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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 1-5794
MASCO CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 38-1794485
(State of Incorporation) (I.R.S. Employer Identification No.)
21001 VAN BORN ROAD, TAYLOR, MICHIGAN 48180
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 313-274-7400
Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $1.00 par Value New York Stock Exchange, Inc.
Series A Participating Cumulative
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant on March 15, 2000 (based on the closing sale
price of $19 5/16 of the Registrant's Common Stock, as reported on the New York
Stock Exchange Composite Tape on such date) was approximately $8,447,786,200.
Number of shares outstanding of the Registrant's Common Stock at March 15, 2000:
447,382,000 shares of Common Stock, par value $1.00 per share
Portions of the Registrant's definitive Proxy Statement to be filed for its 2000
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.
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MASCO CORPORATION
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business.................................................... 2
2. Properties.................................................. 6
3. Legal Proceedings........................................... 6
4. Submission of Matters to a Vote of Security Holders......... 7
Supplementary Item. Executive Officers of Registrant........ 7
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 7
6. Selected Financial Data..................................... 8
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 8
8. Financial Statements and Supplementary Data................. 18
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 42
PART III
10. Directors and Executive Officers of the Registrant.......... 42
11. Executive Compensation...................................... 42
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 42
13. Certain Relationships and Related Transactions.............. 42
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 43
Signatures.................................................. 47
FINANCIAL STATEMENT SCHEDULES
Masco Corporation Financial Statement Schedules............. F-1
MascoTech, Inc. and Subsidiaries Consolidated Financial
Statements and Financial Statement Schedule............... F-3
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PART I
ITEM 1. BUSINESS.
Masco Corporation manufactures and sells home improvement and building
products, with emphasis on brand name products holding leadership positions in
their markets. The Company's principal product and service categories are
faucets, kitchen and bath cabinets, other kitchen and bath products,
architectural coatings, builders' hardware products and other specialty products
and services. The Company is among the largest manufacturers in North America of
brand name consumer products designed for the home improvement and home building
industries. Except as the context otherwise indicates, the terms "Masco" and the
"Company" refer to Masco Corporation and its consolidated subsidiaries.
The Company's operations consist of two business segments, North America
and International. Approximately 83% of the Company's sales are generated by
operations in North America (primarily in the United States). International
operations, currently established in 13 countries (principally in Europe),
comprise the balance. European operations are located principally in England,
Denmark and Germany. Additional financial information concerning the Company's
operations by segments as of and for the three years ended December 31, 1999 is
set forth in the Note to the Company's Consolidated Financial Statements
captioned "Segment Information," included in Item 8 of this Report. The
following table sets forth, for the three years ended December 31, 1999, the
contribution of the Company's segments to net sales and operating profit, in
thousands.
NET SALES(1)
------------------------------------
1999 1998 1997
---------- ---------- ----------
North America............................. $5,238,000 $4,441,000 $3,820,000
International, principally Europe......... 1,069,000 839,000 688,000
---------- ---------- ----------
Total................................ $6,307,000 $5,280,000 $4,508,000
========== ========== ==========
OPERATING PROFIT(1)(2)
------------------------------------
1999 1998 1997
---------- ---------- ----------
North America............................. $ 867,000 $ 829,000 $ 689,000
International, principally Europe......... 136,000 123,000 99,000
---------- ---------- ----------
Total................................ $1,003,000 $ 952,000 $ 788,000
========== ========== ==========
(1) Amounts for 1998 and 1997 have been restated to reflect the
change in the segments' composition and to include the
operations of acquired companies accounted for as
pooling-of-interests transactions.
(2) Amounts are before general corporate expense and include
goodwill amortization.
Acquisitions have been a key factor in the Company's growth. During 1999
and early 2000, the Company merged with or acquired 13 businesses with aggregate
annual sales of approximately $2 billion. Of these, eight are based in North
America and five in Europe. The most significant North American transactions are
the mergers with Behr Process Corporation, a manufacturer of premium
architectural coatings and Mill's Pride, L.L.P., a manufacturer of
ready-to-assemble and assembled kitchen and bath cabinetry, bath vanities, home
office workstations, entertainment centers, storage products, bookcases and
kitchen utility products. More information about these transactions is set forth
in the following discussion and under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7 of this
Report.
NORTH AMERICA SEGMENT
The Company manufactures a wide variety of faucet models under several
brand names. DELTA(R) and PEERLESS(R) single and double handle faucets are used
on kitchen, lavatory and other sinks and in bath and shower installations. DELTA
faucets are sold by manufacturers' representatives and Company sales personnel
to major retail accounts and to distributors who sell the faucets to plumbers,
building contractors, remodelers, smaller retailers and others. PEERLESS
faucets, designed for the "do-it-yourself" market, are sold primarily
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through manufacturers' representatives directly to retail outlets such as mass
merchandisers, home centers and hardware stores and are also sold under private
label.
The percentage of operating profit to net sales on faucets is somewhat
higher than that on most other products offered by the Company. The Company
believes that the quality, styling and reliability of and available finishes for
its faucets, manufacturing efficiencies and capabilities, its marketing and
merchandising activities, and the development of a broad line of products, have
accounted for the continued strength of its faucet sales. Management believes
that Masco's faucet operations hold a leadership position in the North American
market, with Moen, Price Pfister, Kohler and American Standard as major brand
competitors. Competition from import products is also a major factor in the
Company's markets.
The Company manufactures economy, stock and semi-custom kitchen and bath
cabinetry in a broad range of styles and price points. The 1999 acquisition of
Mill's Pride, L.L.P. added a leading manufacturer of ready-to-assemble and
assembled cabinetry to the existing cabinet manufacturing operations. The
Company's cabinets are sold in North America under a number of trademarks,
including MERILLAT(R), KRAFTMAID(R), QUALITY CABINETS(R), STARMARK(R) and MILL'S
PRIDE(R), with sales to distributors, home centers and dealers and direct to
builders for both the home improvement and new construction markets. The cabinet
manufacturing industry in the United States is very competitive, with several
large competitors and hundreds of smaller companies. Management believes that
the Company is the largest manufacturer of kitchen and bath cabinetry in North
America. Significant competitors are Aristokraft, Shrock, American Woodmark and
Omega.
Other kitchen and bath products sold by the Company include AQUA GLASS(R)
acrylic and gelcoat bath and shower units and whirlpools, and MIROLIN(R) bath
units, which are sold primarily to wholesale plumbing distributors for use in
the home improvement and new home construction markets. Bath and shower
enclosure units, shower trays and laundry tubs are sold under the brand names
AMERICAN SHOWER & BATH(TM), PLASKOLITE(TM) and TRAYCO(TM) to the home
improvement market through hardware stores and home centers. The Company
manufactures bath and shower accessories under the brand names BALDWIN(R),
FRANKLIN BRASS(R) and MELARD(TM) and bathroom storage products under the brand
name ZENITH PRODUCTS(R). These products are sold to home centers, hardware
stores and mass merchandisers for the "do-it-yourself" market. The Company's
spas and hot tubs are sold under the brand name HOT SPRING SPA(R) and other
trademarks directly to retailers for sale to residential customers.
Also included in other kitchen and bath products are brass and copper
plumbing system components and other plumbing specialties, which are sold to
plumbing, heating and hardware wholesalers and to home centers, hardware stores,
building supply outlets and other mass merchandisers. These products are
marketed in North America for the wholesale trade under the BRASSCRAFT(R)
trademark and for the "do-it-yourself" market under the PLUMB SHOP(R), HOME
PLUMBER(R), MASTER PLUMBER(R) and MELARD(TM) trademarks and are also sold under
private label.
In 1999, the Company added a new line of products with the acquisition of
Behr Process Corporation. Behr is a manufacturer of premium architectural
coatings, including paints, stains, varnishes and waterproofings. BEHR(R)
products are sold in the United States and Canada primarily to the
"do-it-yourself" market through home centers.
Included in the builders' hardware product category are premium BALDWIN(R)
quality brass trim and mortise lock sets, knobs and trim and other builders'
hardware, which are manufactured and sold for the home improvement and new home
construction markets. LIBERTY HARDWARE(R) cabinet and builders' hardware is
manufactured for original equipment manufacturers as well as for the home center
and wholesale markets. WEISER(R) lock sets and related hardware are sold through
contractor supply outlets, hardware distributors and home centers. SAFLOK(TM)
electronic lock sets and WINFIELD(TM) mechanical lock sets are sold primarily to
the hospitality market. The Company also manufactures electronic lock sets under
the brand name LA GARD(TM) for use by the banking industry on safes, vaults and
ATMs and related cabinetry. Key competitors to Baldwin and Weiser in the North
American lock set market are Kwikset and Schlage. Imported products are also
becoming a significant factor in this market.
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Since 1996, the Company has featured on many of its decorative brass
faucets and other products a durable coating that offers tarnish protection and
scratch resistance, under the trademarks BRILLIANCE(R) and THE LIFETIME FINISH
FROM BALDWIN(R). This innovative finish is currently available on many of the
Company's kitchen and bath products and door hardware.
Through local offices of Gale Industries, Inc. and Cary Corporation ("The
Cary Group") in various parts of the United States, the Company also supplies
and installs insulation and other building products primarily for the
residential home building industry. The acquisition of INRECON, L.L.C. during
1999 expanded the Company's service operations with numerous North American
locations that perform repair, remodeling and restoration of residential,
commercial and institutional facilities damaged by fire, wind, water and other
disasters.
The Company manufactures heating, ventilating and air conditioning
accessories under the trademark AMERICAN METAL PRODUCTS(TM) (grilles, registers,
diffusers and Type B Gas Vents), and decorative registers under REGISTERS
UNIQUE(TM), which are sold through wholesale distribution and home centers.
The Company's product offerings were expanded in 1999 through the
acquisition of Arrow Fastener Co., with a complete line of manual and electric
staple guns, hammer and wiring tackers and other fastening tools. Arrow Fastener
products are sold through various distribution channels including wholesalers,
home centers and other retailers.
INTERNATIONAL SEGMENT
The Company manufactures faucets and various other plumbing products under
the brand names DAMIXA(R), GUMMERS(TM) and MARIANI(TM) which are sold throughout
Europe through multiple distribution channels. There are several major
competitors among the European manufacturers of faucets and accessories,
primarily in Germany and Italy, and hundreds of smaller companies throughout
Europe.
The Company manufactures cabinetry in Germany, England, Spain and Denmark
with sales to European consumers, wholesalers and builders through distribution
channels that parallel domestic distribution. European cabinet manufacturers
sell under the brand names, THE MOORES GROUP(TM) for distribution in the United
Kingdom, ALMA KUCHEN(TM) in Germany, and ALVIC(TM) and GMU(TM), primarily in
Spain. The Company significantly expanded its ready-to-assemble cabinet
manufacturing operations in January 2000 with the acquisition of Tvilum-Scanbirk
A/S, headquartered in Denmark, which sells cabinetry, shelving, storage units,
workstations and other products throughout Europe and in the U.S. under several
brand names. Tvilum-Scanbirk had sales in 1999 in excess of $200 million. The
cabinetry manufacturing industry in Europe is highly fragmented, with several
leading producers located in Germany, France and Italy, and hundreds of smaller
manufacturers throughout Europe.
Other kitchen and bath products include HUPPE(R) luxury bath and shower
enclosures sold by the Company through wholesale channels primarily in Germany.
HERITAGE(TM) ceramic and acrylic bath fixtures and faucets are sold in the
United Kingdom directly to selected retailers.
AVOCET(R) builders' hardware products include locks and door and window
hardware. These are distributed to home centers and other retailers, builders
and original equipment door and window manufacturers, primarily in the United
Kingdom.
Commercial ventilating products are manufactured and distributed by the
Company in Europe under the GEBHARDT(TM) brand name. The Company also
manufactures residential hydronic radiators and heat convectors under the brand
names VASCO(R), BRUGMAN(TM) and SUPERIA(TM) and distributes to the European
market from operations in Belgium and Holland. JUNG(TM) water pumps are
manufactured and distributed by the Company primarily in Germany. Certain
International Segment operations manufacture acoustical insulation materials
used for plumbing systems in both residential and commercial buildings.
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ADDITIONAL INFORMATION
- The Company's sales of faucets aggregated approximately $937 million in
1999, $884 million in 1998 and $815 million in 1997. Aggregate sales of
kitchen and bath cabinets were approximately $1,971 million in 1999,
$1,698 million in 1998 and $1,371 million in 1997.
- Direct sales of the Company's product lines to home center retailers have
increased substantially in recent years, and in 1999 sales to The Home
Depot were $1,539 million (approximately 24 percent of sales). Although
builders, dealers and other retailers represent other channels of
distribution for the Company's products, the Company believes that the
loss of The Home Depot as a customer would have a material adverse impact
on the Company.
- The major markets for the Company's products are highly competitive.
Competition in all of the Company's product lines is based primarily on
performance, quality, style, delivery, customer service and price, with
the relative importance of such factors varying among products.
- The Company's operations in the International Segment are subject to
political, monetary, economic and other risks attendant generally to
international businesses. These risks generally vary from country to
country.
- Financial information concerning the Company's export sales and foreign
and domestic operations, including the net sales, operating profit and
assets which are attributable to the Company's North American and
International segments, as of and for the three years ended December 31,
1999, is set forth in Item 8 of this Report in the Note to the Company's
Consolidated Financial Statements captioned "Segment Information."
- Although the architectural coatings division experiences stronger sales
during the second and third calendar quarters, corresponding to peak
building and remodeling seasons, no material portion of the Company's
business is seasonal.
- The Company maintains a higher investment in inventories for certain of
its businesses than the average manufacturing company, a result of its
strategies of providing superior customer service, establishing efficient
production scheduling and benefiting from larger, more cost-effective
purchasing, but otherwise has no special working capital requirements.
- The Company does not consider backlog orders to be material.
- No material portion of the Company's business is subject to renegotiation
of profits or termination of contracts at the election of the U.S.
government.
- Compliance with federal, state and local regulations relating to the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, is not expected to result in material
capital expenditures by the Company or to have a material adverse effect
on the Company's earnings or competitive position.
- In general, raw materials required by the Company are obtainable from
various sources and in the quantities desired, although from time to time
various operations may encounter shortages or unusual price changes.
PATENTS AND TRADEMARKS
The Company holds United States and foreign patents covering its vapor
deposition finish and various design features and valve constructions used in
certain of its faucets, and holds numerous other patents and patent
applications, licenses, trademarks and tradenames. As a manufacturer of brand
name consumer products, the Company views its trademarks and other proprietary
rights as important, but does not believe that there is any reasonable
likelihood of a loss of such rights that would have a material adverse effect on
the Company's present business as a whole.
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EMPLOYEES
At December 31, 1999, the Company employed approximately 42,500 people.
Satisfactory relations have generally prevailed between the Company and its
employees.
EQUITY INVESTMENTS
The Company has equity investments in certain affiliated companies. One of
these companies, MascoTech, Inc., was formed in July, 1984 when the Company
distributed to its stockholders shares of MascoTech common stock as a special
dividend. The Company's ownership in MascoTech is currently 17.5 percent.
MascoTech is a diversified industrial manufacturing company utilizing advanced
metalworking capabilities to supply metal formed components used in vehicle
engine and drivetrain applications, specialty fasteners, towing systems,
packaging and sealing products and other industrial products. MascoTech's net
sales for 1999 were approximately $1.7 billion.
MascoTech's 44 principal manufacturing facilities located in the United
States range in size from approximately 10,000 square feet to 420,000 square
feet, the majority of which are in Michigan, Ohio and Indiana. It also operates
17 manufacturing facilities in nine foreign countries: Australia, Brazil,
Canada, Czech Republic, England, Germany, Italy, Mexico and Spain. Substantially
all of MascoTech's manufacturing facilities are owned by MascoTech and are not
subject to significant encumbrances. The MascoTech executive offices are located
in Taylor, Michigan, and are provided by the Company to MascoTech under a
corporate services agreement. MascoTech's buildings, machinery and equipment
have been generally well maintained, are in good operating condition, and are
adequate for current production requirements.
Further information about the Company's equity investments is set forth in
the Note to the Company's Consolidated Financial Statements captioned "Equity
Investments in Affiliates" included in Item 8 of this Report.
ITEM 2. PROPERTIES.
