *(j) Form of The Sherwin-Williams Company Management Compensation Program filed as Exhibit 10(j) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, and incorporated herein by reference. *(k) The Sherwin-Williams Company 1994 Stock Plan, as amended and restated in its entirety, effective July 26, 2000, filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000, and incorporated herein by reference. *(l) The Sherwin-Williams Company 1997 Stock Plan for Nonemployee Directors, dated April 23, 1997, filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, and incorporated herein by reference. *(m) The Sherwin-Williams Company Director Deferred Fee Plan (1997 Amendment and Restatement), dated April 23, 1997, filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997, and incorporated herein by reference. *(n) Consulting Agreement, dated May 1, 2000, between John G. Breen and the Company filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000, and incorporated herein by reference. *(o) Amended and Restated Split-Dollar Life Insurance Agreement, dated August 18, 2000, among the Company, National City Bank and John G. Breen filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, and incorporated herein by reference. *(p) Salary Continuation and Death Benefit Plan Agreement, dated August 18, 2000, filed as Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, and incorporated herein by reference. *(q) Employment Agreement, dated August 13, 2001, between Larry J. Pitorak and the Company (filed herewith). 13. The 2001 Annual Report, portions of which are incorporated herein by reference (filed herewith). With the exception of those portions of the 2001 Annual Report which are specifically incorporated by reference in this report, the 2001 Annual Report shall not be deemed "filed" as part of this report. 21. Subsidiaries (filed herewith). 23. Consent of Ernst & Young LLP, Independent Auditors (filed herewith). 24. (a) Powers of Attorney (filed herewith). (b) Certified Resolution Authorizing Signature by Power of Attorney (filed herewith). *Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
16 EX-3.A 3 l92671aex3-a.txt EXHIBIT 3(A) EXHIBIT 3(A) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Amended and Restated Articles of Incorporation of THE SHERWIN-WILLIAMS COMPANY --------------------- As amended through May 1, 2001 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMENDED AND RESTATED ARTICLES OF INCORPORATION OF THE SHERWIN-WILLIAMS COMPANY FIRST: The name of this Company is THE SHERWIN-WILLIAMS COMPANY. SECOND: The place where this Company shall be located and its principal business shall be transacted is the City of Cleveland in the County of Cuyahoga and State of Ohio. THIRD: The Company is formed for the purpose of developing, producing, manufacturing, buying, selling and generally dealing in products, goods, wares, merchandise and services of any and all kinds and doing all things necessary or incidental thereto. FOURTH: The number of shares which the Company is authorized to have outstanding is 330,000,000 consisting of 30,000,000 shares of Serial Preferred Stock without par value (hereinafter called "Serial Preferred Stock") and 300,000,000 shares of Common Stock, par value $1.00 each (hereinafter called "Common Stock"). The shares of such classes shall have the following express terms: DIVISION A EXPRESS TERMS OF THE SERIAL PREFERRED STOCK Section 1. The Serial Preferred Stock may be issued from time to time in one or more series. All shares of Serial Preferred Stock shall be of equal rank and shall be identical, except in respect of the matters that may be fixed by the Board of Directors as hereinafter provided, and each share of each series shall be identical with all other shares of such series, except as to the date from which dividends are cumulative. Subject to the provisions of Sections 2 to 8, both inclusive, of this Division, which provisions shall apply to all Serial Preferred Stock, the Board of Directors hereby is authorized to cause such shares to be issued in one or more series and with respect to each such series prior to the issuance thereof to fix: (a) The designation of the series, which may be by distinguishing number, letter or title. (b) The number of shares of the series, which number the Board of Directors may (except where otherwise provided in the creation of the series) increase or decrease (but not below the number of shares thereof then outstanding). (c) The annual dividend rate of the series. (d) The dates at which dividends, if declared, shall be payable, and the dates from which dividends shall be cumulative. (e) The redemption rights and price or prices, if any, for shares of the series. (f) The terms and amount of any sinking fund provided for the purchase or redemption of shares of the series. (g) The amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. (h) Whether the shares of the series shall be convertible into Common Stock, and, if so, the conversion price or prices, any adjustments thereof, and all other terms and conditions upon which such conversion may be made. 1 (i) Restrictions (in addition to those set forth in Sections 6(b) and 6(c) of this Division) on the issuance of shares of the same series or of any other class or series. The Board of Directors is authorized to adopt from time to time amendments to the Articles of Incorporation fixing, with respect to each such series, the matters described in clauses (a) to (i), both inclusive, of this Section 1. Section 2. The holders of Serial Preferred Stock of each series, in preference to the holders of Common Stock and of any other class of shares ranking junior to the Serial Preferred Stock, shall be entitled to receive out of any funds legally available and when and as declared by the Board of Directors dividends in cash at the rate for such series fixed in accordance with the provisions of Section 1 of this Division and no more, payable quarterly on the dates fixed for such series. Such dividends shall be cumulative, in the case of shares of each particular series, from and after the date or dates fixed with respect to such series. No dividends may be paid upon or declared or set apart for any of the Serial Preferred Stock for any quarterly dividend period unless at the same time a like proportionate dividend for the same quarterly dividend period, ratably in proportion to the respective annual dividend rates fixed therefor, shall be paid upon or declared or set apart for all Serial Preferred Stock of all series then issued and outstanding and entitled to receive such dividend. Section 3. In no event so long as any Serial Preferred Stock shall be outstanding shall any dividends, except a dividend payable in Common Stock or other shares ranking junior to the Serial Preferred Stock, be paid or declared or any distribution be made except as aforesaid on the Common Stock or any other shares ranking junior to the Serial Preferred Stock, nor shall any Common Stock or any other shares ranking junior to the Serial Preferred Stock be purchased, retired or otherwise acquired by the Company (except out of the proceeds of the sale of Common Stock or other shares ranking junior to the Serial Preferred Stock received by the Company subsequent to August 31, 1966): (a) Unless all accrued and unpaid dividends on Serial Preferred Stock, including the full dividends for the current quarterly dividend period, shall have been declared and paid or a sum sufficient for payment thereof set apart; and (b) Unless there shall be no arrearages with respect to the redemption of Serial Preferred Stock of any series from any sinking fund provided for shares of such series in accordance with the provisions of Section 1 of this Division. Section 4. (a) Subject to the express terms of each series and to the provisions of Section 6(b)(iii) of this Division A, the Company may from time to time redeem all or any part of the Serial Preferred Stock of any series at the time outstanding (i) at the option of the Board of Directors at the applicable redemption price for such series fixed in accordance with the provisions of Section 1 of this Division, or (ii) in fulfillment of the requirements of any sinking fund provided for shares of such series at the applicable sinking fund redemption price, fixed in accordance with the provisions of Section 1 of this Division, together in each case with accrued and unpaid dividends to the redemption date. (b) Notice of every such redemption shall be mailed, postage prepaid, to the holders of record of the Serial Preferred Stock to be redeemed at their respective addresses then appearing on the books of the Company, not less than thirty (30) days nor more than sixty (60) days prior to the date fixed for such redemption. At any time before or after notice has been given as above provided, the Company may deposit the aggregate redemption price of the shares of Serial Preferred Stock to be redeemed with any bank or trust company in Cleveland, Ohio, or New York, New York, having capital and surplus of more than Five Million Dollars ($5,000,000), named in such notice, and direct that such amount be paid to the respective holders of the shares of Serial Preferred Stock so to be redeemed, in amounts equal to the redemption price of all shares of Serial Preferred Stock so to be redeemed, on surrender of the stock certificate or certificates held by such holders. Upon the making of such deposit such holders shall cease to be shareholders with respect to such shares, and after such notice shall have been given and such deposit shall have been made such holders shall have no interest in or claim against the Company with respect to such shares except only to receive such money from such bank or trust company without interest or the right to exercise, before the redemption date, any unexpired privileges of conversion. In case less than all of the outstanding shares of Serial Preferred Stock 2 are to be redeemed, the Company shall select by lot the shares so to be redeemed in such manner as shall be prescribed by its Board of Directors. If the holders of shares of Serial Preferred Stock which shall have been called for redemption shall not, within six years after such deposit, claim the amount deposited for the redemption thereof, any such bank or trust company shall, upon demand, pay over to the Company such unclaimed amounts and thereupon such bank or trust company and the Company shall be relieved of all responsibility in respect thereof and to such holders. (c) Any shares of Serial Preferred Stock which are redeemed by the Company pursuant to the provisions of this Section 4 and any shares of Serial Preferred Stock which are purchased and delivered in satisfaction of any sinking fund requirements provided for shares of such series and any shares of Serial Preferred Stock which are converted in accordance with the express terms thereof shall be cancelled and not reissued. Any shares of Serial Preferred Stock otherwise acquired by the Company shall resume the status of authorized and unissued shares of Serial Preferred Stock without serial designation. Section 5. (a) The holders of Serial Preferred Stock of any series shall, in case of voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, be entitled to receive in full out of the assets of the Company, including its capital, before any amount shall be paid or distributed among the holders of the Common Stock or any other shares ranking junior to the Serial Preferred Stock the amounts fixed with respect to the shares of such series in accordance with Section 1 of this Division, plus in any event an amount equal to all dividends accrued and unpaid thereon to the date of payment of the amount due pursuant to such liquidation, dissolution or winding up of the affairs of the Company. In case the net assets of the Company legally available therefor are insufficient to permit the payment upon all outstanding shares of Serial Preferred Stock of the full preferential amount to which they are respectively entitled, then such net assets shall be distributed ratably upon outstanding shares of Serial Preferred Stock in proportion to the full preferential amount to which each such share is entitled. After payment to holders of Serial Preferred Stock of the full preferential amounts as aforesaid, holders of Serial Preferred Stock as such shall have no right or claim to any of the remaining assets of the Company. (b) The merger or consolidation of the Company into or with any other corporation, or the merger of any other corporation into it, or the sale, lease or conveyance of all or substantially all the property or business of the Company, shall not be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 5. Section 6. (a) The holders of Serial Preferred Stock shall be entitled to one vote for each share of such stock upon all matters presented to the shareholders; and, except as otherwise provided herein or required by law, the holders of Serial Preferred Stock and the holders of Common Stock shall vote together as one class on all matters. No adjustment of the voting rights of the holders of Serial Preferred Stock shall be made in the event of an increase or decrease in the number of shares of Common Stock authorized or issued or in the event of a stock split or combination of the Common Stock or in the event of a stock dividend on any class of stock payable solely in Common Stock, and none of the foregoing actions shall be deemed to affect adversely the voting powers, rights or preferences of Serial Preferred Stock within the meaning and for the purpose of this Division A. If, and so often as, the Company shall be in default in the payment of dividends in an amount equivalent to six (6) quarterly dividends (whether or not consecutive) on any series of Serial Preferred Stock at the time outstanding, whether or not earned or declared, the holders of Serial Preferred Stock of all series, voting separately as a class and in addition to all other rights to vote for Directors, shall be entitled to elect, as herein provided, two (2) members of the Board of Directors of the Company; provided, however, that the holders of shares of Serial Preferred Stock shall not have or exercise such special class voting rights except at meetings of the shareholders for the election of Directors at which the holders of not less than thirty-five per cent (35%) of the outstanding shares of Serial Preferred Stock of all series then outstanding are present in person or by proxy; and provided further that the special class voting rights provided for herein when the same shall have become vested shall remain so vested until all accrued and unpaid dividends on the Serial Preferred Stock of 3 all series then outstanding shall have been paid, whereupon the holders of Serial Preferred Stock shall be divested of their special class voting rights in respect of subsequent elections of Directors, subject to the revesting of such special class voting rights in the event hereinabove specified in this paragraph. In the event of default entitling the holders of Serial Preferred Stock to elect two (2) Directors as above specified, a special meeting of the shareholders for the purpose of electing such Directors shall be called by the Secretary of the Company upon written request of, or may be called by, the holders of record of at least ten per cent (10%) of the shares of Serial Preferred Stock of all series at the time outstanding, and notice thereof shall be given in the same manner as that required for the annual meeting of shareholders; provided, however, that the Company shall not be required to call such special meeting if the annual meeting of shareholders shall be held within ninety (90) days after the date of receipt of the foregoing written request from the holders of Serial Preferred Stock. At any meeting at which the holders of Serial Preferred Stock shall be entitled to elect Directors, the holders of thirty-five per cent (35%) of the then outstanding shares of Serial Preferred Stock of all series, present in person or by proxy, shall be sufficient to constitute a quorum, and the vote of the holders of a majority of such shares so present at any such meeting at which there shall be such a quorum shall be sufficient to elect the members of the Board of Directors which the holders of Serial Preferred Stock are entitled to elect as hereinabove provided. (b) The vote or consent of the holders of at least two-thirds of the shares of Serial Preferred Stock at the time outstanding, given in person or by proxy either in writing or at a meeting called for the purpose at which the holders of Serial Preferred Stock shall vote separately as a class, shall be necessary to effect any one or more of the following (but so far as the holders of Serial Preferred Stock are concerned, such action may be effected with such vote or consent): (i) Any amendment, alteration or repeal of any of the provisions of the Articles of Incorporation or of the Regulations of the Company which affects adversely the voting powers, rights or preferences of the holders of Serial Preferred Stock; provided, however, that, for the purpose of this clause (i) only, neither the amendment of the Articles of Incorporation so as to authorize or create, or to increase the authorized or outstanding amount of, Serial Preferred Stock or of any shares of any class ranking on a parity with or junior to the Serial Preferred Stock, nor the amendment of the provisions of the Regulations so as to increase the number of Directors of the Company shall be deemed to affect adversely the voting powers, rights or preferences of the holders of Serial Preferred Stock; and provided further, that if such amendment, alteration or repeal affects adversely the rights or preferences of one or more but not all series of Serial Preferred Stock at the time outstanding, only the vote or consent of the holders of at least two-thirds of the number of the shares at the time outstanding of the series so affected shall be required; (ii) The authorization or creation of, or the increase in the authorized amount of, any shares of any class, or any security convertible into shares of any class, ranking prior to the Serial Preferred Stock; or (iii) The purchase or redemption (for sinking fund purposes or otherwise) of less than all of the Serial Preferred Stock then outstanding except in accordance with a stock purchase offer made to all holders of record of Serial Preferred Stock, unless all dividends upon all Serial Preferred Stock then outstanding for all previous quarterly dividend periods shall have been declared and paid or funds therefor set apart and all accrued sinking fund obligations applicable thereto shall have been complied with. This Section 6(b) shall not apply to, and the class or series vote specified therein shall not be required for the approval of, any action which is part of or effected in connection with the consolidation of the Company with or its merger into any other corporation, so long as the class vote specified by Section 6(c) of this Division is obtained in any case in which such class vote is required under clause (ii) of said Section 6(c). (c) The vote or consent of the holders of at least a majority of the shares of Serial Preferred Stock at the time outstanding, given in person or by proxy either in writing or at a meeting called for the purpose at which the holders of Serial Preferred Stock shall vote separately as a class, shall be necessary to effect any one or more of the following (but so far as the holders of Serial Preferred Stock are concerned, such action may be effected with such vote or consent): 4 (i) The sale, lease or conveyance by the Company of all or substantially all of its property or business; or (ii) The consolidation of the Company with or its merger into any other corporation unless the corporation resulting from such consolidation or merger will have after such consolidation or merger no class of shares either authorized or outstanding ranking prior to or on a parity with the Serial Preferred Stock except the same number of shares ranking prior to or on a parity with the Serial Preferred Stock and having the same rights and preferences as the shares of the Company authorized and outstanding immediately preceding such consolidation or merger, and each holder of Serial Preferred Stock immediately preceding such consolidation or merger shall receive the same number of shares, with the same rights and preferences, of the resulting corporation; or (iii) The authorization of any shares ranking on a parity with the Serial Preferred Stock or an increase in the authorized number of shares of Serial Preferred Stock. Section 7. If the shares of any series of Serial Preferred Stock shall be convertible into Common Stock, then upon conversion of shares of such series the stated capital of the Common Stock issued upon such conversion shall be the aggregate par value of the shares so issued having par value, or, in the case of shares without par value, shall be an amount equal to the stated capital represented by each share of Common Stock outstanding at the time of such conversion multiplied by the number of shares of Common Stock issued upon such conversion. The stated capital of the Company shall be correspondingly increased or reduced to reflect the difference between the stated capital of the shares of Serial Preferred Stock so converted and the stated capital of the Common Stock issued upon such conversion. Section 8. The holders of Serial Preferred Stock shall have no preemptive right to purchase or have offered to them for purchase any shares or other securities of the Company, whether now or hereafter authorized. Section 9. For the purpose of this Division A: Whenever reference is made to shares "ranking prior to the Serial Preferred Stock" or "on a parity with the Serial Preferred Stock", such reference shall mean and include all shares of the Company in respect of which the rights of the holders thereof as to the payment of dividends or as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company are given preference over, or rank on an equality with (as the case may be) the rights of the holders of Serial Preferred Stock; and whenever reference is made to shares "ranking junior to the Serial Preferred Stock", such reference shall mean and include all shares of the Company in respect of which the rights of the holders thereof as to the payment of dividends and as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company are junior and subordinate to the rights of the holders of Serial Preferred Stock. DIVISION A-1 CUMULATIVE REDEEMABLE SERIAL PREFERRED STOCK Section 1. There is established hereby a series of Serial Preferred Stock that shall be designated "Cumulative Redeemable Serial Preferred Stock" (hereinafter sometimes called this "Series" or the "Cumulative Redeemable Preferred Stock") and that shall have the terms set forth in this Division A-1. Section 2. The number of shares of this Series shall be 3,000,000. Section 3. (a) The holders of record of shares of Cumulative Redeemable Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors in accordance with the terms hereof, out of funds legally available for the purpose, cumulative quarterly dividends payable in cash on the first day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share of Cumulative Redeemable Preferred Stock or fraction of a share of Cumulative Redeemable Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the lesser of (i) $750 per share 5 or (ii) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions (other than a dividend payable in shares of Common Stock, or a subdivision of the outstanding Common Stock (by reclassification or otherwise)), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share of Cumulative Redeemable Preferred Stock or fraction of a share of Cumulative Redeemable Preferred Stock. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Cumulative Redeemable Preferred Stock were entitled immediately prior to such event under clause (ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Dividends shall begin to accrue and be cumulative on outstanding shares of Cumulative Redeemable Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Cumulative Redeemable Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Cumulative Redeemable Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. No dividends shall be paid upon or declared and set apart for any Cumulative Redeemable Preferred Stock for any dividend period unless at the same time a dividend for the same dividend period, ratably in proportion to the respective annual dividend rates fixed therefor, shall be paid upon or declared and set apart for all Serial Preferred Stock of all series then outstanding and entitled to receive such dividend. The Board of Directors may fix a record date for the determination of holders of Cumulative Redeemable Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 40 days prior to the date fixed for the payment thereof. Section 4. Subject to the provisions of Section 6(b)(iii) of Division A and in accordance with Section 4 of Division A, shares of the Cumulative Redeemable Preferred Stock shall be redeemable from time to time at the option of the Board of Directors of the Company, as a whole or in part, at any time at a redemption price per share equal to one hundred times the then applicable Purchase Price as defined in that certain Rights Agreement, dated as of April 23, 1997 between the Company and KeyBank National Association (the "Rights Agreement"), as the same may be from time to time amended in accordance with its terms, which Purchase Price is $110 as of April 23, 1997, subject to adjustment from time to time as provided in the Rights Agreement. Copies of the Rights Agreement are available from the Company upon request. In case less than all of the outstanding shares of Cumulative Redeemable Preferred Stock are to be redeemed, the Company shall select by lot the shares so to be redeemed in such manner as shall be prescribed by its Board of Directors. Section 5. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company (hereinafter referred to as a "Liquidation"), no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon Liquidation) to the Cumulative Redeemable Preferred Stock, unless, prior thereto, the holders of shares of Cumulative Redeemable Preferred Stock shall have received at least an amount per share equal to one hundred times the then applicable Purchase Price as defined in the Rights Agreement, as the same may be from time to time amended in accordance with its terms (which Purchase Price is $110 as of April 23, 1997), subject to adjustment from time to time as provided in the Rights Agreement, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not earned or declared, to the date of such payment, provided that the holders of shares of Cumulative Redeemable Preferred Stock shall be entitled to receive at least an aggregate 6 amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock (the "Cumulative Redeemable Preferred Stock Liquidation Preference"). (b) In the event, however, that the net assets of the Company are not sufficient to pay in full the amount of the Cumulative Redeemable Preferred Stock Liquidation Preference and the liquidation preferences of all other series of Serial Preferred Stock, if any, which rank on a parity with the Cumulative Redeemable Preferred Stock as to distribution of assets in Liquidation, all shares of this Series and of such other series of Serial Preferred Stock shall share ratably in the distribution of assets (or proceeds thereof) in Liquidation in proportion to the full amounts to which they are respectively entitled. (c) In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in Common Stock, or effect a subdivision or combination or consolidation of the outstanding Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of Cumulative Redeemable Preferred Stock were entitled immediately prior to such event pursuant to the proviso set forth in paragraph 5(a) above, shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (d) The merger or consolidation of the Company into or with any other corporation, or the merger of any other corporation into it, or the sale, lease or conveyance of all or substantially all the property or business of the Company, shall not be deemed to be a Liquidation for the purposes of this Section 5. Section 6. The Cumulative Redeemable Preferred Stock shall not be convertible into Common Stock. DIVISION A-2 CONVERTIBLE PARTICIPATING SERIAL PREFERRED STOCK Section 1. Definitions. For purposes of this Division A-2, the following terms shall have the meanings described: "Acquisition Debt" is equal to Two Hundred Fifty Million Dollars ($250,000,000). Upon payment in full of the Purchase Money Note, the Acquisition Debt shall be zero. "Adjusted Common Stock Value" means 250,000 shares, multiplied by One Thousand Dollars ($1,000), divided by the Common Stock Price on the Original Issue Date, multiplied by the Common Stock Price (but never less than the Floor Price nor greater than the Cap Amount). "Base Value" shall, as of any specified date, be equal to the greater of (a) 35% of the cumulative amount of principal paid or forgiven on the Purchase Money Note, or (b) Fifty Million Dollars ($50,000,000). "Business Day" means any day other than a Saturday, Sunday or a day on which banking institutions are authorized or obligated by law or executive order to close in New York City. "Cap Amount" shall be (a) 150% of the Floor Price during the first five years following the Original Issue Date, and (b) 175% of the Floor Price at any time after the fifth anniversary date of the Original Issue Date. "Closing Price" of any security on any date means the closing sale price (or, if no closing sale price is reported, the last reported sale price) of such security on the NYSE on such date, as reported in the NYSE Composite Transaction Reporting System, or, if such security is not listed for trading on the NYSE on that date, as reported in the composite transactions reporting system for the principal United States securities exchange on which such security is so listed, or, if such security is not so listed, as reported on the National Association of Securities Dealers, Inc. Automated Quotation System, or, if not so reported, the last quoted bid price for such security in the over-the-counter market as reported by the National Quotation Bureau or similar 7 organization, or, if such bid price is not available, the market value of such security on such date as determined by a nationally recognized independent investment banking firm retained for the purpose. "Code" means the Internal Revenue Code of 1986, as amended. "Common Stock" means the common stock, $1.00 par value per share, of the Company. "Common Stock Price" means, on any specified date, the Closing Price of Common Stock on the last Trading Day before such date. The Common Stock Price shall be appropriately adjusted to take into account any dividends or distributions payable in Common Stock, or any reclassification, subdivision or combination of, or similar transaction involving, Common Stock. "Conversion Amount Per Share" is equal to the Convertible Participating Preferred Stock Value Per Share. "Conversion Date" means the date specified in Section 6(c)(i) of this Division A-2. "Conversion Notice" means a notice described in Section 6(c)(i) of this Division A-2. "Convertible Participating Preferred Stock" has the meaning set forth in Section 2 of this Division A-2. "Convertible Participating Preferred Stock Liquidation Preference" has the meaning set forth in Section 8(a) of this Division A-2. "Convertible Participating Preferred Stock Value Per Share" is equal to a fraction. The numerator is the sum of (a) the Adjusted Common Stock Value plus (b) the Base Value less (c) the Acquisition Debt. The denominator is 250,000 shares. If the Convertible Participating Preferred Stock Value Per Share is being calculated on a date on which principal is being paid on the Purchase Money Note, the Base Value shall be calculated including the principal payment made on that date. "ESOP" means the employee stock ownership plan feature of the Plan and any other employee stock ownership plan and trust that is designated by the Company and that assumes or becomes a transferee or a successor by merger, spin-off or split-up, of any of the assets and liabilities of such employee stock ownership plan feature. "ESOP Loan Suspense Account" means a suspense account maintained by the ESOP pursuant to Treasury Regulation Section 54.4975-11(c) (1979). "Floor Price" means the Common Stock Price on the Original Issue Date. "Liquidation" has the meaning set forth in Section 8(a) of this Division A-2. "Original Issue Date" means the date of original issuance of the Convertible Participating Preferred Stock. "Per-Share Redemption Amount" means, as of any specified date, the Conversion Amount Per Share. "Plan" means The Sherwin-Williams Company Employee Stock Purchase and Savings Plan, and any other plan and trust qualified under Code Section 401(a) that is designated by the Company and that assumes or becomes a transferee or a successor by merger, spin-off or split-up, of substantially all of the assets and liabilities of such plan. "Purchase Money Note" means the purchase money note, in the principal amount of Two Hundred Fifty Million Dollars ($250,000,000), made in favor of the Company by The Sherwin-Williams Company Employee Stock Purchase and Savings Plan to acquire the Convertible Participating Preferred Stock. "Redemption Date" means the Business Day that is the effective date of a redemption pursuant to Section 7(b) of this Division A-2. "Redemption Notice" means the notice described in Section 7(b) of this Division A-2. "Redemption Price" means the sum of: (a) the product