UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: Commission file number:
December 31, 1997 0-8894
BENJAMIN MOORE & CO.
(Exact name of registrant as specified in its charter)
New Jersey 13-5256230
(State of incorporation) (I.R.S. Employer Identification No.)
51 Chestnut Ridge Road
Montvale, New Jersey 07645
(Address of principal executive offices)
Registrant's telephone number including area code: (201) 573-9600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $10 per share
----------------------------------------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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___
As of March 2, 1998, the aggregate market value of the registrant's common stock
held by non-affiliates equalled $499,123,295.
As of March 2, 1998, 8,852,536 shares of common stock of the registrant were
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement dated March 23, 1998, for use in
connection with its 1998 Annual Meeting of Shareholders are incorporated by
reference in Part III of this Annual Report on Form 10-K to the extent set forth
in Items 10, 11, 12 and 13 hereof.
<PAGE>
PART I
INTRODUCTION
Benjamin Moore & Co. (the "Company") was incorporated under the laws of
the State of New Jersey in 1891, as the successor to a business established in
1883. As used herein, the term "Company" means Benjamin Moore & Co. and its
subsidiaries, unless the context indicates otherwise. The Company's principal
executive offices are located at 51 Chestnut Ridge Road, Montvale, New Jersey
07645; and its telephone number at that location is (201) 573-9600.
ITEM 1. BUSINESS
The Company is engaged in the formulation, manufacture and sale of a
broad line of coatings, consisting of water-thinnable and solvent-thinnable
general purpose coatings (paints, stains and clear finishes) for use by the
general public, painting contractors and industrial and commercial users,
primarily for the decoration and preservation of the interiors and exteriors of
residential, commercial, institutional and industrial buildings and allied
structures (collectively referred to as "trade sales coatings"), and production
finishes coatings which are usually produced to conform to the specific
requirements of manufacturers who utilize such coatings in the manufacturing
process (collectively referred to as "production finishes coatings"). The
production finishes coatings are primarily used in the manufacture of various
types of flexible packages, beverage and food containers, tanks, roof decking,
coils, furniture and shelving, window blinds and flatwood products. The
production finishes coatings, like the trade sales coatings, serve both
decorative and preservative functions.
The Company believes that it is one of the leading manufacturers of
coatings in the United States and Canada.
Marketing and Distribution
It has always been the Company's policy to actively support the
continued growth and prosperity of independently owned distributors and retail
outlets, through which the trade sales coatings are sold. In furtherance of that
policy, the Company provides financing to such enterprises under circumstances
where it is deemed to be in the best interests of the Company to do so (see,
e.g., Note 7 to the Notes to Consolidated Financial Statements, Part II, Item 8
hereof). The trade sales coatings are sold under such trademarks as Benjamin
Moore(R), Benjamin Moore Paints(R), Moore's(R) House Paint, Moorglo(R),
Moorgard(R) Latex House Paint, Moorwood(R), Moorwhite(R) Primer, Moorlife(R),
Impervo(R) Enamel, Moorcraft(R), Impervex(R), Regal(R) Wall Satin(R), Satin
Impervo(R), AquaGlo(R), AquaPearl(R), AquaVelvet(R), Regal Aquagrip(R), Regal
First Coat(R), Pristine(R), A Stroke of Brilliance(R), Colorscapes(R), and
Benwood(R). Although a variety of ready-mixed colors is available in most of
these products, a substantially wider selection can be obtained through the
Company's Moor-O-Matic(R)III Color System, which provides in-store machine
capability to tint formulated bases with colorants which are manufactured by the
Company. The Company believes its Moor-O-Matic(R)III Color System has been of
significant value in promoting the sales of its trade sales coatings. Moore's(R)
Video Color Planner and Moore's(R) Computer Color Matching System provide the
ability to plan color schemes and to quickly match almost any color by computer.
Production finishes coatings are customarily sold by the Company directly to the
ultimate user.
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Sales
The Company considers itself to be engaged in the formulation,
manufacture and sale of coatings and related goods and services. Reference is
made to the information set forth under the caption, "SELECTED FINANCIAL DATA",
Part II, Item 6 hereof, with respect to net sales of each of the two classes of
products which comprise the aforementioned line of business. During 1997, no one
customer accounted for as much as 2% of the Company's net sales.
Geographic Segment Information
The Company manufactures and sells coatings in the United States,
Canada, New Zealand and Australia. Transfers between geographic areas are not
significant and are eliminated in consolidation. Reference is made to the
information set forth in Note 12 to the Notes to Consolidated Financial
Statements, Part II, Item 8 hereof, with respect to assets and operating results
by geographic area.
Foreign Operations
The Company operates in Canada, New Zealand and Australia. The
Company's Canadian operations are carried on through Benjamin Moore & Co.,
Limited, which is an approximately 84% owned subsidiary of the Company, and
Technical Coatings Co. Limited, which is a wholly-owned subsidiary of the
Canadian Company. The Company's New Zealand operations are carried on through
Benjamin Moore & Co (NZ) Limited, which is a wholly-owned subsidiary of the
Company, and Benjamin Moore Pacific Limited, which is a 51% owned subsidiary of
the New Zealand Company. The Company's Australian operations are carried on
through White Knight Paints Pty. Ltd., which is a 51% owned subsidiary of
Benjamin Moore Pacific Limited. During 1997, revenues and profits from
operations attributable to those companies (which are included in the Company's
consolidated financial statements) were approximately $93,203,000 and
$4,746,000, respectively. Approximately 6.1% of the outstanding shares of the
Canadian subsidiary are owned by persons who are associated with the Company,
including employees of such subsidiary.
Research and Development; Quality Control
The Company considers its research and development and quality control
activities to be among the most advanced in the industry, and of significant
importance in enabling it to achieve and maintain its position as one of the
leading companies in the coatings industry.
The Company maintains several laboratory facilities for the development
of new products and processes, the improvement of existing products and the
special formulation of products to meet the specific requirements of its
customers. The Central Laboratories, which is the principal such facility, is
located in Flanders, New Jersey. Quality control activities are carried out in
laboratories located at each manufacturing facility.
The Company also maintains outdoor testing facilities at Lebanon, New
Jersey, where its products, as well as those of its competitors, are evaluated
for performance under varying weather conditions. Independent commercial
facilities are also utilized for this purpose.
As of December 31, 1997, 122 chemists and technicians were employed by
the Company in research and development and quality control activities. Research
and development and quality control expenditures amounted to $12,496,000,
$13,787,000 and $15,506,000 in 1997, 1996 and 1995, respectively. Quality
control expenditures aggregated $3,943,000, $3,928,000 and $5,636,000,
respectively, and are included herein because a substantial portion of such
expenditures is related to development projects.
3
<PAGE>
Competition
The coatings industry is highly competitive and has historically been
subject to intense price competition. It is estimated that there are
approximately 800 coatings manufacturers in the United States, many of which are
small companies which provide intense competition within regional and local
markets, especially with respect to lower priced coatings and custom made
specialty items which are required on a short-time delivery basis. Other
manufacturers are large diversified corporations, the assets of which are
substantially greater than those of the Company, which compete on a nationwide
basis. The competition which the Company encounters in Canada, New Zealand and
Australia is similar in nature to that which it encounters in the United States.
The Company estimates that it is one of the largest manufacturers of trade sales
coatings in the United States and Canada. With respect to sales of production
finishes coatings, the Company's overall position in the industry is relatively
small.
Seasonal Aspects
Historically, sales of trade sales coatings have been seasonal in
nature, with the heaviest concentration of such sales occurring in the second
and third quarters of the year. Sales of production finishes coatings have been
relatively stable throughout the year. During 1997, the percentages of the
Company's sales of trade sales coatings which were made in the first, second,
third and fourth quarters of the year were 20.5%, 28.1%, 29.7% and 21.7%,
respectively. Production and inventory schedules are timed to coincide with the
aforementioned variations.
Employees
As of December 31, 1997, the Company had approximately 2,050 employees
which includes approximately 300 employees relating to the purchase of a
majority interest in J. C. Licht and Co. Approximately 28% of these employees
were salaried personnel, approximately 12% were sales representatives, and
approximately 60% were hourly employees. The Company considers its relations
with its employees to be excellent.
Raw Materials and Supplies
The Company purchases its raw material and supplies from a wide variety
of sources, and does not consider its business to be dependent upon any one
source of supply. However, the price and supply of some petrochemical
intermediate products, which are important ingredients in the manufacture of
coatings, are subject to world political and economic conditions. Certain raw
materials are converted into synthetic resins which, when combined with
pigments, are used in the production of both the trade sales coatings and the
production finishes coatings.
Patents and Trademarks
The Company does not rely on patents in its business. The Company does,
however, rely upon formulas developed by it, and upon its technical expertise
and experience in meeting the requirements of its customers. The Company owns a
large number of registered trademarks and trade names, several of which are
referred to elsewhere herein, which it considers to be of significance in
identifying the Company and its products.
4
<PAGE>
Backlog
As is typical in the industry, backlog of orders is not significant in
the business of the Company.
Environmental Affairs and Governmental Regulation
The operations of the Company, like those of other companies engaged in
similar businesses, involve the use and disposal of substances regulated under
extensive environmental protection laws. The Company believes that its
operations are in compliance with applicable federal, state and local laws and
regulations relating to the discharge of materials into the environment, or
otherwise relating to the protection of the environment. Such laws and
regulations have not had any material adverse effect upon the Company's capital
expenditures, earnings or competitive position.
The Company places emphasis on environmental responsibility. New and
existing facilities constructed or modified in the normal course of business
incorporate designs to minimize waste.
The Company has entered into full or partial settlement agreements
with governmental authorities or private parties with respect to fourteen sites
under federal and state laws. Total settlement costs have been approximately $2
million.
The Company is involved in twenty-eight unsettled sites. In all cases
the Company believes its share of liability for environmental clean up costs is
less than 1% of such costs for each site. A total of approximately $2,922,000
has been accrued as a reserve against such future costs. These cost estimates
are carefully reviewed and revised where necessary each quarter during the year.