In general, each of the Company's business units arranges for the
manufacturing, distribution and other facilities that will meet its operating
needs. The Company has approximately 70 manufacturing facilities and
approximately 60 warehousing and distribution facilities throughout North
America, including four in Canada and three in Mexico. The majority of the
Company's manufacturing facilities range in size from approximately 10,000
square feet to over 1,000,000 square feet. The Company owns most of its
manufacturing facilities and none of the Company-owned properties is subject to
significant encumbrances. A substantial number of its warehousing and
distribution facilities are leased.
In North America, the Company also operates approximately 180 service
facilities, a majority of which supply and install insulation and other building
products. Separate facilities perform repair, remodeling and restoration to
buildings damaged by fire, wind, water or storms. The majority of the service
locations are leased.
The International Segment operates approximately 50 manufacturing and 40
distribution facilities in 13 countries, most of which are located in England,
Denmark and Germany. The manufacturing facilities are generally owned by the
Company and the distribution facilities are primarily leased.
The Company's corporate headquarters are located in Taylor, Michigan and
are owned by the Company. The Company owns an additional building near its
corporate headquarters that is used by its corporate research and development
department.
The Company's buildings, machinery and equipment have been generally well
maintained, are in good operating condition, and are adequate for current
production and distribution requirements.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to claims and litigation in the ordinary course of
business, but does not believe that any such claim or litigation will have a
material adverse effect on its consolidated financial position.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF REGISTRANT (PURSUANT TO INSTRUCTION 3
TO ITEM 401(b) OF REGULATION S-K).
OFFICER
NAME POSITION AGE SINCE
---- -------- --- -------
Richard A. Manoogian......................... Chairman of the Board and Chief 63 1962
Executive Officer
Raymond F. Kennedy........................... President and Chief Operating Officer 57 1989
Dr. Lillian Bauder........................... Vice President -- Corporate Affairs 60 1996
David A. Doran............................... Vice President -- Taxes 58 1984
Daniel R. Foley.............................. Vice President -- Human Resources 58 1996
Eugene A. Gargaro, Jr. ...................... Vice President and Secretary 57 1993
John R. Leekley.............................. Senior Vice President and General 56 1979
Counsel
Richard G. Mosteller......................... Senior Vice President -- Finance 67 1962
Robert B. Rosowski........................... Vice President -- Controller and 59 1973
Treasurer
Executive officers, who are elected by the Board of Directors, serve for a
term of one year or less. Each elected executive officer has been employed in a
managerial capacity with the Company for over five years except for Mr. Foley
and Dr. Bauder. Mr. Foley was employed by MascoTech, Inc. as its Vice
President -- Human Resources from 1994 to 1996. From 1984 to 1996, Dr. Bauder
served as President and Chief Executive Officer of Cranbrook Educational
Community.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The New York Stock Exchange is the principal market on which the Company's
Common Stock is traded. The following table indicates the high and low sales
prices of the Company's Common Stock as reported on the New York Stock Exchange
Composite Tape and the cash dividends declared per share for the periods
indicated:
MARKET PRICE (1)
----------------- DIVIDENDS
QUARTER HIGH LOW DECLARED (1)
- ------- ---- ---- ------------
1999
Fourth................................. $31 3/4 $22 1/2 $.12
Third.................................. 33 11/16 28 3/16 .12
Second................................. 32 3/8 25 1/4 .11
First.................................. 32 7/16 25 5/16 .11
----
Total............................... $.46
====
1998
Fourth................................. $30 7/8 $20 3/4 $.11
Third.................................. 33 22 11/16 .22(2)
Second................................. 30 15/32 26 15/16 --(2)
First.................................. 29 29/32 24 9/16 .10 1/2
----
Total............................... $.43 1/2
====
(1) After giving effect to the Company's 100 percent stock distribution in
July 1998.
(2) The cash dividend ordinarily declared in the second quarter of the
fiscal year was declared early in the third quarter of 1998.
On March 15, 2000, there were 6,445 holders of record of the Company's
Common Stock.
The Company expects that its practice of paying quarterly dividends on its
Common Stock will continue, although the payment of future dividends will
continue to depend upon the Company's earnings, capital requirements, financial
condition and other factors.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth summary consolidated financial information
for the Company's continuing operations, for the years and dates indicated. Such
information has been restated for 1999 poolings of interests, except for
dividends.
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 1996 1995
---------- --------------- --------------- --------------- ---------------
Net sales........................ $6,307,000 $5,280,000 $4,508,000 $3,854,000 $3,435,000
Income from continuing
operations..................... $ 569,600 $ 565,100 $ 444,100 $ 355,100 $ 237,500
Per share of common stock:(1)
Income from continuing
operations:
Basic....................... $1.31 $1.30 $1.05 $.85 $.57
Diluted..................... $1.28 $1.26 $1.02 $.83 $.56
Dividends declared............. $ .46 $ .43 1/2 $ .41 $.39 $.37
Dividends paid................. $ .45 $ .43 $ .40 1/2 $.38 1/2 $.36 1/2
At December 31:
Total assets................... $6,634,920 $5,618,850 $4,696,600 $4,030,340 $4,039,800
Long-term debt................. $2,431,270 $1,638,290 $1,553,950 $1,279,740 $1,628,700
Shareholders' equity........... $3,136,500 $2,774,040 $2,224,820 $2,064,040 $1,820,710
(1) After giving effect to the 100 percent stock distribution in July 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The financial and business analysis below provides information which the
Company believes is relevant to an assessment and understanding of the Company's
consolidated financial position and results of operations. This financial and
business analysis should be read in conjunction with the consolidated financial
statements and related notes. The financial and business analysis for prior
years has been restated to include the accounts and operations of transactions
accounted for as poolings of interests ("pooled companies"). See Corporate
Development section below.
The following discussion and certain other sections of this Report on Form
10-K contain statements reflecting the Company's views about its future
performance and constitute "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. These views may involve risks and
uncertainties that are difficult to predict and may cause the Company's actual
results to differ materially from the results discussed in such forward-looking
statements. Readers should consider that various factors, including changes in
general economic conditions, nature of competition, relationships with key
customers, industry consolidation, influence of e-commerce and other factors
discussed in the "Overview" and "Outlook for the Company" sections below may
affect the Company's ability to attain the projected performance. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
OVERVIEW
The Company is engaged principally in the manufacture and sale of home
improvement and building products. These products are sold to the home
improvement and home construction markets through mass merchandisers, home
centers, hardware stores, distributors, wholesalers and other outlets for
consumers and contractors. The Company also supplies and installs insulation and
other building products directly to builders and consumers and performs repair
and restoration of residential, commercial and institutional facilities damaged
by fire, wind, water and other disasters.
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Factors that affect the Company's results of operations include the levels
of home improvement and residential construction activity principally in the
U.S. and Europe (including repair and remodeling and new construction), cost
management, fluctuations in European currencies (primarily the euro and British
pound), the increasing importance of home centers as distributors of home
improvement and building products and the Company's ability to maintain its
leadership positions in its markets in the face of increasing global
competition. Historically, the Company has been able to largely offset cyclical
declines in housing markets through new product introductions and acquisitions
as well as market share gains.
CORPORATE DEVELOPMENT
Mergers and acquisitions have historically contributed significantly to
Masco's long-term growth, even though generally the initial impact on earnings
is minimal after deducting transaction-related costs and expenses such as
interest and added depreciation and amortization. The important earnings benefit
to Masco arises from subsequent growth of such companies, since incremental
sales are not impacted by these expenses.
Pooling-of-Interests Transactions:
During the third quarter of 1999, the Company completed mergers with Behr
Process Corporation, a manufacturer of premium architectural coatings; Mill's
Pride, L.L.P., a manufacturer of ready-to-assemble and assembled kitchen and
bath cabinetry, bath vanities, home office workstations and entertainment
centers, storage products, bookcases and kitchen utility products; and a smaller
company. The Company issued approximately 104 million shares of common stock in
exchange for all of the outstanding shares of these companies. The transactions
have been accounted for as poolings of interests and, accordingly, the
consolidated financial statements and related shares and per share data for all
prior periods presented have been restated to include the accounts and
operations of the pooled companies. The Company's net sales and net income prior
to these poolings for the first six months of 1999 (unaudited) were $2,416
million and $262.9 million, respectively, and for the years 1998 and 1997 were
$4,345 million and $476.0 million and $3,760 million and $382.4 million,
respectively.
Purchase Acquisitions:
During the third quarter of 1999, the Company acquired Arrow Fastener
Company, a manufacturer of manual and electric staple gun tackers and staples
and other fastening tools; H&H Tube, a manufacturer of brass, copper, steel and
aluminum tubes; and Superia Radiatoren N.V., a Belgian-based manufacturer of
standard plate radiators. The Company also acquired INRECON, L.L.C., a company
specializing in repair and restoration of residential, commercial and
institutional facilities damaged by fire, wind, water and other disasters.
During the second quarter of 1999, the Company acquired Avocet Hardware
PLC, a U.K. supplier of locks and other builders' hardware; The Cary Group, an
insulation services company; and The GMU Group, a manufacturer and distributor
of kitchen cabinets and cabinet components, headquartered in Spain. In the first
quarter of 1999, the Company acquired A&J Gummers, a U.K. manufacturer of shower
valve products, and The Faucet Queens, Inc., a supplier of plumbing accessories
and hardware products.
The aggregate net purchase price for these 1999 purchase acquisitions was
approximately $850 million, including 1.6 million shares of Company common stock
valued at $48 million. The excess of the aggregate acquisition costs for these
purchase acquisitions over the calculated fair value of net assets acquired
totaled approximately $680 million and has been recorded as acquired goodwill.
Purchase agreements for certain of the 1999 purchase acquisitions include
provisions for additional consideration to be paid if the acquired business
achieves specific operating results in future periods, ranging from one to five
years. Such additional consideration, when earned, is recorded as additional
purchase price.
The results of operations for these 1999 purchase acquisitions are included
in the consolidated financial statements from the dates of acquisition. Had
these companies been acquired effective January 1, 1998, pro forma unaudited
consolidated net sales and net income would have approximated $6,537 million and
$579 mil-
9
11
lion for 1999 and $5,889 million and $590 million for 1998, respectively, and
pro forma unaudited consolidated diluted earnings per share would have increased
approximately $.02 for 1999 and $.05 for 1998.
SECURITIES OF FURNISHINGS INTERNATIONAL INC.
In late November 1995, the Company's Board of Directors approved a formal
plan to dispose of the Company's home furnishings products segment. During
August 1996, the Company completed the sale of its home furnishings products
segment to Furnishings International Inc. Total proceeds to the Company from the
sale were $1,050 million, with approximately $708 million of the purchase price
in cash. The balance consisted of $285 million of 12% pay-in-kind junior debt
securities, and equity securities totaling $57 million, consisting of 13%
cumulative preferred stock, with a stated value of $55 million, 15 percent of
the common stock of Furnishings International and convertible preferred stock.
The junior debt securities mature in 2008 and are stated at face value; the
Company is recording the 12% pay-in-kind interest income from these securities.
The Company records dividend income from the 13% cumulative preferred stock when
such dividends are declared. The convertible preferred stock represents
transferable rights for up to a 25 percent common ownership, although the
Company is restricted from maintaining an ownership in excess of 20 percent of
Furnishings International's common equity. As such, the Company will not acquire
additional common equity, except for purposes of resale.
PROFIT MARGINS
The percentage of operating profit on the Company's faucet sales is
somewhat higher than that on most other products offered by the Company. The
Company believes that the quality, styling, reliability of and available
finishes for its faucets, manufacturing efficiencies and capabilities, its
marketing and merchandising activities, and the development of a broad line of
products have accounted for the continued strength of its faucet sales.
Net income as a percentage of sales was 9.0 percent in 1999 as compared
with 10.7 percent and 9.9 percent in 1998 and 1997, respectively. After-tax
return on shareholders' equity as measured by net income was 20.5 percent in
1999 as compared with 25.4 percent in 1998. Net income as a percentage of sales
and after-tax profit return on shareholders' equity for 1999 were negatively
affected by unusual third quarter after-tax expense, principally related to
transactions accounted for as poolings of interests.
FINANCIAL CONDITION
Over the years, the Company has largely funded its growth through cash
provided by a combination of operations and long-term bank and other borrowings,
and by the issuance of common stock for certain acquisitions.
Bank credit lines are maintained to ensure availability of short-term
funds. At December 31, 1999, the Company had fully utilized its $750 million
bank revolving-credit facility, principally to finance recent purchase
acquisitions. Outstanding balances under this facility are due and payable in
November 2001. During 1999, the Company entered into a $400 million 364-day
credit facility. There was no outstanding balance due under this credit facility
at December 31, 1999. Subsequent to December 31, 1999, the Company amended and
restated this credit facility, increasing the amount of such facility to $1
billion and extending the maturity to March 2001. Certain debt agreements
contain limitations on additional borrowings and a requirement for maintaining a
certain level of net worth. At December 31, 1999, the Company was in compliance
with these borrowing limitations, and the Company's net worth exceeded that
requirement by approximately $806 million.
During 1999, the Company increased its quarterly dividend nine percent to
$.12 per share. This marks the 41st consecutive year in which dividends have
been increased. Although the Company is aware of the greater interest in yield
by many investors and has maintained an increased dividend payout in recent
years, the Company continues to believe that its shareholders' long-term
interests are best served by investing a significant portion of its earnings in
the future growth of the Company.
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12
Maintaining high levels of liquidity and cash flow are among the Company's
financial strategies. The Company's total debt as a percent of total
capitalization increased to 44 percent at December 31, 1999 from approximately
41 percent at December 31, 1998 due principally to borrowings for purchase
acquisitions. The relatively high cash flow of acquired companies should help
the Company to reduce its total debt to total capitalization ratio. The
Company's working capital ratio was 2.5 to 1 at December 31, 1999 compared with
2.1 to 1 at December 31, 1998; excluding $200 million of 6.625% notes, which
matured September 15, 1999, the Company's working capital ratio was 2.4 to 1 at
December 31, 1998.
CASH FLOWS
Significant sources and uses of cash in the past three years are summarized
as follows, in thousands:
CASH SOURCES (USES)
1999 1998 1997
--------- --------- ---------
Net cash from operating activities........... $ 490,610 $ 537,670 $ 470,220
Acquisition of companies, net of cash
acquired................................... (794,950) (322,880) (186,920)
Cash proceeds from sale of subsidiary and
TriMas investment.......................... -- 137,640 --
Capital expenditures......................... (350,850) (243,380) (215,190)
Increases in debt, net....................... 578,990 315,740 262,270
Purchase of Company common stock for:
Treasury................................... (99,600) (43,330) --
Long-term stock incentive award plan....... (6,840) (46,800) (29,110)
Cash dividends paid.......................... (164,990) (145,290) (131,680)
Capital contributions from shareholders of
pooled companies........................... 11,490 1,520 245,450
Distributions to shareholders of pooled
companies.................................. -- (45,950) (536,060)
Other, net................................... 13,770 (42,440) 60,100
--------- --------- ---------
Cash increase (decrease)........... $(322,370) $ 102,500 $ (60,920)
========= ========= =========
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES
Cash from operating activities was $490.6 million in 1999 as compared with
$537.7 million in 1998 and $470.2 million in 1997. During 1999, the Company's
accounts receivable and inventories increased in total by $202.4 million and
$122.9 million, respectively, primarily as a result of acquisitions, higher
actual sales volume and higher anticipated sales volume. As compared with the
average manufacturing company, the Company maintains a higher investment in
inventories, which relates to the Company's business strategies of providing
better customer service, establishing efficient production scheduling and
benefiting from larger, more cost-effective purchasing.
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES
Cash used for investing activities was $1,132.0 million in 1999, $471.1
million in 1998 and $342.0 million in 1997.
Cash used for investing activities in 1999 included $795.0 million for 1999
purchase acquisitions. Such purchase acquisitions are set forth in the Note to
the Company's Consolidated Financial Statements captioned "Purchase
Acquisitions." Investing activities for 1998 and 1997 included cash for purchase
acquisitions of $322.9 million and $186.9 million, respectively.
Capital expenditures totaled $350.9 million in 1999 as compared with $243.4
million in 1998 and $215.2 million in 1997. These amounts primarily pertain to
expenditures for additional facilities related to increased demand for existing
products as well as for new products. The Company also continues to invest in
11
13
automating its manufacturing operations and increasing its productivity, in
order to be a more efficient producer and to improve customer service. The
Company expects capital expenditures for 2000, excluding those of any 2000
acquisitions, to exceed $350 million. Depreciation and amortization expense for
1999 totaled $181.8 million, compared with $156.7 million for 1998 and $131.5
million for 1997; for 2000, depreciation and amortization expense, excluding any
2000 acquisitions, is expected to approximate $230 million.
