SHERWIN WILLIAMS CO - 10-K Annual Report

Back to GetFilings.com

1

================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

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 EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------

9.875% Debentures due 2016 New York Stock Exchange
Common Stock, Par Value $1.00 New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:
None

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _

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

At January 31, 1998, 172,993,132 shares of the Registrant's Common Stock,
with a par value of $1.00 each, were outstanding, net of treasury shares. The
aggregate market value of such voting stock held by non-affiliates of the
Registrant at that date was $4,916,017,711.

DOCUMENTS INCORPORATED BY REFERENCE

Definitive Proxy Statement dated March 11, 1998 relating to certain
information required to be disclosed in Part III.

================================================================================
2

THE SHERWIN-WILLIAMS COMPANY
AND CONSOLIDATED SUBSIDIARIES

As used in this Form 10-K, the terms "Company" and "Registrant" mean The
Sherwin-Williams Company and its consolidated subsidiaries, taken as a whole,
unless the context indicates otherwise.

TABLE OF CONTENTS

ITEM NO. PAGE NO.
- -------- --------

Part I
1. Business Segment Information 1
2. Description of Property 9
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 10
Executive Officers of the Registrant 11

Part II
5. Market for Common Equity and Related Stockholder Matters 13
6. Selected Financial Data 13
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
8. Financial Statements and Supplementary Data 22
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 24

Part III
10. Directors and Executive Officers of the Registrant 25
11. Executive Compensation 25
12. Security Ownership of Certain Beneficial Owners and
Management 25
13. Certain Relationships and Related Transactions 25

Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K 26

Signatures 49
Exhibit Index 51
Consent of Ernst & Young LLP, Independent Auditors 55

NOTE ON INCORPORATION BY REFERENCE

In Part III of this Form 10-K, various information and data are
incorporated by reference from the Company's Definitive Proxy Statement dated
March 11, 1998 ("Proxy Statement"). Any reference in this Form 10-K to
disclosures in the Proxy Statement shall constitute incorporation by reference
only of that specific information and data into this Form 10-K.
3

PART I

ITEM 1. BUSINESS SEGMENT INFORMATION

GENERAL DEVELOPMENT OF BUSINESS

The Sherwin-Williams Company, which was first incorporated under the laws
of the State of Ohio eighteen years after its founding in 1866, is engaged in
the manufacture, distribution and sale of coatings and related products to
professional, industrial, commercial and retail customers primarily in North and
South America.

PAINT STORES SEGMENT

The Paint Stores Segment is the marketer and seller of Sherwin-Williams(R)
branded architectural coatings, industrial maintenance products, product
finishes and related items produced by the Company's Coatings Segment. It is
also a distributor of Con-Lux(R), Old Quaker(TM), Mercury(R) and other
controlled-brand products produced by the Coatings Segment in addition to
complementary coatings and other products manufactured by third parties. Paint,
wallcoverings, floorcoverings, window treatments, spray equipment and other
associated products are marketed by store personnel and direct sales
representatives to the do-it-yourself customer, architect, professional painter,
contractor, industrial and commercial maintenance customer, property manager and
manufacturer of products requiring a factory finish. Competitors of the Segment
are other paint and wallpaper stores, mass merchandisers, home centers,
independent hardware stores, hardware chains and manufacturer-operated direct
outlets. Product quality, service and price determine the competitive advantage
in the highly fragmented paint and coatings markets. The loss of any single
customer would not have a material adverse effect on the business of the
Segment.

During 1997, the Paint Stores Segment was successful in expanding its
customer base through the addition of new stores, new products and the expansion
into new markets made possible by internal efforts and from previous
acquisitions. There were several key new architectural products introduced in
1997: a variety of primers sold under the Prep-Rite(TM) label; a new exterior
high gloss latex sold under the SuperPaint(R) label with unique technology
allowing for a high gloss with quick drying time; new chemical coatings products
including low volatile organic compound (VOC) enamels and primers sold under the
Kem(R) and Kem Aqua(R) labels; and, new industrial maintenance products
including a variety of VOC-compliant products designed for high performance tank
liners, industrial and marine markets, and other unique functions. These new
products, along with the Segment's existing product base and product
technologies obtained through acquisitions, helped the Segment achieve
significant sales gains in 1997. The Segment also completed its first full year
in new markets entered through acquired businesses, which include certain
industrial and marine markets and the business and commercial aircraft markets.
A new business unit has been formed to service the aviation market in order to
capitalize on the acquired aircraft technology. The Segment will continue to
aggressively pursue opportunities in all its markets and will expand its product
lines as prudently needed to meet customer demand.

To enhance its stores technologically, in 1998 the Segment will complete
the installation of a satellite network among its stores. This network will
bring all associated products onto a perpetual inventory system along with the
current perpetual inventories for manufactured products, thus allowing the
Segment to achieve purchasing efficiencies, better inventory control and sharing
of inventory data among the stores. In 1998, the Segment also plans to introduce
approximately twenty new products, including a new line of VOC-compliant
interior stains, sealers and varnishes under the Wood Classics(TM) label. This
line will offer unparalleled drying speed, a large color selection and maximum
user flexibility. A new advertising campaign will be used to promote the
Segment's full family of quality products and to increase customer awareness of
the outstanding service available through the Sherwin-Williams' stores. The
campaign theme is: "When Only the Best Will Do, Ask Sherwin-Williams.(TM)" The
Product Finishes Business Unit of the Coatings

1
4

Division has been transferred to the Paint Stores Segment to provide improved
management of the product line throughout the technical, manufacturing and
selling processes. For financial reporting purposes, the results of this
business unit will be reflected in the Paint Stores Segment beginning in 1998.

COATINGS SEGMENT

The five divisions within the Coatings Segment (Coatings, Consumer Brands,
Automotive, Transportation Services and Diversified Brands) participated in the
manufacture, distribution and/or sale of coatings and related products. In 1998,
the Coatings and Consumer Brands Divisions have been consolidated to form one
division responsible for technical, manufacturing and selling of products to the
dealer, home center and mass merchandiser markets.

The Segment has sales to certain customers that, individually, may be a
significant portion of its revenues. However, the loss of any single customer
would not have a material adverse effect on the overall business of the Segment.
All technical expenditures sponsored by the Company occurred in the Coatings
Segment. The expenditures for research and development appear on page 32 of this
report.

COATINGS DIVISION

In the United States, the Coatings Division manufactures paint and
paint-related products for do-it-yourself customers, professional painters,
contractors, industrial and commercial maintenance accounts, and manufacturers
of factory finished products. Sherwin-Williams(R) branded and controlled-branded
architectural and industrial finishes are manufactured for the Paint Stores
Segment. Labels, color cards, traffic paint, adhesives, private label and other
branded products were manufactured for the Paint Stores Segment, the Consumer
Brands Division and other divisions of the Company. Competitive factors for the
Division are product innovation, product quality, service, distribution and
price. Domestic competitors of the Division consist of other coatings
manufacturers located throughout the United States. There are approximately 800
such manufacturers at the regional and national levels. The Coatings Division
continues to strive to be the lowest cost supplier of high quality coatings in
order to gain an advantage over its competitors.

Worldwide, there are many competitors in each of the foreign markets served
by the Division as it manufactures, distributes and sells its products through
wholly-owned subsidiaries, joint ventures and licensees of technology,
trademarks and trade names. At December 31, 1997, the Division included 8
subsidiaries and 3 joint ventures in 9 foreign countries and 34 licensing
agreements in 26 foreign countries. The majority of the sales from licensees and
subsidiaries are in South America, the Division's most important international
market. A new licensing agreement was signed in Thailand in 1997. In 1998, the
Division will continue to develop new business internationally by following a
predetermined regional approach for the establishment of subsidiaries, joint
ventures and licensees in selected countries.

During 1997, the Coatings Division's efforts were focused on the
rationalization of its existing facilities, primarily the transfer of production
from one of its Chicago manufacturing facilities to other facilities in order to
obtain improved efficiency. As a result of these changes, the ongoing
integration of acquired businesses and new products for the Consumer Brands
Division, the Division struggled with service and production problems in some of
its manufacturing areas. In spite of these issues, the Division was able to
improve overall productivity per gallon at the plant level. The Division's
expansion of its powder coatings operations continued in 1997 with the addition
of facilities in Arlington, Texas, Ontario, California and Spartanburg, South
Carolina. Continued quality efforts at these plants were demonstrated by ISO
9001 certification at the Harrisburg, Pennsylvania plant and QS certification
(automotive) at the Fort Wayne, Indiana plant -- the first manufacturing plant
of the Company to obtain such certification.

2
5

Expansion through acquisitions also continued in 1997. In addition to
Thompson Minwax Holding Corp. (Thompson Minwax), the acquisition of Sumare
Industria Quimica, S.A. in February 1997 provided accelerated entry into the
Brazilian industrial maintenance and product finishes coatings market. The
acquisition of Pinturas Andina S.A. in June 1997 provided further expansion into
the Chilean architectural coatings market. The Coatings Division's growth the
past several years, both internally and through acquisitions, has brought
significant challenges throughout the year but has also provided many future
opportunities for continued improvement.

In 1998, the Coatings Division will embark on a year of change. The Product
Finishes Business Unit has been transferred to the Paint Stores Segment, certain
caulks and sealants' business will transfer to the Diversified Brands Division,
and the Division's remaining operations will be consolidated with those of the
Consumer Brands Division. The newly-consolidated business will operate as the
Coatings Division. This consolidation is expected to create improved efficiency
by allowing the Coatings Division to be more responsive to the demands of, and
changes in, the marketplace. The Division's priorities will include the
development of common goals and the elimination of duplicate duties in efforts
to obtain overall enhanced quality and service for its customers.
Internationally, the Division plans to consolidate production in Chile in a new
facility, expand production capacity in Brazil and launch a new industrial
coatings program in Argentina.

CONSUMER BRANDS DIVISION

Consolidated with the Coatings Division since the beginning of 1998, the
Consumer Brands Division is responsible for the sales and marketing of branded
and private label products by a direct sales staff to unaffiliated home centers,
mass merchandisers, independent dealers and distributors. Many of the country's
leading retailers are among the Division's regional and national customers. The
Division's competition for sales to these leading retailers comes from over 400
regional and national paint manufacturers and distributors of branded and
private label paint and associated products. Important competitive factors are
service, brand recognition, distribution and price.

The Thompson Minwax acquisition brought the Thompson's(R) brand of exterior
stains and watersealers to the Division's domestic product line and the
Ronseal(TM) brand of interior varnishes and exterior stains to its product lines
in the United Kingdom and Ireland. A new line of fence care products under the
Thompson's(R) label was introduced in 1997, providing an entry into a currently
untapped market. The integration of these acquired brands along with the brands
obtained from the acquisition of Pratt & Lambert United, Inc. was aided by the
addition of new advertising campaigns highlighting product attributes. The
Division also launched its new line of paints under the Martha Stewart Everyday
Colors(TM) label in May 1997. This line represents a new interior latex paint
line consisting of 256 colors blended to provide unique shades in a
high-quality, durable paint.

In 1998, the Division, as part of the combined Coatings Division, will
introduce new exterior and interior coatings product lines under the Dutch
Boy(R) label. The exterior line, to be sold under the name Climate Guard(TM),
consists of five different formulations designed to address the varying needs of
regional climates. The interior line is a one-coat paint product aimed at the
entry-level price market and will be sold under the name Classic One(TM). These
products provide an excellent complement to the existing Dutch Boy(R) line. The
Division will also launch a new advertising campaign in 1998 focusing on the
protective qualities of the Thompson's(R) brand, particularly the waterseal and
stain lines, in addition to continued promotion of its existing lines. The
Thompson's Wood Protector(R) line is designed to provide protection from mildew
and graying of color while also providing superior waterproofing protection. The
Thompson's(R) stains, offered in semi-transparent and solid form, offer various
qualities such as protection from water, fading and scuffing. With its new
products and a streamlined management process, the Division hopes to
significantly expand distribution in the coming year.

3
6

AUTOMOTIVE DIVISION

The Automotive Division develops, manufactures and markets motor vehicle
finish and refinish products under Sherwin-Williams(R) and other branded labels
in the United States, Canada, Mexico and other countries. Through its network of
135 company-operated branches (as of December 31, 1997), supported by a direct
sales staff, the Division sells directly to independent automotive body shops,
automotive dealerships, fleet owners and refinishers, production shops, body
builders and manufacturers requiring a factory finish. Products are also
marketed through independent jobbers and wholesale distributors. The Division
sold its joint venture interest in American Standox, Inc. in January 1998 and
has retained the right to continue distributing Standox(R) branded vehicle
refinishing paints to certain customers on a non-exclusive basis.

Key competitive factors for the Automotive Division are technology, product
quality, distribution and service. The Automotive Division has numerous
competitors in its domestic and foreign markets with broad product offerings and
several others with niche products. Strong distribution and high quality
products have been the Division's greatest competitive advantages.

A subsidiary in Jamaica manufactures and markets products that are sold
through 10 stores and other dealers and by a direct sales force to independent
dealers, painters, contractors, automotive body shops and industrial and
commercial maintenance accounts. In recent years, the Division has further
expanded its international presence through acquisitions in Mexico, Brazil and
Chile. These acquired international automotive operations performed well during
1997, and the Division plans further market penetration in these areas in the
future. Additionally, the Division has 14 licensees of automotive technology in
14 foreign countries.

During 1997, the Division was successful in expanding its original
equipment manufacturer business, particularly with VOLVO Trucks North America,
Inc. (VOLVO). The Division's success resulted from continued improvement in
product quality and color matching technology. The Division also introduced
Vortex(TM) basecoat to the Class-8 heavy truck market, positioning itself for
further growth. Vortex(TM) is the first low-bake waterborne basecoat system to
be used in production by the heavy truck manufacturing market. It allows heavy
truck manufacturers to offer a wider multitude of colors while still reducing
solvent emissions without sacrificing performance.

In 1998, the Division will continue to strengthen its market image and
business through the introduction of new products, improved product quality and
commitment to technological development. It will continue to meet customer
demand for products that are compliant with national VOC regulations, and will
seek to expand its presence in the factory finish market segment. Due to these
efforts, the Company expects increased market penetration in both domestic and
international regions during 1998.

TRANSPORTATION SERVICES DIVISION

The Transportation Services Division provides warehousing, truckload
freight, pool assembly, freight brokerage and consolidation services primarily
for the Company and for certain external manufacturers, distributors and
retailers throughout the United States and Canada. This Division provides the
Company with total logistics service support which allows increased delivery
schedules, lower field inventory levels and fewer out-of-stocks.

The Transportation Services Division has many different and diverse
competitors. In the trucking industry, there are a few large carriers having
small or moderate market share while thousands of other carriers compete for the
balance of the market. The warehousing and distribution service market is
characterized by a large number of competitors with none having dominant share.
Since the primary business of the Division is to provide services for the
Company's other divisions, gaining market share is not an objective.

The Division successfully integrated the transportation and distribution
functions of Thompson Minwax during 1997 while maintaining quality service. A
supply chain management system,
4
7

Centralized Truckload Management, was implemented in 1997. This system tenders
and monitors all truck load business via electronic data interchange, allowing
for real-time tracking of in-transit truck load shipments and providing an
enhanced technological measurement of carrier performance. The Division also
experienced an improved safety record during the year, lowering its overall
incident rate for recordable accidents.