Possible insurance recoveries are not considered in estimating liabilities.
Also, the Company is involved in remedial activities at three of its
owned facilities as follows:
1. A water monitoring program continues at the Company's facility in
Cuyahoga Heights, Ohio. No remediation activities are being conducted now. Total
costs to date are $172,000.
2. Soil and shallow ground water contamination has been detected at the
Company's plant at Milford, MA. The affected soils have been excavated and an
interim ground water pumping extraction and treatment system has been installed.
Further studies are being undertaken to assess the full extent of the water
contamination. However, preliminary results indicate that the problem is
moderate and is being remediated with traditional technologies. Expenditures to
date have been approximately $800,000.
3. The Company has expended approximately $5 million over the last ten
years to assess and remediate contamination of soil and water at the Company's
facility at Santa Clara, California, operated by its subsidiary, Technical
Coatings Co. The Company has installed an underground trench along two sides of
its property. This trench is capable of capturing the contamination and
preventing its migration off the plant site. A biological treatment system
treats the pumped water to acceptable cleanup levels. The treated water is used
in the paint manufacturing process as cooling water before being discharged to
the municipal sewer system or reinjected to the ground for recirculation.
There are ongoing engineering studies to identify and develop
additional remediation techniques to address soil contamination and to clean up
contaminated water more rapidly. Current operating and maintenance costs are
approximately $75,000 per year.
Adjoining landowners filed suits against the Company claiming damages
due to the migration, or potential migration, of the contamination located at
the Company's facility at Santa Clara.
In each case the plaintiff or his predecessor in title has conducted
activities on its own property which resulted in contamination there. One of
these suits was settled during 1994 for approximately $67,000. The other suit
was settled during 1993 for $75,000 and an undertaking by the Company to
continue the remediation activities at the site.
5
<PAGE>
Accrued costs against future cleanup expenses for these three
facilities are approximately $463,000.
Federal and state laws require that potentially responsible parties
fund remedial actions regardless of fault, legality of original disposal or
ownership of a disposal site. In 1997 the Company spent approximately $347,000
on remedial cleanups and related studies compared with approximately $447,000
spent for such purposes in 1996 and $325,000 for such purposes in 1995.
The Company recovered approximately $1,309,000 in indemnification costs
in 1995 under an environmental impairment insurance policy. The Company
continues to negotiate further settlements.
It is difficult to estimate the ultimate level of future environmental
expenditures due to a number of uncertainties, including uncertainties about the
current status of the law and regulations, uncertainties surrounding remediation
procedures, including the development of new technologies, the enactment of
additional regulations, the identification of new sites for which the Company
could be a potentially responsible party ("PRP"), the apportionment of
responsibility among identified PRPs in addition to the Company and insurance
recoveries of Company costs, as well as information relating to individual
sites. Subject to the foregoing, Company management believes its estimates of
its liability are reasonable and anticipates that capital expenditures and the
cost of remedial actions to comply with the current laws governing environmental
protection will not have a material adverse effect upon its consolidated
financial statements.
6
<PAGE>
ITEM 2. PROPERTIES
Set forth below is certain information with respect to the Company's
principal facilities:
<TABLE>
<CAPTION>
Approximate
Location Principal Use Square Feet Owned/Leased
- -------- ------------- ----------- ------------
<S> <C> <C> <C>
Newark, NJ Plant 267,600 Owned
Melrose Park, IL Chicago Plant 145,200 Owned
Jacksonville, FL Plant 130,200 Owned
Pell City, AL Birmingham Plant 120,800 Owned
Toronto, ON Executive Offices- 118,800 Owned
Subsidiary; Plant
Milford, MA Boston Plant 110,500 Owned
Cuyahoga Heights, OH Cleveland Warehouse 106,000 Owned
Colonial Heights, VA Richmond Plant 92,800 Owned
Mesquite, TX Dallas Plant 87,300 Owned
Flanders, NJ Central Laboratories, 78,000 Owned
Information Resource
Center, Executive
Offices - Subsidiary
St. Louis, MO Warehouse 76,800 Owned
Denver, CO Warehouse 73,500 Owned
Johnstown, NY Plant 69,000 Owned
Montreal, PQ Plant 63,500 Owned
Commerce, CA Los Angeles Plant 59,000 Owned
Montvale, NJ Corporate Offices 57,000 Owned
Glendale Heights, IL Executive Offices- 57,000 Leased (1)
Subsidiary; Warehouse
Nutley, NJ Plant 50,000 Owned
Burlington, ON Plant 46,600 Owned
Seven Hills, NSW Plant 43,600 Leased (2)
Aldergrove, BC Vancouver Plant 39,400 Owned
Santa Clara, CA Plant 39,400 Owned
</TABLE>
- -------------------------------
(1) Lease expires December, 2006, not including renewal options.
(2) Lease expires October, 1999, not including renewal options.
7
<PAGE>
<TABLE>
<CAPTION>
Approximate
Location Principal Use Square Feet Owned/Leased
- -------- ------------- ----------- ------------
<S> <C> <C> <C>
Auckland, NZ Executive Offices- 30,700 Owned
Subsidiary; Plant
Seven Hills, NSW Executive Offices- 25,000 Leased (2)
Subsidiary; Warehouse
</TABLE>
The Company owns 9.32 acres of land in Lebanon, New Jersey, which is
used as a testing facility. The Company also leases warehouse facilities in
North Kansas City, Missouri; Bloomington, Minnesota; Newark, California;
Auckland and Christchurch, New Zealand; Rocklea, QLD, Australia and in Concord,
Edmonton, Saskatoon, Winnipeg, Dartmouth and Mount Pearl, Canada. Warehouse
arrangements also exist in Portland, Oregon. In addition, the Company leases
approximately 40 retail locations.
All of the facilities which are stated above as being owned by the
Company are owned in fee, free and clear of any mortgages or other material
encumbrances. The Company believes that its properties and equipment are well
maintained and in good condition, and that the rentals paid by it for its leased
properties are at competitive rates. The Company also believes that its
facilities are adequate for its existing needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in a number of legal actions in which
substantial monetary damages are sought. Management believes that the outcome of
all such legal actions, individually and in the aggregate, will not have a
material effect on the Company's consolidated financial statements. Also, see
"Environmental Affairs and Governmental Regulation" above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no submission of matters to a vote of security holders during
the fourth quarter of 1997.
- -----------------------------------
(2) Lease expires June, 2001, not including renewal option.
8
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are elected each year by the
directors of the Company, and are as follows:
Name Office Age
- ---- ------ ---
Richard Roob Chairman of the Board of Directors;
Chief Executive Officer and Acting
Chief Financial Officer 65
Yvan Dupuy President and Chief Operating Officer 46
Benjamin M. Belcher, Jr. Executive Vice President 63
Ward C. Belcher Vice President-Operations 51
Michael A. Bonner Vice President-Technology 48
James E. Henderson Treasurer 46
Michael A. Kolind Vice President - Business Development 45
John T. Rafferty Secretary and General Counsel 65
Ellen Singer Vice President - Marketing 41
Charles C. Vail Senior Vice President and Vice President -
Human Resources and Administration 54
- ------------------------------
All of the executive officers of the Company, except for Ms. Singer, have
during a period in excess of the past five years, been actively engaged in the
business and affairs of the Company in various senior management capacities. Ms.
Singer was elected Vice President - Marketing on February 10, 1998 and had been
the Director of Marketing of the Company since January 1, 1997 and the Corporate
Marketing Manager from 1995 until 1996. Prior thereto, she was Business Director
of Nabisco Foods Group from 1987 until 1995.
9
<PAGE>
PART II
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
There is no established public trading market for shares of the Company's
common stock. The Company has in the past purchased shares of its common stock
from shareholders in privately negotiated transactions. However, except with
respect to shares distributed from its Employees' Stock Ownership Plan ("ESOP"),
the Company is under no obligation to purchase shares from its shareholders and
there can be no assurance that such purchases will be continued. As of March 2,
1998, the Company had approximately 1,780 shareholders.
The following table sets forth the high and low price for shares in each
quarter during 1997 and 1996 as determined by an independent appraisal firm
engaged by the Company to determine fair value per share for purposes of small
block transactions and transactions involving the ESOP, including purchases by
the Company of shares distributed from the ESOP. The table also shows the
dividends paid in each such quarter. The Company believes that, except for small
block transactions and transactions involving the ESOP or distributed ESOP
shares, the fair value of the Company's shares should reflect a discount from
the appraised price after taking into account all the relevant circumstances.
<TABLE>
<CAPTION>
Price Range Dividends Paid
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------
High Low High Low
<S> <C> <C> <C> <C> <C> <C>
1st quarter $74.61 $72.23 $79.89 $63.86 $ .42 $ .40
2nd quarter 76.24 71.81 68.68 65.32 .42 .40
3rd quarter 79.87 76.10 71.44 66.48 .42 .40
4th quarter 80.15 74.62 73.19 71.36 .42 .40
4th quarter-extra .37 .30
---------------
Total $ 2.05 $ 1.90
===============
</TABLE>
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Selected Income Statement Data:
Year Ended December 31,
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net Sales:
Trade sales coatings $614,919 $573,195 $513,215 $499,713 $471,738
Production finishes coatings 51,375 51,995 50,996 47,351 40,213
-------------------------------------------------------------
Total $666,294 $625,190 $564,211 $547,064 $511,951
=============================================================
Income before cumulative effect
of change in accounting principle $ 24,304 $ 43,339 $ 30,456 $ 41,322 $ 36,511
Net income $ 30,635 $ 43,339 $ 30,456 $ 41,322 $ 36,511
Basic and diluted income before
cumulative effect of change in
accounting principle per share $ 2.71 $ 4.67 $ 3.19 $ 4.29 $ 3.75
Basic and diluted net income per share $ 3.42 $ 4.67 $ 3.19 $ 4.29 $ 3.75
Common stock cash dividends:
Declared per share $ 2.08 $ 1.92 $ 1.80 $ 1.81 $ 1.68
Paid per share $ 2.05 $ 1.90 $ 1.80 $ 1.78 $ 1.68
<CAPTION>
Selected Balance Sheet Data:
December 31,
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Current assets $ 222,775 $217,554 $212,611 $195,433 $188,237
Current liabilities 66,756 72,191 78,204 56,870 39,696
-------------------------------------------------------------
Working capital $ 156,019 $145,363 $134,407 $138,563 $148,541
=============================================================
Total assets $ 351,232 $330,997 $330,155 $304,088 $276,040
Long-term obligations $ 14,649 $ 11,823 $ 12,176 $ 12,914 $ 14,453
Shareholders' equity - net $ 236,368 $232,933 $227,661 $221,538 $209,760
Book value per share of
common stock (1) (2) $ 27.92 $ 27.45 $ 25.99 $ 25.30 $ 23.28
</TABLE>
Certain reclassifications have been made to the above selected financial data to
conform to the method of presentation used in 1997.