Costs of environmental responsibilities and compliance with existing
environmental laws and regulations have not had, nor in the opinion of the
Company are they expected to have, a materially adverse effect on the Company's
capital expenditures, financial position or results of operations.
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES
Financing activities for 1999 provided cash of $319.1 million. Cash from
financing activities for 1999 included $300 million from the issuance of 7.75%
debentures, $479.0 million from a net increase in other debt (primarily bank
debt to finance purchase acquisitions) and $11.5 million of capital
contributions from shareholders of pooled companies. After giving effect to the
issuance of debt securities in 1999, the Company has on file with the Securities
and Exchange Commission ("SEC") an unallocated shelf registration pursuant to
which the Company is able to issue up to a combined total of $109 million of
debt and equity securities. The Company intends to file a shelf registration
statement with the SEC during 2000 to authorize the issuance of additional debt
and equity securities. Cash used for financing activities for 1999 included $200
million for the retirement of 6.625% notes, which matured September 15, 1999,
$165 million for cash dividends paid, $99.6 million for the acquisition of
approximately 3.7 million shares of Company common stock in open-market
transactions and $6.8 million for the acquisition of Company common stock for
the Company's long-term stock incentive award plan. Acquisitions of Company
common stock occurred during the first six months of 1999. As a result of
pooling-of-interests requirements, the Company in mid-1999 canceled its share
buy-back program.
Financing activities for 1998 provided cash of $35.9 million. Cash from
financing activities for 1998 included $250 million from the issuance of 6.625%
debentures, $100 million from the issuance of 5.75% notes and a net increase in
other debt of $74.3 million. Cash used for financing activities for 1998
included $108.6 million for the early retirement of certain of the Company's 9%
notes and the payment of a premium associated with this early retirement, $145.3
million for cash dividends paid, $43.3 million for the acquisition of
approximately 1.9 million shares of Company common stock in open-market
transactions, $46.8 million for the acquisition of Company common stock for the
Company's long-term stock incentive award plan and $44.4 million of net
distributions to shareholders of pooled companies.
Cash used for financing activities for 1997 totaled $189.1 million. Cash
from financing activities for 1997 included a net increase in debt of $262.3
million. Cash used for financing activities included $29.1 million for the
acquisition of Company common stock for the Company's long-term stock incentive
award plan, $131.7 million for cash dividends paid and $536.1 million for
distributions to shareholders of pooled companies. During 1997, one of the
pooled companies completed a recapitalization. Such recapitalization resulted in
the distribution of $512 million to existing shareholders and contributions from
new shareholders totaling $234.1 million. Other distributions to and
contributions from shareholders of pooled companies in 1997 totaled $24.1
million and $11.4 million, respectively.
Capital contributions from and distributions to shareholders of pooled
companies as described above occurred prior to August 31, 1999, the date of the
pooling mergers.
The Company believes that its present cash balance and cash flows from
operations are sufficient to fund its near-term working capital and other
investment needs. The Company believes that its longer-term working capital and
other general corporate requirements will be satisfied through cash flows from
operations and, to the extent necessary, from bank borrowings, from future
financial market activities and from proceeds from asset sales.
12
14
CONSOLIDATED RESULTS OF OPERATIONS
Sales and Operations
Net sales for 1999 were $6,307 million, representing an increase of 19
percent over 1998. Excluding results from purchase acquisitions and
divestitures, net sales for 1999 increased 12 percent over 1998. Net sales for
1998 increased 17 percent to $5,280 million from $4,508 million in 1997; after
adjusting for purchase acquisitions and divestitures, net sales increased 13
percent in 1998 over 1997.
Cost of sales as a percentage of sales for both 1999 and 1998 was 63.4
percent as compared with 62.7 percent for 1997. Cost of sales as a percentage of
sales for 1997 was lower principally due to the influence of product sales mix.
Excluding amortization of acquired goodwill ($45.4 million, $29.0 million and
$18.7 million in 1999, 1998 and 1997, respectively), selling, general and
administrative expenses as a percent of sales were 21.5 percent in 1999 as
compared with 19.6 percent in 1998 and 21.2 percent in 1997. Selling, general
and administrative expense in 1999 includes the influence of unusual expense
principally related to transactions accounted for as poolings of interests.
Excluding such unusual expense, selling, general and administrative expenses as
a percent of sales declined slightly in 1999 as compared with 1998. The
reduction in selling, general and administrative expense from the 1997
percentage reflects the continuation of cost containment initiatives and the
leveraging of fixed costs over a higher sales base.
Operating profit margin, before general corporate expense, was 15.9 percent
in 1999 as compared with 18.0 percent in 1998 and 17.5 percent in 1997 (general
corporate expense includes those expenses not specifically attributable to the
Company's business segments). The decrease in 1999 from 1998 included the
negative effect of unusual expense principally related to transactions accounted
for as poolings of interests.
Operating profit margin, after general corporate expense, was 14.5 percent
in 1999, 16.4 percent in 1998 and 15.7 percent in 1997. General corporate
expense was $92 million in 1999, as compared with $86 million in 1998 and $82
million in 1997. General corporate expense as a percent of sales decreased to
1.5 percent in 1999 from 1.6 percent in 1998 and 1.8 percent in 1997.
Other Income (Expense), Net
Included in other income (expense), net are equity earnings from MascoTech
of $15.4 million for both 1999 and 1998 and $14.6 million for 1997.
Included in other, net under other income (expense), net is interest income
for 1999, 1998 and 1997 of $46.6 million, $41.5 million and $36.8 million,
respectively, from the 12% pay-in-kind junior debt securities of Furnishings
International Inc. Such interest income began to accrue in August 1996 upon the
sale of the Company's home furnishings businesses. Also included in other, net
in 1997 is interest income of $7.5 million from a $151 million note receivable
from MascoTech, which was paid on September 30, 1997.
Included in other, net under other income (expense), net for 1999 were
approximately $30 million of income and gains, net, regarding certain
non-operating assets and $7.6 million of dividend income from the Company's
investment in Furnishings International's 13% cumulative preferred stock. Also
included in other, net for 1999 were approximately $4 million of expenses
related to the early retirement of debt.
Included in other, net under other income (expense), net in 1998 were
pre-tax gains aggregating approximately $59 million from sales of the Company's
Thermador subsidiary ($30 million) and the Company's investment in TriMas
Corporation ($29 million). Also included in other, net for 1998 were $7 million
of dividend income from the Company's investment in Furnishings International's
13% cumulative preferred stock and an approximate $12 million pre-tax charge
related to the early retirement of long-term debt.
Included in other, net under other income (expense), net in 1997 were $10.8
million of dividend income from the Company's investment in Furnishings
International's 13% cumulative preferred stock, net gains aggregating
approximately $28 million related to the sales of certain non-operating assets
and charges aggregating approximately $30 million principally for the adjustment
of the Company's Payless Cashways investment to its estimated fair value.
13
15
During the second quarter of 1997, MascoTech effected conversion of all of
its publicly held outstanding convertible preferred stock with the issuance of
approximately 10 million shares of its common stock. This conversion reduced the
Company's common equity ownership in MascoTech to 17 percent from 21 percent,
and increased the Company's equity in MascoTech's net book value by
approximately $29.5 million. As a result, the Company recognized a pre-tax gain
of $29.5 million during the second quarter of 1997.
Net Income and Earnings Per Share
Net income for 1999 was $569.6 million as compared with $565.1 million for
1998 and $444.1 million for 1997. Diluted earnings per share for 1999 were $1.28
compared with $1.26 for 1998 and $1.02 for 1997. Net income and earnings per
share for 1999 were negatively affected by unusual expense, principally related
to transactions accounted for as poolings of interests. The Company's effective
tax rate decreased to 37.0 percent in 1999 from 37.6 percent in 1998 and 39.5
percent in 1997, due principally to the increased utilization of foreign tax
credits. The Company estimates that its effective tax rate should approximate
37.0 percent for 2000.
BUSINESS SEGMENT RESULTS
The following table sets forth the Company's net sales and operating profit
information by business segment, in millions. As a result of significant mergers
and acquisitions during 1999, the Company redefined its business segments;
accordingly, segment information for prior years has been restated.
PERCENT
INCREASE
-----------
1999 1998
VS. VS.
BUSINESS SEGMENT 1999 1998 1997 1998 1997
- ---------------- ------ ------ ------ ---- ----
NET SALES:
North America.................................... $5,238 $4,441 $3,820 18% 16%
International, principally Europe................ 1,069 839 688 27% 22%
------ ------ ------
Total....................................... $6,307 $5,280 $4,508 19% 17%
====== ====== ======
OPERATING PROFIT:*
North America.................................... $ 867 $ 829 $ 689 5% 20%
International, principally Europe................ 136 123 99 11% 24%
------ ------ ------
Total....................................... $1,003 $ 952 $ 788 5% 21%
====== ====== ======
OPERATING PROFIT MARGIN:*
North America.................................... 16.6% 18.7% 18.0%
International, principally Europe................ 12.7% 14.7% 14.4%
* Before general corporate expense, but including goodwill amortization.
14
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NET SALES BY PRODUCT GROUP
The following table sets forth the Company's world-wide net sales by
product group, in millions.
PERCENT
INCREASE
-----------
NET SALES 1999 1998
------------------------ VS. VS.
PRODUCT GROUP 1999 1998 1997 1998 1997
- ------------- ------ ------ ------ ---- ----
Faucets.............................................. $ 937 $ 884 $ 815 6% 8%
Kitchen and Bath Cabinets............................ 1,971 1,698 1,371 16% 24%
Other Kitchen and Bath Products...................... 1,125 1,076 1,042 5% 3%
Architectural Coatings............................... 539 437 353 23% 24%
Builders' Hardware................................... 415 302 261 37% 16%
Other Specialty Products and Services................ 1,320 883 666 49% 33%
------ ------ ------ --- ---
Total...................................... $6,307 $5,280 $4,508 19% 17%
====== ====== ====== === ===
NORTH AMERICA
Excluding purchase acquisitions and divestitures, North American net sales
for 1999 increased 14 percent over 1998 due largely to higher unit sales volume
of cabinets, architectural coatings and other kitchen and bath products, higher
installation sales of fiberglass insulation, and to a lesser extent, new product
introductions and selling price increases. Operating profit margin for 1999 was
negatively affected by unusual expense principally related to transactions
accounted for as poolings of interests, which more than offset the favorable
influence of purchase acquisitions. Excluding unusual 1999 expense, operating
profit margin modestly exceeded the 1998 level.
Excluding purchase acquisitions and divestitures, North American net sales
for 1998 increased 14 percent over 1997 due largely to higher unit sales volume
of cabinets, architectural coatings and faucets, higher installation sales of
fiberglass insulation and to a lesser extent, new product introductions and
selling price increases. Operating profit margin for 1998 compared with 1997 was
favorably influenced by higher unit sales volume, offset in part by the
influence of product sales mix and stronger than anticipated demand for lower
margin cabinets.
Results of the Company's North American business segment for 1999, 1998 and
1997 benefited from demographic and economic conditions principally in the
United States, including favorable population trends, modest economic growth and
relatively low unemployment and interest rates. These conditions have favorably
influenced the housing market in the United States, including housing starts,
existing home sales and repair and remodeling activities.
INTERNATIONAL, PRINCIPALLY EUROPE
Excluding purchase acquisitions, net sales of this segment increased 1
percent in 1999 compared with 1998 and were flat for 1998 compared with 1997.
Operating profit margin for 1999 and 1998 was favorably influenced by recent
acquisitions. Operating results of existing European operations in this segment
have been adversely influenced in recent years, in part due to softness in the
Company's European markets, competitive pricing pressures on certain products
and the effect of a higher percentage of lower margin sales to total sales. In
addition, a stronger U.S. dollar had a negative effect on the translation of
European results in 1999 compared with 1998 as well as 1998 compared with 1997,
lowering European net sales in 1999 and 1998 by approximately 3 percent and 2
percent, respectively.
Operating results of the Company's business segments for 1999, 1998 and
1997 benefited from the leveraging of fixed selling, general and administrative
expenses over higher sales.
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OUTLOOK FOR THE COMPANY
Assuming that the U.S. economy maintains its present rate of moderate
growth and interest rates remain relatively stable, the Company expects
increases in both sales and earnings for 2000. The Company believes that its
results should be favorably affected in the future with its efforts to: continue
to invest in new manufacturing technologies and productivity improvement
initiatives in order to contain costs and increase efficiency; maintain a lower
level of selling, general and administrative expenses as a percent of sales;
introduce new products and marketing initiatives to attempt to increase market
share; and actively pursue acquisition candidates that complement or support the
Company's core competencies.
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are to be recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 137 defers the effective adoption date of
SFAS No. 133 to January 1, 2001. SFAS No. 133 should not have a material effect
on the Company's financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has considered the provisions of Financial Reporting Release
No. 48, "Disclosure of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity Instruments."
The Company had no holdings of derivative financial or commodity-based
instruments at December 31, 1999. A review of the Company's other financial
instruments and risk exposures at that date revealed that the Company had
exposure to interest rate and foreign currency exchange rate risks. At December
31, 1999, the Company performed sensitivity analyses to assess the potential
effect of these risks and concluded that near-term changes in interest rates and
foreign currency exchange rates should not materially affect the Company's
financial position, results of operations or cash flows.
YEAR 2000
The Company did not experience any significant disruptions to its operating
systems as a result of the date change to year 2000 ("Y2K").
The Company has in place a team that has been and is continuing to address
any remaining Y2K issues that encompass operating and administrative areas of
the Company. Also, the Company continues to monitor the status of its
remediation plans. The process includes an assessment of issues and development
of remediation plans, where necessary, as they relate to internally used
software, computer hardware and the use of computer applications in the
Company's manufacturing processes.
The approximate cost of the Y2K program, including planned upgrades, is
less than $20 million. This cost, most of which has been incurred and expensed
at December 31, 1999, is not material to the Company's results of operations or
financial position.
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EURO CONVERSION
A single currency called the euro was introduced in Europe on January 1,
1999. Eleven of the fifteen member countries of the European Union adopted the
euro as their common legal currency as of that date. Fixed conversion rates
between these participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The legacy
currencies will remain legal tender as denominations of the euro until at least
January 1, 2002 (but not intended to be later than July 1, 2002). During this
transition period, parties may settle non-cash transactions using either the
euro or a participating country's legacy currency. Cash transactions will
continue to be settled in the legacy currencies of participating countries until
January 1, 2002, when euro-denominated currency will be issued. The Company is
currently completing changes to existing systems to facilitate a smooth
transition to the new currency and believes that conversion to the euro will not
have a material effect on the Company's financial position or results of
operations.
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19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Masco Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Masco Corporation and its subsidiaries at December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)(2)(i) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Detroit, Michigan
February 16, 2000
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20
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
-------------- --------------
Current Assets:
Cash and cash investments................................. $ 230,780,000 $ 553,150,000
Receivables............................................... 1,002,630,000 800,280,000
Inventories............................................... 769,870,000 646,930,000
Prepaid expenses and other................................ 106,500,000 81,640,000
-------------- --------------
Total current assets.............................. 2,109,780,000 2,082,000,000
Equity investment in MascoTech, Inc. ....................... 69,930,000 59,830,000
Equity investments in other affiliates...................... 133,550,000 165,020,000
Securities of Furnishings International Inc. ............... 481,270,000 434,640,000
Property and equipment...................................... 1,624,360,000 1,357,830,000
Acquired goodwill, net...................................... 1,742,930,000 1,055,790,000
Other assets................................................ 473,100,000 463,740,000
-------------- --------------
Total Assets...................................... $6,634,920,000 $5,618,850,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable............................................. $ 62,300,000 $ 309,320,000
Accounts payable.......................................... 243,810,000 196,930,000
Accrued liabilities....................................... 540,320,000 470,090,000
-------------- --------------
Total current liabilities......................... 846,430,000 976,340,000
Long-term debt.............................................. 2,431,270,000 1,638,290,000
Deferred income taxes and other............................. 220,720,000 230,180,000
-------------- --------------
Total Liabilities................................. 3,498,420,000 2,844,810,000
-------------- --------------
Shareholders' Equity:
Common shares authorized: 900,000,000; issued:
1999-443,510,000; 1998-443,280,000..................... 443,510,000 443,280,000
Preferred shares authorized: 1,000,000.................... -- --
Paid-in capital........................................... 601,990,000 584,530,000
Retained earnings......................................... 2,151,520,000 1,762,800,000
Other comprehensive income (loss)......................... (60,520,000) (16,570,000)
-------------- --------------
Total Shareholders' Equity........................ 3,136,500,000 2,774,040,000
-------------- --------------
Total Liabilities and Shareholders' Equity........ $6,634,920,000 $5,618,850,000
============== ==============
See notes to consolidated financial statements.