In 1998, the Division plans to open two new distribution centers. The
Sierra, Nevada distribution center, a 695,000 square foot state-of-the-art
facility, will service the West Coast and a 200,000 square foot facility in
Vaughn, Ontario will service the Division's Eastern and Central Canadian
operations. These facilities will improve efficiency in the Division's overall
distribution network through the consolidation of smaller centers and the
synergies of combination. The facilities will contain the most advanced
technology available with respect to computer systems, asset protection and
safety. The Division will also continue to focus on technological innovations to
improve distribution center productivity, truckload control and fleet
operations. These innovations will include the installation of in-cab computers,
an improved dispatch system, an improved fuel-efficient tractor fleet and
automation within the distribution facilities.

DIVERSIFIED BRANDS DIVISION

The Diversified Brands Division competes in the following areas: retail and
wholesale consumer aerosols; custom, industrial and automotive aerosols;
interior stains, varnishes and wood finishing products; paint applicators; and
cleaning products. The Division participates in the retail and wholesale paint,
automotive, homecare products, institutional, insecticide and industrial
markets. A wide variety of aerosol products are filled, packaged and distributed
to regional, national and international customers. Products are marketed through
mass merchandisers, home centers, automotive chains, independent dealers,
industrial maintenance distributors and grocery stores in the United States,
Canada, Mexico, Brazil and Chile. Approximately 7.8 percent of the Division's
total sales in 1997 represented aerosols, paint applicators and interior stains
sold to the Paint Stores Segment. In 1997, in its Cleaning Solutions Group, the
Division lost some powdered detergent sales due to its unwillingness to match a
competitor's price, and it incurred operating difficulties. Despite these
problems, the Division was able to post significant improvements in 1997 over
1996. There are various primary competitors in each of the Division's product
lines. The main competitive factors are technical expertise, quality, service
and price. Superior quality products, excellent regulatory-complying products,
breadth of product line, technical leadership in electronic commerce and strong
customer relationships have enabled the Division to distinguish itself from the
competition.

The Thompson Minwax acquisition brought several new product lines to the
Division's vast product offering, thereby expanding its market presence. Product
lines added include interior stains and varnishes under the Minwax(R) name,
finishing and enamel coatings under the Formby's(R) and Red Devil(R) brand
names, wood floor staining systems under the Duraseal(R) name and high-
performance specialty lubricants under the Tri-Flow(TM) brand name. The
Minwax(R) line provides the Division with a complete line of leading wood
finishing products that hold the top market position within their respective
categories. Innovation and leadership within the industry have led to consistent
growth in this product line. Since this acquisition, the Division has expanded
distribution and product selection in several national home centers. The
Division also expanded internationally in 1997 through the October acquisition
of Marson Chilena, S.A., a leading producer and marketer of aerosol paint in
Chile.

In 1998, the Division's efforts will be targeted toward increased
distribution of its current product line and expanded growth of its product
offerings. In addition to new products offered under its Krylon(R), Cello(R) and
Sprayon(R) labels, the Division will expand its Dupli-Color(R) product line to
include engine enamels, high heat products and truck bed coatings. The Red
Devil(R) brand will be expanded to include a new aerosol product line. The
applicator product line will also feature two new patent-pending products for
1998. A new roller frame will be introduced under the Kwik-
5
8

Release(TM) brand, and a new paint brush line featuring crinkle filament
bristles will be introduced under The Wave(TM) brand. These bristles are
designed to hold more latex paint than any existing brushes, thereby increasing
the painter's productivity. The Division will also concentrate on improving
sales of its existing product lines, particularly its janitorial, industrial and
consumer cleaning products. Also in 1998, the Division will assume the
management responsibilities for the Company's caulk and sealant business and the
Ronseal(TM) brand of interior varnishes and exterior stains. With continued
focus on customer satisfaction combined with high-quality products, the Division
is prepared to meet or exceed customer expectations while improving sales and
maintaining profitability.

OTHER SEGMENT

The Other Segment is responsible for the acquisition, development, leasing
and management of properties for use by the Company and others generally within
the United States. Obtaining real estate in the proper location at the
appropriate cost is a critical component for achieving the desired operating
success, particularly for paint stores and distribution service centers. This
Segment has many competitors consisting of other real estate owners, developers
and managers in areas where we currently hold property. The main competitive
factors are the availability of property and price.

At the end of 1997, the Retail Properties Division owned or leased 220
properties, representing over 1,800,000 square feet of space, which are
conducive to the sale of paint and associated products. Such properties include
134 freestanding buildings, for exclusive use by the Paint Stores Segment, and
86 multi-tenant properties, utilized when the basic needs of the paint store can
be met and where external rental opportunities can be profitably operated.
Multi-tenant properties are usually smaller "strip" shopping centers with
adequate parking and, generally, the paint store will be located at the end of
the shopping area for the most convenient access. The paint store must be easily
accessible to professional painters and contractors with sufficient access to
pickup and delivery areas. In 1998, the Division does not anticipate significant
growth in the number of owned retail properties needed by the Paint Stores
Segment. The occupancy rate for external space was 81.1 percent at December 31,
1997.

The Non-Retail Properties Division owned or leased 27 properties at the end
of 1997 consisting of office buildings, distribution service centers, idle
manufacturing facilities and vacant land. Occasionally, such properties are
acquired or developed to provide the lowest cost alternative for expansion of
distribution operations. Locations that have been utilized profitably in the
past which can no longer contribute to the Company's future plans are offered
for sale or lease. By the end of 1997, the Division had obtained lease
commitments for all of the office space vacated by a former large tenant as of
December 31, 1996. This space will be fully occupied by March 31, 1998. In
addition, it was able to obtain a tax credit for the rehabilitation of the
building containing this space, resulting in a 20% tax credit on all capital
expenditures made to the building over a five-year period.

RAW MATERIALS AND PRODUCTS PURCHASED FOR RESALE

With respect to the Paint Stores Segment, there are sufficient suppliers of
each product purchased for resale that the Segment does not anticipate any
significant sourcing problems. For the Coatings Segment, raw materials and fuel
supplies are generally available from various sources in sufficient quantities
that the Segment does not anticipate any significant sourcing problems during
1998.

6
9

SEASONALITY

The majority of the sales for the Paint Stores Segment and Coatings Segment
traditionally occur during the second and third quarters. There is no
significant seasonality in sales for the Other Segment.

TRADEMARKS AND TRADE NAMES

Customer recognition of trademarks and trade names collectively contribute
significantly to the sales of the Company. The Paint Stores Segment is
identified with names such as Sherwin-Williams(R), SuperPaint(R), Pro Mar(R),
EverClean(R), Glas-Clad(R), Perma-Clad(R), Old Quaker(TM), Con-Lux(R),
Mercury(TM) and Brod-Dugan(TM). The Coatings Segment employs a variety of trade
names and trademarks in marketing its products, such as Sherwin-Williams(R),
Thompson's(R), Dutch Boy(R), Kem-Tone(R), Martin-Senour(R), Cuprinol(R), Pratt &
Lambert(R), Globo(TM), Andina(TM), H&C(R), Lazzuril(TM), Excelo(TM), Western(R),
Colorgin(TM), Rubberset(R), Dupli-Color(R), Rust Tough(R), Sprayon(R),
Minwax(R), White Lightning(R), Krylon(R), Cello(R), Formby's(R), Red Devil(R),
Tri-Flow(TM), Marson(TM) and Ronseal(TM).

PATENTS

Although patents and licenses are not of material importance to the
business of the Company as a whole, the Automotive and Coatings Divisions'
international operations derive a portion of their income from the license of
technology, trademarks and trade names to foreign companies.

BACKLOG AND PRODUCTIVE CAPACITY

Backlog orders are not significant in the business of any Segment.
Sufficient productive capacity currently exists to fulfill the Company's needs
for paint and coatings products through 1998.

EMPLOYEES

The Company employed approximately 25,000 persons at December 31, 1997.

ENVIRONMENTAL COMPLIANCE

See Management's Discussion and Analysis of Financial Condition and Results
of Operations, on page 14 of this report, for further details on environmental
compliance.

7
10

BUSINESS SEGMENTS

(MILLIONS OF DOLLARS) 1997 1996 1995
- --------------------------------------------------------------------------------------

NET EXTERNAL SALES
Paint Stores $2,605 $2,410 $2,131
Coatings 2,264 1,709 1,129
Other 12 14 14
- --------------------------------------------------------------------------------------
Segment totals $4,881 $4,133 $3,274

INTERSEGMENT TRANSFERS
Coatings $1,015 $ 924 $ 801
Other 21 21 19
- --------------------------------------------------------------------------------------
Segment totals $1,036 $ 945 $ 820

OPERATING PROFITS
Paint Stores $ 225 $ 206 $ 158
Coatings 345 260 202
Other 12 13 13
Corporate expenses-net (155) (104) (55)
- --------------------------------------------------------------------------------------
Income before income taxes $ 427 $ 375 $ 318

IDENTIFIABLE ASSETS
Paint Stores $ 689 $ 634 $ 550
Coatings 2,711 1,764 846
Other 73 45 45
Corporate 563 552 700
- --------------------------------------------------------------------------------------
Consolidated totals $4,036 $2,995 $2,141

CAPITAL EXPENDITURES
Paint Stores $ 27 $ 40 $ 29
Coatings 114 68 68
Other 9 3 4
Corporate 14 12 7
- --------------------------------------------------------------------------------------
Consolidated totals $ 164 $ 123 $ 108

DEPRECIATION
Paint Stores $ 28 $ 26 $ 24
Coatings 52 40 31
Other 3 3 2
Corporate 7 7 6
- --------------------------------------------------------------------------------------
Consolidated totals $ 90 $ 76 $ 63

NOTES TO SEGMENT TABLE

Intersegment transfers are accounted for at values comparable to normal
unaffiliated customer sales. Operating profit is total revenue, including
realized profit on intersegment transfers, less operating costs and expenses.
Corporate expenses include interest which is unrelated to real estate leasing
activities, certain provisions for disposition and termination of operations and
environmental remediation which are not directly associated with or allocable to
any operating segment, and other adjustments.

Identifiable assets are those directly identified with each segment's
operations. Corporate assets consist primarily of cash, investments, deferred
pension assets and headquarters' property, plant and equipment.

Net external sales and operating profits of consolidated foreign
subsidiaries were $550 million and $54 million, respectively, for 1997.
Identifiable assets of consolidated foreign subsidiaries totaled $240 million at
December 31, 1997. Domestic operations account for the remaining net external
sales, operating profits and identifiable assets. Corporate expenses and
identifiable assets do not include any significant foreign operations. No single
geographic area outside the United

8
11

States was significant relative to consolidated net external sales or
consolidated identifiable assets. Consolidated foreign operations were not
material for any year prior to 1997.

Export sales and sales to any individual customer were each less than 10%
of consolidated sales to unaffiliated customers during all years presented.

ITEM 2. DESCRIPTION OF PROPERTY

The Company's corporate headquarters are located in Cleveland, Ohio. The
Company's principal manufacturing and distribution facilities, operated by the
Coatings Segment, are located as set forth below.

Leased
or
Manufacturing facilities Owned
- ------------------------ ------

Anaheim, California Owned
Arlington, Texas Leased
Baltimore, Maryland Owned
Bedford Heights, Ohio Owned
Chicago, Illinois Owned
Coffeyville, Kansas Owned
Columbus, Ohio Owned
Crisfield, Maryland Leased
Deshler, Ohio Owned
Edison, New Jersey Owned
Elk Grove, Illinois Owned
Emeryville, California Owned
Ennis, Texas Leased
Flora, Illinois Owned
Fort Wayne, Indiana Leased
Fort Worth, Texas Owned
Fountain Inn, South Carolina Owned
Garland, Texas Owned
Greensboro, North Carolina (2) Owned
Harrisburg, Pennsylvania Leased
Havre de Grace, Maryland Owned
Holland, Michigan Owned
Kankakee, Illinois Leased
Lawrenceville, Georgia Owned
Memphis, Tennessee Leased
Memphis, Tennessee Owned
Morrow, Georgia Owned
Newark, New Jersey Owned
Olive Branch, Mississippi Owned
Ontario, California Leased
Orlando, Florida Owned
Richmond, Kentucky Owned
San Diego, California Leased
Spartanburg, South Carolina Leased
Victorville, California Owned
Wichita, Kansas Owned
Arica, Chile Owned
Buenos Aires, Argentina Owned
Fort Erie, Ontario, Canada Owned
Kingston, Jamaica Owned
Mexico City, Mexico Owned
Santiago, Chile Leased
Santiago, Chile (2) Owned
Sao Paulo, Brazil (5) Owned
Sheffield, England Owned
Zaragoza, Mexico Owned

Distribution facilities
- ------------------------
Bedford Heights, Ohio Leased
Buford, Georgia Leased
Dayton Valley, Nevada Owned
Effingham, Illinois Leased
Fredericksburg, Pennsylvania Owned
Reno, Nevada Leased
Richmond, Kentucky Owned
Sparks, Nevada Leased
Waco, Texas Leased
Winter Haven, Florida Owned
Buenos Aires, Argentina Owned
Kingston, Jamaica Owned
Mexico City, Mexico Owned
Montreal, Quebec, Canada Owned
Richmond Hill, Ontario, Canada Leased
San Juan, Puerto Rico Leased
Santiago, Chile (2) Owned
Sao Paulo, Brazil (5) Owned
Scarborough, Ontario, Canada Owned
Zaragoza, Mexico Owned

9
12

In addition, the Coatings Segment included 135 company-operated automotive
branches, of which 1 was owned, in the United States and Canada and 10 leased
stores in Jamaica at December 31, 1997.

The operations of the Paint Stores Segment included 2,195 company-operated
specialty paint stores in the United States, Canada and Puerto Rico at December
31, 1997. All stores are leased locations with 220 being leased from the
Company's Retail Properties Division in the Other Segment. The Paint Stores
Segment is divided into four separate operating divisions, each of which is
responsible for the stores located within its geographical region. At the end of
1997, the Mid Western Division operated 613 stores primarily located in the
midwestern and upper west coast states and western Canada, the Eastern Division
operated 458 stores along the upper east coast and New England states and
eastern Canada, the Southeastern Division operated 583 stores principally
covering the lower east and gulf coast states and Puerto Rico, and the South
Western Division operated 541 stores in the plains and the lower west coast
states. The Paint Stores Segment opened 39 net new stores in 1997 and relocated
40.

All property within the Other Segment is owned by the Company except for 4
land leases in the Retail Properties Division and 2 warehouse leases in the
Non-Retail Properties Division.

ITEM 3. LEGAL PROCEEDINGS

Reference is made to the legal proceeding reported in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 brought by the
United States Department of Justice, on behalf of the United States
Environmental Protection Agency, against the Company in the United States
District Court for the Northern District of Illinois. On November 5, 1997, the
Court approved the Consent Decree previously entered into between the Company
and the United States of America, on behalf of the Administrator of the United
States Environmental Protection Agency, under which the Company agreed to (i)
comply with applicable environmental laws and regulations, (ii) pay a civil
penalty in the amount of $4,700,000, (iii) spend $1,100,000 at two environmental
remediation/restoration projects located in the south side of Chicago, Illinois
which are unrelated to the Company's activities, (iv) conduct an investigation
at its southeast Chicago, Illinois facility to determine the nature, extent and
potential impact, if any, of environmental contamination at the facility, and
(v) implement selected remedial action measures, if required, to address any
environmental contamination identified pursuant to the investigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

10
13

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth the names and ages of the current Executive
Officers, the positions and offices with the Company held by them as of February
28, 1998 and the date when each was first elected or appointed an Executive
Officer.