of (i) the number of whole and fractional shares of Convertible Participating Preferred Stock redeemed, multiplied by (ii) the Per-Share Redemption 8 Amount; plus (b) any accumulated and unpaid dividends on the shares of Convertible Participating Preferred Stock. "Series" has the meaning set forth in Section 2 of this Division A-2. "Trading Day" means, with respect to any security, (a) if the principal trading market for the applicable security is the NYSE or another national securities exchange, a day on which the NYSE or such other national securities exchange is open for business, (b) if the principal trading market for the applicable security is the Nasdaq, a day on which a trade may be made on the Nasdaq National Market, or (c) if the applicable security is not listed, admitted for trading or quoted as provided in clause (a) or (b), any Business Day. Any day for which there is no reported sales of Common Stock on the applicable exchange or market shall not be treated as a Trading Day. Section 2. Designation of Series. There is established hereby a series of Serial Preferred Stock that shall be designated "Convertible Participating Serial Preferred Stock" (hereinafter sometimes called this "Series" or the "Convertible Participating Preferred Stock") and that shall have the terms set forth in this Division A-2. Section 3. Number of Shares. The number of shares of this Series shall be 1,000,000. Section 4. Issuance and Transfer Restrictions. Shares of Convertible Participating Preferred Stock shall be issued and sold by the Company to the Plan to be held in the ESOP Loan Suspense Account. Shares of Convertible Participating Preferred Stock shall be uncertificated shares. Transfers of shares of Convertible Participating Preferred Stock may only be effected by applicable entry or entries in the stock transfer books of the Company. Shares of Convertible Participating Preferred Stock are prohibited from being transferred out of the ESOP Loan Suspense Account until such time as such shares are converted into shares of Common Stock in accordance with Section 6 of this Division A-2 or redeemed by the Company in accordance with Section 7 of this Division A-2. The transfer restrictions set forth in the preceding sentence shall not apply to any shares of Common Stock resulting from a conversion of the Convertible Participating Preferred Stock. Section 5. Dividends. The holders of record of shares of Convertible Participating Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors in accordance with the terms hereof, out of funds legally available for such purpose, cumulative quarterly dividends payable in cash on the last day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share of Convertible Participating Preferred Stock or fraction of a share of Convertible Participating Preferred Stock, in an amount per share equal to $10.00 per share. Dividends shall begin to accrue and be cumulative on outstanding shares of Convertible Participating Preferred Stock from the date of issue of such shares. Accrued but unpaid dividends shall not bear interest. No dividends shall be paid upon or declared and set apart for any Convertible Participating Preferred Stock for any dividend period unless at the same time a dividend for the same dividend period, ratably in proportion to the respective annual dividend rates fixed therefor, shall be paid upon or declared and set apart for all Serial Preferred Stock of all series then outstanding and entitled to receive such dividend. The Board of Directors may fix a record date for the determination of holders of Convertible Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 40 days prior to the date fixed for the payment thereof. Section 6. Conversion. (a) Conversion Right. All or any portion of the outstanding shares of Convertible Participating Preferred Stock held in the ESOP Loan Suspense Account shall be convertible, at the option of the Plan, at any time and from time to time, and without the payment of additional consideration by the Plan, into such number of shares of Common Stock as is determined under the following conversion formula. Each share of Convertible Participating Preferred Stock will be converted into a number of shares of Common Stock equal to (i) the Conversion Amount Per Share divided by (ii) the Common Stock Price. (b) Alternative Conversion Right. All, but not less than all, of the outstanding shares of Convertible Participating Preferred Stock held in the ESOP Loan Suspense Account shall be convertible, at the option of the Plan, at any time and from time to time, and without payment of additional consideration by the Plan, into such number of shares of Common Stock as is determined under the following conversion 9 formula. Each share of Convertible Participating Preferred Stock will be converted into a number of shares of Common Stock equal to (i) the Adjusted Common Stock Value divided by (ii) 250,000 shares divided by (iii) the Common Stock Price. In the event the Convertible Participating Preferred Stock are converted pursuant to the Alternative Conversion Right set forth in this Section 6(b), the entire unpaid principal balance and any and all interest accrued on such unpaid principal balance owing under the Purchase Money Note shall immediately become due and payable. (c) Conversion Procedures. (i) In order to convert shares of Convertible Participating Preferred Stock into shares of Common Stock pursuant to this Section 6, the Plan shall deliver to the Company at its principal executive offices or another place designated by the Company in a written notice sent to the Plan, a Conversion Notice, in form satisfactory to the Company, duly executed by the Plan. Each Conversion Notice shall specify (1) the number of shares of Convertible Participating Preferred Stock to be converted and (2) whether the Convertible Participating Preferred Stock are being converted pursuant to the Conversion Right set forth in Section 6(a) of this Division A-2 or the Alternative Conversion Right set forth in Section 6(b) of this Division A-2. In the event shares of the Convertible Participating Preferred Stock are converted pursuant to this Section 6, the Company shall deliver Common Stock which is readily tradable on an established securities market (A) as soon as practicable after receipt of the Conversion Notice, if such Conversion Notice is received prior to the effectiveness of any registration statement filed with the Securities and Exchange Commission regarding the registration of such Common Stock, or (B) as soon as reasonably practicable, but not later than five (5) Business Days, after receipt of the Conversion Notice, if such Conversion Notice is received after the effectiveness of any registration statement filed with the Securities and Exchange Commission regarding the registration of such Common Stock. Any conversion pursuant to this Section 6 shall be deemed to have been effected at the close of business on the Business Day on which the Conversion Notice has been received by the Company (a "Conversion Date"). (ii) The Company shall, as soon as practicable after the Conversion Date, cause to be issued and delivered to the person specified in the Conversion Notice a certificate or certificates evidencing the number of full shares of Common Stock to which such person shall be entitled, together with a cash payment in respect of any fractional shares of Common Stock otherwise issuable. The person or persons entitled to receive the shares of Common Stock deliverable upon conversion of such shares of Convertible Participating Preferred Stock shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the relevant Conversion Date, unless the stock transfer books of the Company shall be closed on such Conversion Date, in which event such person or persons shall be deemed to have become such holder or holders of record at the close of business on the next succeeding day on which such stock transfer books are open. (d) Fractional Shares. No fractional shares or scrip representing fractional shares of Common Stock shall be issued upon conversion of any shares of Convertible Participating Preferred Stock. If more than one share of Convertible Participating Preferred Stock shall be surrendered for conversion at one time by the same record holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Convertible Participating Preferred Stock which are converted. In lieu of any fractional share of Common Stock that would otherwise be issuable upon conversion of any shares of Convertible Participating Preferred Stock, the Company shall pay a cash adjustment in respect of such fractional share in lieu thereof, calculated to the nearer cent, with one-half cent or more rounded upward. (e) Reservation and Authorization of Shares. The Company shall at all times when the Convertible Participating Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of the Convertible Participating Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Convertible Participating Preferred Stock. (f) Converted Shares. After the Conversion Date with respect to any shares of Convertible Participating Preferred Stock, such shares shall no longer be deemed to be outstanding and all rights with 10 respect to such shares, including but not limited to the rights, if any, to receive notices or distributions and to vote, shall immediately cease and terminate on the Conversion Date, except only the right of the holders thereof to receive shares of Common Stock (and cash in lieu of fractional shares) in exchange therefor. Section 7. Redemption. (a) Shares Released from the ESOP Loan Suspense Account. The Plan may, at the option of the Plan, elect to have the Company redeem any or all shares or fractions of a share of Convertible Participating Preferred Stock when and as they are released from the ESOP Loan Suspense Account as provided in Treasury Regulation Section 54.4975-11(c). The amount paid by the Company for shares so redeemed shall be equal to the Redemption Price. (b) Notice of Redemption. In the event of a redemption pursuant to Section 7(a) of this Division A-2, the Plan shall give notice (a "Redemption Notice") to the Company. Each Redemption Notice shall specify (i) the Redemption Date, (ii) the number of shares of Convertible Participating Preferred Stock to be redeemed or the aggregate Redemption Price for all shares of Convertible Participating Preferred Stock to be redeemed as of the applicable Redemption Date, (iii) the place or places for payment of the Redemption Price, (iv) that payment will be made upon surrender of shares of Convertible Participating Preferred Stock, and (v) that the right of holders to convert shares of Convertible Participating Preferred Stock shall terminate at the close of business on the Redemption Date (unless the Company defaults in the payment of the Redemption Price). The Redemption Date may be the date the Redemption Notice is given. (c) Redemption Procedures. On the Redemption Date, the Plan shall surrender the shares of Convertible Participating Preferred Stock to the Company and shall thereupon be entitled to receive payment of the applicable Redemption Price for each such share. If a Redemption Notice shall have been given, as aforesaid, and if, on the Redemption Date, assets necessary for the redemption shall be legally available therefor and shall have been irrevocably deposited, set aside for or paid (including, payment in the form of debt forgiveness) to the Plan, then, notwithstanding that the redeemed shares of Convertible Participating Preferred Stock shall not have been surrendered, (i) such shares shall no longer be deemed outstanding, (ii) the Plan shall cease to be a stockholder of the Company to the extent of its interest in such shares, and (iii) all rights whatsoever with respect to such shares of Convertible Participating Preferred Stock shall terminate, except the right to receive the Redemption Price for each such share, without interest or any sum of money in lieu of interest thereon. Redemptions of Convertible Participating Preferred Stock shall be effected as of the close of business on the Redemption Date before effecting any conversion for which the Conversion Date corresponds with the Redemption Date. (d) No Sinking Fund. The shares of Convertible Participating Preferred Stock shall not be subject to the operation of any retirement or sinking fund. (e) Redeemed Shares. After the Redemption Date with respect to any shares of Convertible Participating Preferred Stock, such shares shall no longer be deemed to be outstanding and all rights with respect to such shares, including but not limited to the rights, if any, to receive notices or distributions and to vote, shall immediately cease and terminate on the Redemption Date, except only the right of the holders thereof to receive the Redemption Price therefor, without interest or any sum of money in lieu of interest thereon. Any shares of Convertible Participating Preferred Stock redeemed pursuant to this Section 7 shall be retired and canceled after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Serial Preferred Stock and may be reissued as part of a new series of Serial Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions set forth herein. (f) Payment of Redemption Price. The Company, at its option, may make payment of the Redemption Price (i) in cash, (ii) in shares of Common Stock which are readily tradeable on an established securities market, or (iii) in any combination of any of the foregoing. For purposes of determining the number of shares of Common Stock to be delivered by the Company in satisfaction, in whole or in part, of any Redemption Price, shares of Common Stock shall be valued at the Common Stock Price as of the Redemption Date. 11 Section 8. Liquidation. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company (hereinafter referred to as a "Liquidation"), no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon Liquidation) to the Convertible Participating Preferred Stock, unless, prior thereto, the holders of shares of Convertible Participating Preferred Stock shall have received at least an amount per share equal to $1,000, plus an amount equal to accrued and unpaid dividends thereon, whether or not earned or declared, to the date of such payment (the "Convertible Participating Preferred Stock Liquidation Preference"). (b) In the event, however, that the net assets of the Company are not sufficient to pay in full the amount of the Convertible Participating Preferred Stock Liquidation Preference and the liquidation preferences of all other series of Serial Preferred Stock, if any, which rank on a parity with the Convertible Participating Preferred Stock as to distribution of assets in Liquidation, all shares of this Series and of such other series of Serial Preferred Stock shall share ratably in the distribution of assets (or proceeds thereof) in Liquidation in proportion to the full amounts to which they are respectively entitled. (c) The merger or consolidation of the Company into or with any other Company, or the merger of any other corporation into it, or the sale, lease or conveyance of all or substantially all the property or business of the Company, shall not be deemed to be a Liquidation for the purposes of this Section 8. DIVISION B EXPRESS TERMS OF THE COMMON STOCK The Common Stock shall be subject to the express terms of the Serial Preferred Stock and any series thereof. Each share of Common Stock shall be equal to every other share of Common Stock. The holders of shares of Common Stock shall be entitled to one vote for each share of such stock upon all matters presented to the shareholders. The holders of shares of Common Stock shall have no preemptive rights to purchase or have offered to them for purchase any shares of Common Stock which at any time shall be required for issuance in fulfillment of the provisions of any series of the Company's Serial Preferred Stock. FIFTH: No holders of any class of shares of the Company shall have any preemptive right to purchase or have offered to them for purchase any shares or other securities of the Company, whether now or hereafter authorized. SIXTH: (A) Notwithstanding any provision of the Ohio Revised Code now or hereafter in force requiring for any purpose the vote, consent, waiver or release of the holders of shares entitling them to exercise two-thirds, or any other proportion, of the voting power of the Company or of any class or classes of shares thereof, such action, unless otherwise expressly required by statute or by the Articles of the Company, may be taken by the vote, consent, waiver or release of the holders of shares entitling them to exercise a majority of the voting power of the Company or of such class or classes. (B) The affirmative vote (i) of the holders of shares entitling them to exercise two-thirds of the voting power of the Company, and (ii) of the holders of two-thirds of the shares of Common Stock at the time outstanding, given in person or by proxy at a meeting called for the purpose at which the holders of Common Stock shall vote separately as a class, shall be necessary: (a) to approve (i) the sale, exchange, lease, transfer or other disposition by the Company of all, or substantially all, of its assets or business to a related corporation or an affiliate of a related corporation, or (ii) the consolidation of the Company with or its merger into a related corporation or an affiliate of a related corporation, or (iii) the merger into the Company of a related corporation or an affiliate of a related corporation, or (iv) a combination or majority share acquisition in which the Company is the acquiring corporation and its voting shares are issued or transferred to a related corporation or an affiliate of a related corporation or to shareholders of a related corporation or an affiliate of a related corporation; or (b) to approve any agreement, contract or other arrangement with a related corporation providing for any of the transactions described in subparagraph (a) above; or 12 (c) to effect any amendment of the Articles of the Company which changes the provisions of this Paragraph (B). For the purpose of this Paragraph (B), (i) a "related corporation" in respect of a given transaction shall be any corporation which, together with its affiliates and associated persons, owns of record or beneficially, directly or indirectly, more than 5% of the shares of any outstanding class of stock of the Company entitled to vote upon such transaction, as of the record date used to determine the shareholders of the Company entitled to vote upon such transaction; (ii) an "affiliate" of a related corporation shall be any individual, joint venture, trust, partnership or corporation which, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the related corporation; (iii) an "associated person" of a related corporation shall be any officer or director or any beneficial owner, directly or indirectly, of 10% or more of any class of equity security, of such related corporation or any of its affiliates; (iv) the terms "combination", "majority share acquisition" and "acquiring corporation" shall have the same meaning as that contained in Section 1701.01 of the Ohio General Corporation Law or any similar provision hereafter enacted. The determination of the Board of Directors of the Company, based on information known to the Board of Directors and made in good faith, shall be conclusive as to whether any corporation is a related corporation as defined in this Paragraph (B). SEVENTH: The Company may from time to time, pursuant to authorization by the Board of Directors and without action by the shareholders, purchase or otherwise acquire shares of the Company of any class or classes in such manner, upon such terms and in such amounts as the Board of Directors shall determine; subject, however, to such limitation or restriction, if any, as is contained in the express terms of any class of shares of the Company outstanding at the time of the purchase or acquisition in question. EIGHTH: No shareholder of the Company may cumulate his voting power. NINTH: These Amended and Restated Articles of Incorporation shall supersede and take the place of the heretofore existing Articles of Incorporation of the Company and all amendments thereto. 13 EX-4.D 4 l92671aex4-d.txt EXHIBIT 4(D) EXHIBIT 4(d) AMENDMENT NO. 2 TO AMENDED AND RESTATED 364-DAY REVOLVING CREDIT AGREEMENT This Amendment No. 2 dated as of December 28, 2001 (this "Amendment") to the Amended and Restated 364-Day Revolving Credit Agreement dated December 31, 1999, as amended by Amendment No. 1 dated as of December 1, 2000 (collectively, the "Credit Agreement"), by and among THE SHERWIN-WILLIAMS COMPANY ("Company"), THE CHASE MANHATTAN BANK, as Administrative Agent and Competitive Advance Facility Agent ("Chase"), and the LENDERS referred to therein. W I T N E S S E T H: ------------------- WHEREAS, the Company has been notified by the following financial institutions that were "Lenders" under the Credit Agreement that their Commitments shall terminate effective 12:01 a.m. New York time on December 28, 2001: (i) Bank One, N.A., (ii) The Bank of Nova Scotia, and (iii) Wachovia Bank, N.A. (formerly known as Wachovia Bank of Georgia, N.A.).; and WHEREAS, the Company, Chase and the Lenders desire to amend the Credit Agreement to: (i) reflect the reduction in the aggregate Commitments of the Lenders, and the aggregate principal amount of the Credit Agreement, by reason of the termination of certain of the Lenders' Commitments as referenced above to an amount not to exceed One Hundred Twelve Million Two Hundred Thousand and 00/100 Dollars ($112,200,000), (ii) add The Northern Trust Company as a Lender, and (iii) revise the list of Lenders accordingly. NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties agree as follows: 1. All capitalized terms used in this Amendment but not otherwise defined herein shall have the meanings ascribed such terms in the Credit Agreement. 2. The Northern Trust Company is hereby added to the Credit Agreement as a Lender. 3. The Commitments and Percentages set forth on Schedule A to the Credit Agreement are hereby deleted and the Commitments and Percentages set forth on Schedule A hereto are hereby substituted in lieu thereof. 4. The parties hereby confirm their election to extend and continue the Credit Agreement, as amended hereby, for an additional period of three hundred sixty-four (364) days commencing as of the date set forth above at the aggregate amount equal to the Commitments set forth on Schedule A attached hereto. 1 5. The representations and warranties contained in Article IV of the Credit Agreement, after giving effect to this Amendment, are true and correct on and as of the date hereof, except to the extent that such representations and warranties expressly relate to an earlier date. 6. This Amendment shall become effective as of the date set forth above, provided the Company shall have received counterparts of this Amendment that, when taken together, bear the signatures of Chase and the Lenders. This Amendment shall apply and be effective only with respect to the provisions of the Credit Agreement specifically referred to herein. After the date hereof, any reference to the Credit Agreement shall mean the Credit Agreement, as modified hereby. 7. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and when taken together shall constitute one and the same agreement. 8. This Amendment shall be governed by, and construed in accordance with, the laws of the State of Ohio. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date indicated above. THE SHERWIN-WILLIAMS COMPANY By: /s/ ---------------------------------------- Sean P. Hennessy, Senior Vice President-Finance, Treasurer and Chief Financial Officer By: /s/ ---------------------------------------- Cynthia D. Brogan, Vice President and Assistant Treasurer THE CHASE MANHATTAN BANK, individually as a Lender, and as Administrative Agent and Competitive Advance Facility Agent By: /s/ ---------------------------------------- Name: ------------------------------- Title: ------------------------------- 2 SIGNATURE PAGE TO AMENDMENT NO. 2 DATED AS OF DECEMBER 28, 2001, TO THE SHERWIN-WILLIAMS COMPANY AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT DATED DECEMBER 31, 1999, AS AMENDED BY AMENDMENT NO. 1 DATED AS OF DECEMBER 1, 2000 The Northern Trust Company hereby agrees to each of the terms and conditions of the Credit Agreement, a copy of which has been delivered by the Company to The Northern Trust Company. AMOUNT OF COMMITMENT: THE NORTHERN TRUST COMPANY - -------------------- $5,000,000 By: /s/ ---------------------------------------- Name: ------------------------------- Title: ------------------------------- 3 SIGNATURE PAGE TO AMENDMENT NO. 2 DATED AS OF DECEMBER 28, 2001, TO THE SHERWIN-WILLIAMS COMPANY AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT DATED DECEMBER 31, 1999, AS AMENDED BY AMENDMENT NO. 1 DATED AS OF DECEMBER 1, 2000 Name of Lender: FIRST UNION BANK By: /s/ ---------------------------------------- Name: ------------------------------- Title: ------------------------------- 4 SIGNATURE PAGE TO AMENDMENT NO. 2 DATED AS OF DECEMBER 28, 2001, TO THE SHERWIN-WILLIAMS COMPANY AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT DATED DECEMBER 31, 1999, AS AMENDED BY AMENDMENT NO. 1 DATED AS OF DECEMBER 1, 2000 Name of Lender: THE BANK OF NEW YORK By: /s/ ---------------------------------------- Name: ------------------------------- Title: ------------------------------- 5 SIGNATURE PAGE TO AMENDMENT NO. 2 DATED AS OF DECEMBER 28, 2001, TO THE SHERWIN-WILLIAMS COMPANY AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT DATED DECEMBER 31, 1999, AS AMENDED BY AMENDMENT NO. 1 DATED AS OF DECEMBER 1, 2000 Name of Lender: BANK OF AMERICA, N.A. By: /s/ ---------------------------------------- Name: ------------------------------- Title: ------------------------------- 6 SIGNATURE PAGE TO AMENDMENT NO. 2 DATED AS OF DECEMBER 28, 2001, TO THE SHERWIN-WILLIAMS COMPANY AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT DATED DECEMBER 31, 1999, AS AMENDED BY AMENDMENT NO. 1 DATED AS OF DECEMBER 1, 2000 Name of Lender: ABN AMRO BANK N.V. By: /s/ ---------------------------------------- Name: ------------------------------- Title: ------------------------------- 7 SIGNATURE PAGE TO AMENDMENT NO. 2 DATED AS OF DECEMBER 28, 2001, TO THE SHERWIN-WILLIAMS COMPANY AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT DATED DECEMBER 31, 1999, AS AMENDED BY AMENDMENT NO. 1 DATED AS OF DECEMBER 1, 2000 Name of Lender: CITICORP USA, INC. By: /s/ ---------------------------------------- Name: ------------------------------- Title: ------------------------------- 8 SIGNATURE PAGE TO AMENDMENT NO. 2 DATED AS OF DECEMBER 28, 2001, TO THE SHERWIN-WILLIAMS COMPANY AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT DATED DECEMBER 31, 1999, AS AMENDED BY AMENDMENT NO. 1 DATED AS OF DECEMBER 1, 2000 Name of Lender: NATIONAL CITY BANK By: /s/ ---------------------------------------- Name: ------------------------------- Title: ------------------------------- 9 SIGNATURE PAGE TO AMENDMENT NO. 2 DATED AS OF DECEMBER 28, 2001, TO THE SHERWIN-WILLIAMS COMPANY AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT DATED DECEMBER 31, 1999, AS AMENDED BY AMENDMENT NO. 1 DATED AS OF DECEMBER 1, 2000 Name of Lender: SUNTRUST BANK, ATLANTA By: /s/ ---------------------------------------- Name: ------------------------------- Title: ------------------------------- 10 SIGNATURE PAGE TO AMENDMENT NO. 2 DATED AS OF DECEMBER 28, 2001, TO THE SHERWIN-WILLIAMS COMPANY AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT DATED DECEMBER 31, 1999, AS AMENDED BY AMENDMENT NO. 1 DATED AS OF DECEMBER 1, 2000 Name of Lender: WELLS FARGO BANK, N.A. By: /s/ ---------------------------------------- Name: ------------------------------- Title: ------------------------------- 11 SIGNATURE PAGE TO AMENDMENT NO. 2 DATED AS OF DECEMBER 28, 2001, TO THE SHERWIN-WILLIAMS COMPANY AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT DATED DECEMBER 31, 1999, AS AMENDED BY AMENDMENT NO. 1 DATED AS OF DECEMBER 1, 2000 Name of Lender: MELLON BANK, N.A. By: /s/ ---------------------------------------- Name: ------------------------------- Title: ------------------------------- 12 SIGNATURE PAGE TO AMENDMENT NO. 2 DATED AS OF DECEMBER 28, 2001, TO THE SHERWIN-WILLIAMS COMPANY AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT DATED DECEMBER 31, 1999, AS AMENDED BY AMENDMENT NO. 1 DATED AS OF DECEMBER 1, 2000 Name of Lender: FIFTH THIRD BANK By: /s/ ---------------------------------------- Name: ------------------------------- Title: ------------------------------- 13 SIGNATURE PAGE TO AMENDMENT NO. 2 DATED AS OF DECEMBER 28, 2001, TO THE SHERWIN-WILLIAMS COMPANY AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT DATED DECEMBER 31, 1999, AS AMENDED BY AMENDMENT NO. 1 DATED AS OF DECEMBER 1, 2000 Name of Lender: BANCA COMMERCIALE ITALIANA, CHICAGO BRANCH By: /s/ ---------------------------------------- Name: ------------------------------- Title: ------------------------------- 14 Schedule A to Amendment No. 2 dated as of December 28, 2001 to The Sherwin-Williams Company Amended and Restated 364-Day Credit Agreement --------------------------------------------- Lender Percentage of Commitments Commitment ------ ------------------------- ---------- The Chase Manhattan Bank 8.9127% $10,000,000 First Union National Bank (formerly known as First Union National Bank of North Carolina) 8.9127% $10,000,000 The Bank of New York 8.9127% $10,000,000 Bank of America, N.A. 8.9127% $10,000,000 ABN AMRO Bank N.V. 8.9127% $10,000,000 Citicorp USA, Inc. 8.9127% $10,000,000 National City Bank 8.9127% $10,000,000 SunTrust Bank, Atlanta 8.9127% $10,000,000 Wells Fargo Bank, N.A. 8.9127% $10,000,000 Mellon Bank, N.A. 6.7736% $7,600,000 The Northern Trust Company 4.4563% $5,000,000 Fifth Third Bank 4.2781% $4,800,000 Banca Commerciale Italiana, Chicago Branch 4.2781% $4,800,000 ------------ $112,200,000 15 EX-10.Q 5 l92671aex10-q.txt EXHIBIT 10(Q) EXHIBIT 10(q) EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, effective as of August 13, 2001 (the "Effective Date"), is made between LARRY J. PITORAK ("Employee") and THE SHERWIN-WILLIAMS COMPANY, an Ohio corporation with its principal place of business in Cleveland, Ohio ("Employer"). WHEREAS, Employee previously has worked for Employer in an at-will relationship, in a capacity as an Executive Officer of Employer, which relationship the parties mutually have decided to terminate; and WHEREAS, Employer desires to continue to employ Employee for the term of this Agreement and Employee desires to accept such employment, all under the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the terms, conditions, premises, and the mutual covenants set forth herein, the parties to this Agreement hereby agree as follows: i) SCOPE AND NATURE OF EMPLOYMENT ASSIGNMENT. Employer shall employ Employee in the position or capacity of an employee on "Special Assignment," without specific assigned duties or employment obligations, but subject always to the direction and control of Employer, its officers and authorized agents, and Employee hereby accepts such assignment. ii) TERM OF AGREEMENT. The Term of this Agreement shall be from August 13, 2001 to April 30, 2003, unless it is terminated sooner in accordance with, and subject to, Section 12 herein. iii) COMPENSATION. (1) IN GENERAL. The term "Compensation" shall mean Employee's "Base Pay" and "Bonus," as defined below. (2) BASE PAY: For the duration of the term of this Agreement, Employer shall pay to Employee, utilizing payroll practices consistent with those applicable to other Top-5 Officers (as defined below) of Employer at the time such payments are made, a bi-weekly salary of Fifteen Thousand Six Hundred Twenty Four and 00/100 Dollars ($15,624.00), less applicable and usual tax and other withholdings and employee contributions to benefit plans. (3) BONUS: For calendar years 2001 and 2002, in the event a bonus or other short-term incentive award payment is paid to other executives of Employer who are identified as being among the top five officers of Employer in its annual Proxy Statement as filed pursuant to the Securities Exchange Act of 1934 ("Top-5 Officers"), pursuant to the Sherwin-Williams Management Incentive Plan ("SWIMP"), or its successor plan or program, then Employer shall pay such a bonus or other short-term incentive award payment to Employee, at a time and in the manner in which such payment is made to such other Top-5 Officers of Employer. With respect to calendar years 2001 and/or 2002, the amount of such bonus or other short-term incentive, if paid or payable shall be on the basis of: Ninety percent (90%) of achievement (48% of Base Pay) in each year; provided, however, if the average percent of achievement of such Top-5 Officers shall exceed ninety percent, Employer will pay him at the average achievement level of such Top-5 Officers, not to exceed 100% of goal achievement (60% of Base Pay). 