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21
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
-------------- -------------- --------------
Net sales..................................... $6,307,000,000 $5,280,000,000 $4,508,000,000
Cost of sales................................. 3,995,530,000 3,347,900,000 2,825,610,000
-------------- -------------- --------------
Gross profit........................ 2,311,470,000 1,932,100,000 1,682,390,000
Selling, general and administrative
expenses.................................... 1,354,640,000 1,036,700,000 957,770,000
Amortization of acquired goodwill............. 45,430,000 29,000,000 18,720,000
-------------- -------------- --------------
Operating profit.................... 911,400,000 866,400,000 705,900,000
-------------- -------------- --------------
Other income (expense), net:
Re: MascoTech, Inc.:
Equity earnings.......................... 15,430,000 15,360,000 14,580,000
Gain from change in investment........... -- -- 29,500,000
Equity earnings, other affiliates........... 8,500,000 13,840,000 9,560,000
Other, net.................................. 89,190,000 124,300,000 68,540,000
Interest expense............................ (120,420,000) (114,400,000) (94,280,000)
-------------- -------------- --------------
(7,300,000) 39,100,000 27,900,000
-------------- -------------- --------------
Income before income taxes.......... 904,100,000 905,500,000 733,800,000
Income taxes.................................. 334,500,000 340,400,000 289,700,000
-------------- -------------- --------------
Net income.......................... $ 569,600,000 $ 565,100,000 $ 444,100,000
============== ============== ==============
Earnings per share:
Basic............................... $1.31 $1.30 $1.05
============== ============== ==============
Diluted............................. $1.28 $1.26 $1.02
============== ============== ==============
See notes to consolidated financial statements.
20
22
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
--------------- ------------- -------------
Cash Flows From (For):
Operating Activities:
Net income..................................... $ 569,600,000 $ 565,100,000 $ 444,100,000
Depreciation and amortization.................. 181,820,000 156,670,000 131,510,000
Unremitted equity earnings of affiliates....... (18,720,000) (24,070,000) (19,470,000)
Interest accrual on pay-in-kind notes
receivable.................................. (46,630,000) (41,500,000) (36,800,000)
Deferred income taxes.......................... 5,240,000 61,660,000 34,640,000
Gain from:
Sale of subsidiary and TriMas investment.... -- (59,300,000) --
Change in MascoTech investment.............. -- -- (29,500,000)
Increase in receivables........................ (116,830,000) (98,930,000) (74,940,000)
Increase in inventories........................ (68,280,000) (55,870,000) (52,660,000)
Increase in accounts payable and accrued
liabilities, net............................ 14,300,000 20,340,000 75,360,000
Other, net..................................... (29,890,000) 13,570,000 (2,020,000)
--------------- ------------- -------------
Net cash from operating activities........ 490,610,000 537,670,000 470,220,000
--------------- ------------- -------------
Investing Activities:
Acquisition of companies, net of cash
acquired.................................... (794,950,000) (322,880,000) (186,920,000)
Capital expenditures........................... (350,850,000) (243,380,000) (215,190,000)
Cash proceeds from sale of subsidiary and
TriMas investment........................... -- 137,640,000 --
Other, net..................................... 13,770,000 (42,440,000) 60,100,000
--------------- ------------- -------------
Net cash (for) investing activities....... (1,132,030,000) (471,060,000) (342,010,000)
--------------- ------------- -------------
Financing Activities:
Issuance of 7.75% debentures................... 300,000,000 -- --
Issuance of 6.625% debentures.................. -- 250,000,000 --
Issuance of 5.75% notes........................ -- 100,000,000 --
Increase in other debt......................... 915,830,000 436,430,000 325,100,000
Retirement of 9% notes......................... -- (108,620,000) --
Retirement of 6.625% notes..................... (200,000,000) -- --
Payment of other debt.......................... (436,840,000) (362,070,000) (62,830,000)
Purchase of Company common stock for:
Treasury.................................... (99,600,000) (43,330,000) --
Long-term stock incentive award plan........ (6,840,000) (46,800,000) (29,110,000)
Cash dividends paid............................ (164,990,000) (145,290,000) (131,680,000)
Capital contributions from shareholders of
pooled companies............................ 11,490,000 1,520,000 245,450,000
Distributions to shareholders of pooled
companies................................... -- (45,950,000) (536,060,000)
--------------- ------------- -------------
Net cash from (for) financing
activities............................. 319,050,000 35,890,000 (189,130,000)
--------------- ------------- -------------
Cash and Cash Investments:
Increase (decrease) for the year............... (322,370,000) 102,500,000 (60,920,000)
At January 1................................... 553,150,000 450,650,000 511,570,000
--------------- ------------- -------------
At December 31................................. $ 230,780,000 $ 553,150,000 $ 450,650,000
=============== ============= =============
See notes to consolidated financial statements.
21
23
MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COMMON OTHER
SHARES RETAINED COMPREHENSIVE
TOTAL ($1 PAR VALUE) PAID-IN CAPITAL EARNINGS INCOME (LOSS)
-------------- -------------- --------------- -------------- -------------
Balance, January 1, 1997...... $2,064,040,000 $212,840,000 $ 230,020,000 $1,618,660,000 $ 2,520,000
Net income.................. 444,100,000 444,100,000
Cumulative translation
adjustments............... (28,000,000) (28,000,000)
--------------
Total comprehensive income.... 416,100,000
Shares issued................. 169,250,000 4,700,000 164,550,000
Cash dividends declared....... (134,440,000) (134,440,000)
Re: Shareholders of pooled
companies:
Capital contributions
from...................... 245,450,000 245,450,000
Distribution to............. (536,060,000) (536,060,000)
Compensatory stock
options................... 480,000 480,000
-------------- ------------ ------------- -------------- ------------
Balance, December 31, 1997.... 2,224,820,000 217,540,000 640,500,000 1,392,260,000 (25,480,000)
Net income.................. 565,100,000 565,100,000
Cumulative translation
adjustments............... 8,910,000 8,910,000
--------------
Total comprehensive income.... 574,010,000
Shares issued................. 206,590,000 5,670,000 200,920,000
100 percent stock
distribution................ -- 221,960,000 (221,960,000)
Shares repurchased............ (43,330,000) (1,890,000) (41,440,000)
Cash dividends declared....... (148,610,000) (148,610,000)
Re: Shareholders of pooled
companies:
Capital contributions
from...................... 1,520,000 1,520,000
Distribution to............. (45,950,000) (45,950,000)
Compensatory stock
options................... 4,990,000 4,990,000
-------------- ------------ ------------- -------------- ------------
Balance, December 31, 1998.... 2,774,040,000 443,280,000 584,530,000 1,762,800,000 (16,570,000)
Net income.................. 569,600,000 569,600,000
Cumulative translation
adjustments............... (43,950,000) (43,950,000)
--------------
Total comprehensive income.... 525,650,000
Shares issued................. 85,550,000 3,960,000 81,590,000
Shares repurchased............ (99,600,000) (3,730,000) (95,870,000)
Cash dividends declared....... (180,880,000) (180,880,000)
Re: Shareholders of pooled
companies:
Capital contributions
from...................... 11,490,000 11,490,000
Compensatory stock
options................... 20,250,000 20,250,000
-------------- ------------ ------------- -------------- ------------
Balance, December 31, 1999.... $3,136,500,000 $443,510,000 $ 601,990,000 $2,151,520,000 $(60,520,000)
============== ============ ============= ============== ============
See notes to consolidated financial statements.
22
24
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of Masco Corporation and all majority-owned subsidiaries. All
significant intercompany transactions have been eliminated. The consolidated
financial statements for prior years and related notes have been restated to
include the accounts and operations of transactions accounted for as poolings of
interests.
Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of any contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from such estimates and
assumptions.
Cash and Cash Investments. The Company considers all highly liquid
investments with an initial maturity of three months or less to be cash and cash
investments.
Receivables. The Company does significant business with a number of
individual customers, including certain home centers. The Company monitors its
exposure for credit losses and maintains adequate allowances for doubtful
accounts; the Company does not believe that significant credit risks exist. At
December 31, 1999 and 1998, accounts and notes receivable are presented net of
allowances for doubtful accounts of $26.1 million and $22.2 million,
respectively.
Property and Equipment. Property and equipment, including significant
betterments to existing facilities, are recorded at cost. Upon retirement or
disposal, the cost and accumulated depreciation are removed from the accounts
and any gain or loss is included in the statement of income. Maintenance and
repair costs are charged to expense as incurred.
Depreciation and Amortization. Depreciation is computed principally using
the straight-line method over the estimated useful lives of the assets. Annual
depreciation rates are as follows: buildings and land improvements, 2 to 10
percent, and machinery and equipment, 5 to 33 percent. Depreciation was $114.6
million, $107.5 million and $95.8 million in 1999, 1998 and 1997, respectively.
Acquired goodwill is being amortized using the straight-line method over
periods not exceeding 40 years; at December 31, 1999 and 1998 such accumulated
amortization totaled $153.9 million and $108.5 million, respectively. At each
balance sheet date, management evaluates the recoverability of acquired goodwill
by comparing the carrying value of the asset to the associated current and
projected annual sales, operating profit and undiscounted annual cash flows;
management also considers business prospects, market trends and other economic
factors in performing this evaluation. Based on this evaluation, there was no
permanent impairment related to acquired goodwill at December 31, 1999 and 1998.
Purchase costs of patents are being amortized using the straight-line method
over the legal lives of the patents, not to exceed 17 years. Amortization of
intangible assets totaled $67.2 million, $49.2 million and $35.7 million in
1999, 1998 and 1997, respectively.
Fair Value of Financial Instruments. The carrying value of financial
instruments reported in the balance sheet for current assets, current
liabilities and long-term variable rate debt approximates fair value. The fair
value of financial instruments that are carried as long-term investments (other
than those accounted for by the equity method) was based principally on quoted
market prices for those or similar investments or by discounting future cash
flows using a discount rate that reflects the risk of the underlying
investments. The fair value of the Company's long-term fixed-rate debt
instruments was based principally on quoted market prices for the same or
similar issues or the current rates available to the Company for debt with
similar terms and remaining maturities. The aggregate market value of the
Company's long-term investments and long-term debt at December 31, 1999 was
approximately $772 million and $2,370 million, as compared with the Company's
aggregate carrying value of $706 million and $2,431 million, respectively, and
at December 31,
23
25
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING POLICIES -- (CONCLUDED)
1998 the aggregate market value was approximately $650 million and $1,663
million, as compared with the Company's aggregate carrying value of $639 million
and $1,638 million, respectively.
POOLING-OF-INTERESTS TRANSACTIONS
During the third quarter of 1999, the Company completed mergers with Behr
Process Corporation, a manufacturer of premium architectural coatings; Mill's
Pride, L.L.P., a manufacturer of ready-to-assemble and assembled kitchen and
bath cabinetry, bath vanities, home office workstations and entertainment
centers, storage products, bookcases and kitchen utility products; and a smaller
company. The Company issued approximately 104 million shares of common stock in
exchange for all of the outstanding shares of these companies. The transactions
have been accounted for as poolings of interests and, accordingly, the
consolidated financial statements and related shares and per share data for all
prior periods presented have been restated to include the accounts and
operations of the pooled companies. The Company's net sales and net income prior
to these poolings for the first six months of 1999 (unaudited) were $2,416
million and $262.9 million, respectively, and for the years 1998 and 1997 were
$4,345 million and $476 million and $3,760 million and $382.4 million,
respectively.
PURCHASE ACQUISITIONS
During the third quarter of 1999, the Company acquired Arrow Fastener
Company, a manufacturer of manual and electric staple gun tackers and staples
and other fastening tools; H&H Tube, a manufacturer of brass, copper, steel and
aluminum tubes; and Superia Radiatoren N.V., a Belgian-based manufacturer of
standard plate radiators. The Company also acquired INRECON, L.L.C., a company
specializing in repair and restoration of residential, commercial and
institutional facilities damaged by fire, wind, water and other disasters.
During the second quarter of 1999, the Company acquired Avocet Hardware
PLC, a U.K. supplier of locks and other builders' hardware; The Cary Group, an
insulation services company; and The GMU Group, a manufacturer and distributor
of kitchen cabinets and cabinet components, headquartered in Spain. In the first
quarter of 1999, the Company acquired A&J Gummers, a U.K. manufacturer of shower
valve products, and The Faucet Queens, Inc., a supplier of plumbing accessories
and hardware products.
The aggregate net purchase price of these 1999 purchase acquisitions was
approximately $850 million, including 1.6 million shares of Company common stock
valued at $48 million. The excess of the aggregate acquisition cost for these
purchase acquisitions over the calculated fair value of net assets acquired
totaled approximately $680 million and has been recorded as acquired goodwill.
Purchase agreements for certain of the 1999 purchase acquisitions include
provisions for additional consideration to be paid if the acquired business
achieves specific operating results in future periods, ranging from one to five
years. Such additional consideration, when earned, is recorded as additional
purchase price.
The results of operations for these 1999 purchase acquisitions are included
in the consolidated financial statements from the dates of acquisition. Had
these companies been acquired effective January 1, 1998, pro forma unaudited
consolidated net sales and net income would have approximated $6,537 million and
$579 million for 1999 and $5,889 million and $590 million for 1998,
respectively, and pro forma unaudited consolidated diluted earnings per share
would have increased approximately $.02 for 1999 and $.05 for 1998.
24
26
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
(IN THOUSANDS)
AT DECEMBER 31
-------------------
1999 1998
-------- --------
Raw material................................................ $307,060 $262,410
Finished goods.............................................. 290,440 236,610
Work in process............................................. 172,370 147,910
-------- --------
$769,870 $646,930
======== ========
Inventories are stated at the lower of cost or net realizable value, with
cost determined principally by use of the first-in, first-out method.
EQUITY INVESTMENTS IN AFFILIATES
Equity investments in affiliates consist primarily of the following common
equity interests:
AT DECEMBER 31
-------------------
1999 1998 1997
----- ---- ----
MascoTech, Inc. ........................................... 17.5% 17% 17%
Emco Limited............................................... 42 % 42% 42%
Hans Grohe, a German company............................... 27 % 27% 27%
TriMas Corporation......................................... -- -- 4%
Excluding Hans Grohe, for which there is no quoted market value, the
aggregate market value of the Company's equity investments in affiliates at
December 31, 1999 (which may differ from the amounts that could then have been
realized upon disposition), based upon quoted market prices at that date, was
$125 million, as compared with the Company's related aggregate carrying value of
$165 million. The Company's carrying value in common stock of these equity
affiliates exceeded its equity in the underlying net book value by approximately
$49 million at December 31, 1999. This excess is being amortized over a period
not to exceed 40 years.
Pursuant to a corporate services agreement, the Company provides MascoTech,
Inc. with certain corporate staff and administrative services. The fees charged
to MascoTech approximated $6 million in 1999, $8 million in 1998 and $10 million
in 1997, and are included as a reduction of general corporate expense. MascoTech
holds an option expiring in 2002 to require the Company to purchase up to $200
million aggregate amount of subordinated debt securities of MascoTech.
During January 1998, MascoTech announced the completion of its acquisition
of TriMas Corporation. The Company recorded a gain in the first quarter of 1998
as a result of selling its common stock investment in TriMas to MascoTech in the
public tender offer.
25
27
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY INVESTMENTS IN AFFILIATES -- (CONCLUDED)
Approximate combined condensed financial data of the affiliates listed on
the previous page at December 31, 1999 and 1998 and for the three years then
ended, are summarized in U.S. dollars as follows, in thousands:
1999 1998 1997
----------- ----------- ----------
Net sales.............................................. $ 2,847,000 $ 2,732,600 $2,745,600
=========== =========== ==========
Gross Profit........................................... $ 727,800 $ 704,700 $ 689,300
=========== =========== ==========
Income from continuing operations before income
taxes................................................ $ 191,400 $ 203,800 $ 287,400
=========== =========== ==========
Net income attributable to common shareholders......... $ 124,000 $ 142,900 $ 172,700
=========== =========== ==========
The Company's net equity in above net income........... $ 23,900 $ 29,200 $ 24,100
=========== =========== ==========
Cash dividends received by the Company from
affiliates........................................... $ 5,200 $ 5,100 $ 4,600
=========== =========== ==========
At December 31:
Current assets....................................... $ 859,300 $ 832,300
Current liabilities.................................. (400,200) (412,700)
----------- -----------
Working capital................................... 459,100 419,600
Property and equipment............................... 886,500 839,100
Other assets......................................... 942,000 968,400
Long-term liabilities................................ (1,809,300) (1,741,500)
----------- -----------
Shareholders' equity.............................. $ 478,300 $ 485,600
=========== ===========
Equity in undistributed earnings of affiliates of $70 million at December
31, 1999, $57 million at December 31, 1998 and $43 million at December 31, 1997
are included in consolidated retained earnings.
