During 1995 and 1996, the Company has made several significant strategic acquisitions which will benefit our future growth. The acquisition of Pratt & Lambert United, Inc. (Pratt & Lambert) has enhanced our access to the independent dealer and mass merchandising distribution channels in the United States. The acquisition of Thompson Minwax Holding Corp. (Thompson Minwax) in January 1997 has provided us with leading brands in the stain and varnish category in which we were under-represented. The Paint Stores Segment, through the acquisitions of Con-Lux Coatings, Inc. in New Jersey, Brod-Dugan Company in St. Louis and Mercury Paint Company in Detroit, further expanded its efforts to provide excellent products and services to these markets. The acquisition of Pro-Line Paint Company and Seagrave Coatings Corporation has enhanced and supported our entry into the marine coatings market. Our product assortment was also further increased by the acquisition of F.L.R. Paints, Incorporated, a well known manufacturer and marketer of concrete stains, White Lightning Products Corp., an important manufacturer and marketer of caulks and sealants, and the Household and Professional Products Division of Grow Group, Inc. and Sunshine Quality Products, which form the nucleus of our Cleaning Solutions Group in the Diversified Brands Division. During the past two years, we have made a significant investment in Latin America through acquisitions. In the architectural coatings area, we have acquired Sherwin-Williams Argentina I. y C.S.A., a former licensee, and the architectural coatings business of the Brazilian company Globo S.A. Tintas e Pigmentos. In the automotive refinish coatings area, we have acquired Lazzuril Tintas S/A Corporation, the leading automotive refinish company in Brazil and Productos Quimicos y Pinturas, S.A. de C.V. which is a leading automotive refinish company in Mexico. In addition, the Stierling Group of coatings companies was acquired which gives us an important position in the automotive refinish, industrial maintenance and industrial coatings market in the Republic of Chile. In February 1997, we acquired Sumare Industria Quimica S.A., a significant Brazilian industrial maintenance and industrial coatings company. We were also able to establish our position in the Brazilian spray paint market through the acquisition of Industria Quimica Elgin Ltda., the leading spray paint manufacturer in Brazil. These acquisitions, in conjunction with our already established businesses of Compania Sherwin-Williams, S.A. de C.V. in Mexico and Sherwin-Williams do Brasil Industria e Comercio Ltda., provide a good Latin American base upon which we will participate in the growth of the key coatings market segments in the region. The acquisition of Thompson Minwax also brought with it the Ronseal ™ brand, which provides us with a well known brand and business platform on which to grow in the United Kingdom. These newly-acquired companies have added some of the most widely recognized brands of paint, coatings and other products to the Company’s national and international product offering, thereby significantly enhancing our future growth potential. The Company has been committed to build and maintain a strong balance sheet for some time in order to allow for acquisition opportunities, such as these, that arise as our industry consolidates. After making the acquisitions in 1995 principally for cash, the Company still had available $269.5 million in cash and short-term investments at the end of that year. Total investment for all acquisitions completed in 1996 was $670.8 million. The Company’s total debt at December 31, 1996 was $312.8 million while total shareholders’ equity was $1.4 billion. However, since December 31 we have added additional leverage to pay for Thompson Minwax and Sumare Industria Quimica, S.A. Currently, our debt level is approximately $1.2 billion of which $700 million is newly-issued debentures ranging in maturities from three to one hundred years. This capital structure provides the Company the flexibility to continue to grow both internally and through acquisitions. Our people have made good progress in the integration of the acquired businesses into the Company’s markets and channels of distribution. Although operating profit contributions during 1996 from Pratt & Lambert and the other acquisitions exceeded the related cost of financing, there is much opportunity remaining to make the acquired businesses more profitable. We are confident that our management teams and employees will be able to achieve these higher levels of profitability. Though much attention has been devoted to acquisitions, just as importantly, our business excluding the recent acquisitions continues to improve. In the Paint Stores Segment, record increases in net sales and operating profits were achieved for the fifth consecutive year. Paint volume gains to painting contractors and industrial customers and increased retail sales in each of the Segment’s four divisions accounted for the 13.1 percent net sales increase over 1995 to a total of $2.4 billion in net sales. Comparable-store net sales, including the sales of acquired products through existing stores, increased 10.0 percent. Excluding the effects of acquisitions on the Segment, net sales increased 9.1 percent over 1995. Operating profit of the Paint Stores Segment for the year increased 30.2 percent over last year; 28.1 percent when excluding the effects of acquisitions. This substantial increase in operating profit of the Segment was directly related to the sales volume gains and to the continued containment of selling, general and administrative expenses. In addition to adding a net of 44 stores through acquisitions, the Segment opened 23 net new stores to bring the total number of stores at year-end to 2,156. The Company is represented in all geographic markets in the United States with future expansion planned in domestic markets where the Company is currently under-represented. In 1997, excluding any acquisitions, we plan to add 40-50 net new stores which will include several stores in Canada and Mexico. The Coatings Segment of the Company realized annual net sales of $1.7 billion. This was an increase of 51.4 percent over 1995 due primarily to the effects of the acquisitions. Acquisitions will provide continuing growth potential for the Segment due to the addition of several