Name Age Present Position
---- --- ----------------

John G. Breen 63 Chairman and Chief Executive Officer, Director
Thomas A. Commes 55 President and Chief Operating Officer,
Director
Larry J. Pitorak 51 Senior Vice President -- Finance, Treasurer
and Chief Financial Officer
John L. Ault 52 Vice President -- Corporate Controller
Christopher M. Connor 41 President, Paint Stores Group
Michael A. Galasso 50 President & General Manager,
Automotive Division
Thomas E. Hopkins 40 Vice President -- Human Resources
Conway G. Ivy 56 Vice President -- Corporate Planning and
Development
Joseph M. Scaminace 44 President & General Manager, Coatings Division
Louis E. Stellato 47 Vice President, General Counsel and Secretary
Richard M. Wilson 45 President & General Manager, Diversified
Brands Division

The following is a brief account of each Executive Officer's business
experience with the Company during the last five years:

Mr. Breen has served as Chairman and Chief Executive Officer since June
1986 and has served as a Director since April 1979.

Mr. Commes has served as President and Chief Operating Officer since June
1986 and has served as a Director since April 1980.

Mr. Pitorak has served as Senior Vice President -- Finance, Treasurer and
Chief Financial Officer since April 1992.

Mr. Ault has served as Vice President -- Corporate Controller since January
1987.

Mr. Connor has served as President, Paint Stores Group since August 1997
prior to which he served as President & General Manager, Diversified Brands
Division commencing April 1994. From September 1992 to April 1994, Mr. Connor
served as Senior Vice President -- Marketing, Paint Stores Group.

Mr. Galasso has served as President & General Manager, Automotive Division
since June 1997 prior to which he served as Vice President &
Director -- Operations, Automotive Division commencing May 1992.

Mr. Hopkins has served as Vice President -- Human Resources since August
1997 prior to which he served as Vice President -- Human Resources, Paint Stores
Group commencing February 1996. From November 1989 to February 1996, Mr. Hopkins
served as Director of Human Resources, Paint Stores Group.

Mr. Ivy has served as Vice President -- Corporate Planning and Development
since April 1992.

11
14

Mr. Scaminace has served as President & General Manager, Coatings Division
since June 1997 prior to which he served as President & General Manager,
Automotive Division commencing April 1994. From September 1985 to April 1994,
Mr. Scaminace served as President & General Manager, Diversified Brands
Division.

Mr. Stellato has served as Vice President, General Counsel and Secretary
since July 1991.

Mr. Wilson has served as President & General Manager, Diversified Brands
Division since August 1997 prior to which he served as Senior Vice
President -- Marketing, Paint Stores Group commencing April 1994. From June 1987
to April 1994, Mr. Wilson served as President & General Manager, Southeastern
Division, Paint Stores Group.

There are no family relationships between any of the persons named.

12
15

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

Sherwin-Williams Common Stock is listed on the New York Stock Exchange and
traded under the symbol SHW.

QUARTERLY STOCK PRICES AND DIVIDENDS
Quarter High Low Dividend
-----------------------------------------------

1997 1ST $29.125 $25.938 $ .10
2ND 32.375 24.125 .10
3RD 33.375 27.063 .10
4TH 30.188 25.188 .10
1996 1st $22.688 $19.500 $ .0875
2nd 23.500 20.938 .0875
3rd 23.563 21.125 .0875
4th 28.875 22.813 .0875

The number of shareholders of record for Sherwin-Williams Common Stock, par
value $1.00 per share, at January 31, 1998 was 12,061. The closing market value
per share as listed on the New York Stock Exchange at the close of business on
January 31, 1998 was $28.625.

ITEM 6. SELECTED FINANCIAL DATA
(Millions of Dollars, except per share data)

1997 1996 1995 1994 1993
- ------------------------------------------------------------------------

OPERATIONS
Net Sales $4,881 $4,133 $3,274 $3,100 $2,949
Net Income 261 229 201 187 165

FINANCIAL POSITION
Total assets $4,036 $2,995 $2,141 $1,962 $1,915
Long-term debt 844 143 24 20 38

PER COMMON SHARE DATA
Net income -- basic* $ 1.51 $ 1.34 $ 1.18 $ 1.08 $ .93
Net income -- diluted* 1.50 1.33 1.17 1.07 .92
Cash dividends .40 .35 .32 .28 .25

* Amounts reflect adoption of Statement of Financial Accounting Standards No.
128, "Earnings Per Share", effective December 31, 1997. All amounts shown for
periods prior to adoption have been restated. See Note 1, page 31, and Note
16, page 47, for further per share information.

13
16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION -- 1997

Net operating cash flow generated by the Company during 1997 exceeded
$439.5 million. This cash flow, combined with a net increase in total debt of
$691.9 million, provided the funds to invest in property, plant and equipment,
to increase the annual dividend to shareholders, and to invest in the
acquisitions of Thompson Minwax Holding Corp. (Thompson Minwax) and other
smaller domestic and foreign acquisitions throughout 1997. The Company's
Consolidated Balance Sheets and Statements of Consolidated Cash Flows, on pages
28 and 29 of this report, provide more detailed information on the Company's
financial position and cash flows.

The Company's current ratio increased to 1.37 at December 31, 1997 from
1.35 at the end of 1996. Other current assets decreased $78.1 million due
primarily to the receipt of approximately $53.9 million from various insurance
companies related to environmental matters. Short-term borrowings, primarily
related to the Company's commercial paper program, decreased $61.0 million
during the year. The Company's commercial paper program had unused borrowing
availability of $893.3 million at December 31, 1997. Outstanding borrowings
under the commercial paper program are fully backed by the Company's revolving
credit agreements. Increases in other components of net working capital occurred
during 1997 due to the effects of acquisitions combined with increased sales and
manufacturing activity.

Deferred pension assets of $276.1 million at December 31, 1997 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 1997 increase in deferred pension assets of $21.7 million
represents primarily the recognition of the current year net pension credit,
described in Note 6 on page 36 of this report, and the recording of a settlement
of a portion of the accumulated benefit obligation in one of its defined benefit
pension plans in accordance with Statement of Financial Accounting Standards
(SFAS) No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits". The assumed
discount rate used to compute the actuarial present value of benefit obligations
was lowered to 7.0 percent at December 31, 1997 due to decreased rates of
high-quality, long-term investments, thereby increasing the benefit obligations
and unrecognized net loss of the plans. The deferral of the increase in the
actual return on plan assets during 1997 over the assumed return of 8.5 percent,
which occurred due primarily to favorable returns on equity investments, caused
an offsetting decrease to the cumulative unrecognized net loss of the plans. The
net effect of these deferred items, combined with an increased asset base, will
result in an increase to the net pension credit in 1998. Goodwill, which
represents the excess cost over the fair value of net assets acquired in
purchase business combinations, increased $614.7 million, and intangible assets,
which represent items such as trademarks and patents, increased $206.0 million
over 1996. These increases relate primarily to goodwill and intangible assets
acquired during 1997 and other adjustments of $869.7 million reduced by
amortization expense of $49.0 million during the year. The decrease in other
assets of $60.1 million occurred primarily due to the reclassification of
certain asset values associated with a previously unconsolidated foreign joint
venture acquired in 1996 which was accounted for at cost and the
reclassification of certain amounts to long-term liabilities.

Net property, plant and equipment increased $142.9 million to $692.3
million at December 31, 1997 due to net fixed assets acquired of $61.8 million
and capital expenditures of $164.0 million offset by depreciation expense of
$90.2 million and the disposition or retirement of certain assets. Capital
expenditures in 1997 represented primarily the costs of installing or upgrading
point-of-sale terminals in the paint stores and costs for the construction,
capacity expansion or upgrade of manufacturing and distribution centers. The
decrease in capital expenditures during 1997 in the Paint Stores Segment
occurred due primarily to reduced spending related to the installation of

14
17

point-of-sale terminals in the paint stores. The Coatings Segment's increase in
capital expenditures during 1997 relates to construction costs for three new
powder coatings facilities in Texas, California and South Carolina, construction
costs for a new manufacturing facility in Brazil, construction costs for a new
distribution center in Nevada and costs for capacity expansion at some of its
existing facilities. Capital expenditures in the Other Segment increased due to
costs related to refurbishing vacant tenant space prior to re-leasing. In 1998,
the Company expects that its most significant capital expenditures will relate
to construction of new facilities in Brazil and Chile, various capacity and
productivity improvement projects at manufacturing facilities and new or
upgraded information systems equipment. The Company does not anticipate the need
for any specific external financing to support these capital programs.

Long-term debt increased $701.2 million during the year to $843.9 million
at December 31, 1997. As more fully explained in Note 8, on page 39 of this
report, the net increase relates to the February 1997 issuance of $400.0 million
of debt securities under the Company's $450.0 million shelf registration with
the Securities and Exchange Commission, the February 1997 issuance of $300.0
million of debentures in private offerings not registered under the Securities
Act of 1933, as amended (Securities Act), and the October 1997 issuance of the
$50.0 million of debt securities remaining under the Company's $450.0 million
shelf registration. The net proceeds from these borrowings were used to
refinance a portion of the Company's commercial paper debt, which was incurred
primarily to finance the acquisition of Thompson Minwax. In connection with the
issuance of the long-term debt referenced above, in May 1997, the Company
decreased the aggregate principal amount of unsecured short-term notes which may
be issued under its commercial paper program to $1,000.0 million from $1,450.0
million, and in December 1997, the Company filed a new shelf registration with
the Securities and Exchange Commission covering $150.0 million of debt
securities. No securities have been issued pursuant to this shelf registration.
The Company expects to remain in a borrowing position throughout 1998.

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 and the addition of postretirement obligations
assumed in acquisitions. The current portion of the accrued postretirement
liability, amounting to $9.5 million at December 31, 1997, is included in other
accruals. The assumed discount rate used to calculate the actuarial present
value of the postretirement benefit obligations was lowered to 7.0 percent at
December 31, 1997 due to decreased rates of high-quality, long-term investments,
thereby increasing the cumulative unrecognized net loss for the postretirement
plans. The effect of this change on the net postretirement benefit expense for
1998 will be minimal as the cumulative unrecognized net loss is below the
threshold for required amortization. See Note 7, on page 38 of this report, for
further information on the Company's postretirement benefit obligations.

Other long-term liabilities include accruals for environmental-related
liabilities and other non-current miscellaneous items. The increase of $69.1
million during 1997 primarily relates to the increased accruals for
environmental-related liabilities and the reclassification of certain amounts
from current liabilities and other assets. See Note 10, on page 41 of this
report, for additional information concerning the Company's other long-term
liabilities.

The Company and certain other companies are defendants in a number of
lawsuits arising from the manufacture and sale of lead pigments and lead paints.
It is possible that additional lawsuits may be filed against the Company in the
future with similar allegations. The various existing lawsuits seek damages for
personal injuries and property damages, along with costs involving the abatement
of lead related paint from buildings and medical monitoring costs. The Company
believes that such lawsuits are without merit and is vigorously defending them.
The Company does not believe that any potential liability ultimately determined
to be attributable to the Company arising out of such lawsuits will have a
material adverse effect on the Company's business or financial condition.

15
18

The operations of the Company, like those of other companies in our
industry, are subject to various federal, state and local environmental laws and
regulations. These laws and regulations not only govern our current operations
and products, but also impose liability on the Company for past operations which
were conducted utilizing practices and procedures considered acceptable under
the laws and regulations existing at that time. The Company expects
environmental laws and regulations to impose increasingly stringent requirements
upon the Company and our industry in the future. The Company believes it
conducts its operations in compliance with applicable environmental laws and
regulations and has implemented various programs to protect the environment and
promote continued compliance.

Capital expenditures and other expenses related to ongoing environmental
compliance measures are included in the normal operating expenses of conducting
business. The Company's capital expenditures and other expenses related to
ongoing environmental compliance measures were not material to the Company's
financial condition or net income during 1997, and the Company does not expect
such capital expenditures and other expenses to be material to the Company's
financial condition or net income in the future.

The Company is involved with environmental compliance and remediation
activities at some of its current and former sites (including former 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
remediation of hazardous waste at a number of third-party sites, primarily
Superfund sites. The Company may be similarly designated with respect to
additional third-party sites in the future.

The Company accrues for certain environmental remediation-related
activities relating to its past operations and third-party sites, including
Superfund sites, for which commitments or clean-up plans have been developed or
for which costs or minimum costs can be reasonably estimated. The Company also
accrues for certain environmental remediation-related activities relating to
sites obtained through acquisitions in a similar manner. The Company
continuously assesses its potential liability for remediation-related activities
and adjusts its environmental-related accruals as information becomes available
upon which more accurate costs can be reasonably estimated and as additional
accounting guidelines are issued, such as SOP 96-1 that was adopted in 1996,
which require changing the estimated costs or the procedure utilized in
estimating such costs. Actual costs incurred may vary from these estimates due
to the inherent uncertainties involved including, among others, the number and
financial condition of parties involved with respect to any given site, the
volumetric contribution which may be attributed to the Company relative to that
attributable to other parties, the nature and magnitude of the wastes involved,
the various technologies that can be used for remediation and the determination
of acceptable remediation with respect to a particular site.

Pursuant to a Consent Decree entered into with the United States of
America, on behalf of the Environmental Protection Agency, 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 nature, extent and potential impact, if any,
of environmental contamination at the facility, and (ii) implement remedial
action measures, if required, to address any environmental contamination
identified pursuant to the investigation. In addition, the Company is a
defendant in a lawsuit brought by PMC, Inc. regarding one of the Company's
former Chemical Division's manufacturing facilities which is located adjacent to
the Company's southeast Chicago, Illinois facility. This former manufacturing
facility was sold to PMC, Inc. in 1985. PMC, Inc. is seeking an undisclosed
amount for environmental remediation costs and other damages based upon
contractual and tort theories, and under various environmental laws. The Company
is vigorously defending this lawsuit.

16
19

With respect to the Company's southeast Chicago, Illinois facility and its
former manufacturing facility adjacent thereto, the Company has evaluated its
potential liability and, based upon its preliminary evaluation, has accrued an
appropriate amount. However, due to the uncertainties surrounding these
facilities, the Company's ultimate liability may result in costs that are
significantly higher than currently accrued. In such event, the recording of the
liability may result in a significant impact on net income for the annual or
interim period during which the additional costs are accrued.

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
10, on page 41 of this report, for discussion of the environmental-related
accruals included in the Company's consolidated balance sheets.

Shareholders' equity increased more than $190.9 million during 1997 due
primarily to the excess current year net income over dividends paid to
shareholders. The par value of $101.9 million for additional common shares
issued in the form of a two-for-one stock split in March 1997 was credited to
Common Stock and a like amount charged to other capital. The Company did not
acquire any of its own shares through open market purchases during this period.
Approximately 160,700 shares of the Company's Common Stock were received in
exchange for stock issued in accordance with the Company's stock plans. The
Company acquires its own stock for general corporate purposes and, depending on
its future cash position and market conditions, it may acquire additional shares
in the future. In April 1997, the Board of Directors authorized the Company to
purchase, in the aggregate, 10,000,000 shares of Common Stock. The increase of
$14.1 million in the cumulative foreign currency translation adjustment occurred
due primarily to the strengthening of the U.S. dollar over the Company's foreign
subsidiaries' currencies. The Company's Brazilian subsidiaries, which had been
accounted for under highly inflationary accounting rules, are now accounted for
under non-highly inflationary accounting rules beginning July 1, 1997. As of
that date, the Brazilian Real is the functional currency for all Brazilian
operations, and any resulting translation adjustments have been included in the
cumulative foreign currency translation adjustment of shareholders' equity.