SECURITIES OF FURNISHINGS INTERNATIONAL INC.
During August 1996, the Company completed the sale of its home furnishings
products segment to Furnishings International Inc. Total proceeds to the Company
from the sale were $1,050 million, including $708 million in cash, $285 million
of junior debt securities and equity securities aggregating $57 million.
Securities of Furnishings International Inc. are summarized as follows:
(IN THOUSANDS)
AT DECEMBER 31
-------------------
1999 1998
-------- --------
Junior debt securities (12% pay-in-kind)............. $423,900 $377,270
Preferred stock (13% cumulative).....................
Common stock (15% ownership)......................... ) 57,370 57,370
Convertible preferred stock..........................
-------- --------
$481,270 $434,640
======== ========
The junior debt securities mature in 2008 and are stated at face value. The
convertible preferred stock represents transferable rights for up to a 25
percent common ownership, although the Company is restricted from maintaining an
ownership in excess of 20 percent of Furnishings International's common equity.
As such, the Company will not acquire additional common equity, except for
purposes of resale.
26
28
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
(IN THOUSANDS)
AT DECEMBER 31
-----------------------
1999 1998
---------- ----------
Land and improvements.................................... $ 101,000 $ 87,050
Buildings................................................ 643,190 563,910
Machinery and equipment.................................. 1,694,910 1,440,530
---------- ----------
2,439,100 2,091,490
Less, accumulated depreciation........................... 814,740 733,660
---------- ----------
$1,624,360 $1,357,830
========== ==========
ACCRUED LIABILITIES
(IN THOUSANDS)
AT DECEMBER 31
-----------------------
1999 1998
---------- ----------
Salaries, wages and related benefits..................... $ 162,900 $ 116,130
Advertising and sales promotion.......................... 110,450 87,830
Insurance................................................ 49,860 55,360
Income taxes............................................. 33,130 49,460
Dividends payable........................................ 53,220 37,330
Interest................................................. 39,570 34,280
Property, payroll and other taxes........................ 24,260 27,900
Other.................................................... 66,930 61,800
---------- ----------
$ 540,320 $ 470,090
========== ==========
LONG-TERM DEBT
(IN THOUSANDS)
AT DECEMBER 31
-----------------------
1999 1998
---------- ----------
Notes and Debentures:
6.625%, due Sept. 15, 1999............................. -- $ 200,000
9%, due Oct. 1, 2001............................... $ 77,030 77,030
6.125%, due Sept. 15, 2003............................. 200,000 200,000
5.75%, due Oct. 15, 2008............................... 100,000 100,000
7.125%, due Aug. 15, 2013.............................. 200,000 200,000
6.625%, due Apr. 15, 2018.............................. 250,000 250,000
7.75%, due Aug. 1, 2029............................... 300,000 --
Notes payable to banks................................... 750,000 --
Bank term loans.......................................... -- 202,750
European bank debt....................................... 470,060 505,970
Other.................................................... 146,480 211,860
---------- ----------
2,493,570 1,947,610
Less, current portion.................................... 62,300 309,320
---------- ----------
$2,431,270 $1,638,290
========== ==========
All of the notes and debentures above, other than bank notes, are
nonredeemable.
27
29
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT -- (CONCLUDED)
During August 1999, the Company issued $300 million of 7.75% debentures due
August 1, 2029. Proceeds from this issuance were largely used to retire the
6.625% notes which matured September 15, 1999.
The notes payable to banks relate to a $750 million bank revolving-credit
agreement, with any outstanding balance due and payable in November 2001.
Interest is payable on borrowings under this agreement based upon various
floating rate options as selected by the Company (approximately 6 percent at
December 31, 1999). During 1999, the Company entered into a $400 million 364-day
credit facility. There was no outstanding balance due under this credit facility
at December 31, 1999. Subsequent to December 31, 1999, the Company amended and
restated this credit facility, increasing the amount of such facility to $1
billion and extending the maturity to March 2001. Interest is payable on
borrowings under this credit facility based on various floating rate options as
selected by the Company.
European bank debt relates to borrowings of local currency for European
acquisitions and expansion. At December 31, 1999, approximately $206 million of
European debt related to a term loan facility expiring in 2002. The balance of
$264 million represents borrowings under lines of credit primarily expiring in
2003. Interest is payable on European borrowings based upon various floating
rates as selected by the Company (approximately 4 percent at December 31, 1999).
Certain debt agreements contain limitations on additional borrowings and a
requirement for maintaining a certain level of net worth. At December 31, 1999,
the Company was in compliance with these borrowing limitations, and the
Company's net worth exceeded that requirement by approximately $806 million.
At December 31, 1999, the maturities of long-term debt during each of the
next five years, assuming that the bank debt is refinanced, were approximately
as follows: 2000 -- $62.3 million; 2001 -- $113.9 million; 2002 -- $28.6
million; 2003 -- $222.4 million; and 2004 -- $17.4 million.
The Company has on file with the Securities and Exchange Commission an
unallocated shelf registration pursuant to which the Company is able to issue up
to a combined $109 million of debt and equity securities.
Interest paid was approximately $126 million, $114 million and $95 million
in 1999, 1998 and 1997, respectively.
SHAREHOLDERS' EQUITY
During the first six months of 1999, pursuant to the Company's share
repurchase program, as authorized by the Board of Directors, the Company
repurchased approximately 3.7 million of its common shares in open-market
transactions at a cost aggregating $99.6 million. As a result of
pooling-of-interests transaction requirements, the Company in mid-1999 canceled
its share buy-back program. During 1998, the Company acquired approximately 1.9
million of its common shares in open-market transactions at a cost aggregating
$43.3 million.
Included in the consolidated statements of shareholders' equity for 1999,
1998 and 1997 are distributions to and contributions from shareholders of pooled
companies. Such distributions and contributions occurred prior to August 31,
1999, the date of the pooling mergers. During 1997, one of the pooled companies
completed a recapitalization; such recapitalization resulted in the distribution
of $512 million to existing shareholders and contributions from new shareholders
totaling $234 million. Other distributions to shareholders of pooled companies
in 1998 and 1997 totaled $46 million and $24 million, respectively. Other
contributions from shareholders of pooled companies in 1999, 1998 and 1997
totaled $11 million, $2 million and $11 million, respectively.
On the basis of amounts paid (declared) and after giving effect to the 1998
stock split, cash dividends per share were $.45 ($.46) in 1999, $.43 ($.43 1/2)
in 1998 and $.40 1/2 ($.41) in 1997.
28
30
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SHAREHOLDERS' EQUITY -- (CONCLUDED)
In July 1998, the Company effected a two-for-one stock split in the form of
a 100 percent stock distribution to shareholders, which, after giving effect to
1999 poolings of interests, resulted in the issuance of approximately 222
million shares of common stock and reduced paid-in capital by approximately $222
million.
In 1995, the Company's Board of Directors announced the approval of a
Shareholder Rights Plan. The Rights were designed to enhance the Board's ability
to protect the Company's shareholders against, among other things, unsolicited
attempts to acquire control of the Company that do not offer an adequate price
to all shareholders or are otherwise not in the best interests of the
shareholders. The Rights were issued to shareholders of record in December 1995
and will expire in December 2005.
Financial statements of non-U.S. operations are translated into U.S.
dollars using exchange rates in effect at year-end for assets and liabilities
and using weighted average exchange rates in effect during the year for results
of operations. Adjustments resulting from such translation are reflected as
cumulative translation adjustments in shareholders' equity, included in other
comprehensive income (loss).
STOCK OPTIONS AND AWARDS
The Company's 1991 Long Term Stock Incentive Plan (the "Plan") provides for
the issuance of stock-based incentives in various forms. At December 31, 1999,
outstanding stock-based incentives were primarily in the form of restricted
long-term stock awards, stock appreciation rights, phantom stock awards and
stock options. Additionally, the Company's 1997 Non-Employee Directors Stock
Plan (the "1997 Plan") provides for the payment of compensation to non-employee
Directors in part in Company common stock.
RESTRICTED LONG-TERM STOCK AWARDS
The Company granted long-term stock awards, net of cancellations, for
402,000, 1,149,000 and 1,581,000 shares of Company common stock during 1999,
1998 and 1997, respectively, to key employees of the Company and to non-employee
Directors of the Company. These long-term stock awards do not cause net share
dilution inasmuch as the Company reacquires an equal number of shares on the
open market. The weighted average grant date fair value per share of long-term
stock awards granted during 1999, 1998 and 1997 was $29, $26 and $21,
respectively. Early vesting of certain of these awards is contingent upon the
market price of Company common stock equaling or exceeding certain price targets
within specific time periods, including a $50 price target by February 2003.
Compensation expense for the annual vesting of long-term stock awards was $20
million, $17 million and $14 million in 1999, 1998 and 1997, respectively. The
unamortized costs of unvested stock awards, aggregating approximately $118
million at December 31, 1999, are included in other assets and are being
amortized over the typical 10-year vesting periods.
STOCK APPRECIATION RIGHTS AND PHANTOM STOCK AWARDS
In connection with transactions accounted for as poolings of interests in
1999, the Company converted existing stock appreciation rights ("SARs") into
Company SARs with annual cash compensation linked to the value of approximately
330,000 shares of Company common stock. In connection with other acquisitions in
1999, the Company generated phantom stock awards linked to the value of 664,000
shares of Company common stock. Compensation expense related to SARs and phantom
stock awards for 1999 was $66.6 million, of which approximately $61 million
pertained to transactions accounted for as poolings of interests; for 1998 and
1997, such expense was $8.3 million and $13.0 million, respectively.
NON-COMPENSATORY STOCK OPTIONS
Fixed stock options are granted to key employees of the Company and to
non-employee Directors of the Company and have a maximum term of 10 years. The
exercise price equals the market price of Company
29
31
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS AND AWARDS -- (CONTINUED)
common stock on the date of grant. These options generally become exercisable in
installments beginning in the third year and extending through the eighth year
after grant.
During 1997, the Company granted original stock options for 5,680,000
shares of Company common stock with an exercise price of $19 1/2 per share
(equal to the market price on the grant date). During 1999, 1998 and 1997, the
Company granted restoration stock options for 1,956,000, 692,000 and 278,000
shares of Company common stock with grant date exercise prices ranging from $25
to $33, $25 to $31 and $17 1/2 to $26, respectively (the market prices on the
grant dates), and stock options for 64,000 shares in each of 1999 and 1998 and
56,000 shares in 1997 to non-employee Directors of the Company with exercise
prices of $30, $29 and $19 1/2, respectively.
The Compensation Committee of the Board of Directors, in acceding to the
Chief Executive Officer's request that his annual salary and bonus be reduced to
$1.00 per year, effective January 1, 1996, considered alternative compensation
arrangements for the Chief Executive Officer and in April 1996 granted the Chief
Executive Officer a 10-year option, with a $20 1/2 exercise price when the
market price was $13 15/16 per share, to purchase two million shares of Company
common stock. This option became exercisable in 1997 when the price of Company
common stock exceeded $20 1/2 per share.
In 1996, other officers and certain other key employees of the Company
voluntarily accepted an effective 15 percent salary reduction, with salaries
frozen through 1998 at that level. This reduction in compensation was replaced
with stock options and career stock awards. The stock options were granted with
an exercise price of $16 (equal to the market price on the grant date). Annual
vestings of such stock options commenced in 1997 as a result of the Company
common stock price exceeding $20 1/2 per share for the required period. Such
options were granted for approximately 3,230,000 shares of Company common stock.
In addition, in 1996 when the market price of Company common stock was $16 per
share, the executive officers were granted career stock awards; annual vestings
of such awards commenced in 1997 as a result of the Company common stock price
exceeding $25 per share in late 1997.
A summary of the status of the Company's fixed stock options for the three
years ended December 31, 1999 is presented below.
(SHARES IN THOUSANDS)
1999 1998 1997
------ ------ ------
Option shares outstanding, January 1................... 14,396 16,200 14,616
Weighted average exercise price...................... $18 $17 $14
Option shares granted, including restoration options... 2,020 756 6,014
Weighted average exercise price...................... $29 $28 $20
Option shares exercised................................ 3,780 2,486 4,276
Weighted average exercise price...................... $17 $13 $13
Option shares canceled................................. -- 74 154
Weighted average exercise price...................... -- $10 $11
Option shares outstanding, December 31................. 12,636 14,396 16,200
Weighted average exercise price...................... $20 $18 $17
Weighted average remaining option term (in years).... 5.9 6.6 7.2
Option shares exercisable, December 31................. 4,952 3,781 4,588
Weighted average exercise price...................... $21 $17 $16
30
32
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS AND AWARDS -- (CONCLUDED)
The following table summarizes information for option shares outstanding
and exercisable at December 31, 1999 (shares in thousands).
OPTION SHARES OUTSTANDING OPTION SHARES EXERCISABLE
- ------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF OPTION EXERCISE NUMBER OF EXERCISE
PRICES SHARES TERM PRICE SHARES PRICE
- -------- --------- --------- -------- --------- --------
$10-15 1,870 2 Years $11 1,552 $10
16-19 2,892 6 Years 16 519 17
20-27 5,600 7 Years 20 830 21
28-33 2,274 6 Years 29 2,051 30
------ ------ -------- --- ----- ---
$10-33 12,636 6 Years $20 4,952 $21
====== ====== ======== === ===== ===
At December 31, 1999, a combined total of 11,239,000 shares and 765,000
shares of Company common stock was available under the 1991 Plan, and the 1997
Plan, respectively, for the granting of stock options and long-term stock
awards.
The Company has elected to continue to apply the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, the Company's stock options do not constitute compensation
expense in the determination of net income in the statement of income. Had stock
option compensation expense been determined pursuant to the methodology of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," the pro forma effect would have been a reduction in
the Company's diluted earnings per share of approximately $.04, $.01 and $.02 in
1999, 1998 and 1997, respectively.
For SFAS No. 123 calculation purposes, the weighted average grant date fair
values of option shares, including restoration options granted in 1999, 1998 and
1997 were $7.28, $6.00 and $6.27, respectively. The fair values of these options
were estimated at the grant dates using a Black-Scholes option pricing model
with the following assumptions for 1999, 1998 and 1997, respectively: risk-free
interest rate -- 5.0%, 4.9% and 6.7%; dividend yield -- 1.6%, 2.1% and 2.5%;
volatility factor -- 34%, 28% and 27%; and expected option life -- 3 years, 3
years and 7 years.
COMPENSATORY STOCK OPTION
In connection with transactions accounted for as poolings of interests, the
Company converted an existing variable stock option into a Company stock option
to acquire 1.4 million shares of Company common stock at an exercise price of
$7.66 per share, expiring in 2027. Such stock option was outstanding and
exercisable at December 31, 1999. Compensation expense related to such stock
option was $20.3 million, $5.0 million and $.5 million in 1999, 1998 and 1997,
respectively. Approximately $15.7 million of compensation expense for 1999
relates to the accelerated vesting of such option, which resulted from the
consummation of transactions accounted for as poolings of interests.
EMPLOYEE RETIREMENT PLANS
The Company sponsors defined-benefit and defined-contribution pension plans
for most of its employees. In addition, substantially all salaried employees
participate in non-contributory profit-sharing plans, to which payments are
determined annually by the Directors. Aggregate charges to income under the
Company's
31
33
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE RETIREMENT PLANS -- (CONTINUED)
pension, retirement and profit-sharing plans were $57.3 million in 1999, $35.8
million in 1998 and $26.4 million in 1997.