2 iv) STOCK OPTIONS: (1) VESTING. All unvested stock options will continue to vest through the term of this Agreement such that Employee's service under this Agreement shall be deemed employment service under Employer's stock option plan. In the event Employee elects to "Retire" under this Agreement (as defined in Section 10 of this Agreement), all unvested options at such time shall become fully vested. In the event of a Change of Control (as defined under Section 11 herein), all unvested options shall become fully vested. (2) EXERCISE PERIOD. All stock options which are fully vested as of August 13, 2001 shall be fully exercisable in accordance with their terms during the term of this Agreement. Thereafter, such options shall be exercisable in accordance with their terms, provided, however, that if Employee Retires under this Agreement, he shall have: (a) a period of ten years from date of original grant to exercise such options granted on or after February 4, 1998, and (b) a period of three years from date of Retirement to exercise options granted prior to February 4, 1998, but in no event later than the time such options would otherwise expire by their terms. All stock options which vest fully after September 1, 2001 shall be exercisable after becoming so vested, throughout the term of this Agreement; provided, however, that if Employee Retires upon termination of this Agreement, he shall have a period of ten years from the date of grant to exercise such options. (3) ISO STATUS. Incentive Stock Options shall retain their status as such during the period of this Agreement. Such options, however, shall be converted to nonqualified stock options if not exercised within ninety (90) days of Employee's Retirement. v) RESTRICTED STOCK. Management of the Employer shall recommend to The Compensation and Management Development Committee of Employer's Board of Directors to 3 approve the early retirement of Employee as provided in this Agreement, pursuant to Section 3(d) of the Restricted Stock Grants between Employer and Employee dated February 7, 2001 and February 3, 1999 (the "Grants"), respectively, which were made pursuant to The Sherwin-Williams Company 1994 Stock Plan (the "1994 Stock Plan"). Such approval shall entitle Employee to continue his rights thereunder in full (i.e., without proration of the number of shares granted thereunder for the portion of the Restriction Period completed as of the date of such Retirement), and, upon termination of this Agreement and Employee's Retirement, Employee will be treated as if he had remained employed in a Participating Position throughout the entire Restriction Period (as those terms are defined under the 1994 Stock Plan). vi) RETIREMENT PLANS. The following four plans identified below shall be referred to collectively as the "Retirement Plans". (1) SALARIED EMPLOYEES' REVISED PENSION INVESTMENT PLAN AND PENSION INVESTMENT EQUALIZATION PLAN. Employee shall be entitled to Employer contributions under these two plans, in accordance with their terms, based upon the Compensation paid to him under this Agreement, during the term of this Agreement. In the final calendar year of this Agreement, in the event Employee Retires, he shall be eligible for Employer contributions under these plans even if he is not employed by Employer on the last day of the plan year. (2) EMPLOYEE STOCK PURCHASE AND SAVINGS PLAN AND DEFERRED COMPENSATION SAVINGS PLAN. Employee shall be entitled to make salary deferral contributions and to receive Employer matching contributions and Company Bonus Contributions (as defined under these plans), in accordance with their terms, based upon Compensation paid to him under this Agreement, during the term of this Agreement. vii) EMPLOYEE BENEFIT PLANS. 4 (1) HEALTH, MEDICAL, DENTAL, AND VISION COVERAGES; MEDICAL SPENDING ACCOUNTS. Employee shall continue to be eligible to participate in Employer's health, medical, dental, vision and medical spending account programs, on the same basis as any other Top-5 Officer of Employer, during the term of this Agreement. Employee shall experience a "qualifying event" (as that term is defined under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA")) on the date this Agreement terminates, by reason of expiration of its term or earlier termination in accordance with Paragraph 12 of this Agreement. (2) RETIREE HEALTH CARE. Employee shall be eligible to elect coverage under Employer's Retiree Medical Program, in the event of Employee's Retirement upon termination of this Agreement. Notwithstanding the foregoing, in the event Employee Retires, enrolls in the Retiree Health Care plan, and suspends such election (for example, because he or his spouse becomes employed with another employer which provides such similar coverage), he nevertheless shall remain eligible to participate in the Retiree Medical Program at such later date as he may designate. (3) EXECUTIVE LIFE INSURANCE PLAN. Employer shall pay the current annual premium under this program for Employee, as is necessary to provide a pre-retirement death benefit under the plan equal to three times Base Pay, until he reaches age sixty-two (62). At such time, Employer will roll out or release to Employee an insurance policy that will provide paid up life insurance coverage, for the life of Employee, in the face amount (i.e., with a death benefit of) two times Final Salary (as defined under the Executive Life Insurance Plan), or at Employee's option, a payout of the cash surrender value at that time less the Company's investment in the premium from inception date of the Plan. 5 (4) DISABILITY COVERAGE. Employee waives coverage under the Short-Term Disability Plan as of August 13, 2001. Coverage under Employer's Executive Group Long-Term Disability Plan shall continue (fully paid by Employer) through the date of Employee's Retirement (subject to Paragraph 12 herein). Thereafter, Employee may continue coverage pursuant to the terms of the Plan. (5) LIABILITY COVERAGES. Coverage under Employer's Umbrella Liability, Business Travel Accident, Dependent Life and Voluntary Personal Accident programs shall continue or be made available to Employee during the term of this Agreement, on the same basis as made available to Top-5 Officers of Employer, except that, if Employee Retires prior to the end of this Agreement (but subject to Paragraph 12 herein), his continuation or conversion coverage rights will be determined under the applicable plans. (6) PERKS/FRINGES: Except as set forth below, Employee shall be entitled to receive such perquisites and fringe benefits during the term of this Agreement to which he was entitled while he was a Top-5 Officer of Employer including, but not limited to, benefits under the General Executive Automobile Policy (such as lease costs, taxes, vehicle title costs, insurance, maintenance, repairs, and fuel), home security system monitoring, cellular telephone expenses, reimbursement for dues at The Club at Key Center, reimbursement for dues for professional associations of which Employee was a member on the Effective Date, personal umbrella liability insurance reimbursement, or other policies or programs of Employer. In addition, Employer shall forgive the remaining indebtedness to it by Employee related to the unpaid portion of the value of the vehicle in excess of Employee's entitlement under the General Executive Automobile Policy, and shall transfer title of the vehicle to Employee on or before Employee's Retirement hereunder, on a date as designated by Employee. 6 viii) PLAN PROCEDURAL MATTERS; FURTHER AMENDMENT OF PLANS. (1) PROCEDURES. During the term of this Agreement, except as otherwise specifically agreed in this Agreement. Employer will treat Employee as an employee at will, provide to Employee, on a timely basis, all notices, forms, Summary Plan Descriptions, Summaries of Material Modifications, and the like, as are required by ERISA and other applicable laws to be furnished to participants in the Retirement Plans and Employee Benefit Plans, as described in Sections 6 and 7 above, including such forms as may be requested by Employee to designate a beneficiary to receive any payment hereunder in the event of the death of Employee prior to termination of this Agreement. (2) PLAN MODIFICATIONS. Nothing in this Agreement is to be construed to prevent Employer from amending, modifying, terminating, or suspending any plan, program, policy, procedure, or practice hereunder, provided that such amendment, modification, termination or suspension is of general application to all participants or employees covered thereunder and not of unique or separate application to Employee; and provided further, hereunder, that no such amendment, modification, termination, or suspension hereunder shall deprive Employee of any right with respect to which he already is vested. Notwithstanding the foregoing, it is expressly understood that any amendments or modifications to, or replacement of, the Retirement Plans and Employee Benefit Plans described in Sections 6 and 7 above, or the SWIMP described in Paragraph 3 above, which are of general application to employees of Employer (or to the Top-5 Officers of Employer, as the case may be), similarly will apply to, or inure to the benefit of, Employee during the term of this Agreement. ix) OUTPLACEMENT ASSISTANCE. Employer shall pay for outplacement assistance through Ratliff, Taylor & Lekan, Inc. until Employee secures permanent, full-time employment. 7 x) RETIRE OR RETIREMENT. Employee shall be deemed to have "Retired" or elected "Retirement" under this Agreement, upon: (i) the termination of this Agreement, (ii) notification of his intent to "Retire" to either the Vice President of Human Resources or the Director of Compensation and Benefits of Employer at least one business day prior to the proposed effective date of such Retirement, and (iii) Employee's completion of such routine administrative forms as may be designated by Employer for such purpose. It is understood that, subject to this Agreement, once Employee Retires, stock options in Paragraph 4 and employee benefit plans in Paragraph 7 will be administered in accordance with the terms of those plans. xi) AMENDED AND RESTATED SEVERANCE PAY AGREEMENT. Employee and Employer are parties to an Amended and Restated Severance Pay Agreement, effective as of April 23, 1997 (the "CIC Agreement"). In the event there is a Change of Control under the CIC Agreement prior to termination of this Agreement, Employee, if he shall so elect, shall be entitled to all benefits under the CIC Agreement as if he were a Top-5 Officer of Employer at such time; provided, however, that Employee shall not be entitled to duplicate benefits under this Agreement and the CIC Agreement and the provisions of the CIC Agreement providing benefits to Employee shall be deemed to satisfy the like benefit obligations under this Agreement. xii) TERMINATION. (1) IN GENERAL. This Agreement shall terminate only upon the expiration of its Term, unless terminated sooner as set forth below; provided, however, that certain obligations of the parties hereto shall survive termination of the Agreement, as may be specified herein. (2) INVOLUNTARILY, FOR "CAUSE" BY EMPLOYER. Employer hereby specifically reserves the right to terminate the Term for Special Assignment under Paragraph 2 and Compensation and employee benefits otherwise due in the future under Paragraphs 3 through 9 8 immediately "for cause"; provided, however, that such termination shall not apply or cause a forfeiture of any benefits with respect to which Employee has a vested interest or in contravention to his rights under ERISA with respect to such plan or program. As used herein, the term "for cause" shall mean willful misconduct or gross negligence causing demonstrable injury to the reputation of the Employer and its affiliates, material breach of this Agreement, theft from the Employer, or interference with the business operations of the Employer. Notwithstanding the foregoing, before Employer can terminate this Agreement "for cause," (a) Employee must be given thirty (30) days' advance written notice of the act giving rise to the reason "for cause," and the opportunity to cure (if it can be cured), and (b) Employer must obtain the consent of the majority of its Board of Directors to invoke such termination; and, provided further, that the term "interference with the business operations of Employer" shall not be deemed to include Employee discharging his ordinary duties as an employee of any subsequent employer. (3) VOLUNTARILY, BY EMPLOYEE. Employee may terminate his employment under this Agreement prior to the conclusion of the term of this Agreement at any time upon reasonable notice to Employer. At such time, Employee will be entitled to Retire hereunder. (4) AUTOMATICALLY, BY EMPLOYEE COMMENCING REGULAR, FULL-TIME EMPLOYMENT PRIOR TO TERMINATION OF AGREEMENT. In the event Employee commences regular, full-time employment prior to April 30, 2003, (and not by reason of termination of employment by Employer under Section 12b. above), this Agreement shall terminate (subject to the survival provisions in Paragraph 23), and Employer shall be obligated to make such payments and provide such coverages or benefits as follows: a. Compensation and Retirement Plans: Employer shall pay to 9 Employee the amounts of Compensation and Employer contributions that otherwise would have been paid, accrued or reserved with respect to, or contributed on behalf of Employee had the Agreement not terminated prior to April 30, 2003. b. Employee Benefit Plans: Health, Medical, Dental, and Vision, coverage shall cease. Executive Life Insurance coverage shall continue as set forth in Paragraph 7c. herein. Disability Coverage, Liability Coverage, and Perks/Fringes, all as set forth in Sections 7d. through 7f. shall cease. However, Employer shall pay Employee the value of the employer contributions that otherwise would have been paid, accrued or reserved with respect to, or contributed on behalf of Employee had the Agreement not terminated. For purposes of Perks/Fringes, the value for each month of such benefits shall be equal to the average of the amounts paid, accrued, or reserved on behalf of Employee, or reimbursed to Employee during the prior twelve (12) month period. c. Stock Options, and Restricted Stock: Employee shall be given the opportunity to Retire at the time of termination of this Agreement. If he so elects, then he shall be treated under Sections 4 and 5 of this Agreement as if he retired at April 30, 2003. xiii) CONFIDENTIAL INFORMATION. Employee agrees that in addition to any other limitations to which he already is subject, regardless of the circumstances of the termination of his at-will employment with Employer, he will not communicate to any person, firm, or corporation any confidential information relating to customer lists, prices, trade secrets, advertising, or any other confidential knowledge which he has or might from time to time acquire 10 with respect to the business of Employer or any of its affiliates or subsidiaries. This provision shall not apply to information required to be disclosed by law or by court order. xiv) ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of Employer, Employee, and each of their respective successors, assigns, personal and legal representatives, executors, administrators, heirs, distributees, devisees, and legatees, as applicable; provided, however, that neither this Agreement nor any rights or obligations hereunder will be assignable or otherwise subject to hypothecation by Employee (except by will, designation of a beneficiary to receive post-death payments hereunder, or by operation of the laws of intestate succession) or by the Employer, except that Employer may assign this Agreement to any successor (whether by merger, purchase or otherwise) to all or substantially all of the stock, assets or businesses of Employer, if such successor expressly agrees to assume the obligations of Employer hereunder. xv) ENTIRETY. This Agreement embodies the entire understanding and agreement between the parties relative to the subject matter hereof. xvi) CONTROLLING LAW. The interpretation and performance of this Agreement shall be governed by the laws of the State of Ohio, to the extent not otherwise preempted by the Employee Retirement Income Security Act of 1974 ("ERISA"). xvii) FURTHER ASSISTANCE. Following the date of execution of this Agreement, Employee agrees to make himself available for reasonable amounts of time upon reasonable notice, at the request of Employer or its attorneys, with respect to pending or threatened litigation or arbitration proceedings brought by or against Employer or any of its affiliates. Employee agrees that, for reasonable amounts of time, and upon reasonable notice, he will consult with Employer or its attorneys regarding threatened or pending litigation and/or 11 arbitration proceedings and provide deposition testimony or testimony at hearings or trial without the need for a subpoena. Employer agrees to reimburse Employee for reasonable and documented travel costs and travel expenses in connection with such consultation or testimony. Employer also agrees that in connection with such testimony, Employee will be accompanied by an attorney selected by and paid for by Employer. Such assistance by Employee shall not be required to the extent it interferes with subsequent employment obligations of Employee to any new, subsequent employer. xviii) MUTUAL RELEASE. EMPLOYER, ON BEHALF OF ITSELF, ITS CURRENT OR FORMER SUBSIDIARIES, THEIR DIRECTORS, OFFICERS, SHAREHOLDERS, EMPLOYEES, AGENTS, REPRESENTATIVES, INSURERS, SUCCESSORS AND ASSIGNS, AND EMPLOYEE, ON BEHALF OF HIMSELF, HIS HEIRS, AGENTS, SUCCESSORS, ASSIGNS AND REPRESENTATIVES, HEREBY MUTUALLY WAIVE, RELEASE AND DISCHARGE EACH OTHER; AND THE PERSONS AND ORGANIZATIONS IDENTIFIED PREVIOUSLY IN THIS SENTENCE (COLLECTIVELY, "PERSONS"), WITH RESPECT TO ANY AND ALL CAUSES OF ACTION, CLAIMS, LIABILITIES AND DEMANDS OF ANY NATURE, WHETHER KNOWN OR UNKNOWN, RESULTING FROM OR BASED UPON, DIRECTLY OR INDIRECTLY, EMPLOYEE'S EMPLOYMENT RELATIONSHIP WITH THE ABOVE DESCRIBED PARTIES AND FOR EMPLOYEE INCLUDING, BUT NOT LIMITED TO, ANY ACTIONS, CLAIMS, LIABILITIES OR DEMANDS CONCERNING, BASED UPON OR ARISING OUT OF ANY ALLEGED WRONGFUL TERMINATION, BREACH OF EMPLOYMENT CONTRACT, BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING, DEFAMATION, WORKERS' COMPENSATION, INTENTIONAL OR NEGLIGENT 12 INFLICTION OF EMOTIONAL DISTRESS, OR DISCRIMINATION BASED ON RACE, NATIONAL ORIGIN, SEX, RELIGION, AGE OR HANDICAP, (INCLUDING, WITHOUT LIMITATION, CLAIMS OR RIGHTS UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967 AS AMENDED OR SIMILAR STATE LAWS). THIS RELEASE DOES NOT COVER ANY RIGHTS EMPLOYEE MAY HAVE UNDER THE PENSION INVESTMENT PLAN, THE EMPLOYEE STOCK PURCHASE AND SAVINGS PLAN, THE DEFERRED COMPENSATION SAVINGS PLAN, AND THE PENSION INVESTMENT EQUALIZATION PLAN, OR ANY OTHER PLAN COVERED BY ERISA, NOR DOES IT COVER ANY ACT, ACTIONS, OR OMISSION BY ANY PERSON OCCURRING ON OR AFTER THE EFFECTIVE DATE, OR ANY BREACH BY ANY PERSON OF THIS AGREEMENT. xix) RIGHT TO ATTORNEY; OPPORTUNITY TO REVIEW. Employee represents and agrees that: (i) he fully understands his right to have this Agreement reviewed by and to discuss all aspects of this Agreement with his private attorney and that to the extent, if any, he desires, he has availed himself to this right; (ii) he has had a period of not less than 21 days within which to review and consider this Agreement and has used as much of this 21 day period as he desired prior to executing the same; and (iii) he is voluntarily entering into this Agreement. xx) NONDISCLOSURE. Employer and Employee agree that the terms and provisions of this Agreement and all events leading thereto are to remain confidential and shall not be discussed by either of them, after the date of execution of this Agreement, with anyone other than his attorneys, tax and financial planning advisors (and for Employee, immediate family members) or as otherwise required by law. Employer specifically agrees that Employee may discuss the reasons his employment with Employer terminated, provided that Employee does not disparage 13 or malign Employer. Employee further agrees that if any unauthorized disclosures are made, this Employment Agreement, if the Employer so elects, shall be null and void and Employee, if the Employer elects, shall be liable to return the monies paid hereunder to the Employer, it being understood, that Employer shall act in good faith in exercising its rights hereunder including undertaking a good faith investigation and shall give Employee prior notice of its intentions hereunder. Employer agrees that the terms and provisions of this Agreement and all events leading thereto are to remain confidential and shall not be discussed by agents or employees of Employer with anyone other than its attorney, persons necessary for purposes of implementing this Agreement, or as otherwise required by law. xxi) INDEMNIFICATION. Nothing in this Agreement shall terminate any obligation of Employer to defend or indemnify Employee for any act, action, or omission by Employee while he was acting in the course and scope of his employment prior to the Effective Date or during the Term of this Agreement, as may be evidenced by any indemnification agreement between the parties, by-laws of Employer, or insurance carried by Employer for this purpose; it being expressly understood that the indemnification protection afforded Employee prior to the Effective Date is to continue after the Effective Date. xxii) NO OTHER REPRESENTATIONS. The making, execution and delivery of this Agreement have been induced by no representations, statements, warranties or agreements other than those expressed or referred to herein. xxiii) SURVIVAL. To the extent not otherwise inconsistent with any other provision of this Agreement, the provisions of Paragraphs 4, 5, 7b., 7c., 9, 12d., 13, 17, 18, 20, and 21 shall remain in full force and effect after termination or expiration of this Agreement for any reason. 14 xxiv) ENFORCEABILITY. This Agreement may be revoked by Employee during the seven-day period immediately following the date he executes this Agreement. xxv) ATTORNEYS' FEES. Employer shall pay the attorneys' fees of Employee's attorney incurred in the consultation, negotiation, and preparation of this Agreement. xxvi) MUTUALLY ACCEPTABLE REFERENCE. Employer and Employee have agreed upon a mutually acceptable reference and explanation for Employee's termination of employment. Such reference and explanation is attached as Exhibit A hereto. Employer and Employee agree to use Exhibit A to explain Employee's termination of employment or as a reference when so requested, and no Person shall make statements inconsistent with the reference and explanation in Exhibit A. xxvii) APPROVALS AND CONSENTS. Employer will obtain such approvals and consents as are necessary under relevant law or its by-laws to effectuate and deliver, with proper authority, its commitments hereunder, including, without limitation, the approval of The Compensation and Management Development Committee of Employer's Board of Directors with respect to Management of the Employer's recommendation concerning Restricted Stock as described in Paragraph 5 herein. In the event it fails to do so, Employee may rescind this Agreement, including the Release herein, and shall not be obligated to repay or reimburse Employee for any amounts paid hereunder. You may revoke this agreement during the seven (7) day period immediately following the date you execute it. This agreement will not become effective until the end of this seven (7) day period. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the dates indicated below. 15 READ CAREFULLY. THIS DOCUMENT CONTAINS A RELEASE. THE SHERWIN-WILLIAMS COMPANY LARRY J. PITORAK By: /s/ /s/ ----------------------------- ------------------------------------- Title: Date: -------------------------- -------------------------------- Date: --------------------------- 16 EX-13 6 l92671aex13.txt EXHIBIT 13 EXHIBIT 13 THE 2001 ANNUAL REPORT TO SHAREHOLDERS THE SHERWIN-WILLIAMS COMPANY 2001 ANNUAL REPORT [SHERWIN-WILLIAMS LOGO] America's Paint Company [PHOTOS] STRENGTH STABILITY SECURITY AMERICA'S PAINT COMPANY. Words of strength about a company with more than $5 billion in annual sales. Words of stability about a company with more than 135 years of coatings experience. Words of security about a company with increased dividends to shareholders for 22 consecutive years. Words that honor, humble and remind us of our industry leadership and corporate responsibility to our customers, employees and shareholders. TABLE OF CONTENTS SUMMARY OF OPERATING SEGMENTS 2 FINANCIAL HIGHLIGHTS 3 LETTER TO SHAREHOLDERS 4 THE OPERATING SEGMENTS 8 STORES MAP 18 SUBSIDIARIES AND CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION 19 FINANCIAL SUMMARY 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21 REPORTS OF MANAGEMENT AND INDEPENDENT AUDITORS 28 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES 29 DIRECTORS, OFFICERS, OPERATING PRESIDENTS 47 SHAREHOLDER INFORMATION 48
ON THE COVER [PHOTO] Like many Americans, Philadelphia painter Meg Saligman was "struck by a desire to do something" after the events of Sept. 11, 2001. Working with the city's Mural Arts Program and with paint, brushes and buckets supplied by Sherwin-Williams, she and three other painters -- Efrain Hererra, Larissa Preston and Cesar Viveros -- painted a 7,500-square-foot flag mural in downtown Philadelphia. "We are not doctors or therapists, so we couldn't help people heal in that way," Saligman says. "But if in our small way we could offer solace and a sense of unity to even one person, it would be worthwhile." It also was important to her that people go about their daily activities despite the tragedy. "We're painters, and we paint," she says. The Sherwin-Williams Company recruits, selects and hires the best possible people available -- without discrimination based on race, religion, color, creed, sex, national origin, age, disability, status as a special disabled veteran, veteran of the Vietnam era or any other unlawful consideration. SUMMARY OF OPERATING SEGMENTS PAINT STORES [PHOTO] PRODUCTS SOLD Paints, stains, caulks, applicators, wallcoverings, floorcoverings, spray equipment and related products MARKETS SERVED Do-It-Yourselfers, professional painting contractors, home builders, property managers, architects, interior designers, industrial, marine, aviation, flooring and original equipment manufacturer (OEM) product finishes MAJOR BRANDS SOLD Sherwin-Williams(R), Con-Lux(R), Old Quaker(TM), Mercury(R), Brod Dugan(R), Mautz(R), Pro-Line(R), Sea-Guard(R), ArmorSeal(R), Kem(R) Hi-Temp, Cook(TM), Sher-Wood(R), Powdura(R), Polane(R) and Kem Aqua(R) OUTLETS 2,573 Sherwin-Williams stores in North America [PIE CHART] NET EXTERNAL SALES BY OPERATING SEGMENT CONSUMER [PHOTO] PRODUCTS SOLD Branded, private label and licensed brand paints, stains, varnishes, industrial products, wood finishing products, applicators, corrosion inhibitors, aerosols and related products MARKETS SERVED Do-It-Yourselfers, professional painting contractors and industrial maintenance MAJOR BRANDS SOLD Dutch Boy(R), Krylon(R), Minwax(R), Cuprinol(R), Thompson's(R) Water Seal(R), Formby's(R), Red Devil(R), Pratt & Lambert(R), Martin Senour(R), H&C(TM), White Lightning(R), Dupli-Color(R) and Rubberset(R) OUTLETS Leading mass merchandisers, home centers, independent paint dealers, hardware stores, automotive retailers and industrial distributors in North America AUTOMOTIVE FINISHES [PHOTO] PRODUCTS SOLD High performance interior and exterior coatings for the automotive, fleet and heavy truck markets, as well as thousands of associated products MARKETS SERVED Automotive jobbers, wholesale distributors, collision repair facilities, dealerships, fleet owners and refinishers, production shops, body builders and original equipment manufacturers MAJOR BRANDS SOLD Sherwin-Williams(R), Martin Senour(R), Western(R), Lazzuril(TM), Excelo(TM), Baco(TM) and ScottWarren(TM) OUTLETS 174 company-operated branches in the United States, Canada, Jamaica and Chile, and other operations in the United States, Canada, Mexico, Brazil, Jamaica, Chile and Italy INTERNATIONAL COATINGS [PHOTO] PRODUCTS SOLD Architectural paints, stains, varnishes, industrial maintenance products, aerosols, product finishes, wood finishing products and related products MARKETS SERVED Do-It-Yourselfers, professional painting contractors, independent dealers, industrial maintenance and OEM product finishes MAJOR BRANDS SOLD Sherwin-Williams(R), Dutch Boy(R), Krylon(R), Kem-Tone(R), Martin Senour(R), Pratt & Lambert(R), Minwax(R), Sumare(TM), Ronseal(TM), Globo(TM), Pulverlack(R), Colorgin(TM), Andina(TM), Tri-Flow(TM), Thompson's(R) Water Seal(R) and Marson(TM) OUTLETS Distribution in more than 20 countries through wholly-owned subsidiaries, joint ventures and licensees of technology, trademarks and trade-names, including 52 company-operated architectural and industrial stores in Chile and Brazil 2 FINANCIAL HIGHLIGHTS
(thousands of dollars except per share data) 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------- NET SALES $5,066,005 $5,211,624 $5,003,837 - ---------------------------------------------------------------------------------------------------------------------- NET INCOME BEFORE IMPAIRMENT(1) 263,158 309,654 303,860 LESS: IMPAIRMENT OF LONG-LIVED ASSETS, NET OF TAX 293,628 ---------- ---------- ---------- NET INCOME 263,158 16,026 303,860 - ---------------------------------------------------------------------------------------------------------------------- PER SHARE: NET INCOME BEFORE IMPAIRMENT - DILUTED(1) 1.68 1.90 1.80 LESS: IMPAIRMENT OF LONG-LIVED ASSETS, NET OF TAX 1.80 ---------- ---------- ---------- NET INCOME - DILUTED 1.68 .10 1.80 NET INCOME - BASIC 1.69 .10 1.81 CASH DIVIDENDS .58 .54 .48 BOOK VALUE 9.66 9.22 10.25 - ---------------------------------------------------------------------------------------------------------------------- AVERAGE SHARES OUTSTANDING (THOUSANDS) 155,557 161,912 167,925 RETURN ON SALES(1) 5.2% 5.9% 6.1% - ---------------------------------------------------------------------------------------------------------------------- RETURN ON NET OPERATING ASSETS EMPLOYED (RONAE)(2) 27.5% 29.8% 29.8% - ---------------------------------------------------------------------------------------------------------------------- RETURN ON BEGINNING SHAREHOLDERS' EQUITY(1) 17.9% 18.2% 17.7% - ---------------------------------------------------------------------------------------------------------------------- EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)(1) $ 627,174 $ 717,503 $ 707,030 - ---------------------------------------------------------------------------------------------------------------------- FREE CASH FLOW(3) $ 388,090 $ 242,442 $ 271,941 - ---------------------------------------------------------------------------------------------------------------------- TOTAL DEBT TO CAPITALIZATION 29.3% 33.5% 30.4% - ---------------------------------------------------------------------------------------------------------------------- INTEREST COVERAGE(1) 8.8X 9.0X 9.0X - ---------------------------------------------------------------------------------------------------------------------- CURRENT RATIO 1.3 1.4 1.4 - ---------------------------------------------------------------------------------------------------------------------- TOTAL TECHNICAL EXPENDITURES(4) $ 86,222 $ 83,627 $ 78,189