The Company is engaged in a company-wide project to prepare the Company's
computer systems and applications for the change in date from the year 1999 to
2000. This project consists of identifying and taking appropriate corrective
action to address the Year 2000 issue in affected systems and applications. The
Company expects its Year 2000 project (including testing and implementation) to
be completed on a timely basis. All costs and expenses incurred to address the
Year 2000 issue are charged against income on a current basis. The Company does
not expect these costs and expenses to be material to the Company's financial
condition, annual results of operation or cash flows.

In addition, the Company commenced a multi-year, company-wide information
technology project to enhance the Company's computer systems. The project will
provide efficiencies and further integration of operations. The Company
currently expects that full implementation of this project will involve
significant capital expenditures over the next several years. Certain costs and
expenses related to this project, including amortization costs, are charged
against income on a current basis. While this project will reduce the Company's
cash flows from operations in the first year, anticipated benefits in subsequent
years will reduce any impact on cash flows. The capital expenditures, costs and
expenses are not expected to have a material adverse effect on the Company's
annual results of operations.

The Company is exposed to market risk through various financial
instruments, including fixed rate debt instruments and interest rate swaps. The
Company does not believe that any potential loss related to these financial
instruments in future earnings, fair values or cash flows from

17
20

possible near-term market movements will have a material adverse effect on the
Company's financial condition or results of operations.

At a meeting held February 4, 1998, the Board of Directors increased the
quarterly dividend to $.1125 per share. This represents the nineteenth
consecutive annual increase and a compounded annual rate of increase of 27.2
percent since the dividend was reinstated in the fourth quarter of 1979. The
1997 annual dividend of $.40 per share marked the eighteenth consecutive year
that the dividend approximated our payout ratio target of 30 percent of the
prior year's earnings.

RESULTS OF OPERATIONS -- 1997 vs 1996

Consolidated net sales increased 18.1 percent over 1996 to $4.88 billion in
1997. Excluding incremental sales from Thompson Minwax and other smaller
domestic and foreign acquisitions (collectively, the 1997 Acquisitions) which
occurred at various times since December 31, 1996, net sales for 1997 increased
3.7 percent.

The Paint Stores Segment's sales during 1997 increased 8.1 percent, or 6.6
percent excluding the 1997 Acquisitions, due primarily to increased paint
gallons sold to wholesale customers combined with wholesale volume increases in
the remaining major product lines. Wholesale customers include professional
painters, contractors and industrial and commercial maintenance customers.
Although volume sales to retail customers were soft in the second half of the
year, overall retail sales increased in 1997 compared to 1996, thereby
contributing to the sales improvement in the Paint Stores Segment.

External sales in the Coatings Segment increased 32.5 percent during 1997
due primarily to incremental sales from the 1997 Acquisitions. Excluding the
1997 Acquisitions, sales declined 0.5 percent. Sales were affected by the loss
of certain business due to our unwillingness to match or exceed the low prices
offered by our competition. The Company expects sales from new products and
product lines and the expansion of its presence at several retailers to offset
the lost sales; however, the Segment's overall expected sales increase will be
tempered during the first half of 1998 as compared to the first half of 1997.
Reduced gallons sold to national accounts and home center customers, which
resulted from poor out-the-door sales and the loss of certain product lines at
one of its customers, accounted for a slight sales decline in the Consumer
Brands Division after excluding the 1997 Acquisitions. External sales in the
Automotive Division were higher than last year on both an as-reported basis and
excluding the 1997 Acquisitions due primarily to sales gains in its automotive
branches and at original equipment manufacturers combined with foreign sales
gains resulting from increased market penetration in those areas. In the
Diversified Brands Division, sales gains in the industrial and applicator
product lines were offset by reduced sales to some customers in the retail
national (formerly hardware) and cleaning solutions businesses, leading to
slightly lower sales excluding the 1997 Acquisitions as compared to last year.
External sales in the Coatings Segment's consolidated foreign subsidiaries
increased significantly during 1997 and represented 11.3 percent of the
Company's consolidated net sales due primarily to the Company's acquisition
activity. Revenue generated by real estate operations in the Other Segment was
lower than last year due to the loss of a large tenant in one of its office
buildings at the end of 1996.

Consolidated gross profit as a percent of sales increased to 43.0 percent
from 41.8 percent in 1996 due in part to the effects of the 1997 Acquisitions,
although improved gross profit margins were also obtained excluding the 1997
Acquisitions. The Paint Stores Segment's 1997 gross margin excluding the 1997
Acquisitions was higher than last year due primarily to sales gains in its
higher-margin paint and paint-related product lines. Margins in the Coatings
Segment were higher than last year due to above-average margins realized from
some of the 1997 Acquisitions' businesses combined with a favorable sales mix in
most of its divisions and favorable factory operations in the Automotive
Division.

18
21

Consolidated selling, general and administrative expenses as a percent of
sales increased to 32.2 percent from 31.7 percent in 1996. Excluding the 1997
Acquisitions, SG&A expenses as a percent of sales were even with last year. The
Paint Stores Segment's SG&A expenses as a percent of sales were favorable to
last year on both an as-reported basis and excluding the 1997 Acquisitions due
to cost containment combined with the sales gains achieved. Increased
merchandising and administrative costs related to new products, new customers
and improved service levels led to an unfavorable SG&A ratio in the Coatings
Segment for 1997 compared to 1996.

Consolidated operating profits increased 21.6 percent in 1997, or 7.2
percent excluding the 1997 Acquisitions. Operating profits of the Paint Stores
Segment increased 9.3 percent, or 8.9 percent excluding the 1997 Acquisitions,
due primarily to increased paint volume combined with containment of selling,
general and administrative expenses. The Coatings Segment's operating profits
excluding the 1997 Acquisitions were 6.6 percent higher than last year due
primarily to the realization of manufacturing efficiencies in certain business
units. Operating profits of the Coatings Segment's consolidated foreign
subsidiaries represented 12.6 percent of the Company's consolidated operating
profits due primarily to profits from the Company's acquisitions. 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. The
operating profits of the Other Segment decreased in 1997 due primarily to vacant
lease space during part of the year related to the loss of a large tenant in one
of its office buildings. Corporate expenses increased in 1997 due primarily to
increased interest expense and net losses relating to translation of certain
foreign investments which are not directly associated with or allocable to any
individual operating segment. Refer to page 1 of this report for additional
Business Segment Information.

Interest expense increased significantly in 1997 due to the increases in
long-term debt related to the financing of the 1997 Acquisitions. As a result,
interest coverage decreased to 6.3 times from 16.3 times in 1996. Our fixed
charge coverage, which is calculated using interest and rent expense, declined
to 3.2 times from 3.9 times in 1996.

Net interest and investment income increased in 1997 due primarily to
higher average cash and short-term investment balances and higher average
yields. See Note 4, on page 35 of this report, for further detail on other costs
and expenses. As shown in Note 14, on page 44 of this report, the effective
income tax rate in 1997 remained unchanged from the 1996 rate.

Net income increased 13.7 percent in 1997 to $260.6 million from $229.2
million in 1996. Excluding the Acquisitions, net income increased 14.9 percent.
Net income per common share-basic, calculated in accordance with SFAS No. 128
adopted for the fourth quarter ended December 31, 1997, increased 12.7 percent
to $1.51 from $1.34 (as restated to conform to SFAS No. 128). See Note 1, on
page 31 of this report, for additional discussion on the Company's adoption of
SFAS No. 128 and Note 16, on page 47 of this report, for detailed computations.
As a consequence of the lost external sales in the Coatings Segment in 1997, the
Company's anticipated increase in net income during the first half of 1998 will
be slightly impacted.

Although the costs and expenses of the Company's Year 2000 project and the
expenses associated with the information technology project will slightly impact
operating profits and net income in 1998, the Company expects that 1998 sales
and earnings will exceed the sales and earnings recorded in 1997.

RESULTS OF OPERATIONS -- 1996 vs 1995

Consolidated net sales increased to $4.13 billion in 1996, a 26.2 percent
increase over 1995. Excluding incremental sales from Pratt & Lambert United,
Inc. and other smaller acquisitions (collectively, the 1996 Acquisitions) after
date of acquisition, net sales for 1996 increased 7.5 percent.
19
22

Sales in the Paint Stores Segment increased 13.1 percent over 1995, or 9.1
percent excluding the 1996 Acquisitions, due primarily to increased paint
gallons sold to both retail and wholesale customers. Comparable store sales were
up 10.0 percent for the year. Despite selling price reductions on certain
non-paint product lines in 1996, volume gains generated overall sales increases
in all non-paint product lines except window treatments.

Incremental sales from the 1996 Acquisitions led to an external sales
increase of 51.4 percent over 1995 in the Coatings Segment. Excluding the 1996
Acquisitions, external sales increased 4.7 percent. Increased gallons sold to
national accounts and independent dealers led to a net external sales increase
excluding the 1996 Acquisitions over 1995 in the Consumer Brands Division. In
the Automotive Division, 1996 external sales gains excluding the 1996
Acquisitions were generated primarily from sales growth in its branch
distribution network. The addition of new products and new customers in the
Diversified Brands Division during 1996 helped achieve sales gains in its
custom, automotive, hardware and industrial product lines excluding the 1996
Acquisitions. Revenue generated by real estate operations in the Other Segment
decreased slightly compared to 1995 due to the disposition of certain properties
in late 1995 and in 1996.

Lower gross profit margins from some of the 1996 Acquisitions' businesses
caused consolidated gross profit as a percent of sales to decline to 41.8
percent from 42.7 percent in 1995. Excluding the 1996 Acquisitions, gross profit
margins increased to 44.4 percent. Gross profit margins in the Paint Stores
Segment, both including and excluding the 1996 Acquisitions, were higher than
1995 due to increased sales of its higher margin product lines combined with
increased retail sales. Stable product costs combined with a favorable sales mix
led to improved gross profit margins over 1995 in the Coatings Segment excluding
the 1996 Acquisitions.

Consolidated selling, general and administrative (SG&A) expenses as a
percent of sales were favorable to 1995, declining to 31.7 percent from 32.8
percent, due to lower-than-average expenses in the 1996 Acquisitions'
businesses. Excluding the 1996 Acquisitions, SG&A expenses as a percent of sales
increased to 33.5 percent. The Paint Stores Segment's controlled spending
throughout 1996 combined with its sales gains led to favorable SG&A expenses as
a percent of sales on both an as-reported basis and excluding the 1996
Acquisitions. The Coatings Segment's SG&A expenses as a percent of sales
excluding the 1996 Acquisitions were unfavorable to 1995 due primarily to
increased merchandising costs, advertising and promotional expenses related to
product introductions in the Consumer Brands and Diversified Brands Divisions.

Consolidated operating profits increased 30.3 percent over 1995, or 19.2
percent excluding the 1996 Acquisitions. Operating profits of the Paint Stores
Segment increased 30.2 percent, or 28.1 percent excluding the 1996 Acquisitions,
due to volume gains and the continued containment of SG&A expenses. The Coatings
Segment's operating profits excluding the 1996 Acquisitions increased 11.9
percent due to stable raw material costs and manufacturing efficiencies
resulting from volume gains. The operating profits of the Other Segment
increased in comparison to 1995 primarily due to the reduction in costs
associated with disposed properties. Corporate expenses increased over 1995 due
to increased interest expense, decreased net investment income and increases in
other costs and expenses which are not directly associated with or allocable to
any individual operating segment.

The increases in long-term debt and short-term borrowings which occurred in
1996 due to the financing of the 1996 Acquisitions caused interest expense to
increase significantly over 1995. Correspondingly, interest coverage decreased
to 16.3 times from 126.8 times in 1995. Fixed charge coverage, which is
calculated using interest and gross rent expense, declined to 3.9 times from 4.2
times in 1995.

Net interest and investment income was lower than 1995 due to lower average
cash and short-term investment balances offset partially by higher average
yields. Other costs and expenses increased in 1996 due to increased provisions
for dispositions and termination of operations and for environmental
remediation-related matters and other items as more fully discussed in Note 4 on
20
23

page 35 of this report. The effective income tax rate increased in 1996, as
shown in Note 14, on page 44 of this report, primarily due to the increase in
non-deductible tax items, primarily goodwill.

Net income increased 14.2 percent in 1996 to $229.2 million from $200.7
million in 1995. Excluding the 1996 Acquisitions, net income increased 12.6
percent. Net income per share increased 13.7 percent in 1996 to $1.34 from $1.18
(as restated in accordance with SFAS No. 128).

In accordance with the consensus guidance in Emerging Issues Task Force No.
87-11, "Allocation of Purchase Price to Assets to be Sold", all 1996 results of
operations exclude the results of operations of certain Pratt & Lambert United,
Inc. subsidiaries through their respective dates of sale. These subsidiaries,
which were sold during the third quarter of 1996, include essentially all
operations of Pierce & Stevens Corp., a manufacturer of specialty chemicals, and
Miracle Adhesives Corporation, a manufacturer of adhesives for the construction
industry. The total operating profit related to these subsidiaries prior to
their sale, approximately $3.0 million in 1996, has been excluded from the
statement of consolidated income. The net gain realized on the sale of these
subsidiaries was insignificant to the allocation of purchase price pursuant to
APB Opinion No. 16.

21
24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT AUDITORS

Shareholders and Board of Directors
The Sherwin-Williams Company
Cleveland, Ohio

We have audited the accompanying consolidated balance sheets of The
Sherwin-Williams Company and subsidiaries as of December 31, 1997, 1996 and
1995, and the related statements of consolidated income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. Our audits also included the financial statement schedule listed at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Sherwin-Williams Company and subsidiaries at December 31, 1997, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

/s/ Ernst & Young LLP

Cleveland, Ohio
January 23, 1998

22
25

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, 1997, 1996
and 1995. The primary responsibility for the integrity of the financial
information rests with management. This information is prepared in accordance
with generally accepted accounting principles based upon our best estimates and
judgments and giving due consideration to materiality.

The Company maintains accounting and control systems which are designed to
provide reasonable assurance that assets are safeguarded from loss or
unauthorized use and which produce records adequate for preparation of financial
information. There are limits inherent in all systems of internal control based
on the recognition that the cost of such systems should not exceed the benefits
to be derived. We believe our system provides this appropriate balance.

The Board of Directors pursues its responsibility for these financial
statements through the Audit Committee, composed exclusively of outside
directors. The Committee meets periodically with management, internal auditors
and our independent auditors to discuss the adequacy of financial controls, the
quality of financial reporting and the nature, extent and results of the audit
effort. Both the internal auditors and independent auditors have private and
confidential access to the Audit Committee at all times.

/s/ J. G. Breen /s/ L. J. Pitorak /s/ J. L. Ault
J. G. Breen L. J. Pitorak J. L. Ault
Chairman and Senior Vice President -- Finance, Vice President --
Chief Executive Officer Treasurer and Chief Financial Officer Corporate Controller

FORWARD-LOOKING STATEMENT

Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Business Segment Information"
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 expectations and beliefs concerning future events and discuss,
among other things, anticipated future performance and revenues, expected growth
and future business plans. Words and phrases such as "expects", "anticipates",
"believes", "will likely result", "will continue", "plans to" and similar
expressions are intended to identify forward-looking statements. 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
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; raw material availability and pricing; changes in the
Company's relationships with customers and suppliers; the ability of the Company
to successfully integrate recent and future acquisitions into its existing

23
26

operations; 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; 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 outcome of pending and future litigation and other claims; 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.