Net periodic pension cost for the Company's qualified pension plans
includes the following components, in thousands:
1999 1998 1997
-------- -------- --------
Service cost..................................... $ 9,630 $ 8,530 $ 7,090
Interest cost.................................... 12,470 11,260 10,170
Expected return on plan assets................... (10,610) (11,870) (11,140)
Amortization of transition asset................. (620) (620) (620)
Amortization of prior-service cost............... 380 320 330
Amortization of net loss......................... 2,250 1,530 770
-------- -------- --------
Net periodic pension cost........................ $ 13,500 $ 9,150 $ 6,600
======== ======== ========
The following table provides a reconciliation of changes in the projected
benefit obligation, fair value of plan assets and funded status of the Company's
qualified pension plans at December 31, in thousands:
1999 1998
-------- --------
Changes in projected benefit obligation:
Benefit obligation at January 1........................ $175,980 $152,320
Service cost........................................... 9,220 8,140
Interest cost.......................................... 12,470 11,260
Plan amendments........................................ 980 (1,720)
Actuarial (gain)/loss.................................. (28,600) 11,780
Benefit payments....................................... (7,110) (5,800)
-------- --------
Projected benefit obligation at December 31......... $162,940 $175,980
======== ========
Changes in fair value of plan assets:
Fair value of plan assets at January 1................. $112,860 $106,520
Actual return on plan assets........................... (8,700) 6,110
Cash contributions..................................... 10,650 6,460
Benefit payments....................................... (7,110) (5,800)
Expenses/other......................................... (400) (430)
-------- --------
Fair value of plan assets at December 31............ $107,300 $112,860
======== ========
Funded status of qualified pension plans:
Plan assets (less than) projected benefit obligation at
December 31......................................... $(55,640) $(63,120)
Unamortized net asset at transition.................... (1,560) (2,180)
Unamortized prior-service cost......................... 4,880 4,150
Unamortized net loss................................... 41,250 52,930
-------- --------
Net liability recognized............................ $(11,070) $ (8,220)
======== ========
The major assumptions used in accounting for the Company's pension plans
are as follows:
1999 1998 1997
----- ------ -----
Discount rate for obligations......................... 7.75% 6.75% 7.0%
Expected return on plan assets........................ 9.0 % 11.0 % 11.0%
Rate of compensation increase......................... 5.0 % 5.0 % 5.0%
32
34
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE RETIREMENT PLANS -- (CONCLUDED)
In addition to the Company's qualified pension and retirement plans, the
Company has non-qualified unfunded supplemental pension plans covering certain
employees, which provide for benefits in addition to those provided by the
qualified pension plans. The actuarial present value of accumulated benefit
obligations and projected benefit obligations related to these non-qualified
pension plans totaled $41.4 million and $48.9 million, and $37.0 million and
$46.2 million at December 31, 1999 and 1998, respectively. Net periodic pension
cost for these plans was $7.9 million, $7.1 million and $4.7 million in 1999,
1998 and 1997, respectively.
The Company sponsors certain post-retirement benefit plans that provide
medical, dental and life insurance coverage for eligible retirees and dependents
in the United States based on age and length of service. At December 31, 1999,
the aggregate present value of the unfunded accumulated postretirement benefit
obligation approximated $3 million.
SEGMENT INFORMATION
As a result of significant mergers and acquisitions during 1999, the
Company redefined its business segments; accordingly, segment information for
prior years has been restated. The Company's operating segments are organized
according to geographic area, as this organization most closely aligns with the
way in which the Company manages its businesses. The Company's operations
consist of the manufacture and sale and certain installation of the following
home improvement and building products:
North America:
Kitchen and Bath Products -- kitchen and bath cabinets; faucets;
plumbing fittings; bathtubs and shower tub enclosures; whirlpools and
spas; and bath accessories.
Architectural Coatings -- stains, varnishes and paints.
Builders' Hardware and Other Specialty Products and
Services -- builders' hardware, including mechanical and electronic
lock sets; other cabinets; grilles, registers and diffusers for
heating/cooling systems; insulation; staple gun tackers and staples
and other fastening tools; and water pumps.
International, principally Europe:
Kitchen and bath cabinets; faucets; plumbing fittings; shower tub
enclosures; bath accessories; builders' hardware, including
mechanical lock sets; standard plate radiators, hydronic radiators
and heat convectors; venting and ventilation systems; rolling
shutters; and water pumps.
The following table sets forth the Company's world-wide net sales for the
above products by product group, in millions.
NET SALES
------------------------
1999 1998 1997
------ ------ ------
Faucets................................................... $ 937 $ 884 $ 815
Kitchen and Bath Cabinets................................. 1,971 1,698 1,371
Other Kitchen and Bath Products........................... 1,125 1,076 1,042
Architectural Coatings.................................... 539 437 353
Builders' Hardware........................................ 415 302 261
Other Specialty Products and Services..................... 1,320 883 666
------ ------ ------
Total........................................... $6,307 $5,280 $4,508
====== ====== ======
33
35
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT INFORMATION -- (CONCLUDED)
These products are sold to the home improvement and home construction
markets through mass merchandisers, hardware stores, home centers, distributors,
wholesalers and other outlets for consumers and contractors.
The Company's operations are principally located in North America and
Europe. The Company's country of domicile is the United States.
Corporate assets consist primarily of real property, cash and cash
investments and other investments.
Accounting policies for the segments are the same as those for the Company.
The Company evaluates performance based on operating profit or loss and, other
than general corporate expense, allocates specific corporate overhead to each
segment.
The following table presents information about the Company by segment:
NET SALES (1)(2)(3)(4) OPERATING PROFIT
------------------------------------ --------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- ---------- -------- --------
The Company's operations by
segment were:
North America.............. $5,238,000 $4,441,000 $3,820,000 $ 867,000 $829,000 $689,000
International, principally
Europe................... 1,069,000 839,000 688,000 136,000 123,000 99,000
---------- ---------- ---------- ---------- -------- --------
Total.................. $6,307,000 $5,280,000 $4,508,000 1,003,000 952,000 788,000
========== ========== ==========
General corporate expense............................................ (92,000) (86,000) (82,000)
---------- -------- --------
Operating profit, after general corporate expense.................... 911,000 866,000 706,000
Other income (expense), net.......................................... (7,000) 39,000 28,000
---------- -------- --------
Income before income taxes (6)....................................... $ 904,000 $905,000 $734,000
========== ======== ========
Equity investments in affiliates........................................................................
Securities of Furnishings International Inc. ...........................................................
Corporate assets........................................................................................
Total assets....................................................................................
(IN THOUSANDS)
ASSETS AT DECEMBER 31 (5)
------------------------------------
1999 1998 1997
---------- ---------- ----------
The Company's operations by
segment were:
North America......................................... $3,746,000 $2,672,000 $2,508,000
International, principally
Europe.............................................. 1,437,000 1,176,000 711,000
---------- ---------- ----------
Total............................................. 5,183,000 3,848,000 3,219,000
General corporate expense.................................
Operating profit, after general corporate expense.........
Other income (expense), net...............................
Income before income taxes (6)............................
Equity investments in affiliates.......................... 203,000 225,000 228,000
Securities of Furnishings International Inc. ............. 481,000 435,000 393,000
Corporate assets.......................................... 768,000 1,111,000 857,000
---------- ---------- ----------
Total assets...................................... $6,635,000 $5,619,000 $4,697,000
========== ========== ==========
DEPRECIATION AND
PROPERTY ADDITIONS (7) AMORTIZATION
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
The Company's operations by segment were:
North America............................................. $316,000 $182,000 $211,000 $110,000 $100,000 $ 84,000
International, principally Europe......................... 95,000 90,000 47,000 48,000 38,000 28,000
-------- -------- -------- -------- -------- --------
Total............................................... $411,000 $272,000 $258,000 $158,000 $138,000 $112,000
======== ======== ======== ======== ======== ========
(1) Included in net sales in 1999, 1998 and 1997 are export sales from the U.S.
of $127 million, $112 million and $89 million, respectively.
(2) Intra-company sales between segments represented less than one percent of
consolidated net sales in 1999, 1998 and 1997.
(3) Includes net sales to one customer in 1999, 1998 and 1997 of $1,539 million,
$1,236 million and $983 million, respectively.
(4) Net sales from the Company's operations in the U.S. were $5,024 million,
$4,275 million and $3,655 million in 1999, 1998 and 1997, respectively.
(5) Long-lived assets of the Company's operations in the U.S. and Europe were
$2,135 million and $997 million, $1,392 million and $813 million and $1,296
million and $467 million at December 31, 1999, 1998 and 1997, respectively.
(6) Income before income taxes and net income pertaining to non-U.S. operations
were $120 million and $69 million, $118 million and $59 million, and $93
million and $45 million for 1999, 1998 and 1997, respectively.
(7) Property additions include assets of purchase acquisitions.
34
36
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER INCOME (EXPENSE), NET
(IN THOUSANDS)
1999 1998 1997
--------- --------- --------
Re: MascoTech, Inc.:
Equity earnings.............................. $ 15,430 $ 15,360 $ 14,580
--------- --------- --------
Gain from change in investment............... -- -- 29,500
--------- --------- --------
Equity earnings, other affiliates.............. 8,500 13,840 9,560
--------- --------- --------
Other, net:
Income from cash and cash investments........ 9,330 21,540 17,280
Other interest income........................ 52,530 46,340 47,620
Other items.................................. 27,330 56,420 3,640
--------- --------- --------
89,190 124,300 68,540
--------- --------- --------
Interest expense............................... (120,420) (114,400) (94,280)
--------- --------- --------
$ (7,300) $ 39,100 $ 27,900
========= ========= ========
Other interest income for 1999, 1998 and 1997 includes $46.6 million, $41.5
million and $36.8 million, respectively, from the 12% pay-in-kind junior debt
securities of Furnishings International Inc. Such interest income began to
accrue in August 1996 upon the sale of the Company's home furnishings
businesses. Other interest income for 1997 includes $7.5 million of interest
income from a $151 million note receivable from MascoTech, which was paid on
September 30, 1997.
Other items in 1999 include approximately $30 million of income and gains,
net regarding certain non-operating assets and $7.6 million of dividend income
from the Company's investment in Furnishings International's 13% cumulative
preferred stock. Also included in other items for 1999 were approximately $4
million of expenses related to the early retirement of debt.
Other items in 1998 include pre-tax gains aggregating approximately $59
million from sales of the Company's Thermador subsidiary ($30 million) and the
Company's investment in TriMas Corporation ($29 million). Also included in other
items for 1998 were $7 million of dividend income from the Company's investment
in Furnishings International's 13% cumulative preferred stock and an approximate
$12 million pre-tax charge related to the early retirement of long-term debt.
Other items in 1997 include $10.8 million of dividend income from the
Company's investment in Furnishings International's 13% cumulative preferred
stock and net gains aggregating approximately $28 million related to the sales
of certain non-operating assets as well as charges aggregating approximately $30
million principally for the adjustment of the Company's Payless Cashways
investment to its estimated fair value.
During the second quarter of 1997, MascoTech effected conversion of all of
its publicly held outstanding convertible preferred stock with the issuance of
approximately 10 million shares of its common stock. This conversion reduced the
Company's common equity ownership in MascoTech to 17 percent from 21 percent,
and increased the Company's equity in MascoTech's net book value by
approximately $29.5 million. As a result, the Company recognized a pre-tax gain
of $29.5 million during the second quarter of 1997.
35
37
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
(IN THOUSANDS)
1999 1998 1997
--------- --------- --------
Income before income taxes:
U.S. ......................................... $ 783,910 $ 787,090 $640,660
Foreign....................................... 120,190 118,410 93,140
--------- --------- --------
$ 904,100 $ 905,500 $733,800
========= ========= ========
Provision for income taxes:
Currently payable:
U.S. Federal............................... $ 256,420 $ 203,200 $183,430
State and local............................ 27,800 28,290 30,520
Foreign.................................... 45,040 47,250 41,110
Deferred:
U.S. Federal............................... (1,270) 49,250 28,000
Foreign.................................... 6,510 12,410 6,640
--------- --------- --------
$ 334,500 $ 340,400 $289,700
========= ========= ========
Deferred tax assets at December 31:
Intangibles................................... $ 11,540 $ 18,160
Inventories................................... 5,530 12,210
Accrued liabilities........................... 59,170 51,580
Capital loss carryforward..................... 100,570 117,760
Other, principally equity investments......... 60,550 52,060
--------- ---------
237,360 251,770
Valuation allowance........................... (127,320) (156,700)
--------- ---------
110,040 95,070
--------- ---------
Deferred tax liabilities at December 31:
Property and equipment........................ 206,110 193,340
Other......................................... 37,610 30,170
--------- ---------
243,720 223,510
--------- ---------
Net deferred tax liability at December 31....... $ 133,680 $ 128,440
========= =========
At December 31, 1999 and 1998, net deferred tax liability consists of net
short-term deferred tax assets of $25.0 million and $25.9 million, respectively,
and net long-term deferred tax liabilities of $158.7 million and $154.3 million,
respectively.
A valuation allowance of approximately $127.3 million and $156.7 million
was recorded at December 31, 1999 and 1998, respectively, primarily due to the
Company's inability to quantify the major portion of its capital loss
carryforward which may ultimately be realized. Such capital loss benefit
pertains to a $100.6 million and $117.8 million after-tax capital loss
carryforward at December 31, 1999 and 1998, respectively, on the 1996
disposition of the Company's home furnishings products segment and a $26.7
million and $38.9 million benefit of a capital nature on the Company's equity
and other investments at December 31, 1999 and 1998, respectively.
36
38
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES -- (CONCLUDED)
The following is a reconciliation of the U.S. federal statutory rate:
1999 1998 1997
---- ---- ----
U.S. federal statutory rate................................ 35% 35% 35%
State and local taxes, net of federal tax benefit.......... 2 2 2
Higher taxes on foreign earnings........................... 1 2 3
Dividends-received deduction............................... - - (1)
Amortization in excess of tax.............................. 1 1 1
Change in valuation allowance.............................. (2) (2) (2)
Other, net................................................. - - 1
-- -- --
Effective tax rate....................................... 37% 38% 39%
== == ==
Income taxes paid were approximately $326 million, $216 million and $194
million in 1999, 1998 and 1997, respectively.
Earnings of non-U.S. subsidiaries generally become subject to U.S. tax upon
the remittance of dividends and under certain other circumstances. Provision has
not been made at December 31, 1999 for U.S. or additional foreign withholding
taxes on approximately $57.6 million of remaining undistributed net income of
non-U.S. subsidiaries, as such income is intended to be permanently reinvested;
it is not practical to estimate the amount of deferred tax liability on such
income.
EARNINGS PER SHARE
The following are reconciliations of the numerators and denominators used
in the computations of basic and diluted earnings per share, in thousands:
1999 1998 1997
-------- -------- --------
Numerator:
Basic (Net income)............................ $569,600 $565,100 $444,100
Add convertible debenture interest, net (1)... -- 700 5,880
-------- -------- --------
Diluted (Net income).......................... $569,600 $565,800 $449,980
======== ======== ========
Denominator:
Basic shares (based on weighted average)...... 435,600 435,500 423,200
Add:
Contingently issued shares................. 7,300 7,200 6,600
Stock option dilution...................... 3,300 3,800 3,200
Convertible debentures (1)................. -- 1,000 8,400
-------- -------- --------
Diluted shares................................ 446,200 447,500 441,400
======== ======== ========
(1) The Company called these debentures for redemption on February 12, 1998.
Substantially all holders exercised their right to convert these debentures
into Company common stock.
37
39
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED FINANCIAL STATEMENTS (UNAUDITED)
For 1999 and 1998, the following presents, as one entity with Masco
Corporation as the parent company, the combined unaudited financial statements
of the Company and MascoTech, Inc., and for 1997, the combined unaudited
financial statements of the Company, MascoTech and TriMas Corporation.
Intercompany transactions have been eliminated. Amounts, except per share data,
are in thousands. (MascoTech completed its acquisition of TriMas Corporation in
early 1998.)