SALES (millions of dollars) [BAR GRAPH] NET INCOME PER SHARE - DILUTED (1) [BAR GRAPH] (1) Based on net income before the impairment of long-lived assets charge in 2000, net of tax. See Note 2, page 35. (2) Based on income before taxes, and the impairment of long-lived assets charge in 2000, divided by average net accounts receivable, inventories, property, plant and equipment and accounts payable. (3) Net operating cash less capital expenditures and payments of cash dividends. (4) See Note 1, page 34, for a description of technical expenditures. 3 [PHOTO] CHRISTOPHER M. CONNOR JOSEPH M. SCAMINACE CHAIRMAN AND CHIEF EXECUTIVE OFFICER PRESIDENT AND CHIEF OPERATING OFFICER TOTAL RETURNS Percent Change of Stock Price and Dividends Reinvested December 29, 2000, to December 31, 2001 [BAR CHART] 4 LETTER TO SHAREHOLDERS BY ANY MEASURE, 2001 WILL BE REMEMBERED AS AN EXTRAORDINARY YEAR. It was a year of tough business conditions in a tough economy that affected us all. It was a year of a shocking national tragedy that touched us deeply. It was a year that brought our nation together and caused us to reflect upon our individual, family, community and corporate values. At The Sherwin-Williams Company, our culture is shaped by the values we have adhered to for the past 136 years. Our Annual Report to Shareholders begins by naming a few of these cornerstone values. Words like strength, stability and security have always been woven tightly into the fabric of our company just as they reflect what is good and right about our country. In 2001, Sherwin-Williams generated sales of $5.07 billion, which was a 2.8 percent decline year over year. Net income came in at $263.16 million vs. $309.65 million in 2000, before a charge for impairment of long-lived assets. Diluted net income per share finished 2001 at $1.68 vs. $1.90 before the impairment of long-lived assets charge. While the landscape of American business was filled with companies that fared far worse, we take no satisfaction in this relative comparison. We are disappointed with our results. Despite previous widespread forecasts, we recognized early in the year that an economic recovery in 2001 wasn't likely to occur. It was clear that our track record of 23 consecutive years of improved earnings was in jeopardy. Management reacted quickly by implementing a program we called "Challenge 24." The goal was straightforward and simple: leave no stone unturned in an effort to achieve a 24th consecutive year of improved earnings. Challenge 24 was a rallying cry for each employee. We wanted to unleash the talent, knowledge and power of 25,000 employees pulling in the same direction. Unfortunately, the combined energy and effort of our team was not enough to overcome the significant challenges posed by a weak global economy. Although our string of consecutive years of improved earnings ended at 23, Challenge 24 made us a stronger company and helped us achieve some impressive gains. In a year of lower sales and earnings, investors look for signs of strength, such as a company's ability to generate cash. This past year, through excellent management of working capital, we increased free cash flow by $145.65 million to a record $388.09 million. We define free cash flow as net operating cash available after dividend payments and capital expenditures. Two factors contributed heavily to this strong performance. We reduced accounts receivable and inventory levels by a combined $133.63 million and decreased days outstanding on both accounts receivable balances and inventory. Our selling, general and administrative expenses were lower year over year for the first time in 20 years. This was accomplished while still making significant investments in our company. We also were able to reduce headcount through thoughtful and responsible management of our human resource needs. Our increased free cash flow was used to further strengthen, stabilize and secure our company in a number of ways. We retired $123.06 million of debt and increased our year-end cash position by $115.92 million. We also used the cash to make an important acquisition in our Paint Stores Segment by purchasing the net assets of the Mautz Paint Company, including their 33 paint stores in the Midwest. Additionally, we bought back 6.7 million shares of the company's common stock on the open market. On the strength of our free cash flow performance, in 2002 the Board of Directors approved our 23rd consecutive increase in first quarter dividend payments. While 2001 was not the year we had hoped for, we nonetheless view these results as a positive indicator - during an especially tough year - of management's commitment to fiscal responsibility and shareholder value. PAINT STORES SEGMENT The Paint Stores Segment increased sales by 0.7 percent over last year to finish the year at $3.21 billion. Operating profit came in at $390.49 million, which was a decrease of 5.1 percent from 2000's performance. Sales of architectural and industrial paint gallons increased but were offset by 5 LETTER TO SHAREHOLDERS negative year over year comparisons in our chemical coatings business. Our marketing strategy is driven by paint purchase trends. As the population ages and people have less free time, the do-it-yourself market is shifting toward hiring professional painting contractors, who purchase almost all of the products they need from the paint store channel. Therefore, our 2,573 company paint stores in North America and the Caribbean give us a significant advantage over all other paint store competitors serving professional customers. We remain committed to our program of store expansion and added or acquired a net of 85 stores to our chain in 2001. In addition, we continued to introduce new products specifically aimed at improving the productivity of our professional customers. This commitment to technology ensures that we are at the forefront of product innovations year after year. This past year, we continued to strengthen our leadership position in the industrial and marine coatings business. We gained market share by introducing new product technology aimed at specific focus markets. Our expanded business with the U.S. Navy is one example of our growing customer base for industrial and marine coatings. Our chemical coatings business had a tough year as manufacturing companies across North America posted lower output month after month throughout 2001. We took steps to significantly strengthen this part of our company by forming a dedicated division within the Paint Stores Segment focused on growing domestic market share, expanding our supply capabilities outside North America, driving gallon sales and improving profits. We have significant opportunities in this business and look forward to improved results in the future. CONSUMER SEGMENT Net sales for the Consumer Segment ended the year at $1.11 billion for a 9.0 percent decline from 2000's performance. Operating profit came in at $108.17 million, representing a 24.1 percent decrease over last year. Despite this performance, there were encouraging positive trends in our Consumer Segment. During the second half of the year, sales with existing customers began to stabilize. More importantly, quarter over quarter profit improvements were registered in the fourth quarter for the first time in several years. We completed the realignment of this Segment to create three separate divisions: Consumer Division, Diversified Brands Division and Wood Care Division. The management teams responsible for these divisions played a significant role in the improved cash performance of the company. The leadership role these teams assumed in our company's Operational Excellence program is beginning to pay dividends that we expect to continue in 2002. The Consumer Segment has a portfolio of outstanding brand names and relationships with leading retailers throughout North America. We expect improved future results from this Segment. AUTOMOTIVE FINISHES SEGMENT The Automotive Finishes Segment experienced a net sales decrease of 5.9 percent to $464.23 million for the year. Operating profit decreased to $51.23 million from $61.26 million. The decline in operating profit for the year was due primarily to lower sales volume and related manufacturing absorption. While collision repair sales throughout the year were higher, this gain was insufficient to offset a soft domestic economy that negatively impacted car and truck production, curtailing this Segment's OEM sales. In addition, inventory corrections by customers in the secondary distribution channels of this Segment further adversely impacted sales. We are encouraged, though, by the quarter over quarter operating profit improvement registered by our Automotive Finishes Segment in the fourth quarter of 2001. This was the first full year of residency by our Automotive Finishes Segment in its 350,000-square-foot World Headquarters in Warrensville Heights, Ohio. This investment in technology and facilities is already paying dividends by improving our customer relationships and service. Our customer loyalty program, the A-Plus(TM) Club, has an enrollment of more than 750 customers. We are excited about our growing and highly visible participation in NASCAR as the paint supplier to nearly 20 racing teams in 2001. Automotive Finishes Segment customers also can avail themselves of numerous e-business options at our highly interactive web site. The Automotive Finishes Segment has developed a comprehensive distribution platform that includes 174 company-operated branches, thousands of automotive refinish distributors and a presence in nearly 30 countries through subsidiaries and licensing agreements. INTERNATIONAL COATINGS SEGMENT Net sales in the International Coatings Segment decreased 8.9 percent to $279.62 million in 2001. Operating profit, in U.S. dollars, decreased to $4.90 million from $17.65 million. The sales decrease was due primarily to unfavorable currency exchange rates and weak economic conditions in South America. Excluding the effects of currency exchange fluctuations relative to last year, net sales for the Segment increased 5.2 percent in 2001. The operating profit decrease was a result of several factors including price competition, worsening economic conditions 6 in Argentina, and margin erosion caused by a market shift to lower-priced products. We are committed to expanding our reach in this Segment and remain confident about the sales opportunities that exist for our 52 company-operated stores and distribution outlets in more than 20 countries. Our ability to transfer advanced technologies from our domestic operations enables us to maintain a leadership position in many of the markets we serve by providing superior coatings and a constant flow of new product introductions. Successful market expansion and penetration occurred in architectural, industrial, marine, aerosol and chemical coatings markets. Ronseal, our operation in the United Kingdom, successfully introduced an enamel paint line and an exterior stain line, achieving substantial gallon sales growth in 2001. MANAGEMENT PROMOTIONS This past year, three important management promotions were announced. Sean P. Hennessy was promoted to the position of Senior Vice President - Finance, Treasurer and Chief Financial Officer. Sean has had an impressive 17-year career with Sherwin-Williams and has served in a wide range of financial and operating roles. Timothy A. Knight was promoted to President & General Manager, Diversified Brands Division. Tim has been a sales and marketing team leader throughout his seven-year career with the company and is well suited for this division assignment. Harvey P. Sass was promoted to President & General Manager, Wood Care Division. Harvey has made significant contributions to our wood care business over his 14 years with the company, most notably in the area of sales and marketing. These changes strengthen our company and exemplify the importance we place on the retention and development of our strongest assets - our people. OUTLOOK FOR 2002 Financial forecasting has become increasingly difficult in the face of such uncertain economic times. Overall, we expect market conditions in 2002 to be flat to up slightly over 2001 with pockets of strength domestically tempered by a continued weakness in foreign currency and the economy as a whole. However, The Sherwin-Williams Company has remained strong, stable and secure through all phases of the economic cycle, beginning its 23rd consecutive year of anticipated dividend growth for shareholders and delivering the kind of performance expected from the market leader. Carrying the moniker "America's Paint Company" is a badge of honor that the 25,000 employees of our company wear proudly and responsibly. We salute and thank each and every one of them for their dedication and hard work, and know that they join us in thanking our loyal customers, our outstanding suppliers and our trusting shareholders. /s/ Christopher M. Connor ------------------------------------ CHRISTOPHER M. CONNOR CHAIRMAN AND CHIEF EXECUTIVE OFFICER /s/ Joseph M. Scaminace ------------------------------------ JOSEPH M. SCAMINACE PRESIDENT AND CHIEF OPERATING OFFICER [SHERWIN WILLIAMS LOGO] 7 [PHOTO] ALFRED LEWIS CITY MANAGER, PAINT STORES GROUP CHICAGO, ILL. WITH MORE THAN 2,500 STORES IN NORTH AMERICA, SHERWIN-WILLIAMS HAS MORE STORES THAN THE NEXT NINE PAINT STORE COMPANIES COMBINED. PAINT STORES SEGMENT SHERWIN-WILLIAMS STORES ARE THE EXCLUSIVE OUTLETS for Sherwin-Williams(R) branded architectural and industrial paints, stains and products. In 2001, our Paint Stores Group added or acquired 85 stores, bringing the total to 2,573 company-operated outlets in North America. These stores supply a diverse customer base, including architectural and industrial painting contractors, residential and commercial builders and property managers, OEM product finishers, and do-it-yourself homeowners. [PIE CHART] PAINT STORES 63% OF NET EXTERNAL SALES This unique store network enables us to maintain close working relationships with the end users of our products. Staying close to customers helps us to better anticipate and satisfy the diverse needs of each market we serve. In recent years, we have sharpened the focus of our product development and store merchandising efforts on the needs of some key customer segments. This customer-focused approach helps ensure the success of our new products. Our new Cashmere(TM) interior wall paint is a good example. Its ease of application saves residential painting contractors time and effort. Its smooth, stipple-free finish appeals to upscale homeowners. This combination of benefits made Cashmere paint an overnight success and will propel its growth and popularity for years to come. Other examples include Harmony(R), a low-odor, low-VOC wall paint that minimizes disruption in occupied areas; AquaClad(TM) Water-Based Alkyd, a one-coat waterborne industrial and marine topcoat; and a Sher-Wood(R) product line extension to help production wood finishers comply with ever-tightening environmental regulations. Each of the 21 new products introduced by the Paint Stores Group in 2001 builds on our reputation as an innovator and technology leader. Color is as fundamental to our business as product technology. In 2001, we launched Color Excellence(TM), an ongoing program to establish Sherwin-Williams paint stores as the industry leader in color selection and delivery. The Color Excellence program is an end-to-end process-control initiative that improves color accuracy and uniformity by improving batch-to-batch manufacturing consistency, container fill level accuracy, and store tinting equipment calibration. The Color Excellence program sets the stage for the introduction of a new color system, including an exclusive color palette by Martha Stewart, in the spring of 2002. In 2001, we also initiated key changes to the structure and focus of our Chemical Coatings business. Recognizing the increasing globalization of the OEM product finishing industry, we organized teams of technical, marketing and sales specialists to serve specific user markets and expanded our supply capabilities beyond North America. This new organization offers customers around the world professional consultation based on a thorough understanding and depth of experience in their specific industry, combined with a vast technological resource. We will continue to explore and develop e-business applications that provide value to our customers. For example, customers can now search through thousands of wallpaper patterns and place orders on-line. In 2002, we will launch our on-line business center, offering wholesale customers password-protected 24/7 access to order history, account status, pricing, on-line ordering features and other account-management tools. [PHOTO] 9 [PHOTO] FRED KONECKI CASE PACKER CHICAGO,ILL. OUR CONSUMER SEGMENT SELLS PRODUCTS UNDER FAMILIAR BRANDS SUCH AS DUTCH BOY(R), PRATT & LAMBERT(R), MINWAX(R), KRYLON(R) AND THOMPSON'S(R) WATER SEAL(R) THROUGH TOP RETAIL OUTLETS NATIONWIDE. 10 CONSUMER SEGMENT THE THREE OPERATING UNITS WITHIN OUR CONSUMER SEGMENT -- the Consumer Division, the Wood Care Division and the Diversified Brands Division -- produce some of the most powerful brand names in the coatings industry. Private label manufacturing and licensed brand programs have extended our reach among home centers, hardware stores, mass merchandisers, industrial distributors and independent paint stores throughout North America. [PIE CHART] CONSUMER 22% OF NET EXTERNAL SALES CONSUMER DIVISION - With 10 manufacturing facilities and eight distribution centers, the Consumer Division has the resources to serve both external customers and Sherwin-Williams paint stores. We manufacture and market well-known brands like Dutch Boy(R), Pratt & Lambert(R) and Martin Senour(R). We also supply private label products to leading retailers. Successful product launches in 2001 included the Dutch Boy(R) Dimension(R) line of products for faux decorating; the Martha Stewart One Coat Program; and the Pratt & Lambert(R) Ovation(TM) line of faux decorating products. The Consumer Division launched several key operations initiatives designed to reduce costs and maximize efficiencies. These include a supplier collaboration program that relies on close interaction with raw materials suppliers, a purchasing program that leverages our buying power, and a supplier diversity program. We also implemented Six Sigma, a statistical approach to process improvement, as part of our Operational Excellence initiative. We are committed to establishing measurable operational procedures and a culture of continuous improvement. WOOD CARE DIVISION - Headquartered in Upper Saddle River, N.J., the Wood Care Division is responsible for our Minwax(R), Thompson's(R) Water Seal(R), Formby's(R), DuraSeal(R) and Fabulon(R) product lines. Constant product innovation and technological advancement differentiates our Wood Care products and helps build and strengthen our brands. Our products are developed for performance, convenience and lasting beauty. In 2001, we introduced Minwax(R) Stainable Wood Filler, an interior/exterior wood filler for wood finishing repairs. It is a latex formula that stains can penetrate as well as natural wood. We also added Minwax(R) Super Fast-Drying Polyurethane for Floors, an oil-based protective clear finish designed for use with hardwood floors. Because of its fast drying time and formulation that doesn't require sanding between coats, consumers can begin and finish a project in a single day. DIVERSIFIED BRANDS DIVISION - The Diversified Brands Division produces aerosol paints and chemicals, paint brushes and rollers, and caulks and sealants. Our brands include Krylon(R) and Dupli-Color(R) spray paints; Rubberset(R) and Sherwin-Williams(R) brushes and rollers; and White Lightning(R) caulks and sealants. Additionally, we supply private label spray paint to several mass merchandisers. We are the largest manufacturer and marketer of aerosol paint in the country. In 2001, we launched several key products into this market. Dupli-Color(R) Mirage(R) is a multi-color effect spray paint for automotive retail use that is gaining popularity among do-it-your-selfers and professionals alike. The Krylon Products Group introduced several new products under the Krylon(R) brand for the craft market and developed targeted programs for contractors. We also launched a complete line of extension poles for use with our paint rollers. [PHOTO] 11 [PHOTO] TOOLIKA RHOADES SCIENTIST, TRANSPORTATION COATINGS DEVELOPMENT A SPECIAL GROUP OF SCIENTISTS AT THE WORLD AUTOMOTIVE CENTER IN WARRENSVILLE HEIGHTS, OHIO ATTEMPT TO FORSEE THE NEEDS OF CUSTOMERS 3 TO 5 YEARS DOWN THE ROAD. THIS REQUIRES VISION, THE USE OF NON-TRADITIONAL TECHNOLOGY AND A WILLINGNESS TO EXPLORE NEW AND UNIQUE IDEAS. 12 AUTOMOTIVE FINISHES SEGMENT THE SHERWIN-WILLIAMS NAME HAS BECOME synonymous with high-quality, high-performance interior and exterior automotive finishes. It's why in addition to serving traditional automotive, fleet and heavy-duty truck markets, nearly 20 NASCAR teams selected us as their paint supplier in 2001. As one racing team owner remarked recently, "We couldn't help but notice a big difference in the appearance of the cars. The color ... the shine ... the vehicles painted with Sherwin-Williams(R) automotive paint truly stood apart from the rest. And once we heard of the superior support and service that Sherwin-Williams provided the other NASCAR teams, we knew it was time to make a switch." [PIE CHART] AUTOMOTIVE FINISHES 9% OF NET EXTERNAL SALES While being a part of the high-profile racing circuit is certainly rewarding, Sherwin-Williams earned its stripes in automotive markets long before racing achieved its current popularity. In fact, Sherwin-Williams entered the market in 1922 with a lacquer product under the trade name Opex(R). Since then, our Automotive Finishes Segment has extended its reach through 174 company-operated branches in the United States, Canada, Jamaica and Chile, along with a comprehensive distribution platform consisting of thousands of automotive refinish distributors. Our products also have a presence in nearly 30 countries through wholly-owned subsidiaries and foreign licensing agreements. The major brands we offer are Sherwin-Williams(R), Martin Senour(R), Western(R), Lazzuril(TM), Excelo(TM), Baco(TM) and ScottWarren(TM). Our customer-driven service is apparent in all aspects of our organization. Our automotive learning centers have trained thousands of customers and employees on curricula ranging from product specifications to color to business management. The 350,000-square-foot World Automotive Center in Warrensville Heights, Ohio, is a state-of-the art research and development facility that can also replicate virtually any refinishing environment -- from airflow conditions to climate variations. And, with 280 employees in the key automotive finishing disciplines on-site together, customers are assured of the most accurate and timely service possible. At year-end, our customer loyalty program, the A-Plus(TM) Club, had an enrollment of more than 750 customer members, who receive valuable marketing and business management services as part of their membership. The latest in automotive finishing e-technology is also available to Sherwin-Williams customers at www.sherwin-automotive.com. Customers can access automotive color formula mixing information through our Formula Finder, as well as purchase products on-line at our e-store, and remain up-to-date on the latest in color and product technology. The Automotive Finishes Segment of Sherwin-Williams will continue to develop the most technologically advanced, productive, user-friendly products available, while continuing to streamline and consolidate each refinishing system. 13 [PHOTO] JOCELIO VERISSIMO SILVA PRODUCTION CHIEF SHERWIN-WILLIAMS DO BRASIL OUR INTERNATIONAL DIVISION IS STRENGTHENED BY A VERY LOYAL, DEDICATED WORKFORCE OF MORE THAN 2,100 EMPLOYEES. INTERNATIONAL COATINGS SEGMENT SHARED DOMESTIC TECHNOLOGIES - Combined with significant manufacturing capabilities, expanded distribution channels and a growing presence in the markets we serve - fuels optimism in our International Coatings Segment. While our financial performance was hurt by unfavorable currency exchange rates and weak economic conditions in South America, our business is fundamentally sound and poised for growth. [PIE CHART] INTERNATIONAL COATINGS 6% OF NET EXTERNAL SALES The International Coatings Segment distributes Sherwin-Williams brand products and products marketed under well-recognized regional brands in more than 20 countries. We operate through wholly-owned subsidiaries, joint ventures, licensing agreements and independent distributors, along with 52 company- operated stores in Chile and Brazil. CHILE - In Chile, we provide coatings for virtually all retail and wholesale applications. These include Architectural, Industrial, Marine, Chemical Coatings and Aerosols, where we are the market leader with our Marson(TM) brand. We have increased market share and market penetration in each of these areas and are confident of future growth. We will continue to open company stores in support of all these markets. Sales into Industrial and Marine markets, such as fishing and copper mining, benefited from the introduction of new coatings technologies -- transferred from domestic operations. Further expansion in Industrial will occur with the introduction of new products for the industrial flooring market from the Paint Store Segment's General Polymers business unit. ARGENTINA - The addition of two new major dealer chains and expansion of our home center business were bright spots in an otherwise depressed market hit by an unemployment rate of 22%, a fourth consecutive year of recession and, in 2002, a significant currency devaluation. While we anticipate gallon volume to continue shrinking, we expect to gain market share. And, the strong distribution we enjoy with the dealer chains will continue to present future growth and sales opportunities. BRAZIL - This is our largest subsidiary. Our strong portfolio of brands positions us well in every coatings category we serve. We are the market leader in Aerosols with our Colorgin(TM) brand, which is distributed through home centers, mass retailers and hardware stores. Our Sumare(TM) brand has helped us achieve market leadership in Industrial and Marine, which is sold directly to customers as well as through our company stores. We will continue to support this distribution method with the opening of new company stores. Many of the Sumare product technologies in use were developed from the domestic market. We also manufacture and distribute products for the powder coatings and chemical coatings markets. In our Architectural Coatings business, numerous new products were successfully introduced for hospitals and kitchens and baths, along with texture paints and other specialty coatings. These products are primarily sold through home centers, independent dealers and hardware stores. UNITED KINGDOM - The launch of our Tri-Flow(TM) Metal Care(TM) enamel paint was very successful. Continued growth of this line is expected in Europe. Ronseal Limited will continue its focus on upgrading our interior Woodcare line to increase awareness and preference in all sectors. The introduction by Ronseal Limited of exterior stains in the Gardencare(TM) line helped propel significant gallon sales increases for the year and will provide solid growth opportunities among existing distribution and major home centers. (PHOTO) 15 AMERICA'S PAINT COMPANY While 2001 proved to be a challenging year for our company and our nation, the men and women of Sherwin-Williams were again at their best. If adversity truly introduces us to ourselves, then you'll like the people you meet at Sherwin-Williams. Their gifts of time, money, items of need, support and prayers following the events of Sept. 11 were particularly inspiring and worthy of America's Paint Company. Sherwin-Williams employees dispatched countless dust masks, five-gallon pails, respirators, gloves, buckets and other needed supplies to New York, Pennsylvania and the Pentagon. Yet, these gifts cannot be measured merely in hours, dollars or cartons -- but equally, in terms of thoughts, words and deeds. We are proud of, and thankful to, the many dedicated Sherwin-Williams employees who stood so tall in our country's hour of need. [PHOTO] ROCK ISLAND, ILL. - The roof of the Thoms Proestler Co. warehouse is adorned with an Old Glory 274 feet long by 156 feet wide, with a total area of 42,744 square feet. Sherwin-Williams donated the 150 gallons of paint needed for the project, and Jim Phillips, owner of Excel Painting and Wallcoverings, donated more than 100 labor hours. Visible only from the air, the flag is intended to show support for pilots and the airline industry. The red and white areas were painted with Sherwin-Williams(R) Setfast(R) Acrylic Latex Traffic Marking Paint, and the blue areas were painted with Sherwin-Williams(R) Metalatex(R) Semi-Gloss Coating. 16 [PHOTO] RIO RANCHO, N.M. - More than 1,200 gallons of Sherwin-Williams(R) paint were used to cover seven acres of soccer fields at the Rio Rancho Sports Complex. Commercial painting contracting firm JTC Inc. painted the flag with Snow White A-100(R) Exterior Latex Flat and Setfast(R) Acrylic Latex Traffic Marking for the red and blue areas. [PHOTO] TITUSVILLE, FLA. - A shortage of American flags didn't stop the employees of Sherwin-Williams store #2197 from displaying their patriotism and support for the victims of Sept. 11 and their families. Store employees painted their own Stars and Stripes on a 9-by-12-foot canvas drop cloth. [PHOTO] WASHINGTON, D.C. - Sherwin-Williams donated 10,000 gallons of paint for the restoration of sections of the Pentagon damaged by the Sept. 11 terrorist attacks. The idea for the donation came from Sherwin-Williams computer programmer/analyst Kim Falk. In a letter to Secretary of Defense Donald Rumsfeld, Sherwin-Williams Chairman and CEO Christopher M. Connor explained that the company wanted to honor all who were lost in the attacks and support the government in its restoration of the Pentagon. [PHOTO] CHEYENNE, WYO.- Scott Cloudy, a Sherwin-Williams store manager in Cheyenne, displayed his patriotism by painting the American flag on his garage door. He used white Sherwin-Williams(R) DTM Acrylic Coating and Sher-Cryl(TM) Safety Red for the stripes, All Surface Enamel Latex in Regalia Blue for the blue field, and Krylon(R) spray paint for the white stars. 17 STORES MAP [MAP] PAINT STORES AUTOMOTIVE BRANCHES [PHOTO] [MAP] TODAY, MORE THAN 90% OF THE U.S. POPULATION LIVES WITHIN A 50-MILE RADIUS OF A SHERWIN-WILLIAMS PAINT STORE. FOR THE LOCATION OF THEIR LOCAL STORE, CUSTOMERS CAN CALL 1-800-4-SHERWIN, OR VISIT OUR WEB SITE (WWW.SHERWIN-WILLIAMS.COM). THE WEB SITE ALSO OFFERS APPROXIMATELY 10,000 WEB PAGES OF VALUABLE COATINGS INFORMATION. IT'S A COMPREHENSIVE RESOURCE FOR OUR MOST SOPHISTICATED PAINT CUSTOMERS AS WELL AS AN EASY-TO-USE PROJECT GUIDE FOR THE DO-IT-YOURSELFER. 18 SUBSIDIARIES FOREIGN Coatings S.r.L. Compania Sherwin-Williams, S.A. de C.V. Eurofinish S.r.L. Kriesol, S.A. Productos Quimicos y Pinturas, S.A. de C.V. Proquipsa, S.A. de C.V. Quetzal Pinturas, S.A. de C.V. Ronseal (Ireland) Limited Ronseal Limited ScottWarren S.p.A. Sherwin-Williams (Caribbean) N.V. Sherwin-Williams (West Indies) Limited Sherwin-Williams Argentina I.y C.S.A. Sherwin-Williams Canada Inc. Sherwin-Williams Cayman Islands Limited Sherwin-Williams Chile S.A. Sherwin-Williams do Brasil Industria e Comercio Ltda. Sherwin-Williams Foreign Sales Corporation Limited Sherwin-Williams Japan Co., Ltd. Sherwin-Williams Singapore PTE, Ltd. The Sherwin-Williams Company Resources Limited DOMESTIC Contract Transportation Systems Co. DIMC, Inc. Dupli-Color Products Company Sherwin-Williams Automotive Finishes Corp. Sherwin-Williams Realty Holdings, Inc. SWIMC, Inc. The Sherwin-Williams Acceptance Corporation Thompson Minwax International Corp. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Certain statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Letter to Shareholders," and elsewhere in this report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based upon management's current expectations, estimates, assumptions and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), expected growth and future business plans. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as "expects," "anticipates," "believes," "will likely result," "will continue," "plans to," and similar expressions. Readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of the Company, that could cause actual results to differ materially from such statements. These risks, uncertainties and other factors include such things as: general business conditions, strengths of retail economies and the growth in the coatings industry; competitive factors, including pricing pressures and product innovation and quality; changes in raw material availability and pricing; changes in the Company's relationships with customers and suppliers; the ability of the Company to successfully integrate past and future acquisitions into its existing operations, as well as the performance of the businesses acquired; the ability of the Company to successfully complete planned divestitures; changes in general domestic economic conditions such as inflation rates, interest rates and tax rates; risk and uncertainties associated with the Company's expansion into foreign markets, including inflation rates, recessions, foreign currency exchange rates, foreign investment and repatriation restrictions and other external economic and political factors; the achievement of growth in developing markets, such as Mexico and South America; increasingly stringent domestic and foreign governmental regulations including those affecting the environment; inherent uncertainties involved in assessing the Company's potential liability for environmental remediation-related activities; the nature, cost, quantity and outcome of pending and future litigation and other claims, including the lead pigment and lead-based paint litigation and the affect of any legislation and administrative regulations relating thereto; and unusual weather conditions. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. 19 FINANCIAL SUMMARY (Millions of Dollars Except Per Share Data)
2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- OPERATIONS Net sales ........................................ $ 5,066 $ 5,212 $ 5,004 $ 4,934 $ 4,881 Cost of goods sold ............................... 2,846 2,904 2,755 2,804 2,784 Selling and administrative expenses .............. 1,730 1,740 1,673 1,598 1,574 Impairment of long-lived assets .................. 352 Interest expense ................................. 55 62 61 72 81 Income before income taxes ....................... 424 143 490 440 427 Net income ....................................... 263 16 304 273 261 Net income before impairment (A) ................. 263 310 304 273 261 FINANCIAL POSITION Inventories ...................................... $ 633 $ 704 $ 703 $ 683 $ 722 Accounts receivable - net ........................ 523 594 606 605 546 Working capital .................................. 366 436 437 458 417 Property, plant and equipment - net .............. 673 722 712 719 692 Total assets ..................................... 3,628 3,751 4,033 4,051 4,036 Long-term debt ................................... 504 621 622 730 844 Total debt ....................................... 615 740 742 848 1,005 Shareholders' equity ............................. 1,488 1,472 1,699 1,716 1,592 PER SHARE INFORMATION Average shares outstanding (000's) ............... 155,557 161,912 167,925 172,162 172,107 Book value ....................................... $ 9.66 $ 9.22 $ 10.25 $ 10.03 $ 9.21 Net income before impairment - diluted (A) ....... 1.68 1.90 1.80 1.57 1.50 Net income - diluted ............................. 1.68 .10 1.80 1.57 1.50 Net income - basic ............................... 1.69 .10 1.81 1.58 1.51 Cash dividends ................................... .58 .54 .48 .45 .40 FINANCIAL RATIOS Return on sales (A) .............................. 5.2% 5.9% 6.1% 5.5% 5.3% Asset turnover (A) ............................... 1.4x 1.3x 1.2x 1.2x 1.2x Return on assets (A) ............................. 7.3% 7.5% 7.5% 6.7% 6.5% Return on equity (A)(B) .......................... 17.9% 18.2% 17.7% 17.1% 18.6% Dividend payout ratio (A) ........................ 34.6% 28.5% 26.6% 28.5% 26.5% Total debt to capitalization ..................... 29.3% 33.5% 30.4% 33.1% 38.7% Current ratio .................................... 1.3 1.4 1.4 1.4 1.4 Times interest earned (C) ........................ 8.8x 9.0x 9.0x 7.1x 6.3x Working capital to sales ......................... 7.2% 8.4% 8.7% 9.3% 8.5% Effective income tax rate (A) .................... 38.0% 37.5% 38.0% 38.0% 39.0% GENERAL Capital expenditures ............................. $ 83 $ 133 $ 134 $ 146 $ 164 Total technical expenditures (D) ................. 86 84 78 73 63 Advertising expenditures ......................... 236 276 265 283 296 Repairs and maintenance .......................... 48 48 46 45 45 Depreciation ..................................... 109 109 105 98 90 Amortization of intangible assets ................ 39 51 50 50 49 Shareholders of record ........................... 10,281 10,813 11,475 11,929 11,964 Number of employees .............................. 25,789 26,095 25,697 24,822 24,964 Sales per employee (000's) ....................... $ 196 $ 200 $ 195 $ 199 $ 196 Sales per dollar of assets ....................... 1.40 1.39 1.24 1.22 1.21