FINANCIAL STATEMENTS

See "Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form
8-K" for the required Financial Statements.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

24
27

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT

The information required by Item 10 regarding Directors is contained under
the caption "Election of Directors (Proposal 1)" in the Proxy Statement which
will be filed with the Securities and Exchange Commission, pursuant to
Regulation 14A, not later than 120 days after the end of the fiscal year which
information under such caption is incorporated herein by reference.

The information required by Item 10 regarding Executive Officers is
contained under the caption "Executive Officers of the Registrant" in Part I of
this Form 10-K which information under such caption is incorporated herein by
reference.

The information required by Item 10 regarding certain significant employees
is contained under the captions "Corporate Officers of the Company" and
"Operating Managers of the Company" (excluding the Executive Officers) in the
Proxy Statement which information under such captions is incorporated herein by
reference.

The information required by Item 10 regarding compliance with Section 16 of
the Securities Exchange Act of 1934 is contained under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement which
information under such caption is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is contained on pages 7 through 17 of
the Proxy Statement and under the captions "Compensation of Directors" and
"Compensation Committee Interlocks and Insider Participation" contained in the
Proxy Statement which information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

The information required by Item 12 is contained under the captions
"Security Ownership of Management" and "Security Ownership of Certain Beneficial
Owners" in the Proxy Statement which information under such captions is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS

None

25
28

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) Financial Statements
(i) Statements of Consolidated Income for the Years Ended
December 31, 1997, 1996 and 1995
(ii) Consolidated Balance Sheets at December 31, 1997, 1996 and
1995
(iii) Statements of Consolidated Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
(iv) Statements of Consolidated Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995
(v) Notes to Consolidated Financial Statements for the Years
Ended December 31, 1997, 1996 and 1995
(2) Financial Statement Schedule
Financial Schedule No. II for the Years Ended December 31,
1997, 1996 and 1995 -- All other schedules for which
provision is made in the applicable accounting regulations
of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and
therefore have been omitted.
(3) Exhibits
See Exhibit Index at page 51 of this report which is
incorporated herein by reference.

(b) Reports on Form 8-K -- The Company did not file any Reports on Form 8-K
during the quarterly period ended December 31, 1997.

26
29

STATEMENTS OF CONSOLIDATED INCOME

(Thousands of Dollars Except Per Share Data)

Year ended December 31,
- ----------------------------------------------------------------------------
1997 1996 1995

- ----------------------------------------------------------------------------
Net sales $4,881,103 $4,132,879 $3,273,819
Costs and expenses:
Cost of goods sold 2,784,392 2,405,178 1,877,083
Selling, general and
administrative expenses 1,573,510 1,309,086 1,075,442
Interest expense 80,837 24,537 2,532
Interest and net investment
income (8,278) (6,819) (11,518)
Other 23,365 25,520 11,782
- ----------------------------------------------------------------------------
4,453,826 3,757,502 2,955,321
- ----------------------------------------------------------------------------
Income before income taxes 427,277 375,377 318,498
Income taxes 166,663 146,220 117,844
- ----------------------------------------------------------------------------
Net income $ 260,614 $ 229,157 $ 200,654
============================================================================
Net income per common share:
Basic $ 1.51 $ 1.34 $ 1.18
============================================================================
Diluted $ 1.50 $ 1.33 $ 1.17
============================================================================

See notes to consolidated financial statements.

27
30

CONSOLIDATED BALANCE SHEETS

(Thousands of Dollars)

December 31,
- ------------------------------------------------------------------------------
1997 1996 1995

- ------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,530 $ 1,880 $ 249,484
Short-term investments 20,000
Accounts receivable, less allowance 546,314 452,421 334,304
Inventories:
Finished goods 587,680 529,148 395,817
Work in process and raw materials 133,988 113,539 67,270
- ------------------------------------------------------------------------------
721,668 642,687 463,087
Deferred income taxes 124,669 105,065 71,583
Other current assets 136,072 214,134 100,440
- ------------------------------------------------------------------------------
Total current assets 1,532,253 1,416,187 1,238,898
Goodwill 1,161,129 546,461 38,792
Intangible assets 310,221 104,206 84,070
Deferred pension assets 276,086 254,376 233,574
Other assets 63,854 123,969 89,362
Property, plant and equipment:
Land 64,367 53,705 45,203
Buildings 383,485 312,954 282,011
Machinery and equipment 841,343 716,015 629,786
Construction in progress 68,649 51,258 30,434
- ------------------------------------------------------------------------------
1,357,844 1,133,932 987,434
Less allowances for depreciation 665,586 584,541 531,077
- ------------------------------------------------------------------------------
692,258 549,391 456,357
- ------------------------------------------------------------------------------
Total Assets $4,035,801 $2,994,590 $2,141,053
==============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 106,913 $ 168,001
Accounts payable 424,184 385,928 $ 276,863
Compensation and taxes withheld 118,709 103,353 78,148
Current portion of long-term debt 53,926 2,133 755
Other accruals 367,392 325,635 231,280
Accrued taxes 44,539 65,957 31,891
- ------------------------------------------------------------------------------
Total current liabilities 1,115,663 1,051,007 618,937
Long-term debt 843,919 142,679 24,018
Postretirement benefits other than
pensions 199,839 184,551 175,766
Other long-term liabilities 284,200 215,121 110,206
Shareholders' equity:
Common stock -- $1.00 par value:
172,907,418, 171,831,178 and
170,909,626 shares outstanding at
December 31, 1997, 1996 and 1995,
respectively 204,538 101,650 101,110
Other capital 119,695 203,223 182,311
Retained earnings 1,602,454 1,411,295 1,242,167
Treasury stock, at cost (301,418) (295,954) (292,805)
Cumulative foreign currency
translation adjustment (33,089) (18,982) (20,657)
- ------------------------------------------------------------------------------
Total shareholders' equity 1,592,180 1,401,232 1,212,126
- ------------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $4,035,801 $2,994,590 $2,141,053
==============================================================================

See notes to consolidated financial statements.

28
31

STATEMENTS OF CONSOLIDATED CASH FLOWS

(Thousands of Dollars)

Year Ended December 31,
- -----------------------------------------------------------------------------------------------
1997 1996 1995

- -----------------------------------------------------------------------------------------------
OPERATIONS
Net income $ 260,614 $ 229,157 $ 200,654
Non-cash adjustments:
Depreciation 90,202 76,176 62,947
Deferred income tax expense 59,247 (13,798) (3,316)
Provisions for disposition of operations 4,152 17,366 6,267
Provisions for environmental-related matters 7,607 15,494 10,136
Amortization of intangible assets 49,044 27,447 14,971
Defined benefit pension plans net credit (20,173) (15,298) (7,612)
Net increase in postretirement liability 5,452 3,258 3,652
Other 15,133 8,408 10,077
Change in current items-net:
Increase in accounts receivable (22,190) (20,338) (19,571)
Decrease (increase) in inventories (30,940) (85,911) 3,922
Increase in accounts payable 6,841 60,410 17,283
Increase (decrease) in accrued taxes (24,671) 33,147 (8,877)
Other current items 4,398 11,869 1,471
Proceeds of insurance settlement 53,900
Increase in long-term accrued taxes 12,174 4,735 2,477
Costs incurred for environmental-related matters (18,052) (9,400) (6,291)
Costs incurred for disposition of operations (17,585) (6,993) (4,704)
Other 4,377 3,586 (761)
- -----------------------------------------------------------------------------------------------
Net operating cash 439,530 339,315 282,725
- -----------------------------------------------------------------------------------------------
INVESTING
Capital expenditures (163,955) (122,720) (108,392)
Decrease (increase) in short-term investments 20,000 (20,000)
Acquisitions of assets (884,525) (670,755) (72,349)
Decrease (increase) in other investments (5,633) 37,829 (49,833)
Other (6,375) 9,148 5,824
- -----------------------------------------------------------------------------------------------
Net investing cash (1,060,488) (726,498) (244,750)
- -----------------------------------------------------------------------------------------------
FINANCING
Net (decrease) increase in short-term borrowings (61,692) 134,654
Increase in long-term debt 750,653 101,792
Payments of long-term debt (2,194) (72,426) (804)
Payments of cash dividends (69,027) (60,029) (54,553)
Proceeds from stock options exercised 14,760 12,800 11,104
Treasury stock acquired (8,437) (3,149) (17,367)
Other financing of acquisitions 4,542 22,000 18,948
Debt issue costs (6,050)
Other 53 3,937 2,766
- -----------------------------------------------------------------------------------------------
Net financing cash 622,608 139,579 (39,906)
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,650 (247,604) (1,931)
Cash and cash equivalents at beginning of year 1,880 249,484 251,415
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,530 $ 1,880 $ 249,484
===============================================================================================
Taxes paid on income $ 119,464 $ 144,359 $ 122,687
Interest paid on debt 59,572 22,950 2,526
- -----------------------------------------------------------------------------------------------

See notes to consolidated financial statements.

29
32

STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY

(Thousands of Dollars Except Per Share Data)

Cumulative
Foreign
Currency
Common Other Retained Treasury Translation
Stock Capital Earnings Stock Adjustment

- --------------------------------------------------------------------------------------------------
Balance at January 1, 1995 $100,370 $ 159,562 $1,096,066 $(282,648) $(20,006)
Treasury stock acquired (14,404)
Stock issued 740 22,749 4,247
Net income 200,654
Cash dividends -- $.32 per share (54,553)
Current year translation adjustment (651)
- --------------------------------------------------------------------------------------------------
Balance at December 31, 1995 101,110 182,311 1,242,167 (292,805) (20,657)
Stock issued 540 20,912 (3,149)
Net income 229,157
Cash dividends -- $.35 per share (60,029)
Current year translation adjustment 1,675
- --------------------------------------------------------------------------------------------------
Balance at December 31, 1996 101,650 203,223 1,411,295 (295,954) (18,982)
Two-for-one stock split 101,876 (101,876)
Stock issued 1,012 21,321 (5,464)
Stock acquired for trust (2,973)
Net income 260,614
Cash dividends -- $.40 per share (69,027)
Unfunded pension losses-net of taxes (428)
Current year translation adjustment (14,107)
- --------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $204,538 $ 119,695 $1,602,454 $(301,418) $(33,089)
==================================================================================================

See notes to consolidated financial statements.

30
33

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.

Business segments. Business segment information appears on pages 1 through 9 of
this report.

Foreign currency translation. All consolidated non-highly inflationary foreign
operations use the local currency of the country of operation as the functional
currency and translate the local currency asset and liability accounts at
year-end exchange rates while income and expense accounts are translated at
average exchange rates. The resulting translation adjustments are accumulated as
a separate component of Shareholders' Equity titled "Cumulative foreign currency
translation adjustment". All consolidated highly inflationary foreign operations
use the Company's currency as the functional currency.

Cash flows. The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.

Nature of operations. The Company is engaged in the manufacture, distribution
and sale of coatings and related products to professional, industrial,
commercial and retail customers primarily in North and South America.

Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Environmental matters. Capital expenditures for ongoing environmental compliance
measures are recorded in the consolidated balance sheets and related expenses
are included in the normal operating expenses of conducting business. The
Company is involved with environmental compliance and remediation activities at
some of its current and former sites and at a number of third-party sites. The
Company accrues for certain environmental remediation-related activities for
which commitments or clean-up plans have been developed or for which costs or
minimum costs can be reasonably estimated. All accrued amounts are recorded on
an undiscounted basis. In 1996, the Company adopted American Institute of
Certified Public Accountants Statement of Position (SOP) 96-1, "Environmental
Remediation Liabilities". SOP 96-1 proscribes that accrued environmental
remediation-related expenses include direct costs of remediation and indirect
costs related to the remediation effort. Although the Company previously accrued
for the direct costs of remediation and certain indirect costs, additional
indirect costs were required to be accrued by the Company at the time of
adopting SOP 96-1 such as compensation and benefits for employees directly
involved in the remediation activities and fees paid to outside engineering,
consulting and law firms. The effect of initially applying the provisions of SOP
96-1 was treated as a change in accounting estimate and was not material to the
accompanying financial statements. See Note 4 and Note 10 for discussions of the
environmental remediation-related expense and accruals included in the financial
statements.

Stock-based compensation. The Company uses the intrinsic value method of
accounting for stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25. See Note 13 for pro forma disclosure of net income and
earnings per share under the fair value method of accounting for stock-based
compensation as proscribed by Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation".

31
34

Property, plant and equipment. Property, plant and equipment is stated on the
basis of cost. Depreciation is provided principally by the straight-line method.
The major classes of assets and ranges of depreciation rates are as follows:

Buildings 2% - 6-2/3%
Machinery and equipment 4% - 20%
Furniture and fixtures 5% - 20%
Automobiles and trucks 10% - 33-1/3%

Investment in life insurance. The Company invests in broad-based corporate owned
life insurance. The cash surrender values of the policies, net of policy loans,
are included in Other Assets. The net expense associated with such investment is
included in Other Costs and Expenses. Such expense is immaterial to income
before income taxes.

Goodwill. Goodwill represents the cost in excess of fair value of net assets
acquired in purchase transactions and is amortized on a straight-line basis over
periods not exceeding 40 years. The Company evaluates the recoverability of
goodwill at each balance sheet date and would record an impairment if necessary.
Accumulated amortization of goodwill was $48,596, $18,186 and $3,821 at December
31, 1997, 1996 and 1995, respectively.

Intangibles. Accumulated amortization of intangible assets was $85,242, $74,450
and $61,293 at December 31, 1997, 1996 and 1995, respectively. These assets are
amortized by the straight-line method over the expected period of benefit. The
Company reviews such assets for impairment and revises the related estimated
remaining lives if necessary.

Technical expenditures. Total technical expenditures include research and
development costs, quality control, product formulation expenditures and other
similar items. Research and development costs included in technical expenditures
were $24,748, $18,661 and $17,238 for 1997, 1996 and 1995, respectively.

Advertising expenses. The cost of advertising is expensed as incurred. The
Company incurred $295,942, $212,448 and $152,588 in advertising costs during
1997, 1996 and 1995, respectively.

Earnings per share. Effective December 31, 1997, the Company adopted SFAS No.
128, "Earnings Per Share". Accordingly, basic net income per share was computed
based on the weighted-average number of common shares outstanding during the
year, and diluted net income per share was computed based on the
weighted-average number of common shares outstanding plus all potentially
dilutive securities outstanding during the year. All per share amounts shown for
periods prior to adoption have been restated to conform to the provisions of
SFAS No. 128. See Note 16 for computation.

Letters of credit. The Company occasionally enters into standby letter of credit
agreements to guarantee various operating activities. These agreements, which
expire in 1998, provide credit availability to the various beneficiaries if
certain contractual events occur. Amounts outstanding under these agreements
totaled $18,844, $17,092 and $17,075 at December 31, 1997, 1996 and 1995,
respectively.

Fair value of financial instruments. The following methods and assumptions were
used by the Company in estimating its fair value disclosures for financial
instruments:

Cash and cash equivalents: The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents approximate fair
value.

Short-term investments: The carrying amounts reported in the consolidated
balance sheets for marketable debt and equity securities are based on
quoted market prices and approximate fair value.

Investments in securities: The Company maintains certain long-term
investments, classified as available for sale securities, in a fund to
provide for payment of health care benefits of
32
35

certain qualified employees. The estimated fair values of these securities,
included in other assets, of $28,751, $31,785 and $34,709 at December 31,
1997, 1996 and 1995, 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.