(1) See Note 16 to Notes to Consolidated Financial Statements, Part II, Item 8
hereof.
(2) Book value per share is computed based on shareholders' equity before
deduction of employees' stock ownership and stock purchase plan notes.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
Operating Results 1997 vs. 1996
Net sales of $666,294 in 1997, represented an increase of $41,104, or 6.6%
over the comparable period in 1996. Excluding the effect of purchasing a
majority interest of a retail operation in July of 1997, net sales increased
4.2% for the year versus 1996.
Trade sales coatings in the United States increased by 3.5% in 1997 versus
1996, primarily as a result of volume increases. Net trade sales coatings in
Canada were up 5.2% compared to 1996, also primarily resulting from volume
increases. Production finishes coating sales, which amount to less than 10% of
total sales, were essentially flat for 1997 as compared to 1996. Net retail
sales of approximately $20,400 are included in total net sales since the
purchase of a majority interest of a retail operation in July, 1997.
Gross margin increased from 48.7% in 1996 to 50.7% for the year ended 1997.
The improved gross margin in 1997 was the result of efficiencies in purchasing
and manufacturing as well as lower raw material costs as compared to 1996.
During the third quarter of 1997, the Company changed its method of
computing depreciation on its fixed assets from the accelerated methods used in
previous periods to the straight line method effective the beginning of 1997
(see Note 3 to the Notes to Consolidated Financial Statements, Part II, Item 8
hereof). The change was made to better match the depreciation costs of the
assets to the revenue produced by them. The gross margin effect for 1997
resulted in an increase in gross margin of $1,734. Excluding the change in
depreciation, the Company's 1997 gross margin would have been 50.4%. The change
in depreciation method also reduced selling, general and administrative expenses
by $1,663 in 1997.
Selling, general and administrative expenses increased by $31,153 in 1997,
primarily as a result of the following factors. The Company sold approximately
$12,500 of dealer notes to a bank and recorded additional bad debt expense
relating to recourse provisions contained in the agreement. The Company also
recorded additional reserves for certain trade accounts and notes as a result of
adverse developments with certain customers and tightened credit policies during
1997. Approximately $4,400 of impairment write-downs were recorded relating to
identifiable assets, intangibles and goodwill associated with the Company's
investment in Benjamin Moore Pacific Limited, smaller domestic acquisitions and,
to a lesser extent, deferred software/systems costs. With respect to the
write-downs of the identifiable intangibles and goodwill, such assessments were
made on the basis of recent projections of undiscounted future cash flows from
operations. The Company also recorded a charge of approximately $3,500 as a
result of scrapping certain obsolete advertising materials associated with SKU
reductions and the discontinuation of certain products in 1997. Other increases
to selling, general and administrative expenses reflect costs associated with
higher sales volume, and increased advertising and promotion expenses,
principally related to the national introduction of certain new products. The
increases in selling, general and administrative expenses were partially offset
by the reduction in depreciation expense discussed above.
During the third quarter of 1997, the Company recorded a pre-tax charge of
approximately $33,388, including employee separation costs of $29,683, asset
impairments of $1,975 and other costs of $1,730 (see Note 2 to the Notes to
Consolidated Financial Statements, Part II, Item 8 hereof). This charge results
from the Company's announced plan to streamline its operations by reducing its
workforce, consolidating certain manufacturing facilities and disposing of
excess equipment at closed facilities. This plan is expected to improve the
Company's production operations through consolidation of manufacturing into
those paint production facilities which are most cost effective. In connection
with this plan, the Company closed two plants in 1997 and is scheduled to close
another in early 1998 and has offered severance programs to affected employees.
The charge also includes two Company-wide voluntary early retirement programs
which were offered to all eligible employees. In total, more than 275 employees
either accepted early retirement or will receive severance benefits as a result
of the plant closings and the consolidation of certain functions. The costs of
these programs, combined with the cost of other severance arrangements for
employees not eligible to retire, and certain one-time costs relating to pension
and medical plan enhancements and curtailment charges for these employees have
been reflected in the restructuring charge as employee separation costs.
Finally, asset impairments and other costs included in the restructuring charge
consist of the write-down of property, plant and equipment, estimated
decommissioning and maintenance costs of the scheduled closed facilities. As a
result of the above mentioned restructuring, the Company expects to realize
significant future cost savings.
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<PAGE>
The decrease in other expense, net reflects lower interest expense on
reduced bank borrowings in the United States and Canada. During the second half
of 1997 there were no outstanding bank borrowings in the U.S and Canadian
operations. Decrease in other expense, net is also the result of increased
interest income from the significant cash balance on hand during the second half
of 1997 as compared to 1996.
Income before taxes, minority interest and cumulative effect of change in
accounting principle was $24,205, a decrease of $18,311 when compared to the
previous year due to the factors discussed above. The effective income tax rate
in 1997 was 45.9% as compared to 42.7% in 1996. The increase in the effective
tax rate in 1997 is due to increased losses in one of the companies foreign
subsidiaries.
As a result of the foregoing, the Company generated net income of $30,635 in
1997 as compared to $43,339 in 1996. Included in 1997's net income is the 1997
effect, and related cumulative effect, of the change from an accelerated
depreciation method to the straight line method as previously discussed.
Basic and diluted earnings per share for 1997, before and after the
cumulative effect of the change in depreciation method, were $2.71 and $3.42,
respectively, a decrease of $1.96 and $1.25, respectively, compared to 1996.
Operating Results 1996 vs. 1995
Net sales of $625,190 in 1996 represented an increase of $60,979 or 10.8%
over the previous year, establishing a new record for the Company.
Trade sales coatings registered increases in all geographic segments of the
Company resulting in a unit sales gain of approximately 7%.
Production finishes coatings sales, which recorded a modest increase of
approximately $1,000 or 2%, continued to be sluggish in both the United States
and Canada. Production finishes coatings sales represent less than 10% of the
Company's total net sales.
Cost of products sold in 1996 was $320,652 and represented an increase of
$13,441 or 4.4% over 1995. The increase was attributable to greater sales
volume. Cost of products sold as a percentage of sales decreased by 3.1% from
54.4% in 1995 to 51.3% in 1996. The positive effect of lower raw material costs
together with the impact of earlier selling price adjustments were major factors
in the decrease in cost of goods sold as a percentage of net sales.
Selling, administrative and general expenses amounted to $228,274 which was
an increase of $25,721 or 12.7% over 1995. Contributing to the increase were
expenses related to product introduction and consumer rebate promotions, market
development efforts in both the western region of the United States and in
Australia, strategic planning initiatives and profit sharing and incentive
compensation. Costs associated with higher sales volume and general inflationary
factors accounted for the balance of the increase over the previous year.
Net other expenses of $2,076 rose by $429 which primarily represented
interest expense associated with increased short-term borrowings.
Income before taxes and minority interest was $74,188, an improvement of
$21,388 or 40.5% when compared with the previous year. The effective income tax
rate in 1996 was 42.7%, the same as 1995.
Net income of $43,339 in 1996 exceeded the previous year by $12,883 or 42.3%
and is a new earnings record for the Company, exceeding the previous high, set
in 1994, by 4.9%. Earnings per share were $4.67 compared with $3.19 in 1995.
Dividends declared during 1996 amounted to $1.92 per share as compared with
$1.80 per share in 1995.
The Company's majority owned subsidiary, Benjamin Moore Pacific Limited,
acquired a majority interest in White Knight Paints Pty. Ltd. in Australia, as
of July 1, 1996. The New Zealand subsidiary's activities in Australia have been
transferred to White Knight and it is anticipated that this acquisition will
enhance the Company's position in Australasia.
13
<PAGE>
Financial Position and Liquidity
Net cash flows provided by operating activities were $101,892 in 1997, which
was $48,921 and $81,914 greater than in 1996 and 1995, respectively. Cash flow
from operations continues to be the primary source of financing the Company's
growth. The most significant elements affecting this improvement were the
decrease of $30,024 in accounts and notes receivable and the decrease of $6,803
in notes receivable due after one year. Stronger cash flow from decreased
receivables is largely attributed to tightened credit policies in 1997,
resulting in higher cash collections from dealers, and the sale of approximately
$12,500 of dealer notes to a bank in 1997.
Net cash flows used in investing activities were $19,391 in 1997, an
increase of $8,491 over 1996 and $12,060 over 1995. No major construction
projects were in progress in 1997 and overall capital spending declined in 1997
as compared to 1996 and 1995. Included in 1997's cash flows used in investing
activities is the purchase of a majority interest of a retail operation in July
of 1997.
Net cash flows used in financing activities of $49,721 represented an
increase of $7,666 and $44,993 over two years prior. Cash flows relating to
financing activities were principally used for payment of dividends, the
repayment of short-term borrowings and the purchase of treasury stock.
The purchase of treasury stock in 1997 amounted to $12,504, a decrease of
$10,907 from the prior year, primarily due to the purchase of stock from
shareholders in 1996 in order to provide liquidity for payment of estate taxes.
The Company has generally financed its purchases of treasury stock from working
capital as described above at Item 5, "Market Price of the Registrant's Common
Stock and Related Security Holder Matters." During the three years ended
December 31, 1997, the Company purchased 165,075, 434,580 and 157,738 shares,
respectively, of its common stock.