(A) Based on net income before the impairment of long-lived assets charge in 2000, net of tax. See Note 2, page 35. (B) Based on shareholders' equity at beginning of year and net income before impairment. (C) Ratio of income before income taxes excluding the charge for impairment in 2000 and interest expense to interest expense. (D) See Note 1, page 34, for a description of technical expenditures. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION - 2001 Net operating cash flow generated by the Company during 2001 was $561.6 million primarily as a result of net income from operations and reductions in working capital which were partially offset by an unusual tax-related payment of $65.7 million that was made to the U.S. Internal Revenue Service for contested tax issues plus accrued interest. The unusual tax-related payment was made to prevent the imposition of above-market interest charges while contested tax issues are being resolved. Working capital reductions occurred as a result of an increased focus by management to improve collections of accounts receivable and accelerate inventory turnover to coincide with lower sales demand. The operating cash flow provided the majority of funds to invest $82.6 million in property, plant and equipment, reduce total debt by $123.1 million, purchase treasury stock of $157.1 million, increase the annual dividend to $91.0 million, and complete acquisitions of businesses of $15.2 million. The Company ended the year with $118.8 million in cash and cash equivalents. The Company's current ratio decreased to 1.32 at December 31, 2001 from 1.39 at the end of 2000. The Company's Consolidated Balance Sheets and Statements of Consolidated Cash Flows, on pages 30 and 31 of this report, provide more detailed information on the Company's financial position and cash flows. Goodwill, which represents the excess of cost over the fair value of net assets acquired in purchase business combinations, decreased $33.2 million in 2001. Intangible assets, which represent items such as trademarks and patents, decreased $11.6 million in 2001. These decreases were due to amortization expense and foreign currency translation adjustments, partially offset by increases resulting from acquisitions completed in 2001. During 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which supersedes APBO No. 17, "Intangible Assets." See Note 1 on pages 34 and 35 of this report for a description of SFAS No. 142. The Company has adopted or will adopt SFAS No. 142 in the required periods. Application of the non-amortization provisions of the statement for goodwill and intangible assets acquired before July 1, 2001 is expected to increase net income approximately $24.7 million for the full year 2002. Deferred pension assets of $393.6 million at December 31, 2001 represent the excess of the fair market value of the assets in the Company's defined benefit pension plans over the actuarially-determined projected benefit obligations. The 2001 increase in deferred pension assets of $29.2 million represents primarily the recognition of the current year net pension credit, described in Note 6 on pages 36 to 38 of this report. The assumed discount rate used to compute the actuarial present value of projected benefit obligations was decreased from 7.00 percent to 6.75 percent at December 31, 2001 due to decreased rates of high-quality, long-term investments. The decrease in the actual return on plan assets during 2001 was primarily the result of returns on equity investments that were below the assumed return of 8.5 percent. A decrease in Other assets of $13.0 million was due primarily to the amortization of capitalized costs incurred related to designing, developing, obtaining and implementing internal use software in accordance with Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use." In addition, a reduction in assets related to certain marketing programs of the Company also contributed to the decrease in Other assets. Net property, plant and equipment decreased $49.7 million to $672.7 million at December 31, 2001 due to depreciation expense of $109.2 million, impairment charges on assets held for disposal of $6.4 million and foreign currency translation adjustments partially offset by capital expenditures of $82.6 million and acquisitions. Capital expenditures during 2001 in the Paint Stores Segment were primarily attributable to opening new paint stores and store relocations along with normal replacement and upgrading of store equipment. In the Consumer and International Coatings Segments, capital expenditures during 2001 were primarily related to efficiency improvements in production facilities and information systems hardware. Capital expenditures in the Automotive Finishes Segment during 2001 primarily related to improvements and upgrades to the automotive technology center. In 2002, the Company expects that its most significant capital expenditures will relate to various capacity and productivity improvement projects at manufacturing and distribution facilities, new store openings, new point-of-sale equipment and new or upgraded information systems hardware. The Company does not anticipate the need for any specific long-term external financing to support these capital programs. There were no short-term borrowings outstanding under the Company's commercial paper program at December 31, 2001. During the year, borrowings were made under the Company's commercial paper program that is fully backed by and limited to the borrowing availability under the Company's revolving credit agreements. The aggregate maximum borrowing capacity under the current revolving credit agreements as of December 28, 2001 is $750.6 million. The current portion of long-term debt increased $98.9 million due primarily to the reclassification of $100.0 million of 6.5% Notes due February 1, 2002. Current portion of long-term debt at December 31, 2001 also included current maturities of $11.9 million related to various promissory notes and other obligations. Long-term debt decreased $117.2 million to $503.5 million at December 31, 2001, resulting primarily from 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS reclassification to current debt maturities of $111.9 million and early redemption of $10.0 million of the Company's 9.875% Debentures. The Company expects to remain in a borrowing position throughout 2002. The increase in the Company's long-term postretirement benefit liability occurred due to the excess of the net postretirement benefit expense over the costs for benefit claims incurred. The current portion of the accrued postretirement liability, amounting to $14.9 million at December 31, 2001, is included in Other accruals. The assumed discount rate used to calculate the actuarial present value of the postretirement benefit obligations was decreased from 7.00 percent to 6.75 percent at December 31, 2001 due to the reduced rates of high-quality, long-term investments. The assumed health care cost trend rates were revised during 2000 for years 2001 through 2009. The revised rates reflect escalating health care costs that continued to exceed the previously established rates. The trend rate for 2001 was a more representative 9.5 percent annual increase. The rate for 2002 is 8.9 percent decreasing gradually to 5.5 percent in 2010. See Note 6, on pages 36 to 38 of this report, for further information on the Company's postretirement benefit obligations. The decrease of $48.9 million in Other long-term liabilities during 2001 was due primarily to the previously mentioned unusual tax-related payment of $65.7 million made to prevent the imposition of above-market interest charges while contested issues are being resolved. Partially offsetting this decrease was an increase in certain tax liabilities resulting from timing items. See Note 9, on page 39 of this report, for information concerning the Company's Other long-term liabilities. Shareholders' equity increased $15.9 million during 2001 to $1,487.8 million due primarily to net income of $263.2 million and net increases in common stock and other capital of $43.1 million due to the tax impact of certain Employee Stock Purchase and Savings Plan (ESOP) transactions and stock option activity. Partially offsetting such increases were cash dividends paid of $91.0 million, purchases of 6.7 million shares of Company common stock for treasury at a cost of $157.1 million, and other comprehensive losses related to foreign currency translations of $40.9 million. The Company acquires its own common stock for general corporate purposes and, depending on its future cash position and market conditions, it may acquire additional shares in the future. In July 2001, the Company's Board of Directors rescinded the previous authorization limit for treasury stock purchases and issued a new authorization for the Company to purchase, in the aggregate, 20.0 million shares of its common stock. During the third and fourth quarters of 2001, the Company acquired 3.0 million shares of its common stock through open market purchases for treasury purposes. The Company had remaining authorization at December 31, 2001 to purchase 17.0 million shares of its common stock. The 2001 annual dividend of $.58 per share approximated our payout ratio target of 30.0 percent of the prior year's earnings (based on net income before the impairment of long-lived assets charge in 2000, net of tax). This annual dividend represented the twenty-second consecutive year that the dividend has increased and a compounded annual rate of increase of 23.5 percent since the dividend was reinstated in the fourth quarter of 1979. At a meeting held on February 6, 2002, the Board of Directors increased the quarterly dividend to $.15 per share. The changes in Cumulative other comprehensive loss consisted solely of foreign currency translation adjustments for all years presented in the Company's Consolidated Balance Sheets. The increases in 2001 of $40.9 million and in 2000 of $18.0 million were attributable to weakness in several foreign operation's functional currencies, while the 1999 increase of $100.7 million occurred primarily due to the devaluation of the Brazilian real. In January 2000, the Brazilian Central Bank eliminated its governmental policy of supporting and tightly managing the trading band of the real and allowed it to trade freely in the open market against other currencies. In January 2002, the Argentine government announced plans to discontinue its currency board policy of maintaining a one-to-one fixed exchange rate between the peso and U.S. dollar and will attempt to implement a controlled devaluation during 2002. Due to the uncertainty associated with this new currency policy, management is unable at this time to accurately estimate the future impact of the foreign currency translation of the Argentine peso on comprehensive income. The change in the currency translation rate of the Argentine peso is not expected to have a material impact on the results of operations of the International Coatings Segment. The Company's past operations included the manufacture and sale of lead pigments and lead-based paints. The Company, along with other companies, is a defendant in a number of legal proceedings, including purported class actions, separate actions brought by the State of Rhode Island, and actions brought by various counties, cities, school districts and other government-related entities, arising from the manufacture and sale of lead pigments and lead-based paints. The plaintiffs are seeking recovery based upon various legal theories, including negligence, strict liability, breach of warranty, negligent misrepresentations and omissions, fraudulent misrepresentations and omissions, concert of action, civil conspiracy, violations of unfair trade practices and consumer protection laws, enterprise liability, market share liability, nuisance, unjust enrichment and other theories. The plaintiffs seek various damages and relief, including personal injury and property damage, costs relating to the detection and abatement of lead-based paint 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS from buildings, costs associated with a public education campaign, medical monitoring costs and others. The Company believes that the litigation is without merit and is vigorously defending such litigation. The Company expects that additional lead pigment and lead-based paint litigation will be filed against the Company in the future asserting similar or different legal theories and seeking similar or different types of damages and relief. Litigation is inherently subject to many uncertainties. Adverse court rulings or determinations of liability, among other factors, could affect the lead pigment and lead-based paint litigation against the Company and encourage an increase in the number and nature of future claims and proceedings. In addition, from time to time, various legislation and administrative regulations have been enacted or proposed to impose obligations on present and former manufacturers of lead pigments and lead-based paints respecting asserted health concerns associated with such products and to overturn court decisions in which the Company and other manufacturers have been successful. Due to the uncertainties involved, management is unable to predict the outcome of the lead pigment and lead-based paint litigation, the number or nature of possible future claims and proceedings, or the affect that any legislation and/or administrative regulations may have on the litigation or against the Company. In addition, management cannot reasonably determine the scope or amount of the costs and potential liabilities related to such litigation, or any such legislation and regulations. The Company has not accrued any amounts for such litigation. Any costs that may be incurred or potential liabilities that may result from such litigation or such legislation and regulations cannot reasonably be estimated. However, based upon, among other things, the outcome of such litigation to date, management does not currently believe that the costs or potential liabilities ultimately determined to be attributable to the Company arising out of such litigation will have a material adverse effect on the Company's results of operations, liquidity 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 potential liability on the Company for past operations which were conducted utilizing practices and procedures that were 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 that 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. Depreciation of 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, depreciation and other expenses related to ongoing environmental compliance measures were not material to the Company's financial condition, results of operations or liquidity during 2001, and the Company does not expect that such capital expenditures and other expenses will be material to the Company's financial condition, results of operations or liquidity in 2002. The Company is involved with environmental compliance, investigation and remediation activities at some of its current and former sites (including sites which were previously owned and/or operated by businesses acquired by the Company). The Company, together with other parties, has also been designated a potentially responsible party under federal and state environmental protection laws for the investigation and remediation of environmental contamination and 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 environmental-related activities relating to its past operations and third-party sites, including Superfund sites, for which commitments or cleanup plans have been developed and for which costs can be reasonably estimated. These estimated costs are determined based on currently available facts regarding each site. The Company continuously assesses its potential liability for investigation and 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 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 attributed 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. The Company's environmental-related contingent liabilities are expected to be resolved over an extended period of time. Pursuant to a Consent Decree entered into with the United States of America in 1997, on behalf of the Environmental Protection Agency, filed in the United States District Court for the Northern District of Illinois, the Company has agreed, in part, to (i) conduct an investigation at its southeast Chicago, Illinois facility to determine the 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. While the Company continues to investigate this site, certain initial remedial actions have occurred at this site. In 1999, the Company entered into a settlement agreement with PMC, Inc. settling a lawsuit brought by PMC regarding the Company's former manufacturing facility in Chicago, Illinois which was sold to PMC in 1985. Pursuant to the terms of the settlement agreement, the Company agreed, in part, to investigate and remediate, as necessary, certain soil and/or groundwater contamination caused by historical disposals, discharges, releases and/or events occurring at this facility. In 2000, the Company entered into a Consent Decree with the People of the State of Illinois settling an action brought by the State of Illinois against the Company regarding the PMC facility. Under the Consent Decree, the Company agreed, in part, to investigate and remediate, as necessary, certain soil and/or groundwater contamination caused by historical disposals, discharges, releases and/or events occurring at this facility. The Company is currently conducting its investigation of this facility. With respect to the Company's southeast Chicago, Illinois facility and the PMC facility, the Company has evaluated its potential liability and, based upon its investigations to date, has accrued appropriate amounts. However, due to the uncertainties surrounding these facilities, the Company's ultimate liability may result in costs that are significantly higher than currently accrued. In such event, the recording of the liability may result in a material impact on net income for the annual or interim period during which the additional costs are accrued. The Company expects the contingent liabilities related to these facilities to be resolved over an extended period of time. The Company does not believe that any potential liability ultimately attributed to the Company for its environmental-related matters will 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 9, on page 39 of this report, for discussion of the environmental-related accruals included in the Company's Consolidated Balance Sheets. The Company is exposed to market risk associated with interest rates and foreign currency exposure. The Company utilizes derivative instruments as part of its overall financial risk management policy, but does not use derivative instruments for speculative or trading purposes. The Company has partially hedged risks associated with fixed interest rate debt by entering into various interest rate swap agreements (see Note 7, on page 38 of this report). The Company does not believe that any potential loss related to interest rate exposure will have a material adverse effect on the Company's financial condition, results of operations or cash flows. The Company also entered into foreign currency option and forward contracts to hedge against value changes in foreign currency (see Note 4, on page 35 of this report). The Company believes it may experience continuing losses from foreign currency translation. However, the Company does not expect currency translation, transaction or hedging contract losses to have a material adverse effect on the Company's financial condition, results of operations or cash flows. RESULTS OF OPERATIONS - 2001 VS 2000 Consolidated net sales decreased 2.8 percent to $5.1 billion in 2001. The most significant factors impacting sales during the year came from the previously announced discontinued paint programs at certain customers in the Consumer Segment, continuing poor domestic and South American economic conditions and continuing weakness in foreign currency exchange rates. Excluding the effects of the previously announced discontinued paint programs, consolidated net sales would have been down 1.2 percent for the year. Net external sales in the Paint Stores Segment during 2001 increased 0.7 percent to $3.21 billion as higher architectural paint sales offset sales shortfalls in the product finishes and associated product categories. Sales in this Segment continued to be impacted by the sluggish domestic economy and weakness in product finishes sales. Sales to professional painters and industrial maintenance users showed gains for the year. Comparable-store sales decreased 1.3 percent in 2001. This Segment ended 2001 with 2,573 stores in operation compared to 2,488 stores in operation at the end of the prior year. The objective of the Paint Stores Segment is to expand its store base an average of roughly three percent each year. In 2001, the Segment added 85 net new stores through new store openings or acquisition and expects to add approximately 50 net new stores in 2002. External sales in the Consumer Segment decreased 9.0 percent during 2001 to $1.1 billion. Excluding the previously announced discontinued paint programs at certain customers, external sales for this Segment would have decreased 2.4 percent for the year. Sales comparisons will be impacted in the Consumer Segment for 2002 by the anticipated loss of sales caused by the disposition of the Cleaning Solutions Group business. This Segment also continues to be impacted by the sluggish domestic economy, which is expected to continue through 2002. The Segment's plans for 2002 include new product introductions and expansion of its presence at certain retailers and new customer accounts in preparation of an eventual economic recovery. The pending outcome of a bankruptcy filing for reorganization by a large retail customer may have an adverse effect on sales of this Segment. Management is unable to determine the poten- 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS tial impact on sales at this time. External sales in the Automotive Finishes Segment decreased 5.9 percent during 2001 to $464.2 million due primarily to the continuing negative impact of the soft domestic economy on this Segment's OEM sales that could not be offset by higher collision repair sales throughout the year. The Company expects that stronger collision repair sales, an increase in the number of automotive branches and sales from new product and color introductions will result in a sales increase for this Segment in 2002. External sales in the International Coatings Segment decreased 8.9 percent to $279.6 million. The sales decreases, in U.S. dollars, were due primarily to unfavorable currency exchange rates. Excluding the effects of currency exchange fluctuations relative to last year, net sales for the Segment increased 5.2 percent for 2001. Net sales for the year, in local currencies, continued to be impacted by competitive pricing and a shift in sales to lower priced products due to continued poor market and macroeconomic conditions in Brazil and Argentina. The Company expects to realize only minimal sales volume improvements in the International Coatings Segment in 2002 as economic conditions are not expected to improve in most South American countries in which we operate, especially in Argentina where a government controlled currency devaluation is being implemented during the beginning of 2002. Consolidated gross profit as a percent of sales decreased to 43.8 percent from 44.3 percent in 2000. The Company's gross profit margin was impacted by raw material cost increases, inflated energy costs and higher distribution costs during the first half of the year for 2001 versus 2000. Additionally, gross profit was impacted by rising health care and other employee benefit costs. The Paint Stores Segment's 2001 gross profit margin was flat versus 2000 as a favorable paint product sales mix and selective selling price increases were offset by a charge of $2.1 million for the costs associated with closing a manufacturing facility in the Chemical Coatings Division. Gross profit margin in the Consumer Segment was below last year due to the sales shortfall and competitive pricing pressures that prohibited selling price increases sufficient to offset higher year-over-year raw material, distribution and energy costs earlier in the year. Gross profit margin was essentially flat versus last year in the Automotive Finishes Segment. Selective selling price increases, a favorable product sales mix, and provisions for qualified exit costs recorded in 2000 improved the margin comparison in this Segment, while lower production volume and higher raw material, distribution and energy costs earlier in the year offset these improvements. Gross profit margin in the International Coatings Segment decreased primarily due to price competition and a market shift in product sales to lower priced products in the face of higher U.S. dollar denominated raw material costs. Consolidated selling, general and administrative expenses (SG&A) for 2001 were $1,729.9 million, which was $10.5 million below last year's spending level. As a percent of sales, SG&A increased to 34.1 percent from 33.4 percent in 2000 due primarily to lower sales. Overall, SG&A in all Segments is being impacted by rising health care and other employee benefit costs. The Paint Stores Segment's SG&A ratio was slightly unfavorable compared to last year primarily due to incremental increases in expenses associated with the 85 stores added through new store openings or acquisition. In spite of the sluggish market conditions, the Paint Stores Segment continues to invest in its business by opening or acquiring stores and maintaining customer service. A slightly favorable SG&A ratio in the Consumer Segment for 2001 as compared to last year was primarily a result of certain SG&A cost reductions in response to lower sales activity. In dollar spending, Consumer Segment SG&A for 2001 was approximately $37.0 million below last year. The Automotive Finishes Segment's SG&A was higher for the year as the Segment continued some incremental spending in order to maintain its market share and customer service levels in a competitive market. The International Coatings Segment's SG&A was favorable for the year due primarily to weaker foreign currencies and the effect on stating SG&A in U.S. dollars. As a percent of sales, this Segment's SG&A ratio increased due to lower sales volume. Consolidated segment operating profit for 2001 increased to $424.4 million or 8.4 percent of sales compared to $143.4 million or 2.8 percent of sales in 2000. During the fourth quarter of 2000, the Company recognized an asset impairment charge of $352.0 million against segment operating profit in the Consumer Segment to reduce the carrying values of certain long-lived assets, primarily goodwill, to their estimated fair values. Excluding the asset impairment charge, consolidated segment operating profit would have been $495.4 million in 2000 or 9.5 percent of sales. Segment operating profit of the Paint Stores Segment decreased to $390.5 million or 12.2 percent of sales as a favorable paint product sales mix and selective selling price increases could not offset the expense associated with closing a manufacturing facility in the Chemical Coatings Division and the incremental expenses related to new store openings. The Consumer Segment's operating profit declined to $108.2 million or 9.8 percent of external sales due primarily to the sales shortfall and competitive pricing pressures that prohibited selling price increases sufficient to offset higher year-over-year raw material, distribution and energy costs earlier in the year. Segment operating profit of the Automotive Finishes Segment decreased to $51.2 million or 11.0 percent of external sales primarily due to lower production volume and higher raw material, distribution and energy costs earlier in the year and incremental SG&A spending in order to maintain its 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS market share and customer service levels in a competitive market. Segment operating profit of the International Coatings Segment decreased to $4.9 million or 1.8 percent of external sales primarily due to increased price competition and a market shift in product sales to lower priced products in the face of higher U.S. dollar denominated raw material costs. There are certain risks in transacting business internationally, such as changes in applicable laws and regulatory requirements, political instability, general economic and labor conditions, fluctuations in currency exchange rates and expatriation restrictions, which could adversely affect the financial condition or results of operation of the Company's consolidated foreign subsidiaries. Corporate expenses decreased in 2001 primarily due to the reduction in certain information systems expenses and decreased interest expense which were partially offset by increases in certain unallocated employee benefit expenses. Refer to Note 16, on pages 44 through 46 of this report, for additional reportable segment information. Interest expense decreased in 2001 primarily due to lower average short-term debt outstanding and rates. However, interest coverage decreased to 8.8 times in 2001 versus 9.0 times in 2000, excluding the effects of the asset impairment charge, due primarily to lower income before income taxes in 2001. Fixed charge coverage, which is calculated using interest and rent expense, decreased to 5.2 times in 2001 from 5.7 times in 2000, excluding the effects of the asset impairment charge. Interest and net investment income decreased in 2001 primarily due to lower average balances of cash and cash equivalents, partially offset by higher average yields. Other expense - net for 2001 was essentially flat with 2000, as gains from the sale of certain assets were partially offset by provisions for environmental matters in 2001. See Note 4, on page 35 of this report, for further detail on Other expense - net. As shown in Note 13, on page 43 of this report, the effective income tax rate increased to 38.0 percent in 2001 from 37.5 percent in 2000, excluding the effects of the asset impairment charge, due to the impact of certain investment vehicles. Net income increased in 2001 to $263.2 million from $16.0 million in 2000. Net income per share-diluted increased to $1.68 per share compared to $.10 per share last year. See Note 15, on page 44 of this report, for detailed computations. Excluding the effects of the asset impairment charge in 2000, net income for 2000 was $309.7 million and net income per share-diluted was $1.90 per share. RESULTS OF OPERATIONS - 2000 VS 1999 Consolidated net sales increased 4.2 percent to $5.2 billion in 2000, primarily due to increased sales in the Paint Stores, Automotive Finishes and International Coatings Segments that were partially offset by decreased sales in the Consumer Segment. Net external sales in the Paint Stores Segment during 2000 increased 6.1 percent to $3.2 billion as higher volume sales of paint products outpaced increases in the stores' other product lines (wallcoverings, floorcoverings, spray equipment and associated products) with sales to professional painters and industrial users showing the greatest gains. Comparable-store sales increased 3.7 percent in 2000. In 2000, the Segment added 92 net new stores and ended the year with 2,488 stores in operation compared to 2,396 stores in operation at the end of 1999. External sales in the Consumer Segment decreased 0.4 percent during 2000 to $1.2 billion primarily due to a sluggish domestic do-it-yourself market. New product launches, sales to new customers and increased sales to certain existing customers could not offset the effects of the sluggish retail market. External sales in the Automotive Finishes Segment increased 4.8 percent during 2000 to $493.4 million due primarily to the sales of vehicle refinish products. The soft domestic economy during the fourth quarter of 2000 negatively impacted this Segment's OEM sales. External sales in the International Coatings Segment for 2000 increased 2.6 percent to $307.0 million due primarily to increased gallons sold. Sales in local currencies were up 6.5 percent, while U.S. dollar comparisons were affected by currency conversions. Net sales for 2000 continued to be impacted by a shift in sales to lower priced products and competitive pricing due to poor market conditions in South America, particularly in Argentina. Consolidated gross profit as a percent of sales decreased in 2000 to 44.3 percent from 44.9 percent in 1999. The Company's gross profit margin was impacted by raw material cost increases, inflated energy