December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------------
CARRYING Fair Carrying Fair Carrying Fair
AMOUNT Value Amount Value Amount Value
-------------------------------------------------------------------------------------------

Publicly traded debt $764,725 $826,400 $ 15,900 $ 18,670 $15,900 $20,065
Non-traded debt 133,012 122,354 130,460 110,295 8,715 6,162
-------------------------------------------------------------------------------------------

Interest rate swaps: The Company occasionally enters into interest rate
swaps primarily to hedge against interest rate risks. These agreements
generally involve the exchange of fixed and floating rate interest payment
obligations without the exchange of the underlying principal amounts.
Counterparties to these agreements are major financial institutions.
Management believes the risk of incurring losses related to credit risk is
remote.

The fair values for the Company's off-balance-sheet instruments, shown
below, are based on pricing models or formulas using current assumptions
for comparable instruments.

December 31,
---------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------------------

Carrying amount $ (808) $(1,275)
Fair value $ 443 770 (943)
Notional amount 100,000 109,669 9,711
Number of agreements outstanding 2 3 1
---------------------------------------------------------------------------------------

Non-traded investments: It was not practicable to estimate the fair value
of the Company's investment in certain non-traded investments because of
the lack of quoted market prices and the inability to estimate fair values
without incurring excessive costs. The carrying amounts, included in other
assets, of $17,587, $100,797 and $31,491 at December 31, 1997, 1996 and
1995, respectively, represent the Company's best estimate of current
economic values of these investments.

Reclassification. Certain amounts in the 1996 and 1995 financial statements have
been reclassified to conform with the 1997 presentation.

NOTE 2 -- ACQUISITION AND MERGER

Effective January 7, 1997, the Company, through a wholly-owned subsidiary,
acquired all outstanding shares of Thompson Minwax Holding Corp. (Thompson
Minwax). The total amount of funds required to acquire the shares and pay off
certain indebtedness of Thompson Minwax was approximately $830 million. The
excess purchase price over the fair value of the net assets acquired is being
amortized over 40 years using the straight-line method.

For financial statement purposes, the acquisition was accounted for under
the purchase method of accounting. Accordingly, the results of operations of
Thompson Minwax since the date of acquisition are included in the Company's
statements of consolidated income. The following unaudited pro forma combined
condensed statement of consolidated income for the year ended December 31, 1996
was prepared in accordance with Accounting Principles Board Opinion No. 16 and
assumes the merger had occurred on January 1, 1996. The following pro forma data
reflects

33
36

adjustments for interest expense, net investment income and amortization of
goodwill and intangible assets. In management's opinion, the pro forma financial
information is not necessarily indicative of the results of operations which
would have occurred had the acquisition of Thompson Minwax taken place on
January 1, 1996 or of future results of operations of the combined companies
under the ownership and operation of the Company.

UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENT OF CONSOLIDATED INCOME
------------------------------------------------------------

1996
-----------

Net sales $4,497,250
Net income 217,794
Net income per common share-basic 1.27
Net income per common share-diluted 1.26

Effective January 10, 1996, the Company, through its wholly-owned
subsidiary, SWACQ, Inc., acquired all outstanding stock and completed its merger
with Pratt & Lambert United, Inc. (Pratt & Lambert) for a total cash purchase
price of approximately $400,000. The excess purchase price over the fair value
of the net assets acquired is being amortized over 40 years using the straight-
line method. For financial statement purposes, the acquisition was accounted for
under the purchase method of accounting. Accordingly, the results of operations
of Pratt & Lambert are included in the Company's statements of consolidated
income since the date of acquisition.

In addition, during the three-year period ended December 31, 1997, the
Company purchased various domestic automotive and retail paint distributors,
coatings manufacturers, and aerosol and liquid filling businesses. Various
foreign architectural and automotive paint manufacturing and aerosol filling
businesses located in South America were also acquired during the three-year
period. The results of operations of these businesses were not material to
consolidated pro forma results.

NOTE 3 -- INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined
principally on the last-in, first-out (LIFO) method which provides a better
matching of current costs and revenues. The following presents the effect on
inventories, net income and net income per share had the Company used the
first-in, first-out (FIFO) and average cost methods of inventory valuation
adjusted for income taxes at the statutory rate and assuming no other
adjustments. This information is presented to enable the reader to make
comparisons with companies using the FIFO method of inventory valuation.

1997 1996 1995
- ------------------------------------------------------------------------------------------

Percentage of total inventories on LIFO 93% 96% 97%
Excess of FIFO and average cost over LIFO $104,637 $94,138 $102,725
Increase (decrease) in net income due to LIFO (3,604) 4,698 (14,642)
Increase (decrease) in net income per basic share due to
LIFO (.02) .03 (.09)
- ------------------------------------------------------------------------------------------

34
37

NOTE 4 -- OTHER COSTS AND EXPENSES

A summary of significant items included in Other Costs and Expenses is as
follows:

1997 1996 1995
- -----------------------------------------------------------------------------

Dividend and royalty income $(3,361) $(5,127) $(10,433)
Net expense of financing and investing
activities 16,559 11,764 9,376
Provisions for environmental
matters -- net (see Note 10) 107 15,494 10,136
Provisions for disposition and termination
of operations (see Note 5) 4,152 5,506 1,007
Miscellaneous 5,908 (2,117) 1,696
- -----------------------------------------------------------------------------
$23,365 $25,520 $ 11,782
=============================================================================

The net expense of financing and investing activities represents the net
realized gains and losses from disposing of fixed assets, the net gain or loss
associated with the investment of certain long-term asset funds, the net gains
and losses relating to translation of certain foreign investments and the net
pre-tax expense associated with the Company's investment in broad-based
corporate owned life insurance.

The provisions for environmental matters reflect the increased estimated
costs of environmental remediation at current, former and third-party sites.
Beginning in 1996, such provisions include estimates of certain indirect costs
related to environmental matters which are required to be accrued in accordance
with SOP 96-1 (see Note 1). In 1997, the provisions for environmental matters
were partially offset by a settlement of $7,500 with certain insurance carriers
pertaining to environmental-related matters. In 1996, a similar settlement of
$56,000 with certain other insurance carriers partially offset the provisions
for environmental matters required. For the year ended December 31, 1995, the
provisions for environmental remediation reflect only the increased estimated
environmental remediation costs at such sites and do not include the additional
estimated indirect costs required by adopting SOP 96-1.

NOTE 5 -- DISPOSITION AND TERMINATION OF OPERATIONS

The Company is continually re-evaluating its operating facilities with
regard to the long-term strategic goals established by management and the board
of directors. Operating facilities which are not expected to sufficiently
contribute to the Company's future plans are closed or sold.

At the time of the decision to close or sell a facility, a provision is
made and the expense included in Other Costs and Expenses to reduce property,
plant and equipment to its estimated net realizable value. Similarly, provisions
are made which reduce all other assets to their estimated net realizable values
and provide for all qualified exit costs such as lease cancellation penalties,
post-closure rent expenses, incremental post-closure expenses, and the estimated
costs of employee termination benefits if management has approved a termination
plan and communicated such plan to the affected employees. The expenses
associated with the provisions for all other assets and for such exit costs and
termination benefits are included in Cost of Goods Sold. Adjustments to all
previous accruals, as closure or disposition occurs, are included in Other Costs
and Expenses.

There were no provisions made in 1997. The provisions made during 1996
provided for the reduction to net realizable value of certain assets and exit
costs related to one manufacturing facility and consolidations of certain
redundant distribution and administrative facilities. The 1995 provisions
represent the reduction to net realizable value for certain assets and exit
costs associated with closing certain warehouses due to distribution
consolidation.

35
38

A summary of the financial data related to the closing or sale of the
facilities is as follows:

1997 1996 1995
- ------------------------------------------------------------------------------

Beginning accruals -- January 1 $ 60,544 $ 27,545 $ 25,982
Provisions included in cost of goods sold 11,860 5,260
Provisions and adjustments to prior
accruals included in costs and
expenses -- other 4,152 5,506 1,007
- ------------------------------------------------------------------------------
Total charges to current operations 4,152 17,366 6,267
Accruals related to acquired sites 22,626
Actual expenditures (17,585) (6,993) (4,704)
- ------------------------------------------------------------------------------
Ending accruals -- December 31 $ 47,111 $ 60,544 $ 27,545
==============================================================================
Net after-tax charges to current
operations $ 2,699 $ 11,288 $ 4,073
Net after-tax charges per basic share $ .02 $ .07 $ .03
- ------------------------------------------------------------------------------

NOTE 6 -- PENSION BENEFITS

Substantially all employees of the Company participate in noncontributory
defined benefit or defined contribution pension plans. Defined benefit plans
covering salaried employees provide benefits that are based primarily on years
of service and employees' compensation. The defined benefit plans covering
hourly employees generally provide benefits of stated amounts for each year of
service. Multi-employer plans are primarily defined benefit plans which provide
benefits of stated amounts for union employees. The Company's funding policy for
defined benefit pension plans is to fund at least the minimum annual
contribution required by applicable regulations. Plan assets consist primarily
of cash, equity investments and fixed-income securities. There were 1,938,800
shares of the Company's stock included in these assets at December 31, 1997,
1996 and 1995.

The assumed discount rate used to determine the actuarial present value of
benefit obligations was lowered at December 31, 1997 due to decreased rates of
high-quality, long-term investments, thereby increasing the projected benefit
obligation. The net effect of the change in the assumed discount rate and the
increased plan asset earnings resulted in a decrease to the unrecognized net
loss at December 31, 1997. A previous decrease to the assumed discount rate at
December 31, 1995 caused a net decrease to the unrecognized net loss at that
date, thereby increasing the net pension credit in 1996.

The net pension credit for defined benefit plans and its components was as
follows:

1997 1996 1995
- ------------------------------------------------------------------------------

Service cost $ 2,570 $ 3,516 $ 2,401
Interest cost 11,859 10,933 8,929
Actual return on plan assets (60,143) (49,923) (53,926)
Net amortization and deferral 25,541 20,176 34,984
- ------------------------------------------------------------------------------
Net pension credit $(20,173) $(15,298) $ (7,612)
==============================================================================

36
39

Based on the latest actuarial information available, the following table
sets forth the funded status and amounts recognized in the Company's
consolidated balance sheets for the defined benefit pension plans. Certain
defined benefit plans formerly sponsored by Pratt & Lambert United, Inc. and its
subsidiaries are included beginning in 1996, and certain defined benefit plans
formerly sponsored by Thompson Minwax Holding Corp. are included beginning in
1997.

1997 1996 1995
- ---------------------------------------------------------------------------------

Actuarial present value of benefit
obligations:
Vested benefit obligation $(163,152) $(148,534) $(116,335)
Accumulated benefit obligation $(166,577) $(151,376) $(118,585)
Projected benefit obligation (PBO) $(175,204) $(158,876) $(128,335)
- ---------------------------------------------------------------------------------
Plan assets at fair value in:
Plans with assets in excess of the PBO 434,730 391,865 323,216
Plans with assets less than the PBO 11,541
- ---------------------------------------------------------------------------------
446,271 391,865 323,216
Excess (deficient) plan assets in:
Plans with assets in excess of the PBO 276,427 232,989 194,881
Plans with assets less than the PBO (5,360)
- ---------------------------------------------------------------------------------
271,067 232,989 194,881
Unrecognized net asset at January 1, 1986,
net of amortization (4,304) (6,943) (9,865)
Unrecognized prior service cost 808 858 393
Unrecognized net loss 3,903 27,472 48,165
Adjustment required to recognize minimum
liability (708)
- ---------------------------------------------------------------------------------
Net pension assets $ 270,766 $ 254,376 $ 233,574
=================================================================================
Net pension assets recognized in the
consolidated balance sheets:
Deferred pension assets $ 276,086 $ 254,376 $ 233,574
Minimum liability included in
long-term liabilities (708)
Accrued pension liability included in
current liabilities (4,612)
- ---------------------------------------------------------------------------------
$ 270,766 $ 254,376 $ 233,574
=================================================================================
Assumptions used in determining actuarial
present value of benefit obligations:
Discount rate 7.00% 7.25% 7.25%
Weighted-average rate of increase in
future compensation levels 5.00% 5.00% 5.00%
Long-term rate of return on plan
assets 8.50% 8.50% 8.50%
=================================================================================

The Company's annual contribution for its defined contribution pension
plans, which is based on a level percentage of compensation for covered
employees, offset the pension credit by $28,255 for 1997, $24,730 for 1996 and
$20,326 for 1995. The cost of multi-employer and foreign plans charged to income
was immaterial for the three years ended December 31, 1997.

37
40

NOTE 7 -- BENEFITS OTHER THAN PENSIONS

In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits under company-sponsored plans for active
and retired employees. Beginning in 1996, these plans include certain health
care and postretirement benefit plans formerly sponsored by Pratt & Lambert
United, Inc. and its subsidiaries. Beginning in 1997, these plans include
certain health care and postretirement benefit plans formerly sponsored by
Thompson Minwax Holding Corp. The health care plans are contributory and contain
cost-sharing features such as deductibles and coinsurance. There were 16,049,
16,935 and 14,823 active employees entitled to receive benefits under these
plans as of December 31, 1997, 1996 and 1995, respectively. The cost of these
benefits for active employees is recognized as claims are incurred and amounted
to $47,484, $44,221 and $37,194 for 1997, 1996 and 1995, respectively. The
Company has a fund, to which it no longer intends to contribute, that provides
for payment of health care benefits of certain qualified employees.
Distributions from the fund amounted to $5,025 in 1997, $4,618 in 1996 and
$5,265 in 1995.

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 4,229, 4,152 and
4,008 retired employees entitled to receive benefits as of December 31, 1997,
1996 and 1995, respectively. The plans are unfunded.

The assumed discount rate used in determining the actuarial present value
of the accumulated postretirement benefit obligation was 7.0% in 1997 and 7.25%
in 1996 and 1995. The discount rate was lowered at December 31, 1997, due to
decreased interest rates of high-quality long-term investments, thereby
increasing the accumulated postretirement benefit obligation, the effect of
which increased the unrecognized net loss. The assumed weighted-average annual
rate of increase in the per capita cost of covered benefits (i.e., the health
care cost trend rate) is 7.2 percent for 1998 and decreases gradually to 5.5
percent for 2003 and thereafter. The health care cost trend rate has a
significant effect on the amounts reported. To illustrate, increasing the
assumed health care cost trend rate by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of December 31,
1997 by $14,689 and the aggregate service and interest cost components of net
periodic postretirement benefit cost for 1997 by $1,191.