AT DECEMBER 31
------------------------
1999 1998
---------- ----------
COMBINED BALANCE SHEETS
Assets
Current assets:
Cash and cash investments........................... $ 235,270 $ 582,540
Receivables......................................... 1,221,590 1,023,620
Prepaid expenses and other.......................... 169,570 131,940
Inventories:
Raw material..................................... 358,480 324,990
Finished goods................................... 376,680 324,420
Work in process.................................. 218,310 195,870
---------- ----------
953,470 845,280
---------- ----------
Total current assets........................... 2,579,900 2,583,380
Equity investments in affiliates...................... 244,280 258,580
Securities of Furnishings International Inc. ......... 481,270 434,640
Property and equipment................................ 2,347,040 2,035,960
Acquired goodwill, net................................ 2,519,530 1,836,450
Other assets.......................................... 511,510 516,990
---------- ----------
Total assets................................... $8,683,530 $7,666,000
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable....................................... $ 62,300 $ 314,140
Accounts payable.................................... 358,300 306,940
Accrued liabilities................................. 654,230 605,320
---------- ----------
Total current liabilities...................... 1,074,830 1,226,400
Long-term debt........................................ 3,804,160 3,026,530
Deferred income taxes and other....................... 420,320 428,540
Other interests in combined affiliates................ 247,720 210,490
---------- ----------
Total liabilities.............................. 5,547,030 4,891,960
Equity of shareholders of Masco Corporation........... 3,136,500 2,774,040
---------- ----------
Total liabilities and shareholders' equity..... $8,683,530 $7,666,000
========== ==========
38
40
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------
1999 1998 1997
----------- ----------- -----------
COMBINED STATEMENTS OF INCOME
Net sales.............................................. $ 7,976,720 $ 6,902,620 $ 6,071,450
Cost of sales.......................................... (5,232,220) (4,543,950) (3,982,430)
Selling, general and administrative expenses........... (1,617,670) (1,285,460) (1,167,710)
----------- ----------- -----------
Operating profit............................. 1,126,830 1,073,210 921,310
----------- ----------- -----------
Other income (expense), net:
Interest expense..................................... (201,240) (195,900) (128,730)
Other, net........................................... 102,550 157,350 151,820
----------- ----------- -----------
(98,690) (38,550) 23,090
----------- ----------- -----------
Income before income taxes and other
interests.................................. 1,028,140 1,034,660 944,400
Income taxes........................................... (382,180) (388,230) (388,310)
Other interests in combined affiliates................. (76,360) (81,330) (111,990)
----------- ----------- -----------
Net income................................... $ 569,600 $ 565,100 $ 444,100
=========== =========== ===========
Earnings per share:
Basic................................................ $1.31 $1.30 $1.05
=========== =========== ===========
Diluted.............................................. $1.28 $1.26 $1.02
=========== =========== ===========
39
41
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- (CONCLUDED)
FOR THE YEARS ENDED DECEMBER 31
-------------------------------------
1999 1998 1997
----------- ----------- ---------
COMBINED STATEMENTS OF CASH FLOWS
Cash Flows From (For) Operating Activities:
Net income............................................ $ 569,600 $ 565,100 $ 444,100
Depreciation and amortization......................... 265,120 240,310 200,650
Interest accrual on pay-in-kind notes receivable...... (46,630) (41,500) (36,800)
Unremitted equity earnings of affiliates.............. (15,730) (16,820) (9,060)
Deferred income taxes................................. 14,800 61,550 56,990
Gains on disposition of businesses, net............... (14,440) (14,720) (4,980)
Gain from change in investment........................ -- (7,000) (4,980)
Other interests in net income of combined affiliates,
net................................................ 76,360 81,330 111,990
Increase in receivables............................... (120,330) (105,630) (73,630)
Increase in inventories............................... (67,880) (75,510) (55,760)
Increase in accounts payable and accrued liabilities,
net................................................ 9,150 14,280 76,600
Other, net............................................ (29,760) 15,860 (11,220)
----------- ----------- ---------
Net cash from operating activities............ 640,260 717,250 693,900
----------- ----------- ---------
Cash Flows From (For) Investing Activities:
Acquisition of other interests in TriMas
Corporation........................................ -- (869,680) --
Acquisitions, net of cash acquired.................... (883,500) (377,770) (198,020)
Capital expenditures.................................. (486,590) (349,680) (298,530)
Cash proceeds from sale of subsidiaries............... 92,620 108,020 76,560
Proceeds from redemption of debt by affiliates........ -- 80,500 --
Other, net............................................ 13,150 (37,380) (47,500)
----------- ----------- ---------
Net cash (for) investing activities........... (1,264,320) (1,445,990) (467,490)
----------- ----------- ---------
Cash Flows From (For) Financing Activities:
Increase in debt...................................... 1,244,370 1,894,460 355,930
Payment of debt....................................... (676,990) (826,710) (135,400)
Purchase of Company common stock for:
Treasury........................................... (119,130) (106,880) (14,970)
Long-term stock incentive award plan............... (6,840) (46,800) (29,110)
Cash dividends paid................................... (176,110) (155,500) (151,970)
Capital contributions from shareholders of pooled
companies.......................................... 11,490 1,520 245,450
Distributions to shareholders of pooled companies..... -- (45,950) (536,060)
----------- ----------- ---------
Net cash from (for) financing activities...... 276,790 714,140 (266,130)
----------- ----------- ---------
Cash and Cash Investments:
Decrease for the year................................. (347,270) (14,600) (39,720)
At January 1.......................................... 582,540 597,140 636,860
----------- ----------- ---------
At December 31........................................ $ 235,270 $ 582,540 $ 597,140
=========== =========== =========
40
42
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
INTERIM FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
QUARTERS ENDED
AUDITED -------------------------------------------------------
YEAR DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
---------- ----------- ------------ ---------- ----------
1999:
Net sales....................... $6,307,000 $1,645,000 $1,704,000 $1,567,000 $1,391,000
Gross profit.................... $2,311,470 $ 592,070 $ 622,000 $ 580,800 $ 516,600
Net income...................... $ 569,600 $ 178,700 $ 64,900 $ 174,100 $ 151,900
Earnings per share:
Basic......................... $1.31 $.41 $.15 $.40 $.35
Diluted....................... $1.28 $.40 $.15 $.39 $.34
1998:
Net sales....................... $5,280,000 $1,327,000 $1,380,000 $1,327,000 $1,246,000
Gross profit.................... $1,932,100 $ 463,800 $ 510,400 $ 496,300 $ 461,600
Net income...................... $ 565,100 $ 137,800 $ 152,800 $ 144,100 $ 130,400
Earnings per share:
Basic......................... $1.30 $.32 $.35 $.33 $.30
Diluted....................... $1.26 $.31 $.34 $.32 $.29
Diluted earnings per share,
excluding amortization of
acquired goodwill:
1999.......................... $1.37 $.43 $.17 $.41 $.36
1998.......................... $1.32 $.33 $.36 $.33 $.30
Net income and earnings per share for the third quarter and year of 1999
include unusual after-tax expense, principally related to transaction costs
associated with poolings of interests.
41
43
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.
Information regarding executive officers required by this Item is set forth
as a Supplementary Item at the end of Part I hereof (pursuant to Instruction 3
to Item 401(b) of Regulation S-K). Other information required by this Item will
be contained in the Company's definitive Proxy Statement for its 2000 Annual
Meeting of Stockholders, to be filed on or before April 29, 2000, and such
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item will be contained in the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Stockholders, to be
filed on or before April 29, 2000, and such information is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this Item will be contained in the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Stockholders, to be
filed on or before April 29, 2000, and such information is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item will be contained in the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Stockholders, to be
filed on or before April 29, 2000, and such information is incorporated herein
by reference.
42
44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) LISTING OF DOCUMENTS.
(1)Financial Statements. The Company's Consolidated Financial
Statements included in Item 8 hereof, as required at December 31,
1999 and 1998, and for the years ended December 31, 1999, 1998 and
1997, consist of the following:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
(i) Financial Statement Schedule of the Company appended hereto,
as required for the years ended December 31, 1999, 1998 and
1997, consists of the following:
II. Valuation and Qualifying Accounts
(ii) (A) MascoTech, Inc. and Subsidiaries Consolidated Financial
Statements appended hereto, at December 31, 1999 and 1998,
and for the years ended December 31, 1999, 1998 and 1997,
consist of the following:
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Cash Flows
Consolidated Statement of Shareholders' Equity
Notes to Consolidated Financial Statements
(B) MascoTech, Inc. and Subsidiaries Financial Statement
Schedule appended hereto, for the years ended December 31,
1999, 1998 and 1997, consists of the following:
II. Valuation and Qualifying Accounts
(3) Exhibits.
3.i Restated Certificate of Incorporation of Masco Corporation
and amendments thereto.(5)
3.ii Bylaws of Masco Corporation, as amended.(7)
4.a.i Indenture dated as of December 1, 1982 between Masco
Corporation and Morgan Guaranty Trust Company of New York,
as Trustee,(3) and Directors' resolutions establishing Masco
Corporation's: (i) 9% Notes Due October 1, 2001(3), (ii)
6 1/8 Notes Due September 15, 2003(7), (iii) 7 1/8%
Debentures Due August 15, 2013(7), (iv) 6.625% Debentures
Due April 15, 2018(7), (v) 5.75% Notes Due 2008(7) and (vi)
7 3/4% Debentures Due August 1, 2029. (filed herewith)
4.a.ii Agreement of Appointment and Acceptance of Successor Trustee
dated as of July 25, 1994 among Masco Corporation, Morgan
Guaranty Trust Company of New York and The First National
Bank of Chicago. (filed herewith)
4.a.iii Supplemental Indenture dated as of July 26, 1994 between
Masco Corporation and The First National Bank of Chicago.
(filed herewith)
4.b $750,000,000 Amended and Restated Credit Agreement dated as
of November 14, 1996 among Masco Corporation, the banks
party thereto and Morgan Guaranty Trust Company of New York,
as agent(3) and Amendment No. 1 dated April 30, 1997(4) and
Amendment dated as of March 30, 1998.(5)
43
45
4.c Rights Agreement dated as of December 6, 1995, between Masco
Corporation and The Bank of New York, as Rights Agent(1) and
Amendment No. 1 to Rights Agreement dated as of September
23, 1998.(6)
4.d Indenture dated as of November 1, 1986 between Masco
Industries, Inc. (now known as MascoTech, Inc.) and Morgan
Guaranty Trust Company of New York, as Trustee; Agreement of
Appointment and Acceptance of Successor Trustee dated as of
August 4, 1994 among MascoTech, Inc., Morgan Guaranty Trust
Company of New York and The First National Bank of Chicago;
Supplemental Indenture dated as of August 5, 1994 among
MascoTech, Inc. and The First National Bank of Chicago, as
Trustee(7); Directors' resolutions establishing Masco
Industries, Inc.'s 4 1/2% Convertible Subordinated
Debentures Due 2003(7); and Form of Note. (filed herewith)
4.e $1,300,000,000 Credit Agreement dated as of January 16, 1998
among MascoTech, Inc., MascoTech Acquisition, Inc., the
banks party thereto from time to time, The First National
Bank of Chicago, as Administrative Agent, Bank of America
NT&SA and NationsBank, N.A., as Syndication Agents, and
Amendment No. 1 thereto dated as of February 10, 1998.(4)
4.f DM 350,000,000 Multicurrency Revolving Credit Facility dated
September 14, 1998 among Masco GmbH, as Borrower, Masco
Corporation, as Guarantor, Commerzbank Aktiengesellschaft
(Arranger) and Commerzbank International S.A. (Agent).(7)
4.g DM 400,000,000 Term Loan Facility dated July 9, 1997 among
Masco GmbH, as Borrower, Masco Corporation, as Guarantor,
Commerzbank Aktiengesellschaft (Arranger) and Commerzbank
International S.A. (Agent) for the banks party thereto, and
Amendment dated as of June 12, 1998 to Credit Agreement.(7)
4.h $1,000,000,000 Amended and Restated Credit Agreement dated
as of March 20, 2000 among Masco Corporation, the banks
party thereto, Commerzbank Aktiengesellschaft and Bank of
America, N.A., as syndication agents, and Bank One, NA, as
administrative agent. (filed herewith)
NOTE: Other instruments, notes or extracts from agreements
defining the rights of holders of long-term debt of Masco
Corporation or its subsidiaries have not been filed since
(i) in each case the total amount of long-term debt
permitted thereunder does not exceed 10 percent of Masco
Corporation's consolidated assets, and (ii) such
instruments, notes and extracts will be furnished by Masco
Corporation to the Securities and Exchange Commission upon
request.
10.a Assumption and Indemnification Agreement dated as of May 1,
1984 between Masco Corporation and Masco Industries, Inc.
(now known as MascoTech, Inc.).(1)
10.b Corporate Services Agreement and Annex dated as of January
1, 1987 between Masco Corporation and Masco Industries, Inc.
(now known as MascoTech, Inc.), Amendment No. 1 dated as of
October 31, 1996, and related letter agreements dated
January 22, 1998 and June 17, 1998. (all filed herewith)
10.c Corporate Opportunities Agreement dated as of May 1, 1984
between Masco Corporation and Masco Industries, Inc. (now
known as MascoTech, Inc.)(1) and Amendment No. 1 dated as of
October 31, 1996.(2)
10.d Stock Repurchase Agreement dated as of May 1, 1984 between
Masco Corporation and Masco Industries, Inc. (now known as
MascoTech, Inc.) and related letter dated September 20,
1985, Amendment to Stock Repurchase Agreement dated as of
December 20, 1990, and Amendment to Stock Repurchase
Agreement included in Agreement dated as of November 23,
1993.(7)
44
46
10.e Amended and Restated Securities Purchase Agreement dated as
of November 23, 1993 ("Securities Purchase Agreement")
between MascoTech, Inc. and Masco Corporation, including
form of Note, Agreement dated as of November 23, 1993
relating thereto, and Amendment No. 1 to the Securities
Purchase Agreement dated as of October 31, 1996.(7)
10.f Registration Agreement dated as of March 31, 1993, between
Masco Corporation and Masco Industries, Inc. (now known as
MascoTech, Inc.).(7)
NOTE: Exhibits 10.g through 10.q constitute the management
contracts and executive compensatory plans or arrangements
in which certain of the Directors and executive officers of
the Company participate.
10.g Masco Corporation 1991 Long Term Stock Incentive Plan
(Restated July 10, 1998).(7)
10.h Masco Corporation 1988 Restricted Stock Incentive Plan
(Restated December 6, 1995).(1)
10.i Masco Corporation 1988 Stock Option Plan (Restated September
22, 1999). (filed herewith)
10.j Masco Corporation Supplemental Executive Retirement and
Disability Plan. (filed herewith)
10.k Masco Corporation 1997 Annual Incentive Compensation
Plan.(4)
10.l Masco Corporation 1997 Non-Employee Directors Stock Plan (as
amended July 10, 1998).(7)
10.m MascoTech, Inc. 1991 Long Term Stock Incentive Plan
(Restated July 15, 1998).(7)
10.n MascoTech, Inc. 1984 Restricted Stock Incentive Plan
(Restated December 6, 1995).(1)
10.o MascoTech, Inc. 1984 Stock Option Plan (Restated September
21, 1999). (filed herewith)
10.p MascoTech, Inc. 1997 Non-Employee Directors Stock Plan.(4)
10.q Description of the Masco Corporation Program for Estate,
Financial Planning and Tax Assistance.(4)
10.r 12% Senior Note Due 2008 by Furnishings International Inc.
to Masco Corporation and Registration Rights Agreement dated
as of August 5, 1996 between Furnishings International Inc.
and Masco Corporation.(3)
10.s Stock Purchase Agreement dated as of October 15, 1996
between Masco Corporation and MascoTech, Inc.(2)
10.t Registration Rights Agreement among Masco Corporation and
the Investors listed therein dated as of August 31, 1999.(8)
12 Computation of Ratio of Earnings to Fixed Charges. (filed
herewith)
21 List of Subsidiaries. (filed herewith)
45
47
23.a Consent of PricewaterhouseCoopers LLP relating to Masco
Corporation's Consolidated Financial Statements and
Financial Statement Schedules. (filed herewith)
23.b Consent of PricewaterhouseCoopers LLP relating to MascoTech,
Inc.'s Consolidated Financial Statements and Financial
Statement Schedule. (filed herewith)
27.a Financial Data Schedule as of and for the year ended
December 31, 1999. (filed herewith)
27.b Financial Data Schedule as of and for the year-to-date
period ended March 31, 1998, amended for transactions
accounted for as poolings of interests in the third quarter
of 1999. (filed herewith)
27.c Financial Data Schedule as of and for the year ended
December 31, 1997, restated for transactions accounted for
as poolings of interests in the third quarter of 1999.
(filed herewith)
- -------------------------
(1) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1995.
(2) Incorporated by reference to the Exhibits filed with Masco Corporation's
Current Report on Form 8-K dated November 13, 1996.
(3) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1996.
(4) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1997.
(5) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
(6) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(7) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1998.