costs and higher distribution costs. The Paint Stores Segment's 2000 gross profit margin was slightly higher than 1999 primarily due to increased paint volume sales, a favorable product sales mix and selective selling price increases. Gross profit margin in the Consumer Segment for 2000 was lower than 1999 as competitive pricing pressures prohibited selling price increases sufficient to offset increased raw material costs and higher distribution costs. In addition, costs associated with new product launches and new customer start-ups could not be offset by volume related manufacturing efficiencies and certain cost reductions. Gross profit margin decreased in the Automotive Finishes Segment during 2000 and was also unfavorably impacted by increased raw material costs. Gross profit margin in the International Coatings Segment decreased primarily due to price competition, increased raw material costs and an unfavorable product sales mix to lower margin products in 2000. SG&A expenses for 2000 remained flat as a percent of sales at 33.4 percent. Increased expenses in 2000 related to new store openings, new products, new customers and the 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS consolidation of two research facilities and division administrative functions into the automotive technology center. Offsetting these increased expenses was the reduction in costs in 2000 due to the completion in 1999 of the Company's Year 2000 compliance project. The Paint Stores Segment's 2000 SG&A ratio was slightly unfavorable compared to 1999 primarily due to increased expenses related to 92 net new store openings. The Paint Stores Segment continued its investment in expanding its business in spite of the soft domestic economy during the latter part of 2000. A slightly favorable SG&A ratio in the Consumer Segment for 2000 as compared to 1999 was primarily a result of certain administrative cost reductions partially offset by decreased sales and increased costs of new product launches and new customer start-ups. The Automotive Finishes Segment's SG&A ratio in 2000 was also slightly favorable compared to 1999 primarily due to higher sales volume partially offset by severance and moving costs associated with the consolidation of the Segment's research and administrative functions into the newly purchased automotive technology center. The International Coatings Segment's SG&A ratio for 2000 was unfavorable primarily due to higher commissions in Brazil relating to increased sales, partially offset by overall sales increases. During the fourth quarter of 2000, the Company recognized an asset impairment charge of $352.0 million ($293.6 million after-tax or $1.80 per diluted share) in the Consumer Segment to reduce the carrying values of certain long-lived assets, primarily goodwill, to their estimated fair values. Cash flow in 2000 was not affected by this accounting charge which is more fully described in Note 2 on page 35 of this report. Accordingly, consolidated segment operating profit for 2000 was reduced to 2.8 percent of sales compared to 9.8 percent of sales in 1999. Excluding the asset impairment charge, consolidated segment operating profit in 2000 increased 1.1 percent but declined as a percent of sales to 9.5 percent from 9.8 percent in 1999. Segment operating profit of the Paint Stores Segment for 2000 increased 9.2 percent to 12.9 percent of sales, as increased paint volume sales, a favorable product mix and selective selling price increases more than offset increased expenses related to new store openings. The Consumer Segment's 2000 operating profit, excluding the effects of the asset impairment charge, declined 8.0 percent primarily due to competitive pricing pressures that did not allow recovery of all increased raw material costs and higher distribution costs. Segment operating profit during 2000 for the Automotive Finishes Segment decreased $5.3 million or 7.9 percent primarily due to increased raw material costs and disposition and termination of operations expenses of $6.8 million for two research centers idled by the consolidation into the new automotive technology center. See Note 5, on page 36 of this report, for additional disposition and termination of operations information. Segment operating profit of the International Coatings Segment decreased in 2000 to $17.7 million from $33.9 million in 1999 primarily due to increased price competition, increased raw material costs and an unfavorable product sales mix to lower margin products. Corporate expenses decreased in 2000 primarily due to the reduction in certain information systems expenses, including the completion of the Company's Year 2000 compliance project in 1999, partially offset by increased interest expense and certain unallocated employee benefit expenses. Refer to Note 16, on pages 44 through 46 of this report, for additional reportable segment information. Interest expense increased slightly in 2000 primarily due to higher average short-term debt outstanding and rates, partially offset by lower average long-term debt outstanding. As a result, interest coverage, excluding the effects of the asset impairment charge, remained unchanged from 1999 at 9.0 times. Interest coverage in 2000, after recording the effects of the asset impairment charge, decreased to 3.3 times. Fixed charge coverage, excluding the effects of the asset impairment charge, which is calculated using interest and rent expense, decreased to 5.7 times in 2000 from 5.8 times in 1999. Fixed charge coverage in 2000, after recording the effects of the asset impairment charge, was 2.4 times. Interest and net investment income decreased in 2000 primarily due to lower average cash and short-term investment balances, partially offset by higher average yields. See Note 4, on page 35 of this report, for further detail on Other expense - net. As shown in Note 13, on page 43 of this report, the effective income tax rate was 88.9 percent in 2000 due to the effect of a portion of the asset impairment charge that was not deductible for tax purposes. Excluding the effects of the asset impairment charge, the effective tax rate declined to 37.5 percent from 38.0 percent in 1999. Net income decreased in 2000 to $16.0 million from $303.9 million in 1999 due primarily to the effects of the asset impairment charge. Net income per share-diluted for 2000 was reduced to $.10 per share from $1.80 in 1999. See Note 15, on page 44 of this report, for detailed computations. Excluding the effects of the asset impairment charge, net income for 2000 increased 1.9 percent to $309.7 million, and net income per share-diluted increased 5.6 percent to $1.90 per share. 27 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, 2001, 2000 and 1999. The primary responsibility for the integrity of the financial information rests with management. This information is prepared in accordance with accounting principles generally accepted in the United States, 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 systems provide this appropriate balance. The Board of Directors pursues its responsibility for these financial statements through the Audit Committee, composed exclusively of independent 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/ C. M. CONNOR C. M. Connor Chairman and Chief Executive Officer /s/ S. P. HENNESSY S. P. Hennessy Senior Vice President - Finance, Treasurer and Chief Financial Officer /s/ J. L. AULT J. L. Ault Vice President - Corporate Controller 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, 2001, 2000 and 1999, and the related statements of consolidated income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 2001, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ERNEST & YOUNG LLP Cleveland, Ohio January 25, 2002 28 STATEMENTS OF CONSOLIDATED INCOME (Thousands of Dollars Except Per Share Data)
YEAR ENDED DECEMBER 31, ----------------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Net sales ........................................ $ 5,066,005 $ 5,211,624 $ 5,003,837 Cost of goods sold ............................... 2,846,376 2,904,013 2,755,323 Gross profit ..................................... 2,219,629 2,307,611 2,248,514 Percent to net sales .......................... 43.8% 44.3% 44.9% Selling, general and administrative expenses ..... 1,729,855 1,740,367 1,673,449 Percent to net sales .......................... 34.1% 33.4% 33.4% Impairment of long-lived assets .................. 352,040 Operating income ................................. 489,774 215,204 575,065 Percent to net sales .......................... 9.7% 4.1% 11.5% Interest expense ................................. 54,627 62,026 61,168 Interest and net investment income ............... (4,087) (4,981) (5,761) Other expense - net .............................. 14,785 14,753 29,540 ----------- ----------- ----------- Income before income taxes ....................... 424,449 143,406 490,118 Income taxes ..................................... 161,291 127,380 186,258 ----------- ----------- ----------- Net income ....................................... $ 263,158 $ 16,026 $ 303,860 =========== =========== =========== Net income per share: Basic ......................................... $ 1.69 $ .10 $ 1.81 =========== =========== =========== Diluted ....................................... $ 1.68 $ .10 $ 1.80 =========== =========== ===========
See notes to consolidated financial statements. 29 CONSOLIDATED BALANCE SHEETS (Thousands of Dollars)
DECEMBER 31, --------------------------------------------- 2001 2000 1999 ----------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents ............................................ $ 118,814 $ 2,896 $ 18,623 Accounts receivable, less allowance .................................. 523,278 594,162 606,046 Inventories: Finished goods ................................................... 530,916 597,472 591,912 Work in process and raw materials ................................ 101,847 106,255 111,476 ----------- ----------- ----------- 632,763 703,727 703,388 Deferred income taxes ................................................ 104,672 104,662 108,899 Other current assets ................................................. 127,418 146,092 141,143 ----------- ----------- ----------- Total current assets ............................................. 1,506,945 1,551,539 1,578,099 Goodwill ................................................................. 672,397 705,547 1,039,555 Intangible assets ........................................................ 247,489 259,085 274,924 Deferred pension assets .................................................. 393,587 364,351 334,094 Other assets ............................................................. 134,819 147,769 94,464 Property, plant and equipment: Land ................................................................. 64,447 65,546 62,517 Buildings ............................................................ 441,418 431,524 431,802 Machinery and equipment .............................................. 1,024,701 980,560 913,346 Construction in progress ............................................. 34,070 52,779 40,262 ----------- ----------- ----------- 1,564,636 1,530,409 1,447,927 Less allowances for depreciation ..................................... 891,948 808,030 736,251 ----------- ----------- ----------- 672,688 722,379 711,676 ----------- ----------- ----------- Total Assets ............................................................. $ 3,627,925 $ 3,750,670 $ 4,032,812 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings ................................................ $ 106,854 Accounts payable ..................................................... $ 454,410 448,799 $ 458,919 Compensation and taxes withheld ...................................... 141,640 137,211 140,934 Current portion of long-term debt .................................... 111,852 12,920 119,949 Other accruals ....................................................... 326,854 334,891 335,691 Accrued taxes ........................................................ 106,597 74,568 85,396 ----------- ----------- ----------- Total current liabilities ........................................ 1,141,353 1,115,243 1,140,889 Long-term debt ........................................................... 503,517 620,675 621,957 Postretirement benefits other than pensions .............................. 209,963 208,673 206,591 Other long-term liabilities .............................................. 285,328 334,215 364,843 Shareholders' equity: Preferred stock - convertible, participating, no par value: 168,305 shares outstanding at December 31, 2001 .................. 168,305 Unearned ESOP compensation ........................................... (168,305) Common stock - $1.00 par value: 153,978,356, 159,558,335 and 165,663,601 shares outstanding at December 31, 2001, 2000 and 1999, respectively ...................................... 208,031 206,848 206,309 Other capital ........................................................ 200,643 158,650 150,887 Retained earnings .................................................... 2,120,927 1,948,753 2,020,851 Treasury stock, at cost .............................................. (837,284) (678,778) (533,891) Cumulative other comprehensive loss .................................. (204,553) (163,609) (145,624) ----------- ----------- ----------- Total shareholders' equity ....................................... 1,487,764 1,471,864 1,698,532 ----------- ----------- ----------- Total Liabilities and Shareholders' Equity ............................... $ 3,627,925 $ 3,750,670 $ 4,032,812 =========== =========== ===========
See notes to consolidated financial statements. 30 STATEMENTS OF CONSOLIDATED CASH FLOWS (Thousands of Dollars)
YEAR ENDED DECEMBER 31, --------------------------------------- 2001 2000 1999 --------- --------- --------- OPERATING ACTIVITIES Net income ........................................................... $ 263,158 $ 16,026 $ 303,860 Adjustments to reconcile net income to net operating cash: Impairment of long-lived assets .................................. 352,040 Depreciation ..................................................... 109,187 108,906 105,350 Deferred income taxes ............................................ 15,677 (26,886) 21,170 Provisions for qualified exit costs .............................. 5,302 3,304 6,331 Impairment charges-net on assets held for disposal ............... 6,402 4,719 1,309 Provisions for environmental-related matters ..................... 5,609 16,334 Amortization of intangible assets ................................ 38,911 51,124 50,394 Defined benefit pension plans net credit ......................... (29,366) (29,629) (28,083) Income tax effect of ESOP on other capital ....................... 22,902 Net increase in postretirement liability ......................... 2,990 3,682 3,428 Foreign currency related losses .................................. 2,277 2,115 3,333 Other ............................................................ 1,101 9,980 15,546 Change in working capital accounts: Decrease (increase) in accounts receivable ....................... 61,497 21,264 (28,212) Decrease (increase) in inventories ............................... 72,132 6,188 (24,420) Increase (decrease) in accounts payable .......................... 10,233 (21,790) 60,487 Increase (decrease) in accrued taxes ............................. 31,468 (11,744) 6,019 Other ............................................................ 17,035 (22,645) 3,650 Unusual tax-related payment .......................................... (65,677) Increase in long-term accrued taxes .................................. 419 10,005 15,715 Payments for environmental-related matters ........................... (17,565) (9,105) (15,808) Payments for qualified exit costs .................................... (3,326) (6,173) (15,529) Other ................................................................ 11,280 1,963 (13,808) --------- --------- --------- Net operating cash ............................................... 561,646 463,344 487,066 INVESTING ACTIVITIES Capital expenditures ................................................. (82,572) (132,778) (134,171) Acquisitions of businesses ........................................... (15,162) (60,108) (15,427) Increase in other investments ........................................ (16,614) (51,163) (23,435) Proceeds from sale of assets ......................................... 9,866 7,670 9,409 Other ................................................................ 13,590 (16,659) (298) --------- --------- --------- Net investing cash ............................................... (90,892) (253,038) (163,922) FINANCING ACTIVITIES Net (decrease) increase in short-term borrowings ..................... (106,854) 106,854 Increase in long-term debt ........................................... 8,487 Payments of long-term debt ........................................... (16,210) (116,344) (98,982) Payments of cash dividends ........................................... (90,984) (88,124) (80,954) Proceeds from stock options exercised ................................ 17,798 6,419 7,107 Treasury stock purchased ............................................. (157,088) (146,857) (145,806) Other ................................................................ (786) 3,898 (2,225) --------- --------- --------- Net financing cash ............................................... (354,124) (225,667) (320,860) Effect of exchange rate changes on cash .............................. (712) (366) (2,794) --------- --------- --------- Net increase (decrease) in cash and cash equivalents ................. 115,918 (15,727) (510) Cash and cash equivalents at beginning of year ....................... 2,896 18,623 19,133 --------- --------- --------- Cash and cash equivalents at end of year ............................. $ 118,814 $ 2,896 $ 18,623 ========= ========= ========= Income taxes paid .................................................... $ 129,435 $ 156,514 $ 153,890 Interest paid ........................................................ 55,769 64,400 61,868
See notes to consolidated financial statements. 31 STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (Thousands of Dollars Except Per Share Data)
UNEARNED PREFERRED ESOP COMMON OTHER RETAINED STOCK COMPENSATION STOCK CAPITAL EARNINGS ----------- ------------ ----------- ----------- ----------- Balance at January 1, 1999 ............. $ 205,701 $ 143,686 $ 1,797,945 Comprehensive income: Net income ......................... 303,860 Other comprehensive loss ........... Comprehensive income ........... Treasury stock purchased ............... Stock issued (tendered) for exercise of options ............ 463 8,597 Stock tendered in connection with restricted stock grants ....... Restricted stock grants (net activity) ..................... 145 (69) Stock acquired for trust ............... (1,327) Cash dividends -- $.48 per share ....... (80,954) ----------- ----------- ----------- Balance at December 31, 1999 ........... 206,309 150,887 2,020,851 Comprehensive income: Net income ......................... 16,026 Other comprehensive loss ........... Comprehensive loss ............. Treasury stock purchased ............... Stock issued (tendered) for exercise of options ............ 534 8,121 Restricted stock grants (net activity) ..................... 5 3,176 Stock acquired for trust ............... (1,199) Treasury stock transferred to trust .... (2,335) Cash dividends -- $.54 per share ....... (88,124) ----------- ----------- ----------- Balance at December 31, 2000 ........... 206,848 158,650 1,948,753 Comprehensive income: Net income ......................... 263,158 Other comprehensive loss ........... Comprehensive income ........... Treasury stock purchased ............... Issuance of preferred stock to pre-fund ESOP ................... $ 250,000 $ (250,000) Income tax effect of ESOP .............. 22,902 Redemption of preferred stock .......... (81,695) 81,695 Stock issued (tendered) for exercise of options ............ 1,031 19,947 Stock tendered in connection with restricted stock grants ....... Restricted stock grants (net activity) ..................... 152 979 Stock acquired for trust ............... (1,835) Cash dividends -- $.58 per share ....... (90,984) ----------- ----------- ----------- ----------- ----------- Balance at December 31, 2001 ........... $ 168,305 $ (168,305) $ 208,031 $ 200,643 $ 2,120,927 =========== =========== =========== =========== =========== CUMULATIVE OTHER TREASURY COMPREHENSIVE STOCK LOSS TOTAL ----------- ------------- ----------- Balance at January 1, 1999 ............. $ (386,465) $ (44,927) $ 1,715,940 Comprehensive income: Net income ......................... 303,860 Other comprehensive loss ........... (100,697) (100,697) ----------- Comprehensive income ........... 203,163 Treasury stock purchased ............... (145,806) (145,806) Stock issued (tendered) for exercise of options ............ (252) 8,808 Stock tendered in connection with restricted stock grants ....... (1,368) (1,368) Restricted stock grants (net activity) ..................... 76 Stock acquired for trust ............... (1,327) Cash dividends -- $.48 per share ....... (80,954) ----------- ----------- ----------- Balance at December 31, 1999 ........... (533,891) (145,624) 1,698,532 Comprehensive income: Net income ......................... 16,026 Other comprehensive loss ........... (17,985) (17,985) ----------- Comprehensive loss ............. (1,959) Treasury stock purchased ............... (146,857) (146,857) Stock issued (tendered) for exercise of options ............ (365) 8,290 Restricted stock grants (net activity) ..................... 3,181 Stock acquired for trust ............... (1,199) Treasury stock transferred to trust .... 2,335 Cash dividends -- $.54 per share ....... (88,124) ----------- ----------- ----------- Balance at December 31, 2000 ........... (678,778) (163,609) 1,471,864 Comprehensive income: Net income ......................... 263,158 Other comprehensive loss ........... (40,944) (40,944) ----------- Comprehensive income ........... 222,214 Treasury stock purchased ............... (157,088) (157,088) Issuance of preferred stock to pre-fund ESOP ................... Income tax effect of ESOP .............. 22,902 Redemption of preferred stock .......... Stock issued (tendered) for exercise of options ............ (532) 20,446 Stock tendered in connection with restricted stock grants ....... (886) (886) Restricted stock grants (net activity) ..................... 1,131 Stock acquired for trust ............... (1,835) Cash dividends -- $.58 per share ....... (90,984) ----------- ----------- ----------- Balance at December 31, 2001 ........... $ (837,284) $ (204,553) $ 1,487,764 =========== =========== ===========
See notes to consolidated financial statements. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars Unless Otherwise Indicated) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION. The consolidated financial statements include all controlled subsidiaries. Inter-company accounts and transactions have been eliminated. USE OF ESTIMATES. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 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 primarily in North and South America. REPORTABLE SEGMENTS. See Note 16. CASH FLOWS. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. 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 $10,182, $15,913, and $21,093 at December 31, 2001, 2000, and 1999, respectively, are based on quoted market prices. 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. See Note 7 for the fair value of interest rate swap contracts.
DECEMBER 31, --------------------------------------------------------- 2001 2000 1999 ------------------ ------------------ ------------------ CARRYING FAIR Carrying Fair Carrying Fair AMOUNT VALUE Amount Value Amount Value -------- -------- -------- -------- -------- -------- Publicly traded debt ..... $603,762 $598,529 $613,709 $592,113 $726,017 $698,031 Non-traded debt .......... 13,184 12,571 19,886 17,752 15,889 14,792
DERIVATIVE INSTRUMENTS: The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, effective January 1, 2001 with no impact on the Company's results of operations, liquidity or financial condition. SFAS No. 133 requires all derivative instruments to be recorded as either assets or liabilities at fair value. Gains or losses resulting from changes in the values of those derivative instruments may be recognized immediately or deferred depending on the use of the derivative or whether it's designated as a hedge. The Company utilizes derivative instruments as part of its overall financial risk management policy. The Company does not use derivative instruments for speculative or trading purposes. The Company entered into interest rate swap contracts during 2001 primarily to hedge against interest rate risks. See Note 7. The Company also entered into option and forward currency exchange contracts in 2001 primarily to hedge against foreign currency risk exposure. See Note 4. 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 $13,771, $25,143, and $15,860 at December 31, 2001, 2000, and 1999, respectively, represent the Company's best estimate of current economic values of these investments. 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 expense - net. Such expense was immaterial to Income before income taxes. IMPAIRMENT OF LONG-LIVED ASSETS. The Company evaluates the recoverability of long-lived assets and the related estimated remaining lives at each balance sheet date. The Company records an impairment or change in useful life whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." See Note 2. See Impact of recently issued accounting standards below for information on SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." GOODWILL. Goodwill represents the cost in excess of fair value of net assets acquired in business combinations accounted for by the purchase method and is amortized on a 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars Unless Otherwise Indicated) straight-line basis over the expected period of benefit ranging from 10 to 40 years for acquisitions prior to July 1, 2001. Accumulated amortization of goodwill was $104,746, $84,827 and $107,365 at December 31, 2001, 2000, and 1999, respectively. See Note 2. The Company adopted SFAS No. 141, "Business Combinations," which supersedes Accounting Principles Board Opinion (APBO) No. 16, as required on July 1, 2001. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and changes the criteria to recognize intangible assets apart from goodwill. The adoption of this statement had no impact on the Company's results of operations, liquidity or financial condition. See Impact of recently issued accounting standards below for information on SFAS No. 142, "Goodwill and Other Intangible Assets." INTANGIBLES. Intangible assets include non-compete covenants, operating rights, patents, and trademarks. These assets are amortized on a straight-line basis over the expected period of benefit ranging from 2 to 40 years. Accumulated amortization of intangible assets, net of writeoffs of fully amortized intangible assets in 2001, was $87,897, $129,320, and $119,125 at December 31, 2001, 2000, and 1999, respectively. 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% - 33-1/3% Automobiles and trucks .......... 10% - 33-1/3%
LETTERS OF CREDIT. The Company occasionally enters into standby letter of credit agreements to guarantee various operating activities. These agreements, which expire in 2002, provide credit availability to the various beneficiaries if certain contractual events occur. Amounts outstanding under these agreements totaled $14,400, $12,230, and $14,177 at December 31, 2001, 2000, and 1999, respectively. 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 included in Cumulative other comprehensive loss, a component of Shareholders' equity. COMPREHENSIVE INCOME. Cumulative other comprehensive loss consisted solely of foreign currency translation adjustments for all years presented. REVENUE RECOGNITION. Substantially all revenues are recognized when products are shipped and title has passed to unaffiliated customers. 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 $37,193, $33,927, and $27,200 for 2001, 2000, and 1999, respectively. ADVERTISING EXPENSES. The cost of advertising is expensed as incurred. The Company incurred $236,259, $276,078, and $265,411 in advertising costs during 2001, 2000, and 1999, respectively. 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, investigation 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 and for which costs can be reasonably estimated. All accrued amounts are recorded on an undiscounted basis. Accrued environmental remediation-related expenses include direct costs of remediation and indirect costs related to the remediation effort, such as compensation and benefits for employees directly involved in the remediation activities and fees paid to outside engineering, consulting and law firms. See Notes 4 and 9. STOCK-BASED COMPENSATION. The Company uses the intrinsic value method of accounting for stock-based compensation in accordance with APBO No. 25. See Note 12 for pro forma disclosure of net income and earnings per share under the fair value method of accounting for stock-based compensation as prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation." EARNINGS PER SHARE. Shares of preferred stock held in an unallocated account of the ESOP (see Note 10) and common stock held in a revocable trust (see Note 11) are not considered outstanding shares for basic or diluted net income per share calculations. All references to "shares or per share information" throughout this report relate to common shares, unless otherwise indicated. Basic net income per share is computed based on the weighted-average number of shares outstanding during the year. Diluted net income per share is computed based on the weighted-average number of shares outstanding plus all dilutive securities potentially outstanding during the year. See Note 15. All references to net income or losses per share throughout this report are stated on a diluted per share basis, unless otherwise indicated. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. During 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which supersedes APBO No. 17, "Intangible Assets." Goodwill and intangible assets deemed to 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars Unless Otherwise Indicated) have indefinite lives will no longer be amortized but will be subject to impairment tests in accordance with SFAS No. 142. Other intangible assets will continue to be amortized over their useful lives. This statement is effective for fiscal years beginning after December 15, 2001 for goodwill and intangible assets acquired before July 1, 2001. However, this statement was effective July 1, 2001 for all goodwill and intangible assets acquired after June 30, 2001. The Company has adopted or will adopt SFAS No. 142 in the required periods. Application of the non-amortization provisions of the statement is expected to increase net income approximately $24.7 million for the full year 2002. Prior to the end of the first and second quarters of 2002, the Company will perform the required impairment tests of intangible assets deemed to have indefinite lives and the first step in testing goodwill for impairment, respectively, as of January 1, 2002. Management has not yet determined the effect on the Company's results of operations, financial condition or liquidity of any potential impairments resulting from such tests. Also during 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121 and parts of APBO No. 30. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. This statement retains many of the fundamental provisions of SFAS No. 121 relating to assets to be held and used, but excludes goodwill and intangible assets that are not amortized. This statement also supercedes the accounting and reporting provisions for the disposal of a segment of a business found in APBO No. 30. The Company will adopt this statement as required, and management does not believe the adoption will have a material effect on the Company's results of operations, financial condition or liquidity. RECLASSIFICATION. Certain amounts in the 2000 and 1999 consolidated financial statements have been reclassified to conform with the 2001 presentation. NOTE 2 - IMPAIRMENT OF LONG-LIVED ASSETS During the fourth quarter of 2000, the Company recognized an impairment charge of $352,040 ($293,628 after tax or $1.80 per share) to reduce the carrying values of certain long-lived assets to their estimated fair values. Charges of $342,522 reduced goodwill while the remaining portion of the charge primarily reduced fixed assets. The impaired assets are part of the Consumer Segment related to the previous acquisitions of Thompson Minwax Holding Corp. and Pratt & Lambert United, Inc., and purchases of the assets of Sunshine Quality Products, Inc. and the Household and Professional Products Division of Grow Group, Inc. Current losses, cash flow deficiencies and cash flow shortfalls from expectations indicated an impairment review was necessary. Undiscounted future cash flows estimated by management established that impairment existed. The amount of impairment was estimated using a discounted cash flow valuation technique incorporating a discount rate commensurate with the risks involved for each group of assets. NOTE 3 - INVENTORIES Inventories are stated at the lower of cost or market with cost 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) inventory valuation method 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.