The Company reduced its net short-term borrowings by $21,610 and $3,013 in
1997 and 1996, respectively, as compared to increased net borrowings of $22,456
in 1995. There were no facility or line of credit borrowings by the U.S. and
Canadian operations at December 31, 1997.
Working capital increased to $156,019 at December 31, 1997 and the current
ratio increased to 3.3:1 from 3.0:1 for the comparable period last year. Cash
and cash equivalents were $43,899 at December 31, 1997, as compared to $11,365
at December 31, 1996, reflecting the Company's continued commitment to
strengthening its balance sheet and cash position. The Company maintains
excellent relations with its banks and other financial institutions that may
serve as available resources for future growth opportunities, if the need
arises.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Both standards for the Company are effective beginning in
1998. SFAS No. 130 will require the Company to add the reporting of
Comprehensive Income to its financial statements. The Company is currently
evaluating the impact of SFAS No. 131 on its segment disclosures.
Year 2000
Many of the Company's systems must be modified due to computer program
limitations in recognizing dates beyond 1999. If not corrected, the systems
could fail or cause erroneous results by, at or after January 1, 2000.
Substantial changes to, and some replacements of, present systems will be needed
to mitigate potential Year 2000 issues. Costs will be expensed as incurred in
accordance with Emerging Issues Task Force (EITF) Issue No. 96-14, "Accounting
for the Costs Associated with Modifying Computer Software for the Year 2000."
The Company is in the process of identifying and implementing solutions for the
Company's systems and surveying its top vendors to assess its plans for year
2000 readiness. The Company plans to have critical systems for the year 2000
ready by mid-1999. The modification of systems will be performed by a composite
of both Company personnel and external consultants. Management is in the process
of determining the total anticipated cost for compliance with year 2000 issues.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the registrant and its
subsidiaries, together with notes thereto and the independent auditors' report,
are set forth on pages 16 through 34. The additional financial information set
forth in Part IV and included herein should be read in conjunction with the
consolidated financial statements.
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
BENJAMIN MOORE & CO.:
We have audited the accompanying consolidated balance sheets of Benjamin Moore &
Co. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Benjamin Moore & Co. and
Subsidiaries at December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, in 1997 the
Company changed its method of computing depreciation.
Deloitte & Touche LLP
Parsippany, New Jersey
February 27, 1998
16
<PAGE>
Benjamin Moore & Co. and Subsidiaries
Consolidated Statements of Income
For the Years Ended December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales (Notes 1 and 7) $666,294 $625,190 $564,211
------------------------------------------------
Costs and Expenses:
Cost of products sold 328,728 320,652 307,211
Selling, administrative and general 259,427 228,274 202,553
Restructuring (Note 2) 33,388
Other expense, net (Note 18) 46 2,076 1,647
------------------------------------------------
Total costs and expenses 621,589 551,002 511,411
------------------------------------------------
Income Before Taxes, Minority Interest
and Cumulative Effect of Change in
Accounting Principle 44,705 74,188 52,800
Income Tax Provision (Note 17) 20,500 31,672 22,555
------------------------------------------------
Income Before Minority Interest
and Cumulative Effect of Change in
Accounting Principle 24,205 42,516 30,245
Minority Interest in Net Loss of
Consolidated Subsidiaries (99) (823) (211)
------------------------------------------------
Income Before Cumulative Effect of
Change in Accounting Principle 24,304 43,339 30,456
Cumulative Effect of Change in
Accounting Principle (Note 3) 6,331
------------------------------------------------
Net Income $ 30,635 $ 43,339 $ 30,456
================================================
Basic and Diluted Earnings Per Share (Note 4):
Income Before Cumulative Effect of
Change in Accounting Principle $2.71 $4.67 $3.19
Cumulative Effect of Change in
Accounting Principle .71
------------------------------------------------
Net Income $3.42 $4.67 $3.19
================================================
Cash Dividends Declared Per Share
of Common Stock (Note 16) $2.08 $1.92 $1.80
================================================
Proforma amounts assuming new method of
depreciation applied retroactively (Note 3)
Pro forma net income $ 24,304 $ 45,471 $ 32,513
================================================
Pro forma basic and diluted net income per share $2.71 $4.90 $3.41
================================================
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE>
Benjamin Moore & Co. and Subsidiaries
Consolidated Balance Sheets
December 31, 1997 and 1996
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 43,899 $ 11,365
Accounts and notes receivable - net (Note 5) 83,966 110,855
Inventories (Note 6) 72,942 68,952
Prepaid expenses 9,812 15,672
Deferred income taxes (Note 17) 12,156 10,710
-------------------------
Total Current Assets 222,775 217,554
Investments in Temporary Co-Ownerships (Note 7) 8,886 9,066
Property, Plant and Equipment - Net (Note 8) 88,062 80,169
Other Assets (Notes 5, 9 and 17) 31,509 24,208
-------------------------
Total $ 351,232 $ 330,997
=========================
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term borrowings and current portion of long-term
obligations (Notes 10 and 14) $ 6,800 $ 29,545
Accounts payable - trade 22,142 23,910
Other liabilities and accrued expenses (Note 11) 33,799 14,918
Dividends payable 4,015 3,818
-------------------------
Total Current Liabilities 66,756 72,191
-------------------------
Pension and Other Long-Term Benefits (Note 9) 28,734 10,245
-------------------------
Long-Term Obligations (Notes 14 and 17) 14,649 11,823
-------------------------
Minority Interest in Net Assets of Consolidated Subsidiaries 4,725 3,805
-------------------------
Commitments and Contingencies (Note 14)
Shareholders' Equity: (Notes 9 and 16)
Preferred stock, $10 par value - authorized, 500,000 shares; issued - none
Common stock, $10 par value - authorized, 40,000,000 shares;
issued 13,164,312 at December 31, 1997 and 1996 131,643 131,643
Additional paid-in capital 32,632 31,580
Retained earnings 229,251 217,244
Accumulated currency translation adjustment (3,809) (3,270)
Cost of treasury stock; 4,280,615 shares and
4,130,727 shares at December 31, 1997 and 1996, respectively (141,683) (129,247)
Employees' stock ownership and stock purchase plan notes (11,666) (15,017)
-------------------------
Shareholders' Equity - Net 236,368 232,933
-------------------------
Total $ 351,232 $ 330,997
=========================
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
Benjamin Moore & Co. and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Accumulated Cost Employees' Stock
Additional Currency of Ownership and
Common Paid-in Retained Translation Treasury Stock Purchase
Stock Capital Earnings Adjustment Stock Plan Notes
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $131,643 $31,295 $178,296 $(4,018) $ (93,772) $(21,905)
Net income for the year 30,456
Cash dividends declared
on common stock -
$1.80 per share (17,148)
Sale and distribution of
treasury stock - 3,399 shares 232 18
Treasury stock purchases
and capital contribution -
157,738 shares 37 (12,083)
Dividends credited to ESPP notes,
net of interest 607
Note payments 2,892
Foreign currency
translation adjustment 1,111
-----------------------------------------------------------------------------
Balance, December 31, 1995 131,643 31,564 191,604 (2,907) (105,837) (18,406)
Net income for the year 43,339
Cash dividends declared
on common stock -
$1.92 per share (17,699)
Distribution of
treasury stock - 272 shares 16 1
Treasury stock purchases -
434,580 shares (23,411)
Dividends credited to ESPP notes,
net of interest 592
Note payments 2,797
Foreign currency
translation adjustment (363)
-----------------------------------------------------------------------------
Balance, December 31, 1996 131,643 31,580 217,244 (3,270) (129,247) (15,017)
Net income for the year 30,635
Cash dividends declared
on common stock -
$2.08 per share (18,628)
Sale and distribution of
treasury stock - 15,187 shares 1,052 68 (890)
Treasury stock purchases -
165,075 shares (12,504)
Dividends credited to ESPP notes,
net of interest 593
Note payments 3,648
Foreign currency
translation adjustment (539)
-----------------------------------------------------------------------------
Balance, December 31, 1997 $131,643 $32,632 $229,251 $(3,809) $(141,683) $(11,666)
=============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE>
Benjamin Moore & Co. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net income $ 30,635 $ 43,339 $ 30,456
Cumulative effect of change in accounting principle (6,331)
-----------------------------------------
Income before cumulative effect of change in accounting principle 24,304 43,339 30,456
Adjustments To Reconcile Net Income To Net Cash Flows
Provided By Operating Activities:
Restructuring charge 28,901
Depreciation and amortization 7,809 12,008 10,568
Write-off of obsolete advertising materials 3,444
Write-off of goodwill, intangibles and other assets 4,364
Deferred income taxes (11,684) (209) (377)
Minority interest in net loss of consolidated subsidiaries (99) (823) (211)
Loss on disposal of equipment 45 75 39
Pension and other long-term benefits 4,101 3,529 1,353
Other 43 (322) 92
Changes In Assets And Liabilities:
Decrease (increase) in accounts and notes receivable 30,024 (5,601) (12,158)
Decrease (increase) in inventories 1,962 2,633 (6,757)
Decrease (increase) in prepaid expenses 2,196 3,430 (1,654)
Decrease (increase) in notes receivable due after one year 6,803 1,818 (323)
(Increase) decrease in other assets (3,365) 1,808 (623)
Increase (decrease) in other liabilities 3,044 (8,714) (427)
-----------------------------------------
Net Cash Flows Provided By Operating Activities 101,892 52,971 19,978
-----------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of fixed assets 87 19 49
Payments for purchase of plant, equipment
and acquisitions (19,547) (11,412) (15,215)
Net proceeds from sale of short-term investments 12,572
Investments in temporary co-ownerships (941) (1,617) (5,541)
Proceeds from sales of temporary co-ownership interests 1,010 2,110 804
-----------------------------------------
Net Cash Flows Used In Investing Activities (19,391) (10,900) (7,331)
-----------------------------------------
Cash Flows From Financing Activities:
Payment of dividends (17,836) (17,076) (16,592)
Payment of dividends to minority shareholders (287) (252) (220)
(Repayments) proceeds of short-term borrowings, net (21,610) (3,013) 22,456
Proceeds from sale of treasury stock 68 219
Payments for purchase of treasury stock (12,504) (23,411) (12,083)
Repayments of long-term obligations (1,200) (1,100) (1,400)
Payments received on employees' stock ownership and
stock purchase plan notes 3,648 2,797 2,892
-----------------------------------------
Net Cash Flows Used In Financing Activities (49,721) (42,055) (4,728)
-----------------------------------------
Effect Of Exchange Rate Changes On Cash (246) (7) 2
-----------------------------------------
Net Increase In Cash and Cash Equivalents 32,534 9 7,921
Cash and Cash Equivalents At Beginning Of Year 11,365 11,356 3,435
-----------------------------------------
Cash and Cash Equivalents At End Of Year $ 43,899 $ 11,365 $ 11,356
=========================================
Supplemental Cash Flow Information:
Interest paid $ 2,735 $ 3,674 $ 2,959
Income taxes paid $ 30,505 $ 29,663 $ 27,096
Supplemental Schedule of Noncash Investing
and Financing Activities:
Additions to obligations under capital leases $ 224
Issuance of employees' stock purchase plan notes $ 890
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE>
Benjamin Moore & Co. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements include the operations of Benjamin Moore & Co. and
all majority-owned subsidiaries ("the Company") except for Temporary
Co-Ownerships as explained in Note 7 below. All balances and transactions
between subsidiaries are eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include commercial paper of $37,654 in 1997 and
$8,000 in 1996, all with original maturities of less than three months. The
carrying amount of these investments approximates fair value.