Based on the latest actuarial information available, the following table
sets forth the amounts recognized in the Company's consolidated balance sheets
for postretirement benefits other than pensions:

1997 1996 1995
- ---------------------------------------------------------------------------------

Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $(119,600) $(109,116) $(105,200)
Fully eligible active participants (22,530) (20,486) (17,590)
Other active participants (63,877) (53,577) (49,120)
- ---------------------------------------------------------------------------------
(206,007) (183,179) (171,910)
Effect of changes in the accumulated
postretirement benefit obligation to be
amortized over future years:
Unrecognized prior service credit (20,116) (21,570) (24,268)
Unrecognized net loss 16,784 11,288 12,262
- ---------------------------------------------------------------------------------
Total accrued postretirement benefit
liability $(209,339) $(193,461) $(183,916)
=================================================================================

38
41

1997 1996 1995
- ---------------------------------------------------------------------------------

Accrued postretirement benefit liabilities
recognized in the consolidated balance
sheets:
Amount included in current
liabilities $ (9,500) $ (8,910) $ (8,150)
Amount of long-term postretirement
benefits other than pensions (199,839) (184,551) (175,766)
- ---------------------------------------------------------------------------------
Total accrued postretirement benefit
liability $(209,339) $(193,461) $(183,916)
=================================================================================
The expense for postretirement benefit
plans and its components was as follows:
Service cost $ 3,720 $ 3,327 $ 2,723
Interest cost 13,708 12,483 11,998
Net amortization of unrecognized
prior service credit (2,689) (2,696) (2,693)
- ---------------------------------------------------------------------------------
Net postretirement benefit expense $ 14,739 $ 13,114 $ 12,028
=================================================================================

NOTE 8 -- LONG-TERM DEBT

Amount Outstanding
-------------------------------
DUE DATE 1997 1996 1995
- ---------------------------------------------------------------------------------------------------

6.85% Notes 2007 $199,710
7.375% Debentures 2027 149,900
7.45% Debentures 2097 149,390
6.5% Notes 2002 99,955
6.25% Notes 2000 99,948
Floating Rate Notes Through 1999 50,000 $100,000
5.5% Notes 2027 49,922
9.875% Debentures 2007 to 2016 15,900 15,900 $15,900
6% to 9% Promissory Notes Through 2004 23,791 22,618 5,328
8% to 12% Promissory Notes partially secured by Through 2005 4,495 3,242 2,632
certain land and buildings and other
4.75% Promissory Note 2000 800 800
Other Obligations 108 119 158
- ---------------------------------------------------------------------------------------------------
$843,919 $142,679 $24,018
===================================================================================================

Maturities of long-term debt are as follows for the next five years:
$53,926 in 1998; $63,781 in 1999; $105,932 in 2000; $4,141 in 2001; and $102,949
in 2002.

Interest expense on long-term debt amounted to $52,351, $8,602 and $2,387
for 1997, 1996 and 1995, respectively. There were no interest charges
capitalized during the periods presented.

Effective August 31, 1995, the Company entered into revolving credit
agreements with a group of banks to borrow up to an aggregate of $600,000. There
were no outstanding borrowings under these agreements at the end of 1996 or
1995. Effective January 3, 1997, these agreements were terminated and the
Company entered into the following new revolving credit agreements: 1) a 364-
day revolving credit agreement, under which the Company may borrow up to
$290,000; and, 2) a five-year revolving credit agreement, under which the
Company may borrow up to $1,160,000. Effective March 31, 1997, the maximum
borrowing amounts under these agreements were reduced

39
42

to $216,000 and $864,000, respectively. There were no outstanding borrowings
under these agreements at the end of 1997. Effective January 2, 1998, the
aggregate amount of these agreements was further reduced to $1,064,000.

On February 10, 1997, the Company issued $400,000 of debt securities under
its $450,000 shelf registration with the Securities and Exchange Commission
consisting of $100,000 of 6.25% notes due February 1, 2000, $100,000 of 6.5%
notes due February 1, 2002 and $200,000 of 6.85% notes due February 1, 2007. In
addition, on February 10, 1997, the Company issued $150,000 of 7.375% debentures
due February 1, 2027 and $150,000 of 7.45% debentures due February 1, 2097 in a
private offering not registered under the Securities Act of 1933, as amended
(Securities Act). In July 1997, the Company completed offers to exchange all of
its outstanding $300,000 of debentures for an equal principal amount of
newly-issued debentures containing identical terms except that the newly-issued
debentures were registered under the Securities Act. The net proceeds from these
borrowings were used to refinance a portion of the Company's commercial paper
debt.

On October 6, 1997, the Company issued the remaining $50,000 of debt
securities under this shelf registration consisting of 5.5% notes, due October
15, 2027, with provisions that the holders, individually or in the aggregate,
may exercise a put option which would require the Company to repay the
securities at an earlier date. This option is first available to the holders on
October 15, 1999, and then annually on each October 15 thereafter. The net
proceeds from this borrowing were used to refinance short-term commercial paper
debt.

In December 1997, the Company filed a new 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.

The aggregate principal amount of unsecured short-term notes which may be
issued under the Company's commercial paper program was increased from $600,000
to $1,450,000 in January 1997 and subsequently decreased to $1,000,000 in May
1997. At December 31, 1997, outstanding borrowings under this program totaled
$106,748 and are included in short-term borrowings on the balance sheet. The
weighted-average interest rate related to these borrowings was 5.89% at December
31, 1997.

NOTE 9 -- 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 some properties.
Rental expense for operating leases was $113,339, $104,894 and $95,536 for 1997,
1996 and 1995, 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 $10,396 in 1997, $9,877 in 1996 and $9,102
in 1995. Rental income, as lessor, from real estate leasing activities and
sublease rental income for all years presented was not significant.

40
43

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, 1997:

1998 $ 84,004
1999 68,973
2000 55,168
2001 41,967
2002 26,512
Later years 81,089
--------
Total minimum lease payments $357,713
========

NOTE 10 -- OTHER LONG-TERM LIABILITIES

Other long-term liabilities consist of the following:

1997 1996 1995
- ------------------------------------------------------------------------------------------

Environmental-related $143,276 $139,057 $ 70,310
Other 140,924 76,064 39,896
- ------------------------------------------------------------------------------------------
$284,200 $215,121 $110,206
==========================================================================================

The accrual for environmental-related long-term liabilities represents the
Company's provisions for estimated costs associated with extended environmental
remediation-related activities at some of its current and former sites. Also,
the Company, together with other parties, has been designated a potentially
responsible party under federal and state environmental protection laws for the
remediation of hazardous waste at a number of third-party sites, primarily
Superfund sites. In general, these laws provide that potentially responsible
parties may be held jointly and severally liable for investigation and
remediation costs regardless of fault. The Company provides for, and includes in
long-term liabilities, its estimated potential long-term liability for
investigation and remediation costs with respect to such third-party sites.

The Company initially provides for the estimated cost of certain
environmental-related activities relating to its current, former and third-party
sites when minimum costs can be reasonably estimated. These estimates are
determined based on currently-available facts regarding each site. If the best
estimate of costs can only be identified within a range and no specific amount
within that range can be determined more likely than any other amount within the
range, the minimum of the range is accrued. Actual costs incurred may vary from
these estimates due to the inherent uncertainties involved. The Company
estimates the cost of similar environmental-related activities at sites obtained
through acquisition on the same basis as described above. The Company believes
that any additional liability in excess of amounts provided which may result
from the resolution of such matters will not have a material adverse effect on
the financial condition, liquidity or cash flow of the Company.

The increase in the accrual for environmental-related long-term liabilities
in 1996 reflects adjustments to the previous accrual resulting from the ongoing
evaluation of environmental matters at certain current, former and third-party
sites, liabilities accrued relating to certain sites obtained in 1996
acquisitions, and the accrual of certain additional indirect costs relating to
the adoption of SOP 96-1 (see Note 1).

In addition to the accrual for environmental-related long-term liabilities
shown above, accruals for certain current environmental-related liabilities are
included in other accruals in current liabilities on the consolidated balance
sheets.

41
44

NOTE 11 -- STOCK PURCHASE PLAN

As of December 31, 1997, 14,448 employees participated through regular
payroll deductions in the Company's Employee Stock Purchase and Savings Plan.
The Company's contribution charged to income amounted to $33,582, $29,935 and
$26,795 for 1997, 1996 and 1995, respectively. Additionally, the Company made
contributions on behalf of participating employees, which represent salary
reductions for income tax purposes, amounting to $18,905 in 1997, $15,282 in
1996 and $12,775 in 1995.

At December 31, 1997, there were 25,560,734 shares of the Company's stock
being held by this plan, representing 14.8 percent of the total number of shares
outstanding. Shares of company stock credited to each member's account under the
plan are voted by the trustee under instructions from each individual plan
member. Shares for which no instructions are received are voted by the trustee
in the same proportion as those for which instructions are received.

NOTE 12 -- CAPITAL STOCK

Shares Shares
in Treasury Outstanding
- -------------------------------------------------------------------------------------------------

Balance at January 1, 1995 31,088,146 169,651,660
Stock issued upon:
Exercise of stock options 171,226 1,042,086
Conversion of 6.25% Convertible Subordinated Debentures 123,336
Restricted stock grants 144,000
Treasury Stock:
Acquired 822,600 (822,600)
Issued for acquisition (771,144) 771,144
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1995 31,310,828 170,909,626
Stock issued upon:
Exercise of stock options 158,688 918,552
Restricted stock grants 3,000
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1996 31,469,516 171,831,178
Stock issued upon:
Exercise of stock options 160,739 967,040
Restricted stock grants 109,200
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1997 31,630,255 172,907,418
=================================================================================================

An aggregate of 21,594,603, 8,686,286 and 9,779,730 shares of stock at
December 31, 1997, 1996 and 1995, respectively, were reserved for future grants
of restricted stock and the exercise and future grants of stock options. At
December 31, 1997, shares outstanding include 115,000 shares of stock held in a
revocable trust. At December 31, 1997, there were 300,000,000 shares of common
stock and 30,000,000 shares of serial preferred stock authorized for issuance
(3,000,000 shares of the authorized serial preferred stock 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).

NOTE 13--STOCK PLAN

The Company's 1994 Stock Plan permits the granting of stock options, stock
appreciation rights and restricted stock to eligible employees. The 1994 Stock
Plan succeeded the 1984 Stock Plan which expired on February 15, 1994. Although
no further grants may be made under the 1984 Stock Plan, all rights granted
under such plan remain. In April 1997, the 1994 Stock Plan was amended to
authorize an additional 14,000,000 shares to the shares then available for
future grants. Non-qualified and incentive stock options have been granted to
certain officers and key

42
45

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. In April 1997, the 1997 Stock Plan for Nonemployee Directors was
adopted. This plan provides for the granting of stock options and restricted
stock 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. 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 grant.

Restricted stock grants, with an outstanding balance of 361,000 shares at
December 31, 1997, were awarded to certain officers and key employees which
generally require four years of continuous employment from the date of grant
before vesting and receiving the shares without restriction. The number of
shares to be received without restriction is based on the Company's performance
relative to a peer group of companies. There were 123,200 and 208,000 shares
vested and delivered pursuant to these grants during 1997 and 1995,
respectively. No shares were vested during 1996. Unamortized deferred
compensation expense with respect to the restricted stock amounted to $5,401,
$2,962 and $4,024 at December 31, 1997, 1996 and 1995, respectively, and is
being amortized over the four-year vesting period. Deferred compensation expense
aggregated $528, $3,983 and $1,563 in 1997, 1996 and 1995, respectively. No
stock appreciation rights have been granted.

A summary of restricted stock granted during 1997, 1996 and 1995 is as
follows:

1997 1996 1995
-------------------------------------------------------------

Shares granted 232,000 3,000 196,000
Weighted-average fair value
of restricted shares granted
during year $ 27.91 $20.72 $ 16.35

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APBO No. 25), and related
interpretations, in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), requires use of highly subjective assumptions in
option valuation models. Under APBO No. 25, because the exercise price of the
Company's employee stock options is not less than fair market price of the
shares at the date of grant, no compensation 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:

1997 1996 1995
-----------------------------------------------------------------------

Risk-free interest rate 6.10% 5.99% 6.25%
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 0.164 0.201 0.221

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

43
46

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.

1997 1996 1995
- -------------------------------------------------------------

Pro forma net income $257,757 $228,126 $200,229
Pro forma net income per
common share:
Basic $1.49 $1.33 $1.18
Diluted $1.48 $1.32 $1.17

Due to the required phase-in provisions, the effects of applying SFAS No.
123 to arrive at the above pro forma amounts are not representative of the
expected effects on pro forma net income or earnings per share in future years.

A summary of the Company's stock option activity, and related information
for the years ended December 31, 1997, 1996 and 1995, is shown in the following
table in accordance with SFAS No. 123:

1997 1996 1995
- --------------------------------------------------------------------------------------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
OPTIONED EXERCISE Optioned Exercise Optioned Exercise
SHARES PRICE Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------

Outstanding beginning of
year 5,434,596 $14.91 4,976,268 $12.35 5,212,918 $11.23
Granted 1,746,500 27.93 1,648,500 20.82 1,008,400 16.39
Exercised (1,127,779) 12.88 (1,077,240) 11.28 (1,213,312) 9.19
Canceled (242,846) 22.68 (112,932) 18.36 (31,738) 15.72
- --------------------------------------------------------------------------------------------------------
Outstanding end of year 5,810,471 $18.47 5,434,596 $14.91 4,976,268 $12.35
========================================================================================================
Exercisable at end of year 2,924,515 $13.96 3,011,242 $11.99 3,342,388 $11.03
Weighted-average fair value
of options granted during
year $4.53 $3.57 $3.50
Reserved for future grants 15,784,132 3,251,686 4,803,462

Exercise prices for optioned shares outstanding as of December 31, 1997
ranged from $6.47 to $32.28. A summary of these options by range of exercise
prices is shown as follows:

Outstanding Exercisable
-------------------- --------------------- Weighted-
Weighted- Weighted- Average
Average Average Remaining
Range of Optioned Exercise Optioned Exercise Contractual
Exercise Prices Shares Price Shares Price Life (years)
- --------------------------------------------------------------------------------------------

less than $10.00 1,087,866 $ 9.04 1,087,866 $ 9.04 1.88
$10.00-$14.99 322,202 13.61 322,202 13.61 3.94
$15.00-$22.00 2,635,235 18.41 1,470,988 17.41 7.35
greater than $22.00 1,765,168 27.67 43,459 22.96 9.09
- --------------------------------------------------------------------------------------------
5,810,471 $18.47 2,924,515 $13.96 6.66
============================================================================================

NOTE 14 -- INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes". Under SFAS No. 109, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax

44
47

bases of assets and liabilities and are measured using the enacted tax rates and
laws that are currently in effect.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1997, 1996
and 1995 are as follows:

1997 1996 1995
- --------------------------------------------------------------------------------------------

Deferred tax liabilities:
Depreciation $ 38,605 $ 24,393 $ 21,630
Deferred employee benefit items 26,128 27,873 26,360
- --------------------------------------------------------------------------------------------
Total deferred tax liabilities $ 64,733 $ 52,266 $ 47,990
============================================================================================
Deferred tax assets:
Dispositions, environmental and other similar
items $ 61,537 $ 55,143 $ 32,425
Other items (each less than 5% of total assets) 99,120 100,679 82,193
- --------------------------------------------------------------------------------------------
Total deferred tax assets $160,657 $155,822 $114,618
============================================================================================

Significant components of the provisions for income taxes are as follows:

1997 1996 1995
- --------------------------------------------------------------------------------------------

Current:
Federal $ 87,626 $124,847 $ 97,936
Foreign 3,472 8,125 2,470
State and Local 16,318 27,046 20,754
- --------------------------------------------------------------------------------------------
Total Current 107,416 160,018 121,160
Deferred:
Federal 46,890 (12,169) (3,062)
Foreign 2,375 417
State and Local 9,982 (2,046) (254)
- --------------------------------------------------------------------------------------------
Total Deferred 59,247 (13,798) (3,316)
- --------------------------------------------------------------------------------------------
Total income tax expense $166,663 $146,220 $117,844
============================================================================================

For financial reporting purposes, income before income taxes include the
following components:

1997 1996 1995
- --------------------------------------------------------------------------------------------

Domestic $382,325 $343,445 $309,467
Foreign 44,952 31,932 9,031
- --------------------------------------------------------------------------------------------
$427,277 $375,377 $318,498
============================================================================================

A reconciliation of the statutory federal income tax rate and the effective
tax rate follows:

1997 1996 1995
- --------------------------------------------------------------------------------------------

Statutory tax rate 35.0% 35.0% 35.0%
Effect of:
State and local taxes 4.0 4.3 4.2
Investment vehicles (3.3) (2.9) (2.6)
Other, net 3.3 2.6 0.4
- --------------------------------------------------------------------------------------------
Effective tax rate 39.0% 39.0% 37.0%
============================================================================================

45
48

The provision includes estimated taxes payable on that portion of retained
earnings of foreign subsidiaries expected to be received by the Company. No
provision was made with respect to $14,761 of retained earnings at December 31,
1997 that have been invested by foreign subsidiaries. It is not practicable to
estimate the amount of unrecognized deferred tax liability for the undistributed
foreign earnings.