2001 2000 1999 --------- --------- -------- Percentage of total inventories on LIFO ....... 88% 89% 90% Excess of FIFO over LIFO ...................... $ 112,669 $ 110,124 $ 97,953 Decrease in net income due to LIFO ............ (1,567) (7,916) (894) Decrease in net income per share due to LIFO .................................... (.01) (.05) (.01)
NOTE 4 - OTHER EXPENSE - NET A summary of significant items included in Other expense - net is as follows:
2001 2000 1999 --------- --------- -------- Dividend and royalty income ................... $ (3,922) $ (4,144) $ (4,692) Net (income) expense of financing and investing activities .................... (1,796) 10,926 7,084 Provisions for environmental matters - net (see Note 9) .................. 5,609 15,402 Disposition and termination of operations expense - net (see Note 5) ....... 7,304 6,968 3,830 Foreign currency related losses ............... 2,277 2,115 3,333 Other expense (income) ........................ 5,313 (1,112) 4,583 --------- --------- -------- $ 14,785 $ 14,753 $ 29,540 ========= ========= ========
The net (income) expense of financing and investing activities represents the net realized gains or losses from disposing of fixed assets, the net gain or loss associated with the investment in certain long-term asset funds, the net pretax expense associated with the Company's investment in broad-based corporate owned life insurance and other related fees. Foreign currency related losses include foreign currency transaction losses and realized and unrealized gains and losses from foreign currency option and forward contracts. All foreign currency option and forward contracts outstanding at December 31, 2001 have maturity dates of less than twelve months and are undesignated hedges with value changes being recognized currently in earnings in accordance with SFAS No. 133. These derivative instrument 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars Unless Otherwise Indicated) values are included in either Other current assets or Other accruals on the balance sheet and were immaterial at December 31, 2001. There were no foreign currency option and forward contracts outstanding at December 31, 2000 and 1999. NOTE 5 - DISPOSITION AND TERMINATION OF OPERATIONS The Company is continually re-evaluating its operating facilities against its long-term strategic goals. Upon commitment to a formal shutdown plan of an operating facility, provisions are made for all estimated qualified exit costs in accordance with Emerging Issues Task Force No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity" and other related accounting guidance. Qualified exit costs include primarily post-closure rent expenses, incremental post-closure costs and costs of employee terminations. Adjustments may be made to prior provisions for qualified exit costs if information becomes available upon which more accurate amounts can be reasonably estimated. Concurrently, property, plant and equipment is tested for impairment in accordance with SFAS No. 121 and, if impairment exists, carrying value is reduced to estimated net fair value. Adjustments may be made for subsequent revisions in estimated net fair value, not to exceed original asset carrying value before impairment. During the fourth quarter of 2001, formal plans were approved to close two manufacturing facilities in the Paint Stores and Consumer Segments. During 2000, two research centers in the Automotive Finishes Segment and a distribution center in the Consumer Segment were closed. In 1999, two manufacturing facilities and a leased warehouse were closed in the Consumer Segment. Qualified exit costs were accrued and asset impairment charges recorded for all of these facilities. The following table summarizes disposition and termination of operations activities.
2001 2000 1999 --------- --------- -------- QUALIFIED EXIT COSTS: Beginning accruals - January 1 ............... $ 17,903 $ 20,772 $ 29,970 Provisions in Cost of goods sold ............. 4,400 1,055 3,810 Adjustments to prior provisions in Other expense-net .......................... 902 2,249 2,521 Actual expenditures charged to accrual ....... (3,326) (6,173) (15,529) --------- --------- -------- Ending accruals - December 31 ................ $ 19,879 $ 17,903 $ 20,772 ========= ========= ======== IMPAIRMENT CHARGES-NET ON ASSETS HELD FOR DISPOSAL INCLUDED IN OTHER EXPENSE-NET ............................ $ 6,402 $ 4,719 $ 1,309 ========= ========= ======== IMPACT ON NET INCOME RELATING TO THE DISPOSITION AND TERMINATION OF OPERATIONS: Decrease in net income ..................... $ 7,608 $ 5,215 $ 4,966 ========= ========= ======== Decrease in net income per share ........... $ 0.05 $ 0.03 $ 0.03 ========= ========= ========
Approximately 28 percent of the ending accrual for qualified exit costs at December 31, 2001 related to facilities shutdown in 2001 and 2000. The majority of expenditures related to these facilities are expected to be completed by the end of 2003. The remaining portion of the ending accrual primarily represents ongoing contractual expenses and post-closure demolition expenses related to certain owned facilities that have been closed and are involved in ongoing environmental-related activities. The Company cannot reasonably estimate when such matters will be concluded. NOTE 6 - PENSION AND OTHER BENEFITS The Company provides certain health care benefits for active employees. The plans are contributory and contain cost-sharing features such as deductibles and coinsurance. There were 16,512, 16,811, and 16,081 active employees entitled to receive benefits under these plans as of December 31, 2001, 2000, and 1999, respectively. The cost of these benefits for active employees is recognized as claims are incurred and amounted to $68,158, $58,782, and $52,640 for 2001, 2000, and 1999, 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 were $8,113, $7,410, and $6,421 in 2001, 2000, and 1999, respectively. The Company provides pension benefits to substantially all employees through noncontributory defined benefit or defined contribution plans. The Company's annual contribution for its defined contribution pension plans, which was based on 5 percent of compensation for covered employees, was $35,991, $33,043, and $31,512 in 2001, 2000, and 1999, respectively. Beginning January 1, 2002, the annual contribution increased to 6 percent of compensation for covered employees (see Note 10 for information related to a reduction in other annual contributions). Assets in employee accounts of the defined contribution pension plan are invested in various mutual funds as directed by the participants. These mutual funds do not own a significant number of shares of the Company's common stock. Employees of the Company who were hired prior to January 1, 1993 and who are not members of a collective bargaining unit, and certain groups of employees added through acquisitions, are eligible for certain health care and life insurance benefits upon retirement from active service, subject to the terms, conditions and limitations of the applicable plans. There were 4,837, 4,855, and 4,831 retired employees entitled to receive benefits as of December 31, 2001, 2000, and 1999, respectively. The plans are unfunded. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars Unless Otherwise Indicated) A summary of the obligation and assets of the defined benefit pension plan's and postretirement health care and life insurance benefits is as follows:
DEFINED BENEFIT PENSION PLANS OTHER POSTRETIREMENT BENEFITS -------------------------------- ---------------------------------- 2001 2000 1999 2001 2000 1999 -------- -------- -------- --------- --------- --------- BENEFIT OBLIGATION: Balance at beginning of year ................... $194,879 $170,632 $169,099 $ 247,936 $ 225,686 $217,627 Service cost ................................... 2,952 2,990 3,237 3,753 3,821 4,215 Interest cost .................................. 13,092 12,504 11,516 16,301 15,649 14,467 Actuarial loss (gain) .......................... 5,339 8,957 (1,106) 14,012 15,930 966 Plan amendments ................................ 875 738 Plan mergers ................................... 9,446 Other - net .................................... 202 208 181 Benefits paid .................................. (13,491) (10,596) (12,295) (14,884) (13,150) (11,589) -------- -------- -------- --------- --------- --------- Balance at end of year ......................... 203,848 194,879 170,632 267,118 247,936 225,686 PLAN ASSETS: Balance at beginning of year ................... 554,454 523,453 492,384 Actual return on plan assets ................... (1,551) 25,534 44,859 Plan mergers ................................... 17,017 Other - net .................................... (1,420) (954) (1,495) Benefits paid .................................. (13,491) (10,596) (12,295) -------- -------- -------- Balance at end of year ......................... 537,992 554,454 523,453 EXCESS (DEFICIENCY) OF PLAN ASSETS OVER BENEFIT OBLIGATION: Balance at end of year ....................... 334,144 359,575 352,821 (267,118) (247,936) (225,686) Unrecognized net asset ....................... (1,279) Unrecognized actuarial loss (gain) ........... 56,734 2,080 (20,262) 51,134 37,752 21,993 Unrecognized prior service cost (credit) ..... 2,345 2,320 2,404 (8,879) (11,689) (14,498) -------- -------- --------- --------- --------- -------- NET ASSET (LIABILITY) RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS .................... $393,223 $363,975 $333,684 $(224,863) $(221,873) $(218,191) ======== ======== ======== ========= ========= ========= NET ASSET (LIABILITY) RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSISTS OF: Prepaid benefit cost ......................... $393,587 $364,351 $334,094 Long-term accrued benefit liability .......... $(209,963) $(208,673) $(206,591) Amount included in current liabilities ....... (364) (376) (410) (14,900) (13,200) (11,600) -------- -------- -------- --------- --------- --------- $393,223 $363,975 $333,684 $(224,863) $(221,873) $(218,191) ======== ======== ======== ========= ========= ========= WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31: Discount rate ................................ 6.75% 7.00% 7.25% 6.75% 7.00% 7.25% Expected long-term rate of return on assets .................................. 8.50% 8.50% 8.50% Rate of compensation increase ................ 4.50% 5.00% 5.00% Health care cost trend rate .................. 9.50% 6.00% 6.40% NET PERIODIC BENEFIT (CREDIT) COST: Service and interest cost .................... $ 16,044 $ 15,494 $ 14,753 $ 20,054 $ 19,470 $18,682 Net amortization and deferral ................ 943 (490) (699) (2,149) (2,814) (2,768) Expected return on assets .................... (46,353) (44,633) (42,137) -------- -------- -------- --------- --------- --------- Net periodic benefit (credit) cost ........... $(29,366) $(29,629) $(28,083) $ 17,905 $ 16,656 $15,914 ======== ======== ======== ========= ========= =========
37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars Unless Otherwise Indicated) At December 31, 2001, defined benefit pension plan assets included 2,025,200 shares of the Company's common stock with a market value of $55,693, which was 10.4 percent of total plan assets. Dividends received during the year from Company stock was $1,246. The assumed health care cost trend rate is 8.9 percent for 2002 decreasing gradually to 5.5 percent for 2010 and thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects as of December 31, 2001:
ONE-PERCENTAGE-POINT ------------------------ INCREASE (DECREASE) ---------- ---------- Effect on total of service and interest cost components ................................... $ 611 $ (592) Effect on the postretirement benefit obligation ........................................ $ 8,889 $ (8,576)
NOTE 7 - LONG-TERM DEBT
Due Date 2001 2000 1999 -------- --------- --------- --------- 6.85% Notes ........................... 2007 $ 199,839 $ 199,807 $ 199,775 7.375% Debentures ..................... 2027 149,914 149,910 149,907 7.45% Debentures ...................... 2097 149,414 149,408 149,402 6.5% Notes ............................ 2002 99,989 99,978 9.875% Debentures ..................... 2016 1,500 11,500 15,900 5% to 8.5% Through Promissory Notes .................... 2005 3,319 8,882 5,752 10.25% Promissory Note partially secured by Through land and building ................... 2003 1,108 1,179 1,243 --------- --------- --------- Long-term debt before SFAS No. 133 adjustments ......................... 505,094 620,675 621,957 Fair value adjustments to 6.85% Notes in accordance with SFAS No. 133 ........................ (1,577) --------- --------- --------- $ 503,517 $ 620,675 $ 621,957 ========= ========= =========
Maturities of long-term debt are as follows for the next five years: $111,852 in 2002; $4,087 in 2003; $125 in 2004; $215 in 2005, and zero in 2006. Interest expense on long-term debt was $44,582, $46,569, and $55,415 for 2001, 2000, and 1999, respectively. During 2001, the Company entered into four separate interest rate swap contracts with a bank to hedge against changes in the fair value of a portion of the Company's 6.85% Notes. Each interest rate swap contract had a notional amount of $25,000. The Company has agreed to receive interest at a fixed rate of 6.85% and pay interest at six-month London Interbank Offered Rates plus points that vary by contract. These contracts have been designated as perfect fair value hedges of the 6.85% Notes. Accordingly, changes in the fair value of these contracts are recorded as assets or liabilities and offset changes in the carrying value of the 6.85% Notes. The fair value of the interest rate swap contracts represents unrealized losses of $1,577 at December 31, 2001 and is included in Other long-term liabilities on the balance sheet. The weighted average interest rate on these contracts was 3.98% at December 31, 2001. Management believes the risk of incurring losses related to credit risk of these contracts is remote. There were no interest rate swap agreements outstanding at December 31, 2000 and 1999. The Company has 364-day and multi-year amended revolving credit agreements. The current agreements with effective dates of December 28, 2001 and January 3, 2001 reflect the following: 1) a 364-day agreement aggregating $112,200 expiring on December 27, 2002; and 2) a multi-year agreement aggregating $638,400, with $30,400, $190,400, and $417,600 expiring on January 3, 2003, 2005, and 2006, respectively. There were no borrowings outstanding under any revolving credit agreement during all years presented. At December 31, 2000, borrowings outstanding under the commercial paper program totaled $106,854 and are included in Short-term borrowings on the balance sheet. The weighted-average interest rate related to these borrowings was 6.6% at December 31, 2000. There were no borrowings outstanding under this program at December 31, 2001 and 1999, respectively. The Company uses the revolving credit agreements to satisfy its commercial paper program's dollar for dollar liquidity requirement. The aggregate maximum borrowing capacity under the current revolving credit agreements as of December 28, 2001 limits the commercial paper program to a maximum borrowing capability of $750,600. On October 6, 1997, the Company issued $50,000 of debt securities consisting of 5.5% notes, due October 15, 2027, with provisions that the holders, individually or in the aggregate, may exercise a put option on October 15, 1999 and annually thereafter that would require the Company to repay the securities. On October 15, 2000 and 1999, individual debt security holders exercised put options requiring the Company to repay $7,960 and $38,945 of these debt securities. The remaining balance of $3,095 at December 31, 2001 and 2000 and $11,055 at December 31, 1999 of these debt securities are included in Current portion of long-term debt on the balance sheets. On December 24, 1997, the Company filed a shelf registration with the Securities and Exchange Commission covering $150,000 of unsecured debt securities with maturities greater than nine months from the date of issue. The Company may issue these securities from time to time in one or more series and will offer the securities on terms determined at the time of sale. There were no borrowings outstanding under this registration at December 31, 2001, 2000, and 1999. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars Unless Otherwise Indicated) On August 18, 1998, the Company filed a universal shelf registration statement with the Securities and Exchange Commission to issue debt securities, common stock and warrants up to $1,500,000. The registration was effective September 8, 1998. There were no borrowings outstanding under this registration at December 31, 2001, 2000, and 1999. NOTE 8 - OPERATING LEASES The Company leases certain stores, warehouses, manufacturing facilities, office space and equipment. Renewal options are available on the majority of leases and, under certain conditions, options exist to purchase certain properties. Rental expense for operating leases was $141,072, $130,552, and $123,084 for 2001, 2000, and 1999, 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 $13,479, $12,423, and $11,530 in 2001, 2000, and 1999, respectively. 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, 2001: 2002 .............................. $ 104,275 2003 .............................. 85,430 2004 .............................. 68,735 2005 .............................. 51,987 2006 .............................. 33,771 Later years ....................... 81,530 --------- Total minimum lease payments ...... $ 425,728 =========
NOTE 9 - OTHER LONG-TERM LIABILITIES Included in Other long-term liabilities at December 31, 2001, 2000, and 1999 were accruals for extended environmental-related activities of $111,003, $116,594 and $124,096, respectively. The accrual for extended environmental-related activities represents the Company's provisions for estimated costs associated with 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 Other long-term liabilities, its estimated potential long-term liability for investigation and remediation costs with respect to such third-party sites. The Company initially provides for the estimated cost of environmental-related activities relating to its current, former and third-party sites when 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 as 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 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. Current environmental-related liabilities are included in Other accruals on the consolidated balance sheets. NOTE 10 - STOCK PURCHASE PLAN AND PREFERRED STOCK As of December 31, 2001, 14,077 employees contributed to the Company's Employee Stock Purchase and Savings Plan (ESOP). Participants in the ESOP were allowed to contribute up to 11 percent of their annual compensation, up to 7 percent of which could be made on a pre-tax basis, to purchase common shares of the Company or invest in a government fund. Employees making contributions to purchase Company common stock received a matching contribution from the Company of 50 percent of the employee's pre and post-tax contributions, up to a maximum of 7 percent of their annual compensation, plus an additional variable match based on the Company's return on equity (54 percent for the year ended 2001). Beginning January 1, 2002, participants will be allowed to contribute, on a pre-tax basis only, the lesser of 20 percent of their annual compensation or the maximum dollar amount allowed under the Internal Revenue Code which may be invested in a variety of mutual funds or Company common stock. The Company will match such contributions up to 6 percent of annual compensation with Company common stock (see Note 6 for information related to an increase in other annual contributions). The ESOP was further amended to provide all participants the ability to diversify prior employee investments in Company common stock into a variety of mutual funds over a five year period. This right to diversify was previously only available to participants fifty-five years of age and older. The Company's contribution to the ESOP charged to operations was $33,744, $28,070, and $36,535 for 2001, 2000, and 1999, respectively. Additionally, the Company made contributions on behalf of participating employees, representing amounts authorized by employees to be withheld from their earnings, of $27,374, $26,636, and $22,581 in 2001, 2000, and 1999, respectively. At December 31, 2001, there were 23,140,191 shares of the Company's common stock being held by the ESOP, representing 15.0 percent of the total number of voting 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars Unless Otherwise Indicated) shares outstanding. Shares of Company common stock credited to each member's account under the ESOP are voted by the trustee under instructions from each individual plan member. Shares for which no instructions are received, along with any unallocated shares held in the ESOP, are voted by the trustee in the same proportion as those for which instructions are received. On April 18, 2001, the Company issued 250,000 shares of convertible participating serial preferred stock, no par value with cumulative quarterly dividends of ten dollars per share, for $250,000 to the ESOP. The ESOP financed the acquisition of the preferred stock by borrowing $250,000 from the Company at the rate of 8 percent per annum. This borrowing is payable over ten years in equal quarterly installments. Each share of preferred stock is entitled to one vote upon all matters presented to the Company's shareholders and generally vote with the common stock together as one class. The preferred stock will be held in an unallocated account by the ESOP until compensation expense related to the Company's contributions is earned at which time contributions will be credited to the members' accounts. The value of the preferred stock is redeemable and convertible into the Company's common stock at the option of the ESOP based on the relative fair value of the preferred and common stock at time of conversion. The ESOP redeemed 81,695 shares of preferred stock for cash in 2001. NOTE 11 - CAPITAL STOCK
Common Common Shares Shares in Treasury Outstanding ------------ ------------- Balance at January 1, 1999 .................... 34,667,918 171,033,231 Shares tendered as payment for options exercised ......................... 8,392 (8,392) Shares issued for exercise of stock options .......................... 462,598 Shares tendered in connection with restricted stock grants ................... 44,236 (44,236) Net shares issued under restricted stock grants ................... 145,400 Treasury stock purchased .................... 5,925,000 (5,925,000) ------------ ------------- Balance at December 31, 1999 .................. 40,645,546 165,663,601 Shares tendered as payment for options exercised ......................... 8,757 (8,757) Shares issued for exercise of stock options .......................... 533,991 Shares transferred to revocable trust ....... (165,000) 165,000 Net shares issued under restricted stock grants ................... 4,500 Treasury stock purchased .................... 6,800,000 (6,800,000) ------------ ------------- BALANCE AT DECEMBER 31, 2000 .................. 47,289,303 159,558,335 SHARES TENDERED AS PAYMENT FOR OPTIONS EXERCISED ......................... 19,995 (19,995) SHARES ISSUED FOR EXERCISE OF STOCK OPTIONS .......................... 1,031,486 SHARES TENDERED IN CONNECTION WITH RESTRICTED STOCK GRANTS ................... 42,970 (42,970) NET SHARES ISSUED UNDER RESTRICTED STOCK GRANTS ................... 151,500 TREASURY STOCK PURCHASED .................... 6,700,000 (6,700,000) ------------ ------------- BALANCE AT DECEMBER 31, 2001 .................. 54,052,268 153,978,356 ============ =============
An aggregate of 17,964,052 shares, 19,184,038 shares, and 19,722,529 shares of common stock at December 31, 2001, 2000 and 1999, respectively, were reserved for future grants of restricted stock and the exercise and future grants of stock options. Shares outstanding include 507,943 shares, 432,518 shares, and 215,150 shares of common stock held in a revocable trust at December 31, 2001, 2000, and 1999, respectively. At December 31, 2001, there were 300,000,000 shares of common stock and 30,000,000 shares of serial preferred stock authorized for issuance. Of the authorized serial preferred stock, 3,000,000 shares have been designated as cumulative redeemable serial preferred stock which may be issued pursuant to the Company's shareholders' rights plan if the Company becomes the target of coercive and unfair takeover tactics and 1,000,000 shares have been designated as convertible participating serial preferred stock (see Note 10). 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars Unless Otherwise Indicated) NOTE 12 - STOCK PLAN The Company's 1994 Stock Plan permits the granting of restricted stock, stock appreciation rights and stock options 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 Company's 1997 Stock Plan for Nonemployee Directors provides for the granting of restricted stock and stock options to members of the Board of Directors who are not employees of the Company. There were 400,000 shares authorized as available for grant under the 1997 Stock Plan. Grants made pursuant to the 1997 Stock Plan are authorized by the Board of Directors. Restricted stock grants, which generally require four years of continuous employment from the date of grant before vesting and receiving the shares without restriction, have been awarded to certain officers and key employees under the 1994 Stock Plan. The number of shares to be received without restriction is based on the Company's performance relative to a peer group of companies. Shares of restricted stock that vested and were delivered to officers and employees amounted to 116,000 and 120,400 during 2001 and 1999, respectively. No shares of restricted stock vested during 2000. At December 31, 2001, there were 388,000 shares of restricted stock outstanding. Unamortized deferred compensation expense with respect to the restricted stock grants amounted to $5,691, $3,036, and $4,249 at December 31, 2001, 2000, and 1999, respectively, and is being amortized over the four-year vesting period. Deferred compensation expense aggregated $1,130, $3,180, and $77 in 2001, 2000, and 1999, respectively. No stock appreciation rights have been granted. A summary of restricted stock granted during 2001, 2000, and 1999 is as follows:
2001 2000 1999 ---------- ------- -------- Shares granted ............................ 188,500 4,500 204,000 Weighted-average fair value of restricted shares granted during year ... $ 25.72 $ 19.63 $ 23.77
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 following the date of grant and generally expire ten years after the date of grant. The number of options and any period of service required before the options may be exercised is determined by the Board of Directors at the time of grant. No options may be exercised more than ten years from the date of the grant. The Company has elected to follow APBO No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," 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. 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:
2001 2000 1999 ------ ------- ------ Risk-free interest rate ........................ 4.00% 6.29% 5.34% Expected life of option ........................ 3 years 3 years 3 years Expected dividend yield of stock ............... 2.00% 2.00% 2.00% Expected volatility of stock ................... 0.353 0.305 0.265
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.
2001 2000 1999 -------- -------- --------- Pro forma net income ................ $253,892 $ 9,617 $ 297,107 Pro forma net income per share: Basic ............................. $ 1.63 $ .06 $ 1.77 Diluted ........................... $ 1.62 $ .06 $ 1.76
41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars Unless Otherwise Indicated) A summary of the Company's stock option activity and related information for the years ended December 31, 2001, 2000 and 1999 is shown in the following table:
2001 2000 1999 ----------------------------- ----------------------------- ----------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE OPTIONED EXERCISE OPTIONED EXERCISE OPTIONED EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------------- ------------- ------------- ------------- ------------- ------------- Outstanding beginning of year ..... 12,588,310 $ 22.47 10,724,653 $ 22.78 6,259,702 $ 22.89 Granted ........................... 3,070,700 24.29 2,820,900 19.75 5,292,350 22.33 Exercised ......................... (1,031,486) 17.26 (533,991) 12.02 (462,598) 15.36 Canceled .......................... (498,348) 24.10 (423,252) 24.62 (364,801) 27.69 ------------- ------------- ------------- ------------- ------------- ------------- Outstanding end of year ........... 14,129,176 $ 23.19 12,588,310 $ 22.47 10,724,653 $ 22.78 ============= ============= ============= ============= ============= ============= Exercisable at end of year ........ 7,681,476 $ 23.75 5,923,537 $ 23.31 3,971,139 $ 21.09 Weighted-average fair value of options granted during year ..... $ 5.36 $ 4.72 $ 4.67 Reserved for future grants ........ 3,834,876 6,595,728 8,997,876
Exercise prices for optioned shares outstanding as of December 31, 2001 ranged from $13.63 to $35.34. A summary of these options by range of exercise prices is as follows:
OUTSTANDING EXERCISABLE -------------------------------------------- ---------------------------- WEIGHTED- WEIGHTED- AVERAGE WEIGHTED- AVERAGE REMAINING AVERAGE RANGE OF OPTIONED EXERCISE CONTRACTUAL OPTIONED EXERCISE EXERCISE PRICES SHARES PRICE LIFE (YEARS) SHARES PRICE - --------------- ------------ ------------ ------------ ------------ ------------ < $19.00 529,065 $ 16.56 3.62 469,055 $ 16.38 $19.00 - $22.99 6,097,641 20.15 7.60 3,286,201 20.27 $23.00 - $28.99 5,919,720 25.24 8.12 2,367,491 26.31 > $28.99 1,582,750 29.43 6.18 1,558,729 29.43 ------------ ------------ ------------ ------------ ------------ 14,129,176 $ 23.19 7.46 7,681,476 $ 23.75 ============ ============ ============ ============ ============
NOTE 13 - INCOME TAXES 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 using the enacted tax rates and laws that are currently in effect. Significant components of the Company's deferred tax assets and liabilities as of December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999 ------------ ------------ ------------ Deferred tax assets: Dispositions, environmental and other similar items .............. $ 54,856 $ 55,220 $ 56,123 Other items (each less than 5% of total assets) ................. 107,726 98,107 94,196 ------------ ------------ ------------ Total deferred tax assets ..... $ 162,582 $ 153,327 $ 150,319 ============ ============ ============ Deferred tax liabilities: Depreciation and amortization ....... $ 49,164 $ 35,691 $ 66,374 Deferred employee benefit items ..... 58,535 50,333 42,785 ------------ ------------ ------------ Total deferred tax liabilities ... $ 107,699 $ 86,024 $ 109,159 ============ ============ ============
Significant components of the provisions for income taxes are as follows:
2001 2000 1999 ------------ ------------ ------------ Current: Federal ................... $ 118,882 $ 125,393 $ 128,185 Foreign ................... 9,893 6,211 11,787 State and local ........... 16,839 22,662 25,116 ------------ ------------ ------------ Total current .......... 145,614 154,266 165,088 Deferred: Federal ................... 15,374 (27,386) 14,388 Foreign ................... (2,458) 6,213 3,851 State and local ........... 2,761 (5,713) 2,931 ------------ ------------ ------------ Total deferred ......... 15,677 (26,886) 21,170 ------------ ------------ ------------ Total income tax expense ..... $ 161,291 $ 127,380 $ 186,258 ============ ============ ============
Significant components of income before income taxes as used for income tax purposes, are as follows:
2001 2000 1999 ------------ ------------ ------------ Domestic ........... $ 393,200 $ 90,412 $ 411,626 Foreign ............ 31,249 52,994 78,492 ------------ ------------ ------------ $ 424,449 $ 143,406 $ 490,118 ============ ============ ============
42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars Unless Otherwise Indicated) A reconciliation of the statutory federal income tax rate and the effective tax rate follows:
2001 2000 1999 -------- -------- -------- Statutory tax rate ......................... 35.0% 35.0% 35.0% Effect of: State and local taxes ................ 3.0 7.7 3.7 Investment vehicles .................. 1.3 (7.3) (1.5) Impairment of long-lived assets ...... 51.0 Other - net .......................... (1.3) 2.5 0.8 -------- -------- -------- Effective tax rate ......................... 38.0% 88.9% 38.0% ======== ======== ========
A portion of the impairment of long-lived assets charge in 2000 related to goodwill was not deductible for tax purposes. The effect on the statutory federal income tax rate is shown separately in the previous table. The state and local tax effect is not shown separately. The remaining portion of the impairment charge created federal, state and local deferred tax benefits due to the significant temporary differences between the reduced financial carrying amounts and amounts used for tax purposes. The provisions for income taxes include estimated taxes payable on that portion of retained earnings of foreign subsidiaries expected to be received by the Company. A provision was not made with respect to $11,473 of retained earnings at December 31, 2001 that have been invested by foreign subsidiaries. It is not practicable to estimate the amount of unrecognized deferred tax liability for undistributed foreign earnings. Netted against the Company's other deferred tax assets are valuation reserves of $10,200, $9,082 and $16,211 at December 31, 2001, 2000, and 1999, respectively, resulting from the uncertainty as to the realization of the tax benefits from certain foreign net operating losses and certain other foreign assets. NOTE 14 - SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
2001 - ------------------------------------------------------------------------------------------------------ NET INCOME NET INCOME PER SHARE PER SHARE QUARTER NET SALES GROSS PROFIT NET INCOME - BASIC - DILUTED - ------- ------------ ------------ ------------ ------------ ------------ 1st $ 1,158,370 $ 489,023 $ 36,924 $ .23 $ .23 2nd 1,407,514 608,537 90,480 .58 .58 3rd 1,366,768 601,039 90,321 .58 .58 4th 1,133,353 521,029 45,433 .29 .30
Net income in the fourth quarter was decreased by $2,092 ($.01 per share) due to certain year-end adjustments. Gross profit increased by $18 ($12 after-tax, no per share impact) as a result of physical inventory adjustments of $4,418 ($2,872 after-tax, $.02 per share) offset by fourth quarter provisions for qualified exit costs associated with certain facility closings of $4,400 ($2,860 after-tax, $.02 per share). Selling and Administrative expenses decreased $11,735 ($7,628 after-tax, $.05 per share) due to the reduction of $10,368 ($6,739 after-tax, $.04 per share) in certain annual selling expenses related to lower sales, and certain other adjustments of $1,367 ($889 after-tax, $.01 per share). Other expense-net increased $14,972 ($9,732 after-tax, $.06 per share) due primarily to the provisions for the estimated costs of environmental-related matters at current, former and third party sites of $5,609 ($3,645 after-tax, $.02 per share), impairment charges and adjustments to prior provisions related to facility closings of $7,304 ($4,748 after-tax, $.03 per share), and other year-end adjustments of $2,059 ($1,339 after-tax, $.01 per share).