Inventories
Inventories are valued at lower of cost, determined by the use of the
last-in, first-out (LIFO) method, or market.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. The major classes of
property along with the depreciation and amortization methods and their
estimated useful lives are set forth below:
Estimated
Asset Depreciation and Amortization Methods Useful Life
- --------------------------------------------------------------------------------
Buildings Straight-line 40 yrs.
Machinery and equipment Straight-line 10 yrs.
Furniture and fixtures Straight-line 10 yrs.
Automobiles and trucks Straight-line 3-6 yrs.
Leasehold improvements Straight-line Over Life of Lease
As discussed in Note 3, during 1997 the Company changed the method of
computing depreciation on its fixed assets and modified certain of its assets'
estimated useful lives.
Intangible Assets
Included in other assets, intangible assets resulting from acquisitions
amounting to $15,634 and $9,724 at December 31, 1997 and 1996, respectively, are
valued at cost and are being amortized over their estimated useful lives which
range from two to thirty-five years. During 1997, 1996 and 1995 amortization of
such intangibles amounted to $4,085, $923 and $1,124, respectively. Included in
the 1997 amortization of intangibles is the effect of approximately $3,700 of
impairment writedowns of intangibles and goodwill associated with the Company's
investment in Benjamin Moore Pacific Limited and other small acquisitions.
Long-lived Assets
The Company evaluates the recoverability of its long-lived assets over
their remaining useful lives by projecting operating cash flows to be generated
on an undiscounted basis. As of December 31, 1997, the Company believes that the
existing balances of its long-lived assets are recoverable.
Revenue Recognition
Revenues are recorded when products are shipped.
21
<PAGE>
Notes to Consolidated Financial Statements (Continued)
Pension Expense
It is the Company's policy to fund all qualified pension costs based on
calculations made by independent actuaries. Unrecognized net assets are being
amortized over 16-2/3 years for the United States plan and 15 years for the
Canadian plan.
Stock Options
The Company accounts for its stock options under the provisions of
Accounting Principles Board Opinion No. 25. The fair value of such options has
not been estimated because the effect of these issuances is not material to the
Company's consolidated financial statements.
Advertising Expenses
The cost of advertising is expensed as incurred. Advertising expenses
amounted to $44,626, $37,659 and $34,475 in 1997, 1996 and 1995, respectively.
Research and Development Costs
Research and development and quality control expenditures amounted to
$12,496, $13,787 and $15,506 in 1997, 1996 and 1995, respectively. Quality
control expenditures aggregated $3,943, $3,928 and $5,636, respectively, and are
included herein because a substantial portion of such expenditures is related to
development projects.
Provision for Income Taxes
The Company and its 80% or more owned subsidiaries file a consolidated tax
return. The Company provides deferred income taxes on temporary differences
between amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by enacted tax laws. Tax credits are included as a
reduction of income tax expense in the year the credits arise.
Foreign Currency Translation
All balance sheet accounts of foreign subsidiaries are translated to United
States dollars at current exchange rates. The income statements are translated
using the average exchange rates for the period. Adjustments for currency
exchange rate fluctuations are excluded from net income and reflected as a
separate component of shareholders' equity.
Estimates
The preparation of the Company's financial statements, in conformity with
generally accepted accounting principles requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Both standards are effective for the Company beginning in
1998. SFAS No. 130 will require the Company to add the reporting of
Comprehensive Income to its financial statements. The Company is currently
evaluating the impact of SFAS No. 131 on its segment disclosures.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the method of presentation used in 1997.
22
<PAGE>
Notes to Consolidated Financial Statements (Continued)
2. RESTRUCTURING
During the third quarter of 1997, the board of directors approved and
implemented a strategic restructuring program designed to improve operating
efficiency and industry competitiveness. This plan resulted in the Company
recording a pre-tax charge of $33,388 including employee separation costs of
$29,683 and asset impairments and other charges of $3,705. The Company
streamlined its operations by reducing its workforce, consolidating certain
manufacturing facilities and disposing of excess equipment. Activities
associated with the restructuring plan included two voluntary early retirement
programs, the cessation of manufacturing operations at three production
facilities and a reduction in excessive plant management at all remaining
plants. These programs when combined with severance for staff reductions
affected over 275 employees. Cessation of manufacturing costs consist of the
write-down of property, plant and equipment, decommissioning and maintenance
costs.
Over 90% of all separations were completed during 1997 with the majority of
the remaining separations to be completed during 1998. As of December 31, 1997,
approximately $4,400 has been paid and charged against the liability primarily
for severance and other benefit related items. The restructuring charge reduced
net income for the year ended December 31, 1997 by $20,033 or $2.23 per share.
3. CHANGE IN ACCOUNTING PRINCIPLE
In 1997, the Company changed the method of computing depreciation on its
fixed assets from the accelerated methods used in previous periods to the
straight-line method. The change was made because the straight-line method
better matches the depreciation costs of the assets to the revenue produced by
them. This change also makes the Company's depreciation policy more comparable
to the policies used within its industry. The retroactive application of the new
method resulted in a cumulative effect adjustment of $6,331 (net of $4,234 in
income taxes) which is included in net income for the year ended December 31,
1997. The effect of the change on the year ended December 31, 1997, was to
increase net income before the cumulative effect of the change in accounting
principle by $1,960 million ($.22 per share). In conjunction with this change,
the Company also changed estimated useful lives of certain of its assets to more
appropriately reflect the period of time over which such assets are expected to
generate revenues. Pro forma amounts are presented in the Statement of Income
showing the effect of applying the new method retroactively.
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". This standard revises certain methodology for
computing earnings per common share and requires the reporting of two earnings
per share figures: basic earnings per share and diluted earnings per share.
Basic earning per share is computed by dividing net income by the
weighted-average number of shares outstanding. For the Company, diluted earnings
per share is computed by dividing net income by the sum of the weighted-average
number of shares outstanding plus the dilutive effect of shares issuable through
the exercise of stock options.
All earnings per share figures presented herein have been computed in
accordance with the adoption of SFAS No. 128. This adoption did not have an
effect on 1997 or previously reported amounts.
The components of the denominator for basic earnings per common share and
diluted earnings per common share are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per common share:
Weighted average common shares outstanding 8,960,374 9,279,127 9,541,257
Diluted earnings per common share:
Plus stock options assumed to be exercised 4,761 6,214
-----------------------------------------------
Denominator for diluted earnings per common share 8,965,135 9,279,127 9,547,471
===============================================
</TABLE>
23
<PAGE>
Notes to Consolidated Financial Statements (Continued)
5. ACCOUNTS AND NOTES RECEIVABLE
December 31,
1997 1996
- --------------------------------------------------------------------------------
Trade $93,300 $119,268
Other 1,183 946
-------------------------------
Total 94,483 120,214
Less allowance for doubtful accounts 10,517 9,359
-------------------------------
Net $83,966 $110,855
===============================
During 1997, the Company sold approximately $12,500 of current and
long-term dealer notes to a bank (see Note 14). Trade notes receivable, net of
reserves, due after one year amounted to $4,911 and $11,716 at December 31, 1997
and 1996, respectively, and are included in other assets in the accompanying
balance sheets. The carrying amount of notes receivable approximates fair value.
6. INVENTORIES December 31,
1997 1996
- --------------------------------------------------------------------------------
Finished goods $49,369 $40,988
Raw materials 23,573 27,964
-------------------------------
Total $72,942 $68,952
===============================
If the first-in, first-out (FIFO) method of inventory accounting, which
approximates current cost, had been used, inventory would have been $13,817 and
$16,012 higher than reported at December 31, 1997 and 1996, respectively.
Work-in-process is not significant, due to the brief production cycle, and
is included with raw materials.
7. INVESTMENTS IN TEMPORARY CO-OWNERSHIPS
Investments in Temporary Co-Ownerships are carried at cost less a reserve
for impairments. These investments in the capital stock of retail paint stores
are non-interest bearing financing arrangements. All increases in equity from
earnings accrue solely to the benefit of the independent co-owners. The Company
sells its products to Temporary Co-Ownerships at the same prices and terms used
in transactions with other customers. A reasonable estimate of fair value of the
investments in Temporary Co-Ownerships could not be made without incurring
excessive costs.