important brands and operations which provide further growth opportunities in the dealer, mass merchandiser, automotive and specialty markets. Excluding the impact on net sales of the acquisitions, the increase was 4.7 percent. The operating profit of the Segment, excluding the effects of acquisitions, increased 11.9 percent due to containment of administrative expenses and manufacturing efficiencies resulting from increased gallon sales. During 1996, the Coatings Division focused on integrating the operations of Pratt & Lambert and several smaller acquisitions to realize consolidation benefits and overhead cost reductions. Simultaneously, the Division also concentrated on improving foreign operations by lowering the costs of production through manufacturing efficiencies and attaining consistent product quality, distribution and service. In addition, the Division continued to expand its domestic powder coatings operations through acquisition and manufacturing expansion. The Consumer Brands Division completed a record year in 1996, with gallon and dollar net sales increasing significantly. Gross margins remained essentially flat with last year including the effects of lower margin sales from the acquired businesses. Operating profit of the Division improved substantially due to the volume increases associated with the acquired businesses and reduction in selling, general and administrative expenses as a percent of sales. Excluding acquisitions, the Division’s Dutch Boy ® group continues to be the primary contributor to sales increases. In 1997, the Dutch Boy ® brand will celebrate its 90th birthday. Dutch Boy ® was first introduced in 1907 and established itself as one of the premier brands in the country throughout the 20th century. By the mid 1960’s, the Dutch Boy ® name and logo were among the most recognized in the world. The Company purchased the brand in 1980 and updated the packaging, changed the advertising and moved the distribution to national retailers. As Dutch Boy ® prepares to celebrate ninety years of providing quality paint to the American consumer, it looks back on a heritage of offering one of the most trusted brands in quality and value. The Division’s launch of the Ralph Lauren ™ paint line was highly successful in 1996 with increased promotion and distribution to continue throughout 1997. Also, in 1997 the Division is launching a new line of paints under the Martha Stewart ™ label. The Diversified Brands Division’s net sales increased substantially in 1996 due to the contributions of new product introductions and additional product lines acquired in the United States and Brazil. New products will continue to be an important part of the growth of this Division as it builds on the highly successful launch of Krylon ® Living Color ® Latex Enamel in 1996. A Cello ® brand line of cleaning products will be introduced in 1997. As a result of the Thompson Minwax acquisition, 5 various interior stains and varnishes sold under the Minwax ® brand name, finishing and enamel coating products sold under the Formby’s ® and Red Devil ® brand names and specialty lubricants sold under the Tri-Flow ™ brand name will be added to the Division’s product offering. The Automotive Division significantly expanded its business in Latin America during 1996 through acquisitions. The acquired businesses in Mexico, Brazil and Chile position the Division for future growth in these emerging markets. Domestically, the Division continued to improve its product quality and color matching capabilities while enhancing its technological resources. The Transportation Services Division completed successfully in 1996 the consolidation of the acquired distribution facilities which has allowed the Company to start to obtain distribution efficiencies from these acquired businesses. The efficiency of the distribution centers opened in late 1995 was improved in 1996 to further reduce distribution costs. The Division will integrate the Thompson Minwax traffic functions into the current network in 1997 and it will continue its consolidation and rationalization of distribution centers into more strategically located regional centers. During 1996, Mr. Leigh Carter, former President and Chief Operating Officer of the B.F. Goodrich Company, retired from our Board. We would like to thank Leigh for his dedicated service to our Board since 1985. Mr. Curtis E. Moll, Chairman and Chief Executive Officer of MTD Products, Inc. was appointed a Director in January 1997. We welcome Curtis to our Board and look to his knowledge and experience to assist us in the future. Certain internal management changes were made during 1996 to fill open positions and strengthen our management team to better position the Company for the future. Mr. Richard M. Weaver, formerly President & General Manager, Landmark Office Towers Division, was named Vice President - Administration replacing Mr. Robert E. Kinney who retired. We wish Bob and his wife Betty a happy, healthy retirement and thank him for his years of dedicated service to the Company. Mr. Sean P. Hennessy, previously Vice President - Information Services, was appointed Vice President - Controller for the Coatings Division. Ms. Jane L. Haag, previously Vice President - Corporate Audit & Loss Prevention was named Vice President - Information Services. Mr. Kenneth B. Urbanski, previously Controller - Transportation Services Division, was named Vice President - Corporate Audit & Loss Prevention and Ms. Cynthia D. Brogan, formerly Director, Treasury Services, was promoted to Vice President and Assistant Treasurer. We expect 1997 to be another challenging year for the Company as the integration of the recent acquisitions continues and as the Divisions strive for improvement in product quality and customer service. We will continue to pursue those acquisitions that fit our strategic needs. The Company’s Latin American expansion is just the beginning of a presence which we expect will grow for many years and establish the Company as an important factor in this market. We remain committed to the profitable growth of the Company both internally and through acquisitions. We are grateful for the continued dedication of our employees; they have created our past record and represent our future. We remain as determined as ever in our commitment to being “America’s Paint Company”.

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