2000 - ---------------------------------------------------------------------------------------------- NET INCOME NET INCOME (LOSS) PER (LOSS) PER NET INCOME SHARE - SHARE - QUARTER NET SALES GROSS PROFIT (LOSS) BASIC DILUTED - ------------ ------------ ------------ ------------ ------------ ------------ 1st $ 1,221,916 $ 516,244 $ 40,923 $ .25 $ .25 2nd 1,429,267 641,474 115,843 .71 .71 3rd 1,411,903 626,095 106,719 .66 .66 4th 1,148,538 523,798 (247,459) (1.55) (1.55)
The fourth quarter net loss resulted from an after-tax charge for the impairment of long-lived assets of $293,628 or $1.84 per share ($1.80 per share for the year due to the effect of dilution and higher average shares outstanding). Net income in the fourth quarter of $46,169, excluding the impairment charge, was decreased by $484, no per share impact, due to certain year-end adjustments. Gross profit increased by $8,666 ($5,633 after-tax, $.04 per share) primarily as a result of physical inventory adjustments of $9,889 ($6,428 after-tax, $.04 per share) partially offset by fourth quarter provisions for qualified exit costs associated with certain facility closings of $1,055 ($686 after-tax, no per share impact). Administrative expenses increased $1,288 ($838 after-tax, $.01 per share) due to other year end adjustments. Other expense-net increased $8,122 ($5,279 after-tax, $.03 per share) due primarily to fourth quarter impairment charges and adjustments to prior provisions related to facility closings of $6,968 ($4,529 after-tax, $.03 per share). 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars Unless Otherwise Indicated) NOTE 15 - NET INCOME PER SHARE
2001 2000 1999 ------------ ------------ ------------ Basic Average shares outstanding ..... 155,557,085 161,911,789 167,924,660 ============ ============ ============ Net income ..................... $ 263,158 $ 16,026 $ 303,860 ============ ============ ============ Net income per share ........... $ 1.69 $ .10 $ 1.81 ============ ============ ============ Diluted Average shares outstanding ..... 155,557,085 161,911,789 167,924,660 Non-vested restricted stock grants ................ 321,500 279,300 263,567 Stock options - treasury stock method ....... 1,014,950 503,982 838,069 ------------ ------------ ------------ Average shares assuming dilution ........... 156,893,535 162,695,071 169,026,296 ============ ============ ============ Net income ..................... $ 263,158 $ 16,026 $ 303,860 ============ ============ ============ Net income per share ........... $ 1.68 $ .10 $ 1.80 ============ ============ ============
NOTE 16 - REPORTABLE SEGMENT INFORMATION The Company reports its segment information in five reportable segments--the Paint Stores, Consumer, Automotive Finishes, International Coatings (collectively, the "Operating Segments") and Administrative Segments--in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires an enterprise to report segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources. See page 2 and pages 8 through 15 of this report for more information about reportable segments. The Company's chief operating decision maker has been identified as the Chief Executive Officer because he has final authority over performance assessment and resource allocation decisions. Because of the global, diverse operations of the Company, the chief operating decision maker regularly receives discrete financial information about each reportable segment as well as a significant amount of additional financial information about certain aggregated divisions, business units and subsidiaries of the Company. The chief operating decision maker uses all such financial information for performance assessment and resource allocation decisions. Factors considered in determining the five reportable segments of the Company include the nature of the business activities, existence of managers responsible for the operating and administrative activities and information presented to the Board of Directors. The chief operating decision maker evaluates the performance of the Operating Segments and allocates resources based on profit or loss and cash generated from operations before income taxes, excluding corporate expenses and financing gains and losses. The accounting policies of the reportable segments are the same as those described in Note 1. The Paint Stores Segment consists of 2,573 company-operated specialty paint stores in the United States, Canada, Virgin Islands, Puerto Rico and Mexico. Each division and business unit of the Segment is engaged in the related business activity of selling the Company's own manufactured coatings and related products to end-use customers. During 2001, this Segment opened or acquired 85 net new stores, remodeled 6 and relocated 38. The net new stores consisted of 83 stores in the United States, 2 in Canada, and 1 in Puerto Rico along with 1 closing in Mexico. In 2000, there were 92 net new stores opened or acquired (79 in the United States). In 1999, there were 73 net new stores opened (66 in the United States). This Segment also manufactures original equipment manufacturer (OEM) product finishes sold through certain shared or dedicated paint stores and by direct outside sales representatives. In addition to stores, operations in Mexico include a manufacturing facility, distribution activities and outside selling functions to dealers and other distributors. The Paint Stores Segment is the exclusive North American marketer and seller of Sherwin-Williams(R) branded architectural coatings, industrial and marine products, OEM product finishes and related items produced by its Mexican operations, its product finishes manufacturing and by the Consumer Segment. The loss of any single customer would not have a material adverse effect on the business of this Segment. A map on page 18 of this report shows the number of paint stores and their geographical location. The Consumer Segment develops, manufactures and distributes a variety of paint, coatings and related products to third party customers and the Paint Stores Segment. Approximately 44 percent of the total sales of the Consumer Segment in 2001, including inter-segment transfers, represented products sold through the Paint Stores Segment. Sales and marketing of certain control-branded and private labeled products is performed by a direct sales staff. The products distributed through third party customers are intended for resale to the ultimate end-user of the product. The Consumer Segment has sales to certain customers that, individually, may be a significant portion of the sales of the Segment. However, the loss of any single customer would not have a material adverse effect on the overall profitability of the Segment. This Segment incurs most of the Company's capital expenditures related to ongoing environmental compliance measures. The Automotive Finishes Segment develops, manufactures and distributes a variety of motor vehicle finish, refinish and touch-up products primarily throughout North and South America, the Caribbean Islands, and Italy. This Segment also licenses certain technology and trade names worldwide. Sherwin-Williams(R) branded automotive finish and refinish products are distributed throughout North America solely through this Segment's network of 124 company-operated automotive branches in the United States 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars Unless Otherwise Indicated) and 17 in Canada. Additional automotive branches in Jamaica (14) and Chile (19) complete this Segment's worldwide network. At December 31, 2001, this Segment included 11 foreign wholly-owned subsidiaries in 8 foreign countries and 10 licensing agreements in 14 foreign countries. A map on page 18 of this report shows the number of branches and their geographical location. The International Coatings Segment develops, licenses, manufactures and distributes a variety of paint, coatings and related products worldwide. The majority of the sales from licensees and subsidiaries occur in South America, the Segment's most important international market. This Segment sells its products through 33 company-operated specialty paint stores in Chile and 19 in Brazil, and by outside selling functions to dealers and other distributors. At December 31, 2001, this Segment included 12 foreign wholly-owned subsidiaries in 8 foreign countries, 4 foreign joint ventures and 30 licensing agreements in 21 foreign countries. The Administrative Segment includes the administrative expenses of the Company's and certain consolidated subsidiaries' headquarters sites. This Segment includes interest expense which is unrelated to retail real estate leasing activities, investment income, certain foreign currency transaction losses related to dollar-denominated debt and foreign currency option and forward contracts, certain expenses related to closed facilities and environmental-related matters, and other expenses which are not directly associated with any Operating Segment. Administrative expenses do not include any significant foreign operations. Also included in the Administrative Segment is a real estate management unit that is responsible for the ownership, management, leasing of non-retail properties held primarily for use by the Company, including the Company's headquarters site, and disposal of idle facilities. Sales of the Administrative Segment represent external leasing revenue of excess headquarters space or leasing of facilities no longer used by the Company in its operations. Gains and losses from the sale of property are not a significant operating factor in determining the performance of this Segment. Net external sales of all consolidated foreign subsidiaries were $504 million, $540 million, and $497 million for 2001, 2000, and 1999, respectively. Operating profits of all consolidated foreign subsidiaries were $17 million, $32 million, and $70 million for 2001, 2000, and 1999, respectively. Domestic operations account for the remaining net sales and operating profits. Long-lived assets consist of net property, plant and equipment, goodwill, and intangibles. Long-lived assets of consolidated foreign subsidiaries totaled $211 million, $245 million, and $242 million at December 31, 2001, 2000, and 1999, respectively. The consolidated total of long-lived assets for the Company was $1,593 million, $1,687 million, and $2,026 million at December 31, 2001, 2000, and 1999, respectively. No single geographic area outside the United States was significant relative to consolidated net external sales or operating profits. Export sales and sales to any individual customer were each less than 10 percent of consolidated sales to unaffiliated customers during all years presented. In the reportable segment financial information that follows, operating profit is total revenue, including inter-segment transfers, less operating costs and expenses. Identifiable assets are those directly identified with each reportable segment. Administrative Segment assets consist primarily of cash, investments, deferred pension assets, and headquarters property, plant and equipment. The operating margin for each Operating Segment is based upon total external sales and inter-segment transfers. Domestic inter-segment transfers are accounted for at the approximate fully absorbed manufactured cost plus distribution costs. International inter-segment transfers are accounted for at values comparable to normal unaffiliated customer sales. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions of Dollars)
2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- NET EXTERNAL SALES Paint Stores ................................... $ 3,206 $ 3,185 $ 3,002 $ 2,822 $ 2,639 Consumer ....................................... 1,109 1,219 1,224 1,282 1,409 Automotive Finishes ............................ 464 493 471 474 476 International Coatings ......................... 280 307 299 348 350 Administrative ................................. 7 8 8 8 7 -------- -------- -------- -------- -------- Consolidated totals ............................ $ 5,066 $ 5,212 $ 5,004 $ 4,934 $ 4,881 OPERATING PROFITS Paint Stores ................................... $ 390 $ 411 $ 377 $ 347 $ 315 Consumer ....................................... 108 (210)* 155 125 167 Automotive Finishes ............................ 51 61 67 65 64 International Coatings ......................... 5 18 34 24 36 Administrative: Interest expense ............................ (54) (60) (59) (70) (79) Corporate expenses and other ................ (76) (77) (84) (51) (76) -------- -------- -------- -------- -------- Income before income taxes ..................... $ 424 $ 143* $ 490 $ 440 $ 427 IDENTIFIABLE ASSETS Paint Stores ................................... $ 954 $ 1,018 $ 930 $ 881 $ 832 Consumer ....................................... 1,296 1,360* 1,804 1,850 1,938 Automotive Finishes ............................ 329 349 279 275 274 International Coatings ......................... 261 298 294 356 312 Administrative ................................. 788 726 726 689 680 -------- -------- -------- -------- -------- Consolidated totals ............................ $ 3,628 $ 3,751* $ 4,033 $ 4,051 $ 4,036 CAPITAL EXPENDITURES Paint Stores ................................... $ 36 $ 48 $ 49 $ 57 $ 56 Consumer ....................................... 18 40 40 37 57 Automotive Finishes ............................ 11 29 10 8 14 International Coatings ......................... 7 6 11 15 13 Administrative ................................. 11 10 24 29 24 -------- -------- -------- -------- -------- Consolidated totals ............................ $ 83 $ 133 $ 134 $ 146 $ 164 DEPRECIATION Paint Stores ................................... $ 47 $ 45 $ 42 $ 38 $ 40 Consumer ....................................... 31 28 29 30 24 Automotive Finishes ............................ 9 9 8 8 7 International Coatings ......................... 6 6 6 6 6 Administrative ................................. 16 21 20 16 13 -------- -------- -------- -------- -------- Consolidated totals ............................ $ 109 $ 109 $ 105 $ 98 $ 90 OPERATING SEGMENT MARGINS Paint Stores ................................... 12.1% 12.9% 12.5% 12.3% 11.9% Consumer ....................................... 5.5% (10.1%)* 7.6% 6.1% 8.0% Automotive Finishes ............................ 10.2% 11.5% 13.3% 12.8% 12.5% International Coatings ......................... 1.8% 5.9% 11.4% 6.9% 10.2% -------- -------- -------- -------- -------- Operating segment totals ....................... 9.3% 4.6%* 10.8% 9.8% 10.4% INTERSEGMENT TRANSFERS Paint Stores ................................... $ 9 $ 10 $ 8 $ 5 Consumer ....................................... 858 860 817 771 $ 666 Automotive Finishes ............................ 34 36 31 34 37 International Coatings ......................... 2 Administrative ................................. 9 11 12 11 9 -------- -------- -------- -------- -------- Segment totals ................................. $ 910 $ 917 $ 868 $ 821 $ 714
* Includes charge and reduction in asset value of $352 in 2000 for impairment of long-lived assets. See note 2. 46 DIRECTORS, OFFICERS, OPERATING PRESIDENTS BOARD OF DIRECTORS CORPORATE OFFICERS OPERATING PRESIDENTS JAMES C. BOLAND, 62* CHRISTOPHER M. CONNOR, 45** THOMAS S. BRUMMETT, 56 President and Chief Executive Officer Chairman and Chief Executive Officer President & General Manager CAVS/Gund Arena Company Eastern Division JOSEPH M. SCAMINACE, 48** Paint Stores Group JOHN G. BREEN, 67 President and Chief Operating Officer Retired, former Chairman, Chief ROBERT J. DAVISSON, 41 Executive Officer and President SEAN P. HENNESSY, 44** President & General Manager The Sherwin-Williams Company Senior Vice President - Finance, Southeastern Division Treasurer and Chief Financial Paint Stores Group DUANE E. COLLINS, 65 Officer Chairman MICHAEL A. GALASSO, 54** Parker-Hannifin Corporation THOMAS E. HOPKINS, 44** President & General Manager Senior Vice President - Human International Division CHRISTOPHER M. CONNOR, 45 Resources Chairman and Chief Executive Officer TIMOTHY A. KNIGHT, 37 The Sherwin-Williams Company CONWAY G. IVY, 60** President & General Manager Senior Vice President - Corporate Diversified Brands Division DANIEL E. EVANS, 65 Planning and Development Retired, former Chairman, Chief BLAIR P. LACOUR, 55 Executive Officer and Secretary JOHN L. AULT, 56** President & General Manager Bob Evans Farms, Inc. Vice President - Corporate Controller Mid Western Division Paint Stores Group ROBERT W. MAHONEY, 65* CYNTHIA D. BROGAN, 50 Retired, former Chairman, Chief Vice President and JOHN G. MORIKIS, 38** Executive Officer and President Assistant Treasurer President Diebold, Incorporated Paint Stores Group MARK J. DVOROZNAK, 43 GARY E. MCCULLOUGH, 43 Vice President - Corporate Audit and RONALD P. NANDOR, 42** Senior Vice President - Americas Loss Prevention President & General Manager Wm. Wrigley Jr. Company Automotive Division JAMES J. SGAMBELLONE, 44 A. MALACHI MIXON, III, 61 Vice President - Taxes and Assistant STEVEN J. OBERFELD, 49 Chairman and Chief Executive Officer Secretary President & General Manager Invacare Corporation South Western Division LOUIS E. STELLATO, 51** Paint Stores Group CURTIS E. MOLL, 62* Vice President, General Counsel and Chairman and Chief Executive Officer Secretary HARVEY P. SASS, 44 MTD Products, Inc. President & General Manager RICHARD M. WEAVER, 47 Wood Care Division JOSEPH M. SCAMINACE, 48 Vice President - Administration President and Chief Operating Officer THOMAS W. SEITZ, 53** The Sherwin-Williams Company President & General Manager Consumer Division RICHARD K. SMUCKER, 53* President and Co-Chief Executive ROBERT A. TAYLOR, 48 Officer President & General Manager The J. M. Smucker Company Chemical Coatings Division Paint Stores Group
* Audit Committee Member ** Executive Officer as defined by the Securities Exchange Act of 1934 47 SHAREHOLDER INFORMATION ANNUAL MEETING FORM 10-K INDEPENDENT AUDITORS The annual meeting of The Company's Annual Report Ernst & Young LLP shareholders will be held at on Form 10-K, filed with the Cleveland, Ohio 9:00 A.M., April 24, 2002 in Securities and Exchange the Landmark Conference Commission, is available STOCK TRADING Center, 927 Midland Building, without charge. To obtain a Sherwin-Williams Common Stock - 101 Prospect Avenue, N.W., copy, contact the Investor Symbol, SHW - is traded on the Cleveland, Ohio. Relations Office. New York Stock Exchange. INVESTOR RELATIONS DIVIDEND REINVESTMENT TRANSFER AGENT & Conway G. Ivy PROGRAM REGISTRAR The Sherwin-Williams Company A dividend reinvestment The Bank of New York 101 Prospect Avenue, N.W. program is available to Shareholder Relations Cleveland, Ohio 44115-1075 shareholders of common Department-11E Internet: www.sherwin.com stock. For information, P.O. Box 11258 contact our transfer agent, Church Street Station The Bank of New York. New York, NY 10286 1-866-537-8703 HEADQUARTERS E-mail address: The Sherwin-Williams Company Shareowner-svcs@Email.bony.com 101 Prospect Avenue, N.W. Internet: www.stockbny.com Cleveland, Ohio 44115-1075 (216) 566-2000
COMMON STOCK TRADING STATISTICS
2001 2000 1999 1998 1997 ------------ ------------ ------------ ------------ ------------ High ....................................... $ 28.23 $ 27.625 $ 32.875 $ 37.875 $ 33.375 Low ........................................ 19.73 17.125 18.750 19.438 24.125 Close December 31 .......................... 27.50 26.313 21.000 29.375 27.750 Shareholders of record ..................... 10,281 10,813 11,475 11,929 11,964 Shares traded (thousands) .................. 162,219 158,349 161,118 128,942 98,855
QUARTERLY STOCK PRICES AND DIVIDENDS
2001 2000 - ------------------------------------------------------------ ------------------------------------------------------------ QUARTER HIGH LOW DIVIDEND QUARTER HIGH LOW DIVIDEND - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 1st $ 27.25 $ 23.52 $ .145 1st $ 23.000 $ 17.125 $ .135 2nd 26.51 19.73 .145 2nd 27.625 21.172 .135 3rd 23.88 19.95 .145 3rd 24.625 19.875 .135 4th 28.23 21.27 .145 4th 26.563 18.875 .135
48 [PHOTO] [SHERWIN-WILLIAMS LOGO] THE SHERWIN-WILLIAMS COMPANY 101 PROSPECT AVENUE, N.W. CLEVELAND, OHIO 44115-1075 SHERWIN-WILLIAMS.COM EX-21 7 l92671aex21.txt EXHIBIT 21 EXHIBIT 21
STATE OR JURISDICTION OF INCORPORATION OR SUBSIDIARIES ORGANIZATION ------------ --------------------- DOMESTIC SUBSIDIARIES Contract Transportation Systems Co. Delaware DIMC, Inc. Delaware Dupli-Color Products Company Delaware Sherwin-Williams Automotive Finishes Corp. Delaware Sherwin-Williams Realty Holdings, Inc. Illinois SWIMC, Inc. Delaware The Sherwin-Williams Acceptance Corporation Nevada Thompson Minwax International Corp. Delaware FOREIGN SUBSIDIARIES Coatings S.r.L. Peru Compania Sherwin-Williams, S.A. de C.V. Mexico Eurofinish S.r.L. Italy Kriesol, S.A. Uruguay Productos Quimicos y Pinturas, S.A. de C.V. Mexico Proquipsa, S.A. de C.V. Mexico Quetzal Pinturas, S.A. de C.V. Mexico Ronseal (Ireland) Limited Ireland Ronseal Limited United Kingdom ScottWarren S.p.A. Italy Sherwin-Williams Argentina I.y C.S.A. Argentina Sherwin-Williams do Brasil Industria e Comercio Ltda. Brazil Sherwin-Williams Canada Inc. Canada Sherwin-Williams (Caribbean) N.V. Curacao Sherwin-Williams Cayman Islands Limited Cayman Islands Sherwin-Williams Chile S.A. Chile Sherwin-Williams Foreign Sales Corporation Limited U.S. Virgin Islands Sherwin-Williams Japan Co., Ltd. Japan Sherwin-Williams Singapore PTE Ltd. China Sherwin-Williams (West Indies) Limited Jamaica The Sherwin-Williams Company Resources Limited Jamaica
EX-23 8 l92671aex23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements and related Prospectuses of our report dated January 25, 2002, with respect to the consolidated financial statements and schedule of The Sherwin-Williams Company included in this Annual Report (Form 10-K) for the year ended December 31, 2001
REGISTRATION NUMBER DESCRIPTION - ------------ ----------- 333-66295 The Sherwin-Williams Company Deferred Compensation Savings Plan, The Sherwin-Williams Company Key Management Deferred Compensation Plan and The Sherwin-Williams Company Director Deferred Fee Plan Form S-8 Registration Statement 333-61098 The Sherwin-Williams Company Form S-3 Registration Statement 333-61735 The Sherwin-Williams Company Form S-3 Registration Statement 333-41659 The Sherwin-Williams Company Form S-3 Registration Statement 333-25671 The Sherwin-Williams Company 1997 Stock Plan for Nonemployee Directors Form S-8 Registration Statement 333-25669 The Sherwin-Williams Company 1994 Stock Plan Form S-8 Registration Statement 333-25607 The Sherwin-Williams Company Form S-4 Registration Statement 333-01093 The Sherwin-Williams Company Form S-3 Registration Statement 333-00725 The Sherwin-Williams Company Form S-4 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 12, 2002 ERNST & YOUNG LLP EX-24.A 9 l92671aex24-a.txt EXHIBIT 24(A) EXHIBIT 24(a) 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 under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 2001, hereby constitutes and appoints C.M. Connor, J.M. Scaminace, S.P. Hennessy 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 Annual Report on 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 6, 2002 /s/ J.G. Breen ----------------------------- ----------------------------------- J. G. Breen Director 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 under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 2001, hereby constitutes and appoints J.M. Scaminace, S.P. Hennessy 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 Annual Report on 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 1, 2002 /s/ C.M. Connor ----------------------------- ------------------------------------ C.M. Connor Chairman and Chief Executive Officer, Director 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 under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 2001, hereby constitutes and appoints C.M. Connor, J.M. Scaminace 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 Annual Report on 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 1, 2002 /s/ S.P. Hennessy ---------------------- ---------------------------------------------- S.P. Hennessy Senior Vice President - Finance, Treasurer and Chief Financial Officer 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 under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 2001, hereby constitutes and appoints C.M. Connor, J.M. Scaminace, S.P. Hennessy 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 Annual Report on 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 1, 2002 /s/ J.L. Ault ----------------------- --------------------------------------- J. L. Ault Vice President - Corporate Controller 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 under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 2001, hereby constitutes and appoints C.M. Connor, S.P. Hennessy 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 Annual Report on 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 4, 2002 /s/ J.M. Scaminace ----------------------- -------------------------------- J.M. Scaminace President and Chief Operating Officer, Director 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 under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 2001 hereby constitutes and appoints C.M. Connor, J.M. Scaminace, S.P. Hennessy 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 Annual Report on 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 6, 2002 /s/ D.E. Collins ------------------------ -------------------------------------------- D. E. Collins Director 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 under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 2001, hereby constitutes and appoints C.M. Connor, J.M. Scaminace, S.P. Hennessy 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 Annual Report on 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, 2002 /s/ D.E. Evans ----------------------------- ---------------------------------- D. E. Evans Director 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 under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 2001, hereby constitutes and appoints C.M. Connor, J.M. Scaminace, S.P. Hennessy 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 Annual Report on 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, 2002 /s/ R.W. Mahoney ------------------------ ---------------------------------- R. W. Mahoney Director 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 under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 2001, hereby constitutes and appoints C.M. Connor, J.M. Scaminace, S.P. Hennessy 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 Annual Report on 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 2, 2002 /s/ C.E. Moll ----------------------------- ----------------------------------- C. E. Moll Director 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 under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 2001, hereby constitutes and appoints C.M. Connor, J.M. Scaminace, S.P. Hennessy 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 Annual Report on 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 6, 2002 /s/ A.M. Mixon, III ----------------------------- ---------------------------------- A. M. Mixon, III Director 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 under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 2001, hereby constitutes and appoints C.M. Connor, J.M. Scaminace, S.P. Hennessy 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 Annual Report on 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 4, 2002 /s/ R.K. Smucker ----------------------------- --------------------------------- R. K. Smucker Director 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 under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 2001, hereby constitutes and appoints C.M. Connor, J.M. Scaminace, S.P. Hennessy 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 Annual Report on 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 2, 2002 /s/ J.C. Boland ----------------------------- ------------------------------------- J. C. Boland Director 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 under the provisions of the Securities Exchange Act of 1934, as amended, and any rules and regulations of the Securities and Exchange Commission, an Annual Report on Form 10-K for the fiscal year ended December 31, 2001, hereby constitutes and appoints C.M. Connor, J.M. Scaminace, S.P. Hennessy 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 Annual Report on 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 6, 2002 /s/ G.E. McCullough ----------------------------- ------------------------------------ G. E. McCullough Director EX-24.B 10 l92671aex24-b.txt EXHIBIT 24(B) EXHIBIT 24(b) CERTIFICATE ----------- I, the undersigned, Secretary of The Sherwin-Williams Company (the "Company"), hereby certify that attached hereto is a true and complete copy of a resolution of the Board of Directors of the Company, duly adopted at a meeting held on February 6, 2002, and that such resolution is in full force and effect and has not been amended, modified, revoked or rescinded as of the date hereof. IN WITNESS WHEREOF, I have executed this certificate as of this 12th day of March, 2002. /s/ L. E. Stellato ------------------------------- L.E. Stellato, Secretary RESOLVED, that the appropriate officers of the Company are each hereby authorized to execute and deliver a power of attorney appointing C.M. Connor, J.M. Scaminace, S.P. Hennessy and L.E. Stellato or any of them, with full power of substitution and resubstitution, to act as attorneys-in-fact for the Company and for such officers for the purpose of executing and filing with the Securities and Exchange Commission ("SEC") and any national securities exchange, on behalf of the Company, the Annual Report on Form 10-K for the fiscal year ended December 31, 2001 and any and all amendments, exhibits and other documents in connection therewith, and to take other action deemed necessary and appropriate to effect the filing of such Annual Report on Form 10-K and any and all such amendments, exhibits and other documents in connection therewith. -----END PRIVACY-ENHANCED MESSAGE-----