8. PROPERTY, PLANT AND EQUIPMENT December 31,
1997 1996
- --------------------------------------------------------------------------------
Land $ 8,012 $ 8,447
Buildings 65,489 65,803
Machinery, equipment and leasehold improvements 104,582 106,025
-------------------------------
Total 178,083 180,275
Less accumulated depreciation and amortization 90,021 100,106
-------------------------------
Property, plant and equipment-net $ 88,062 $ 80,169
===============================
24
<PAGE>
Notes to Consolidated Financial Statements (Continued)
9. EMPLOYEE BENEFIT PLANS
Pension Plans
The Company and its subsidiaries have retirement income plans covering
substantially all employees. The benefits are based upon years of service and
the employee's highest average compensation during any thirty-six consecutive
full calendar months of employment.
The funded status and amounts recognized in the Company's balance sheets at
December 31, 1997 and 1996, as determined by independent actuaries, are
presented below:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------------------
United States Canadian United States Canadian
Plans Plans Plans Plans
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 131,597 $ 12,558 $ 106,686 $ 11,930
============================================================
Accumulated benefit obligation $ 134,358 $ 12,558 $ 109,892 $ 11,930
============================================================
Projected benefit obligation for
service rendered to date $ 153,855 $ 16,074 $ 131,200 $ 13,778
Plan assets at fair value (plan assets
are invested primarily in insurance
contracts, equities and bonds) 166,721 18,585 142,818 17,238
------------------------------------------------------------
Projected benefit obligation
less than plan assets 12,866 2,511 11,618 3,460
Unrecognized net (gain) loss from past
experience different from that assumed (21,380) 819 (14,336) 66
Prior service cost not yet recognized
in net periodic pension cost 2,794 327 3,384 372
Unrecognized transition asset, net
of amortization (1,614) (1,549) (1,960) (1,885)
------------------------------------------------------------
Accrued pension (cost) credit recognized
in pension and other long-term
benefits/other assets on the balance
sheet before adjustment (7,334) 2,108 (1,294) 2,013
Adjustment to reflect additional
minimum liability (886) (1,014)
------------------------------------------------------------
Accrued pension (cost) credit recognized
in pension and other long-term
benefits/other assets on the
balance sheet after adjustment $ (8,220) $ 2,108 $ (2,308) $ 2,013
============================================================
</TABLE>
25
<PAGE>
Notes to Consolidated Financial Statements (Continued)
Net pension costs include the following components:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 3,839 $ 4,221 $ 3,315
Interest cost on projected benefit obligation 11,122 10,431 10,340
Actual return on plan assets (34,307) (19,655) (26,198)
Net amortization and deferral 19,679 6,726 15,049
--------------------------------------------
Net periodic pension cost $ 333 $ 1,723 $ 2,506
============================================
</TABLE>
As described in Note 2, the Company offered two voluntary early retirement
programs during 1997 that provided employees electing to retire within the
prescribed period with enhanced benefits. During 1997, the Company recorded a
net $5,777 charge for curtailment accounting and benefit enhancements.
The assumptions used in developing the projected benefit obligation as of
December 31 were generally as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7% 7.5% 7%
Rate of increase in compensation 4% 4% 4%
Expected return on assets 9% 9% 9%
</TABLE>
Postretirement Medical and Life Insurance Plans
The Company also provides medical and life insurance benefits that cover
United States and Canadian employees of the Company and its subsidiaries.
Substantially all employees are covered by a postretirement health care plan
which is contributory for employees retiring on or after January 1, 1993, with
retiree contributions adjusted annually; the life insurance plan is
noncontributory. The accounting for the health care plan anticipates future
cost-sharing changes to the written plan that are consistent with the Company's
expressed intent to increase retiree contributions each year by the same percent
increase experienced by the net incurred charges through 1998, after which all
future cost increases will be passed on to the retirees.
As of December 31, 1997, the Company has not established any specific
funding policy for these plans.
26
<PAGE>
Notes to Consolidated Financial Statements (Continued)
The following table sets forth the plans' status reconciled with the amount
shown in the Company's statement of financial position at December 31, 1997 and
1996.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------------------
Medical Life Medical Life
Benefits Insurance Benefits Insurance
<S> <C> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(28,425) $ (2,140) $(13,081) $(1,167)
Fully eligible active plan participants (1,128) (62) (3,966) (219)
Other active plan participants (5,770) (320) (6,820) (322)
----------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets (35,323) (2,522) (23,867) (1,708)
Unrecognized net loss or (gain) from past
experience different from that assumed
and from changes in assumptions 1,604 386 164 (91)
Unrecognized transition obligation 16,082 1,030 16,643 1,062
----------------------------------------------------------------
Accrued postretirement benefit cost
recognized in pension and other
long-term benefits on the
balance sheet $(17,637) $ (1,106) $ (7,060) $ (737)
================================================================
</TABLE>
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits attributed to service during the period $ 540 $ 530 $ 393
Interest cost on accumulated postretirement benefit obligation 2,444 1,788 1,848
Net amortization and deferral 1,519 1,107 1,107
-------------------------------------------
Net periodic postretirement benefit cost $ 4,503 $ 3,425 $ 3,348
===========================================
</TABLE>
As described in Note 2, the Company offered two voluntary early retirement
programs during 1997 that provided employees electing to retire within the
prescribed period with enhanced benefits. During 1997, the Company recorded a
net $8,696 charge for the enhanced benefits.
The significant assumptions used in determining postretirement benefit cost
and the accumulated postretirement benefit obligation were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current year health care trend rate 11% 10% 10%
Ultimate health care trend rate 6% 4% 4%
Discount rate 7% 7.5% 7%
</TABLE>
27
<PAGE>
Notes to Consolidated Financial Statements (Continued)
A one percent increase in the annual health care trend rate would have
increased the accumulated postretirement benefit obligation at December 31, 1997
by $529 as well as increased the postretirement expense in 1997 to $52. The
Company expects to achieve the ultimate health care trend rate within fifteen
years.
Postemployment Benefits
The Company accrues for benefits provided to former or inactive employees
after employment but before retirement. The liability related to these benefits
at December 31, 1997 is approximately $1,266 and is recorded in pension and
other long-term benefits.
Employees' Stock Ownership Plan
The Company also maintains a qualified Employees' Stock Ownership Plan
(ESOP), covering substantially all of its United States employees. The Board of
Directors of the Company is authorized to make contributions from time to time
to the plan trust fund.
In 1989, the Company and its ESOP entered into a leveraged transaction
whereby the Company borrowed $10,000 from a bank and loaned such funds to the
ESOP. The ESOP used the loan proceeds to purchase, as restated to reflect the
1990 stock dividend, 239,792.236 shares of the Company's common stock; 87,590
shares from estates and 152,202.236 shares from the Company's treasury stock
account. The bank loan bears interest at 7.85% and is payable in ten graduated
annual installments through June 30, 1999. Based upon the borrowing rates
currently available to the Company for bank loans with similar terms and average
maturities, the carrying value of the bank loan approximates its current fair
value. The common stock purchased by the ESOP is held by the ESOP trustees as
collateral for the loan from the Company to the ESOP in a restricted account.
Each year the Company will make contributions to the plan, which the plan's
trustees will use to repay the loan from the Company in an amount sufficient for
the Company to make interest and principal payments on the loan. The
collateralized shares of common stock will be released from restriction and
allocated to participating employees annually, as of December 31, based upon the
percentage of debt service paid during the year then ended to the projected
total amount of debt service to be paid under the loan agreement.
Contributions to the ESOP amounted to $1,317, $1,272 and $1,227 in 1997,
1996 and 1995, respectively. The fair value of the shares held by the ESOP
amounted to $33,592 and $34,981 at December 31, 1997 and 1996, respectively.
The Company's Canadian subsidiary maintains a similar plan which covers
substantially all of the Canadian Company's employees. The Canadian subsidiary
contributed approximately $217, $183 and $153 to the Canadian plan trust fund in
1997, 1996 and 1995, respectively.
Stock Option Plan
During 1993, the Company adopted a Stock Option Plan. The Plan provides for
the granting of non-statutory stock options to officers and other employees of
the Company. Options for the purchase of 400,000 shares of common stock, par
value $10 per share, may be granted. The options become fully vested over a
period of up to four years or upon retirement or death and expire ten years from
date of grant. During 1993, the Company granted options to purchase 233,785
shares at an option price of $73.26 per share, which was the fair value at the
date of grant as determined by independent appraisal. During 1997, 1,085 options
were exercised and in 1996 no options were exercised. During 1997 and 1995,
25,000 and 1,000 options, respectively, were granted to certain employees of the
Company. At December 31, 1997 options to purchase 169,122 shares were
exercisable.
28
<PAGE>
Notes to Consolidated Financial Statements (Continued)
10. SHORT-TERM BORROWINGS
Information regarding the Company's arrangements with banks in the United
States, Canada, New Zealand and Australia for short-term lines of credit
follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding borrowings at end of year $ 4,967 $28,165
Average interest rate on outstanding
borrowings at end of year 6.5% 6.2%
Unused portion of lines of credit at end of year $89,659 $73,199
</TABLE>
There are no significant compensating cash balances or commitment fees that
relate to the above arrangements. Due to the short maturity of these borrowings,
the carrying amount approximates fair value.
11. OTHER LIABILITIES AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
December 31,
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income taxes payable $ 3,285 $ 959
Restructuring - current portion 11,311
Salaries, wages and commissions 6,568 7,094
Customer discounts and allowances 4,129 2,802
Other 8,506 4,063
-----------------------------------
Total $33,799 $14,918
===================================
</TABLE>
The current portion of the restructuring reserve shown above primarily
consists of severance and other related liabilities.