Included in the Company's deferred tax assets are valuation reserves of
$19,836, $19,158 and $17,784 at December 31, 1997, 1996 and 1995, respectively,
resulting from the uncertainty as to future recognition of certain foreign net
operating losses and other foreign assets.

NOTE 15 -- SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

1997
- ----------------------------------------------------------------------
NET NET
GROSS NET INCOME PER INCOME PER
QUARTER NET SALES PROFIT INCOME SHARE-BASIC SHARE-DILUTED
- ----------------------------------------------------------------------

1ST $1,069,787 $443,614 $23,134 $.13 $.13
2ND 1,373,351 597,556 93,203 .54 .54
3RD 1,346,531 583,391 99,211 .58 .57
4TH 1,091,434 472,150 45,066 .26 .26

Year-end adjustments during the fourth quarter slightly decreased net
income with no effect on net income per share. Cost of goods sold decreased by a
net of $2,998 ($1,949 after-tax, $.01 per share) as a result of physical
inventory adjustments of $6,967 ($4,529 after-tax, $.03 per share) which were
partially offset by various year end charges of $3,969 ($2,580 after-tax, $.02
per share). Administrative expenses were reduced $2,451 ($1,593 after-tax, $.01
per share) due to other year-end adjustments. Other costs and expenses increased
$5,525 ($3,591 after-tax, $.02 per share) due to provisions for
environmental-related matters at certain current, former and third-party sites
of $493 ($320 after-tax, no per share effect) and increases to prior accruals
for the disposition and termination of operations of $5,032 ($3,271 after-tax,
$.02 per share).

1996
- ----------------------------------------------------------------------
Net Net
Gross Net Income per Income per
Quarter Net Sales Profit Income Share-Basic Share-Diluted
- ----------------------------------------------------------------------

1st $ 857,771 $337,493 $19,593 $.11 $.11
2nd 1,145,254 469,981 81,902 .48 .47
3rd 1,171,010 492,237 88,550 .52 .51
4th 958,844 427,990 39,112 .23 .23

Net income during the fourth quarter decreased by $1,176 ($.01 per share)
due to net before-tax adjustments of $1,809. Cost of goods sold decreased by a
net of $9,516 ($6,185 after-tax, $.04 per share) as a result of physical
inventory adjustments of $17,380 ($11,297 after-tax, $.07 per share) which were
partially offset by provisions for the closing costs associated with certain
operations of $7,560 ($4,914 after-tax, $.03 per share) and other year-end
adjustments of $304 ($198 after-tax, no per share effect). Administrative
expenses were reduced by $5,623 ($3,655 after-tax, $.02 per share) due to other
year-end adjustments. Other costs and expenses increased $16,948 ($11,017
after-tax, $.06 per share) due to the provision of $11,621 ($7,554 after-tax,
$.04 per share) for environmental-related matters at current, former and
third-party sites and to the provision of $5,327 ($3,463 after-tax, $.02 per
share) for the adjustment to net realizable value of certain net fixed assets.

46
49

NOTE 16 -- NET INCOME PER COMMON SHARE

1997 1996 1995
- -------------------------------------------------------------------------------------------

BASIC
Average common shares outstanding 172,107,459 171,117,390 169,941,813
===========================================================================================
Net income $ 260,614 $ 229,157 $ 200,654
===========================================================================================
Net income per common share $ 1.51 $ 1.34 $ 1.18
===========================================================================================
DILUTED
Average common shares outstanding 172,107,459 171,117,390 169,941,813
Non-vested restricted stock grants (see
Note 13) 312,988 300,000 349,600
Stock options -- treasury stock method 1,611,895 1,408,386 1,107,734
Assumed conversion of 6.25% Convertible
Subordinated Debentures 7,942
- -------------------------------------------------------------------------------------------
Average common shares assuming dilution 174,032,342 172,825,776 171,407,089
===========================================================================================
Net income $ 260,614 $ 229,157 $ 200,654
===========================================================================================
Net income per common share $ 1.50 $ 1.33 $ 1.17
===========================================================================================

Net income per common share has been computed in accordance with Statement
of Financial Accounting Standards (SFAS) No. 128 adopted for the quarter ending
December 31, 1997. All net income per share amounts shown for periods prior to
adoption have been restated to conform to the provisions of SFAS No. 128. The
effect of adopting SFAS No. 128 increased net income per share -- basic by $.01
in each year shown above over the previous method of computing net income per
share.

All 6.25% Convertible Subordinated Debentures outstanding at December 31,
1994 were converted to common stock during the first quarter of 1995 without
incurring further interest.

47
50

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(SCHEDULE II)

Changes in the allowance for doubtful accounts are as follows:

1997 1996 1995
- ---------------------------------------------------------------------------------------------

Beginning balance $ 22,631 $ 15,154 $ 10,820
Bad debt expense 15,741 19,095 13,793
Net uncollectible accounts written off (11,481) (11,618) (9,459)
- ---------------------------------------------------------------------------------------------
Ending balance $ 26,891 $ 22,631 $ 15,154
=============================================================================================

Activity related to other asset reserves:
1997 1996 1995
- ---------------------------------------------------------------------------------------------
Beginning balance $ 111,921 $ 83,897 $ 80,853
Charges to expense 49,499 28,838 15,672
Other additions (deductions) (7,840) (814) (12,628)
- ---------------------------------------------------------------------------------------------
Ending balance $ 153,580 $ 111,921 $ 83,897
=============================================================================================

Charges to expense consist primarily of amortization of goodwill and
intangibles. Other additions (deductions) consist primarily of actual costs
incurred and balance sheet reclassifications and, in 1997 and 1995, removal of
fully-amortized items.

48
51

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Cleveland, and State of Ohio, on the 11th day of March, 1998.

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 11, 1998.

SIGNATURE
---------

* J. G. BREEN Chairman and Chief Executive Officer,
- ----------------------------------------------------------- Director (Principal Executive Officer)
J. G. Breen

* T. A. COMMES President and Chief Operating Officer,
- ----------------------------------------------------------- Director
T. A. Commes

* L. J. PITORAK Senior Vice President -- Finance,
- ----------------------------------------------------------- Treasurer and Chief Financial Officer
L. J. Pitorak (Principal Financial Officer)

* J. L. AULT Vice President -- Corporate Controller
- ----------------------------------------------------------- (Principal Accounting Officer)
J. L. Ault

* J. M. BIGGAR Director
- -----------------------------------------------------------
J. M. Biggar

* D. E. COLLINS Director
- -----------------------------------------------------------
D. E. Collins

* D. E. EVANS Director
- -----------------------------------------------------------
D. E. Evans

* R. W. MAHONEY Director
- -----------------------------------------------------------
R. W. Mahoney

* W. G. MITCHELL Director
- -----------------------------------------------------------
W. G. Mitchell

* A. M. MIXON, III Director
- -----------------------------------------------------------
A. M. Mixon, III

49
52

SIGNATURE
---------

* C. E. MOLL Director
- -----------------------------------------------------------
C. E. Moll

* H. O. PETRAUSKAS Director
- -----------------------------------------------------------
H. O. Petrauskas

* R. K. SMUCKER Director
- -----------------------------------------------------------
R. K. Smucker

* The undersigned, by signing his name hereto, does sign this report on behalf
of the designated Officers and Directors of The Sherwin-Williams Company
pursuant to Powers of Attorney executed on behalf of each such Officer and
Director.

By: /s/ L. E. STELLATO March 11, 1998
- -----------------------------------------------------------
L. E. Stellato, Attorney-in-fact

50
53

EXHIBIT INDEX

3. (a) Amended Articles of Incorporation, as amended April 25,
1997, filed as Exhibit 3(i) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
1997, and incorporated herein by reference.
(b) Regulations of the Company, as amended, dated April 27,
1988, filed as Exhibit 4(b) to Post-Effective Amendment No.
1, dated April 29, 1988, to Form S-8 Registration Statement
Number 2-91401, and incorporated herein by reference.
4. (a) Indenture between the Company and Chemical Bank, as Trustee,
dated as of February 1, 1996, filed as Exhibit 4(a) to Form
S-3 Registration Statement Number 333-41659, dated December
8, 1997 (also deemed to be filed as Exhibit 4(a) to Form S-3
Registration Statement 333-01093, dated February 20, 1996
and as Exhibit 4(b) to Form S-3 Registration Statement
Number 33-22705, dated June 24, 1988), and incorporated
herein by reference.
(b) 364-Day Revolving Credit Agreement, dated January 3, 1997,
between the Company, Texas Commerce Bank National
Association, as Administrative Agent, The Chase Manhattan
Bank, as Competitive Advance Facility Agent, and the
financial institutions which are signatories thereto, filed
as Exhibit 99.2 to Form 8-K, dated January 7, 1997, and
incorporated herein by reference.
(c) Amendment No. 1 to 364-Day Revolving Credit Agreement, dated
March 31, 1997, between the Company, Texas Commerce Bank
National Association, as Administrative Agent, The Chase
Manhattan Bank, as Competitive Advance Facility Agent, and
the financial institutions which are signatories thereto,
filed as Exhibit 10(c) to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1997, and
incorporated herein by reference.
(d) Five Year Revolving Credit Agreement, dated January 3, 1997,
between the Company, Texas Commerce Bank National
Association, as Administrative Agent, The Chase Manhattan
Bank, as Competitive Advance Facility Agent, and the
financial institutions which are signatories thereto, filed
as Exhibit 99.1 to Form 8-K, dated January 7, 1997, and
incorporated herein by reference.
(e) Amendment No. 1 to Five Year Revolving Credit Agreement,
dated March 31, 1997, between the Company, Texas Commerce
Bank National Association, as Administrative Agent, The
Chase Manhattan Bank, as Competitive Advance Facility Agent,
and the financial institutions which are signatories
thereto, filed as Exhibit 10(d) to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
1997, and incorporated herein by reference.
(f) Term Loan/Bankers' Acceptance Agreement, by and between the
Company and SunTrust Bank, Atlanta, dated February 1, 1996,
filed as Exhibit 4(f) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995, 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 herewith).

51
54

*(b) Employment Agreements with J.G. Breen, T.A. Commes and C.G.
Ivy filed as Exhibit 28(b) to Form S-3 Registration
Statement Number 33-22705, dated June 24, 1988, and
incorporated herein by reference.
*(c) Amendments to Employment Agreements with J.G. Breen, T.A.
Commes and C.G. Ivy filed as Exhibit 10(c) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, and incorporated herein by reference.
*(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 herewith).
*(f) The Sherwin-Williams Company Deferred Compensation Savings
Plan filed as Exhibit 10(d) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991,
and incorporated herein by reference.
*(g) Amendment No. 1 to The Sherwin-Williams Company Deferred
Compensation Savings Plan filed as Exhibit 10(f) to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, and incorporated herein by
reference.
*(h) The Sherwin-Williams Company Key Management Deferred
Compensation Plan (1994 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, 1995, and
incorporated herein by reference.
*(i) 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.
*(j) 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.
*(k) Form of The Sherwin-Williams Company Management Compensation
Program filed as Exhibit 10(l) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994, and incorporated herein by reference.
*(l) The Sherwin-Williams Company 1994 Stock Plan, as amended and
restated in its entirety, effective April 23, 1997, filed as
Exhibit 10(a) 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 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.
*(n) 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.
(o) Agreement and Plan of Merger, dated as of November 4, 1995,
among the Company, SWACQ, Inc. and Pratt & Lambert United,
Inc., filed as Exhibit(c)(1) to the Tender Offer Statement
on Schedule 14D-1/Schedule 13D, filed November 9, 1995, as
amended, and incorporated herein by reference.

52
55

(p) Stock Purchase Agreement, dated November 22, 1996, among the
Company, Silver Acquisition Corp., Forstmann Little & Co.
Subordinated Debt and Equity Management Buyout Partnership
-- V, L.P., MTF Partners, L.P. and certain individual
shareholders who are signatories thereto, filed as Exhibit 2
to Form 8-K, dated January 7, 1997, and incorporated herein
by reference.
*(q) Split-Dollar Agreement, dated March 25, 1996, among the
Company, National City Bank and John G. and Mary Breen filed
as Exhibit 10(q) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996, and
incorporated herein by reference.
*(r) The Sherwin-Williams Company Estate Protection Plan Trust,
dated November 15, 1996, between the Company and National
City Bank filed as Exhbit 10(r) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996, and incorporated herein by reference.
21. Subsidiaries -- Page 54.
23. Consent of Ernst & Young LLP, Independent Auditors -- Page
55.
24. Powers of Attorney (filed herewith).
27. Financial Data Schedule.

*Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.

53
56

EXHIBIT 21

SUBSIDIARIES

UNITED STATES SUBSIDIARIES

Contract Transportation Systems Co.
DIMC, Inc.
Dupli-Color Products Company
Rubberset Company
Sherwin-Williams Automotive Finishes Corp.
Sherwin-Williams Diversified Brands, Inc.
SW Racing Corp.
SWIMC, Inc.
The Sherwin-Williams Acceptance Corporation
Thompson Minwax International Corp.

FOREIGN SUBSIDIARIES

Compania Sherwin-Williams, S.A. de C.V.
Distribuidora Excelo, S.A. de C.V.
Globo Tintas Ltda.
Kriesol, S.A.
Marson Chilena, S.A.
Pinturas Excelo, S.A. de C.V.
Productos Quimicos y Pinturas, S.A. de C.V.
Proquipsa, S.A. de C.V.
Quetzal Pinturas, S.A. de C.V.
Ronseal (Ireland) Limited
Ronseal Limited (U.K.)
Sherwin-Williams Argentina I.y C.S.A.
Sherwin-Williams do Brasil Industria e Comercio Ltda.
Sherwin-Williams Canada Inc.
Sherwin-Williams Cayman Islands Limited
Sherwin-Williams Chile S.A.
Sherwin-Williams Foreign Sales Corporation Limited
Sherwin-Williams Japan Co., Ltd.
Sherwin-Williams (Caribbean) N.V.
Sherwin-Williams (West Indies) Limited
The Sherwin-Williams Company Resources Limited
147926 Canada Inc.

54
57

EXHIBIT 23

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference of our report dated January
23, 1998, with respect to the consolidated financial statements and schedule of
The Sherwin-Williams Company included in the Annual Report (Form 10-K) for the
year ended December 31, 1997, in the following registration statements and
related prospectuses:

REGISTRATION
NUMBER DESCRIPTION
- ------------ -----------

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 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 9, 1998

ERNST & YOUNG LLP

55