29
<PAGE>
Notes to Consolidated Financial Statements (Continued)
12. GEOGRAPHIC SEGMENT INFORMATION
The Company manufactures and sells coatings for use by the general public
and industrial and commercial users in the United States, Canada, New Zealand
and Australia. Transfers between geographic areas are not significant and are
eliminated in consolidation. Assets and operating results by geographic area are
as follows:
Net Sales:
New Zealand
United States Canada and Australia Consolidated
------------- ------ ------------- ------------
1997 $ 573,091 $ 75,709 $ 17,494 $ 666,294
1996 $ 541,830 $ 71,821 $ 11,539 $ 625,190
1995 $ 496,539 $ 62,560 $ 5,112 $ 564,211
Income (Loss) Before Taxes, Minority Interest,
and Cumulative Effect of Change in Accounting Principle:
1997 $ 39,959 $ 8,499 $ (3,753) $ 44,705
1996 $ 69,793 $ 7,608 $ (3,213) $ 74,188
1995 $ 49,488 $ 4,978 $ (1,666) $ 52,800
Identifiable Assets:
1997 $ 294,969 $ 44,955 $ 11,308 $ 351,232
1996 $ 271,675 $ 44,220 $ 15,102 $ 330,997
1995 $ 279,655 $ 41,015 $ 9,485 $ 330,155
13. ENVIRONMENTAL MATTERS
The Company operates in an industry subject to extensive environmental
regulations and is subject to potential liability under various claims and legal
actions which are pending or may be asserted in the future against the Company
regarding environmental remediation matters. Estimates of the future costs to be
incurred relating to such matters are necessary due to various uncertainties
surrounding remediation procedures, including the development of new
technologies, the enactment of additional regulations, the identification of new
sites for which the Company could be a potentially responsible party ("PRP") and
the apportionment of responsibility among identified PRPs in addition to the
Company. The Company establishes reserves for environmental matters when
remediation expenditures are probable and estimable. It is reasonably possible
that the final resolution of some of these matters may require significant
expenditures by the Company in excess of its existing reserves.
The Company has accrued approximately $2,922 for estimated potential
cleanup costs based upon its monitoring of ongoing activities and its past
experience with these matters.
30
<PAGE>
Notes to Consolidated Financial Statements (Continued)
14. LONG-TERM OBLIGATIONS
Included in long-term obligations is long-term debt as follows:
December 31,
1997 1996
- ---------------------------------------------------------------------------
ESOP loan payable $2,700 $3,900
Bank debt (interest ranging from 7% - 10.5%) 1,332
------------------------
Total 4,032 3,900
Less current maturities 1,628 1,200
------------------------
Long-term debt $2,404 $2,700
========================
Aggregate maturities of long-term debt for the next five years are as
follows: 1998 - $1,628; 1999 - $1,702; 2000 - $311; 2001 - $291 and 2002 - $100.
At December 31, 1997 and 1996, the Company was contingently liable for
guarantees of indebtedness owed by third parties in the amount of $16,800 and
$5,234, respectively, relating to financing arrangements between a bank and such
third parties, to whom the Company sells merchandise. It is not practical to
estimate the fair value of the guarantee. As of December 31, 1997 the Company
has a reserve of $3,186 included in long-term obligations for recourse
provisions resulting from the sale of notes as described in Note 5.
15. LEASES
The Company leases data processing equipment, buildings, transportation
equipment, autos and miscellaneous equipment under operating leases expiring at
various dates.
Minimum future obligations under leases as of December 31, 1997 are as
follows:
Year ending December 31, Total
- --------------------------------------------------------------------------------
1998 $ 6,236
1999 5,269
2000 3,850
2001 2,746
2002 1,775
Thereafter 7,152
-------
Total minimum lease payments $27,028
=======
Rental expense on operating leases (including amounts based on equipment
usage) was approximately $9,857, $8,291 and $8,505 for the years ended December
31, 1997, 1996 and 1995, respectively.
31
<PAGE>
Notes to Consolidated Financial Statements (Continued)
16. SHAREHOLDERS' EQUITY
In 1978 the Board of Directors, with shareholder approval, adopted an
Employees' Stock Purchase Plan (ESPP). Under the Plan, as restated to reflect
stock dividends, up to an aggregate of 1,600,000 shares of Common Stock held in
the treasury may be offered and sold from time to time to employees of the
Company and its subsidiaries at the fair value price per share as determined by
an independent appraisal firm at the date of offering. Since 1979, 639,665
shares have been sold to employees under the Plan.
Notes receivable outstanding with respect to the above referenced Plan, as
well as the Stock Option Plan and the ESOP note receivable, as of December 31,
1997 and 1996 are reflected in the balance sheets as reductions in shareholders'
equity. The notes received by the Company relative to the ESPP offerings since
1991 are non-interest bearing. Notes received by the Company relative to the
Stock Option Plan bear interest at the then current rates of interest.
Treasury stock is reflected at acquisition value, determined by the use of
the first-in, first-out (FIFO) method. Sales and distributions of treasury
shares are recorded at fair value price per share. Any excess of such fair value
proceeds over the FIFO cost is reflected as additional paid-in capital.
A reconciliation of the number of common shares outstanding is as follows:
<TABLE>
<CAPTION>
Shares of Common Stock
Issued Treasury Outstanding
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1995 13,164,312 3,542,080 9,622,232
Sale and distribution of treasury stock (3,399) 3,399
Treasury stock purchases 157,738 (157,738)
--------------------------------------------------
Balance, December 31, 1995 13,164,312 3,696,419 9,467,893
Distribution of treasury stock (272) 272
Treasury stock purchases 434,580 (434,580)
--------------------------------------------------
Balance, December 31, 1996 13,164,312 4,130,727 9,033,585
Sale and distribution of treasury stock (15,187) 15,187
Treasury stock purchases 165,075 (165,075)
--------------------------------------------------
Balance, December 31, 1997 13,164,312 4,280,615 8,883,697
==================================================
</TABLE>
32
<PAGE>
Notes to Consolidated Financial Statements (Continued)
17. INCOME TAXES
The composition of the income tax provision is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
State and local income taxes $ 3,523 $ 5,148 $ 4,627
Foreign income taxes 4,032 3,418 2,056
Federal income taxes:
Current 24,629 23,054 15,851
Deferred (11,684) 52 21
------------------------------------------
Total $20,500 $31,672 $22,555
==========================================
</TABLE>
Deferred income taxes represent the tax effects of differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, primarily as follows:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Pension and employee benefit related items $10,613 $ 4,606
Accounts receivable and recourse reserves 4,621 2,686
Restructuring 4,327
Inventory reserves 3,098 715
Claims reserves 2,204 2,045
Valuation reserves 1,791 2,125
Other 1,409 88
------------------------
Total deferred tax assets $28,063 $12,265
========================
Deferred Tax Liabilities:
Property, plant and equipment $ 8,557 $ 6,870
Temporary Co-Ownership related items 2,306
Pension and employee benefit related items 900 779
------------------------
Total deferred tax liabilities $11,763 $ 7,649
========================
</TABLE>
A reconciliation of the statutory federal tax rate and effective tax rate
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Effect of:
State and local income taxes 5.1 4.5 5.7
Foreign income taxes 5.0 2.5 1.7
Other - net .8 .7 .3
-----------------------------------------
Effective tax rate 45.9% 42.7% 42.7%
=========================================
</TABLE>
The Company does not accrue Federal income taxes on its equity in the
undistributed earnings of its Canadian subsidiary, which amounted to $33,619,
$30,293 and $27,909 at December 31, 1997, 1996 and 1995, respectively, because
the Company intends to reinvest such earnings indefinitely.
33
<PAGE>
Notes to Consolidated Financial Statements (Continued)
18. OTHER EXPENSE, NET
The components of other expense and (income), net are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other income $(2,663) $(1,698) $(1,502)
Interest expense 2,664 3,626 3,110
Loss on the disposal of fixed assets 45 75 39
Other expense 73
------------------------------------------
Net $ 46 $ 2,076 $ 1,647
==========================================
</TABLE>
34
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information set forth under the captions (i)
"ELECTION OF DIRECTORS" at pages 4, 5 and 6 and "Section 16(a) Beneficial
Ownership Reporting Compliance" at page 21 of the Company's Proxy Statement
dated March 23, 1998, for use in connection with its 1998 Annual Meeting of
Shareholders, which information is hereby incorporated by reference, and (ii)
"EXECUTIVE OFFICERS OF THE REGISTRANT" at page 9 of this Annual Report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information set forth under the caption
"DIRECTOR COMPENSATION", "EXECUTIVE COMPENSATION" and "SEVERANCE ARRANGEMENTS"
at pages 8, 9, 10, 11 and 15 of the Company's Proxy Statement dated March 23 ,
1998, for use in connection with its 1998 Annual Meeting of Shareholders, which
information is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Reference is made to the information set forth under the caption
"PRINCIPAL SHAREHOLDERS" at pages 2 and 3 of the Company's Proxy Statement dated
March 23, 1998, for use in connection with its 1998 Annual Meeting of
Shareholders, which information is hereby incorporated by reference.
(b) Security Ownership of Management
Reference is made to the information set forth under the caption
"ELECTION OF DIRECTORS - Ownership of Securities by Nominees and Directors" at
pages 6, 7 and 8 of the Company's Proxy Statement dated March 23 , 1998, for use
in connection with its 1998 Annual Meeting of Shareholders, which information is
hereby incorporated by reference.
(c) Changes in Control
To the knowledge of the Company, there are no arrangements the
operation of which may at a subsequent date result in a change in control of the
Company.
35
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information set forth under the caption
"COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" at pages 11 and 12
of the Company's Proxy Statement dated March 23, 1998, for use in connection
with its 1998 Annual Meeting of Shareholders, which information is hereby
incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) (1) List of Financial Statements Included Under Item 8
of this Report
Independent Auditors' Report 16
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 17
Consolidated Balance Sheets, December 31, 1997
and 1996 18
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1997, 1996 and 1995 19
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 20
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1997, 1996 and 1995 21 - 34
(2) Financial Statement Supplemental Schedule
II Consolidated Valuation and Qualifying Accounts
For the Years Ended December 31,
1997, 1996 and 1995 42
All other schedules for which provision is made in the applicable
regulations of the Securities and Exchange Commission are omitted because of the
absence of conditions under which they are required or because the information
required thereby is shown in the financial statements or notes thereto.
The individual financial statements of the Company have been omitted
because the Company is primarily an operating Company and all subsidiaries are
included in the consolidated financial statements being filed. In addition, in
the aggregate, such subsidiaries do not have minority equity interests and/or
indebtedness to any person other than the Company or its consolidated
subsidiaries in amounts which together exceed 5 percent of the total assets of
the Company at December 31, 1997 and 1996.
36
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company during the last
quarter of the fiscal year ended December 31, 1997.
(c) List of Exhibits
(3) Restated Certificate of Incorporation and Bylaws of the Company.
(i) Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3(a) of the
Company's Registration Statement under the Securities Act of
1933, as amended, on Form S-1 - Registration No. 2-62626).
Reference is made to the information set forth under the
caption "Amendment of the Restated Certificate of
Incorporation" at pages 10 and 11 of the Company's Proxy
Statement dated March 22, 1985, for use in connection with
its 1985 Annual Meeting of Shareholders, which information
is hereby incorporated by reference.
Reference is made to the information set forth under the
caption "Limitation of Liability of Directors and Officers
to the Maximum Extent Permitted by New Jersey Law" at pages
10, 11, 12 and 13 of the Company's Proxy Statement dated
March 28, 1988, for use in connection with its 1988 Annual
Meeting of Shareholders, which information is hereby
incorporated by reference.
Reference is made to the information set forth under the
caption "Amendment of the Restated Certificate of
Incorporation" at pages 11 and 12 of the Company's Proxy
Statement dated March 21, 1989, for use in connection with
its 1989 Annual Meeting of Shareholders, which information
is hereby incorporated by reference.
Reference is made to the information set forth under the
caption "Amendment of the Certificate of Incorporation" at
pages 15, 16 and 17 of the Company's Proxy Statement dated
March 28, 1994, for use in connection with its 1994 Annual
Meeting of Shareholders, which information is hereby
incorporated by reference.
(ii) Bylaws of the Company (incorporated herein by reference to
Exhibit 3(b) of the Company's Registration Statement under
the Securities Act of 1933, as amended, on Form S-1 -
Registration No. 2-62626).
Reference is made to the information set forth under the
caption "Indemnification of Directors, Officers and
Employees" at pages 13 and 14 of the Company's Proxy
Statement dated March 28, 1988, for use in connection with
its 1988 Annual Meeting of Shareholders, which information
is hereby incorporated by reference.
Reference is made to the information set forth under the
caption "Approval of Amendments of the Company Bylaws" at
pages 17 through 21 of the Company's Proxy Statement dated
March 28, 1994, for use in connection with its 1994 Annual
Meeting of Shareholders, which information is hereby
incorporated by reference.
37
<PAGE>
(10) Material Contracts
(iii) (A) Employees' Stock Purchase Plan of the Company (incorporated
herein by reference to Exhibit 4(a) of the Company's
Registration Statement under the Securities Act of 1933, as
amended, on Form S-8 - Registration No. 33-2694).
Reference is made to the information set forth under the
caption "Amendment of Employees' Stock Purchase Plan" at
pages 11 and 12 of the Company's Proxy Statement dated
March 25, 1991, for use in connection with its 1991 Annual
Meeting of Shareholders, which information is hereby
incorporated by reference.
Reference is made to the information set forth under the
caption "Approval of the Stock Option Plan" at pages 13, 14
and 15 of the Company's Proxy Statement dated March 22,
1993, for use in connection with its 1993 Annual Meeting of
Shareholders, which information is hereby incorporated by
reference.
Reference is made to the information set forth under the
caption "Supplemental Executive Retirement Plan" and
"Severance Arrangements" at pages 10, 11 and 15 of the
Company's Proxy Statement dated March 21, 1997, for use in
connection with its 1997 Annual Meeting of Shareholders,
which information is hereby incorporated by reference.
(21) Subsidiaries of the Company Page 44
(23) Consent of Experts and Counsel Page 45
(27) Financial Data Schedule Page 46
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in Montvale, New Jersey, on the 23rd day of March, 1998.
BENJAMIN MOORE & CO.
By /s/ Yvan Dupuy
---------------------
Yvan Dupuy
President and Chief
Operating Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Yvan Dupuy and Richard Roob, and each of
them, his true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K and to file the same, with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
-------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
39
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board of
Directors and Chief
Executive Officer;
(Principal Executive
Officer); Acting Chief Financial
/s/ Richard Roob Officer and Director March 20, 1998
- ------------------------------
Richard Roob
President and Chief
Operating Officer;
/s/ Yvan Dupuy Director March 20, 1998
- ------------------------------
Yvan Dupuy
/s/ Edward G. Klein Corporate Controller March 20, 1998
- ------------------------------
Edward G. Klein
/s/ Benjamin M. Belcher, Jr. Director March 20, 1998
- ------------------------------
Benjamin M. Belcher, Jr.
/s/ W. C. Belcher Director March 20, 1998
- ------------------------------
Ward C. Belcher
/s/ Charles H. Bergmann, Jr. Director March 20, 1998
- ------------------------------
Charles H. Bergmann, Jr.
/s/ Frederick J. Costello Director March 20, 1998
- ------------------------------
Frederick J. Costello
/s/ W. J. Fritz Director March 20, 1998
- ------------------------------
William J. Fritz
/s/ R. J. Hodgson Director March 20, 1998
- ------------------------------
Robert J. Hodgson
/s/ G. Moore Director March 20, 1998
- ------------------------------
Gerald W. Moore
/s/ John C. Moore, Jr. Director March 20, 1998
- ------------------------------
John C. Moore, Jr.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Director March 20, 1998
- ------------------------------
Robert H. Mundheim
Director March 20, 1998
- ------------------------------
Michael C. Quaid
/s/ Charles C. Vail Director March 20, 1998
- ------------------------------
Charles C. Vail
/s/ Ward B. Wack Director March 20, 1998
- ------------------------------
Ward B. Wack
/s/ Sara B. Wardell Director March 20, 1998
- ------------------------------
Sara B. Wardell
/s/ M. C. Workman Director March 20, 1998
- ------------------------------
Maurice C. Workman
</TABLE>
41
<PAGE>
SCHEDULE II
BENJAMIN MOORE & CO. and Subsidiaries
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
Balance At Charged To Charged
Beginning Costs And To Other Balance At
Description Of Year Expenses Accounts Deductions End of Year
----------- ------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance For
Doubtful Accounts:
1997 ...............$ 9,359 $ 19,551 $ 379 $ 18,772 (1) $10,517
======================================================================================================
1996 ...............$ 7,662 $ 6,495 $ - $ 4,798 (1) $ 9,359
======================================================================================================
1995 ...............$ 7,329 $ 4,317 $ - $ 3,984 (1) $ 7,662
======================================================================================================
Reserve For
Inventories:
1997 $ 0 $ 2,000 $ - $ - $ 2,000
======================================================================================================
</TABLE>
(1) Accounts Receivable Written Off - Net of Recoveries
42
<PAGE>
INDEPENDENT AUDITORS' REPORT
Benjamin Moore & Co.:
We have audited the financial statements of Benjamin Moore & Co. and
subsidiaries as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997, and have issued our report thereon dated
February 27, 1998, which report includes an explanatory paragraph relating to
the change in the method of computing depreciation; such financial statements
and report are included elsewhere in this Form 10-K. Our audits also included
the financial statement schedule of Benjamin Moore & Co. and subsidiaries,
listed in Item 14. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such 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.
Deloitte & Touche LLP
Parsippany, New Jersey
February 27, 1998
Subsidiaries of the Company
<TABLE>
<CAPTION>
Percentage Jurisdiction of Immediate
Name Owned Incorporation Parent
- ---- ----- ------------- ------
<S> <C> <C> <C>
Benjamin Moore & Co., Limited 84.0 Canada Company
Technical Coatings Co. Limited 100.0 Canada Benjamin Moore & Co.,
Limited
Technical Coatings Co. 100.0 Pennsylvania Company
Alachua Tung Oil Company 100.0 Florida Company
Benjamin Moore & Co (NZ) Limited 100.0 New Zealand Company
Benjamin Moore Pacific Limited 51.0 New Zealand Benjamin Moore & Co (NZ)
Limited
White Knight Paints Pty. Ltd. 51.0 Australia Benjamin Moore
Pacific Limited
the indecor group 100.0 New Jersey Company
J. C. Licht Co. 66.67 Illinois the indecor group
</TABLE>
INDEPENDENT AUDITORS' CONSENT
Benjamin Moore & Co.:
We consent to the incorporation by reference in Post-Effective Amendment No. 2
to Registration Statement No. 33-2694 and in Registration Statement Nos.
33-39750 and 33-69480 of Benjamin Moore & Co. and subsidiaries on Form S-8 of
our report dated February 27, 1998 (which expresses an unqualified opinion and
includes an explanatory paragraph relating to the change in the method of
computing depreciation) appearing in this Annual Report on Form 10-K of Benjamin
Moore & Co. and subsidiaries for the year ended December 31, 1997.
Deloitte & Touche LLP
Parsippany, New Jersey
February 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1997 EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME,
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF CASH FLOWS AND THE NOTES
THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,245
<SECURITIES> 37,654
<RECEIVABLES> 94,483
<ALLOWANCES> 10,517
<INVENTORY> 72,942
<CURRENT-ASSETS> 222,775
<PP&E> 178,083
<DEPRECIATION> 90,021
<TOTAL-ASSETS> 351,232
<CURRENT-LIABILITIES> 66,756
<BONDS> 4,032
0
0
<COMMON> 131,643
<OTHER-SE> 104,725
<TOTAL-LIABILITY-AND-EQUITY> 351,232
<SALES> 666,294
<TOTAL-REVENUES> 666,294
<CGS> 328,728
<TOTAL-COSTS> 621,543
<OTHER-EXPENSES> 46
<LOSS-PROVISION> 19,551
<INTEREST-EXPENSE> 2,664
<INCOME-PRETAX> 44,705
<INCOME-TAX> 20,500
<INCOME-CONTINUING> 24,304
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 6,331
<NET-INCOME> 30,635
<EPS-PRIMARY> 3.42
<EPS-DILUTED> 3.42
</TABLE>