(8) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
THE COMPANY WILL FURNISH ITS STOCKHOLDERS A COPY OF ANY OF THE ABOVE
EXHIBITS NOT INCLUDED HEREIN UPON THE WRITTEN REQUEST OF SUCH STOCKHOLDER AND
THE PAYMENT TO THE COMPANY OF THE REASONABLE EXPENSES INCURRED BY THE COMPANY IN
FURNISHING SUCH COPY OR COPIES.
(b) REPORTS ON FORM 8-K.
None
46
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MASCO CORPORATION
By /s/ RICHARD G. MOSTELLER
------------------------------------
RICHARD G. MOSTELLER
Senior Vice President -- Finance
March 29, 2000
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 date indicated.
PRINCIPAL EXECUTIVE OFFICER:
/s/ RICHARD A. MANOOGIAN Chairman of the Board and Chief
- --------------------------------------------- Executive Officer
RICHARD A. MANOOGIAN
PRINCIPAL FINANCIAL OFFICER:
/s/ RICHARD G. MOSTELLER Senior Vice President -- Finance
- ---------------------------------------------
RICHARD G. MOSTELLER
PRINCIPAL ACCOUNTING OFFICER:
/s/ ROBERT B. ROSOWSKI Vice President -- Controller and
- --------------------------------------------- Treasurer
ROBERT B. ROSOWSKI
/s/ THOMAS G. DENOMME Director March 29, 2000
- ---------------------------------------------
THOMAS G. DENOMME
/s/ JOSEPH L. HUDSON, JR. Director
- ---------------------------------------------
JOSEPH L. HUDSON, JR.
/s/ VERNE G. ISTOCK Director
- ---------------------------------------------
VERNE G. ISTOCK
/s/ RAYMOND F. KENNEDY President and Chief Operating
- --------------------------------------------- Officer and Director
RAYMOND F. KENNEDY
/s/ MARY ANN KREY Director
- ---------------------------------------------
MARY ANN KREY
/s/ WAYNE B. LYON Director
- ---------------------------------------------
WAYNE B. LYON
/s/ JOHN A. MORGAN Director
- ---------------------------------------------
JOHN A. MORGAN
/s/ ARMAN SIMONE Director
- ---------------------------------------------
ARMAN SIMONE
/s/ PETER W. STROH Director
- ---------------------------------------------
PETER W. STROH
47
49
MASCO CORPORATION
FINANCIAL STATEMENT SCHEDULES
PURSUANT TO ITEM 14(a)(2) OF FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
Schedules, as required, for the years ended December 31, 1999, 1998 and
1997:
PAGE
----
II. Valuation and Qualifying Accounts....................... F-2
MascoTech, Inc. and Subsidiaries Consolidated Financial
Statements and Financial Statement Schedule............... F-3
F-1
50
MASCO CORPORATION
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ----------- ------------------------ ------------ -----------
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- -------------------------------- ----------- ----------- ---------- ------------ -----------
(A) (B)
Allowance for doubtful accounts,
deducted from accounts
receivable in the balance
sheet:
1999....................... $22,235,500 $12,514,200 $4,326,300 $(12,950,400) $26,125,600
=========== =========== ========== ============ ===========
1998....................... $20,634,400 $ 4,248,600 $1,224,200 $ (3,871,700) $22,235,500
=========== =========== ========== ============ ===========
1997....................... $19,081,900 $ 2,959,800 $2,504,100 $ (3,911,400) $20,634,400
=========== =========== ========== ============ ===========
NOTES:
(A) Allowance of companies acquired and companies disposed of, net.
(B) Deductions, representing uncollectible accounts written off, less
recoveries of accounts written off in prior years.
F-2
51
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of MascoTech, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(2)(ii)(A) present fairly, in all material respects,
the financial position of MascoTech, Inc. and its subsidiaries at December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)(2)(ii)(B) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Detroit, Michigan
February 25, 2000
F-3
52
MASCOTECH, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
-------------- --------------
Current assets:
Cash and cash investments................................. $ 4,490,000 $ 29,390,000
Receivables............................................... 218,960,000 223,340,000
Inventories............................................... 183,600,000 198,350,000
Deferred and refundable income taxes...................... 46,750,000 26,590,000
Prepaid expenses and other assets......................... 16,320,000 23,710,000
-------------- --------------
Total current assets.............................. 470,120,000 501,380,000
Equity and other investments in affiliates.................. 110,730,000 93,560,000
Property and equipment, net................................. 722,680,000 678,130,000
Excess of cost over net assets of acquired companies........ 759,330,000 764,220,000
Notes receivable and other assets........................... 38,410,000 53,250,000
-------------- --------------
Total assets...................................... $2,101,270,000 $2,090,540,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 114,490,000 $ 114,830,000
Accrued liabilities....................................... 113,910,000 135,230,000
-------------- --------------
Total current liabilities......................... 228,400,000 250,060,000
Convertible subordinated debentures......................... 305,000,000 310,000,000
Other long-term debt........................................ 1,067,890,000 1,078,240,000
Deferred income taxes....................................... 100,680,000 88,140,000
Other long-term liabilities................................. 98,920,000 110,220,000
-------------- --------------
Total liabilities................................. 1,800,890,000 1,836,660,000
-------------- --------------
Shareholders' equity:
Preferred stock, $1 par:
Authorized: 25 million;
Outstanding: None...................................... -- --
Common stock, $1 par:
Authorized: 250 million;
Outstanding: 44.6 million and 45.8 million............. 44,640,000 45,780,000
Paid-in capital........................................... -- 16,820,000
Retained earnings......................................... 324,290,000 245,860,000
Accumulated other comprehensive loss...................... (24,870,000) (7,460,000)
Less: Restricted stock awards............................. (43,680,000) (47,120,000)
-------------- --------------
Total shareholders' equity........................ 300,380,000 253,880,000
-------------- --------------
Total liabilities and shareholders' equity........ $2,101,270,000 $2,090,540,000
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
53
MASCOTECH, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
--------------- --------------- -------------
Net sales....................................... $ 1,679,690,000 $ 1,635,500,000 $ 922,130,000
Cost of sales................................... (1,246,660,000) (1,208,930,000) (735,470,000)
--------------- --------------- -------------
Gross profit............................... 433,030,000 426,570,000 186,660,000
Selling, general and administrative expenses.... (214,530,000) (204,180,000) (89,930,000)
Gains (charge) on disposition of businesses,
net........................................... 14,440,000 (15,580,000) 4,980,000
Charge for asset impairment..................... (17,510,000) -- --
--------------- --------------- -------------
Operating profit........................... 215,430,000 206,810,000 101,710,000
--------------- --------------- -------------
Other income (expense), net:
Interest expense, Masco Corporation........... -- -- (7,500,000)
Other interest expense........................ (80,820,000) (81,500,000) (29,030,000)
Equity and other income from affiliates....... 13,230,000 10,150,000 43,360,000
Gain (charge) from disposition of, or changes
in, investments in equity affiliates....... (3,150,000) -- 64,350,000
Deferred gain recognized from disposition of
business................................... -- 7,000,000 --
Other, net.................................... (5,220,000) 2,060,000 17,400,000
--------------- --------------- -------------
(75,960,000) (62,290,000) 88,580,000
--------------- --------------- -------------
Income before income taxes................. 139,470,000 144,520,000 190,290,000
Income taxes.................................... 47,040,000 47,050,000 75,050,000
--------------- --------------- -------------
Net income................................. $ 92,430,000 $ 97,470,000 $ 115,240,000
=============== =============== =============
Preferred stock dividends....................... -- -- $ 6,240,000
=============== =============== =============
Earnings attributable to common
stock.................................... $ 92,430,000 $ 97,470,000 $ 109,000,000
=============== =============== =============
BASIC DILUTED BASIC DILUTED BASIC DILUTED
----- ------- ----- ------- ----- -------
Earnings per common share:
Earnings attributable to common stock...... $2.25 $1.84 $2.23 $1.83 $2.70 $2.12
===== ===== ===== ===== ===== =====
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
54
MASCOTECH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------- -------------- -------------
CASH FROM (USED FOR):
OPERATING ACTIVITIES:
Net income.................................. $ 92,430,000 $ 97,470,000 $ 115,240,000
Adjustments to reconcile net income to net
cash provided by operating activities:
(Gains) charge on disposition of
businesses, net........................ (14,440,000) 15,580,000 (4,980,000)
Charges (gains) from disposition or other
changes in investments in equity
affiliates............................. 6,270,000 (7,000,000) (64,350,000)
Charge for asset impairment............... 17,510,000 -- --
Depreciation and amortization............. 83,300,000 83,640,000 43,460,000
Equity earnings, net of dividends......... (10,100,000) (6,080,000) (27,180,000)
Deferred income taxes..................... 9,560,000 (110,000) 17,520,000
Decrease (increase) in marketable
securities, net........................ -- 45,970,000 (8,210,000)
(Increase) decrease in receivables........ (3,500,000) (6,700,000) 2,670,000
Decrease (increase) in inventories........ 400,000 (19,640,000) 1,950,000
(Increase) decrease in prepaid expenses
and other current assets............... (14,390,000) 1,240,000 (1,280,000)
(Decrease) increase in accounts payable
and accrued liabilities................ (5,150,000) (6,060,000) 11,140,000
Other, net................................ (9,260,000) 2,290,000 (7,480,000)
------------- -------------- -------------
Net cash from operating
activities...................... 152,630,000 200,600,000 78,500,000
------------- -------------- -------------
FINANCING ACTIVITIES:
Increase in debt............................ 28,540,000 1,162,670,000 7,080,000
Payment of debt............................. (40,150,000) (410,660,000) (16,590,000)
Payment of note due to Masco Corporation.... -- -- (45,580,000)
Retirement of preferred stock............... -- -- (8,360,000)
Retirement of Company Common Stock.......... (19,530,000) (63,550,000) (6,610,000)
Payment of dividends........................ (13,470,000) (12,240,000) (15,900,000)
Other, net.................................. (5,490,000) (13,480,000) (9,070,000)
------------- -------------- -------------
Net cash (used for) from financing
activities...................... (50,100,000) 662,740,000 (95,030,000)
------------- -------------- -------------
INVESTING ACTIVITIES:
Cash received from sale of businesses,
net....................................... 92,620,000 25,020,000 76,560,000
Acquisition of businesses, net of cash
acquired.................................. (88,550,000) (879,370,000) (11,100,000)
Capital expenditures........................ (135,740,000) (106,300,000) (54,780,000)
Receipt of cash from notes receivable....... 2,180,000 4,880,000 17,330,000
Proceeds from redemptions of debt by
affiliates................................ -- 80,500,000 --
Other, net.................................. 2,060,000 210,000 10,230,000
------------- -------------- -------------
Net cash (used for) from investing
activities...................... (127,430,000) (875,060,000) 38,240,000
------------- -------------- -------------
CASH AND CASH INVESTMENTS:
(Decrease) increase for the year............ (24,900,000) (11,720,000) 21,710,000
At January 1................................ 29,390,000 41,110,000 19,400,000
------------- -------------- -------------
At December 31.................... $ 4,490,000 $ 29,390,000 $ 41,110,000
============= ============== =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
55
MASCOTECH, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
OTHER
COMPREHENSIVE
INCOME
-----------------------
FOREIGN
CURRENCY MINIMUM RESTRICTED TOTAL
PREFERRED COMMON PAID-IN RETAINED TRANSLATION PENSION STOCK SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS AND OTHER LIABILITY AWARDS EQUITY
--------- ------- -------- -------- ----------- --------- ---------- --------------
Balances, January 1, 1997..... $ 10,800 $37,250 $ 47,800 $ 61,060 $ 8,050 $ -- $(26,140) $138,820
Comprehensive income:
Net income................ 115,240 115,240
Foreign currency
translation............. (9,220) (9,220)
Unrealized gain (loss) on
securities (net of tax
benefit, $(920))........ (1,390) (1,390)
--------
Total comprehensive
income............. 104,630
Preferred stock dividends... 150 2,850 (6,240) (3,240)
Common stock dividends...... (12,270) (12,270)
Retirement of common
stock..................... (330) (6,280) (6,610)
Retirement of preferred
stock..................... (450) (7,910) (8,360)
Conversion of outstanding
preferred stock........... (10,350) 9,750 600 --
Exercise of stock options... 430 4,000 4,430
Restricted stock awards, net
of amortization........... (6,740) (6,740)
-------- ------- -------- -------- -------- -------- -------- --------
Balances, December 31, 1997... -- 47,250 41,060 157,790 (2,560) -- (32,880) 210,660
Comprehensive income:
Net income................ 97,470 97,470
Foreign currency
translation............. 6,410 6,410
Minimum pension liability
(net of tax benefit
$(6,700))............... (10,700) (10,700)
Unrealized gain (loss) on
securities (net of tax
benefit, $(420))........ (610) (610)
--------
Total comprehensive
income............. 92,570
Common stock dividends...... (9,400) (9,400)
Retirement of common
stock..................... (3,640) (60,170) (63,810)
Exercise of stock options... 1,160 14,750 15,910
Restricted stock awards, net
of amortization........... (14,240) (14,240)
Common stock issued for
acquisition of business... 1,010 21,180 22,190
-------- ------- -------- -------- -------- -------- -------- --------
Balances, December 31, 1998... -- 45,780 16,820 245,860 3,240 (10,700) (47,120) 253,880
Comprehensive income:
Net income................ 92,430 92,430
Foreign currency
translation............. (18,110) (18,110)
Minimum pension liability
(net of tax, $450)...... 700 700
--------
Total comprehensive
income............. 75,020
Common stock dividends...... (13,470) (13,470)
Retirement of common
stock..................... (1,280) (18,580) (19,860)
Exercise of stock options... 140 1,760 (530) 1,370
Restricted stock awards, net
of amortization........... 3,440 3,440
-------- ------- -------- -------- -------- -------- -------- --------
Balances, December 31, 1999... -- $44,640 -- $324,290 $(14,870) $(10,000) $(43,680) $300,380
======== ======= ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
56
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES:
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and all majority-owned subsidiaries. All significant
intercompany transactions have been eliminated. Corporations that are 20 to 50
percent owned are accounted for by the equity method of accounting; ownership
less than 20 percent is accounted for on the cost basis unless the Company
exercises significant influence over the investee. Capital transactions by
equity affiliates, which change the Company's ownership interest at amounts
differing from the Company's carrying amount, are reflected in other income or
expense and the investment in affiliates account.
The Company has a corporate services agreement with Masco Corporation,
which at December 31, 1999 owned approximately 17 percent of the Company's
Common Stock. Under the terms of the agreement, the Company pays fees to Masco
Corporation for various corporate staff support and administrative services,
research and development and facilities. Such fees aggregated approximately $6.4
million in 1999, $8.7 million in 1998 and $5.5 million in 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements. Such estimates and assumptions also affect the reported amounts of
revenues and expenses during the reporting periods. Actual results may differ
from such estimates and assumptions.
Cash and Cash Investments. The Company considers all highly liquid debt
instruments with an initial maturity of three months or less to be cash and cash
investments.
Marketable Securities and Derivative Financial Instruments. In prior years,
the Company had marketable equity securities holdings which were categorized as
trading and, as a result, were stated at fair value. Changes in the fair value
of trading securities were recognized in earnings. The Company may enter into
futures contracts which are held for purposes other than trading and are carried
at market value. Changes in market value of outstanding futures contracts are
recognized in earnings. The Company may enter into interest rate swap agreements
to limit the effect of changes in the interest rates on any floating rate debt.
For interest rate instruments that effectively hedge interest rate exposures,
the net cash amounts paid or received on the agreements are recognized as an
adjustment to interest expense.
Receivables. Receivables are presented net of allowances for doubtful
accounts of approximately $4.3 million and $3.4 million at December 31, 1999 and
1998, respectively. The Company does a significant amount of business with a
number of individual customers in the transportation industry. The Company
monitors its exposure for credit losses and maintains adequate allowances for
doubtful accounts; the Company does not believe that significant credit risk
exists.
Inventories. Inventories are stated at the lower of cost or net realizable
value, with cost determined principally by use of the first-in, first-out
method.
Property and Equipment, Net. Property and equipment additions, including
significant betterments, are recorded at cost. Upon retirement or disposal of
property and equipment, the cost and accumulated depreciation are removed from
the accounts, and any gain or loss is included in income. Repair and maintenance
costs are charged to expense as incurred.
Depreciation and Amortization. Depreciation is computed principally using
the straight-line method over the estimated useful lives of the assets. Annual
depreciation rates are as follows: buildings and land improvements, 2 1/2 to 10
percent, and machinery and equipment, 6 2/3 to 33 1/3 percent. Deferred
financing costs are amortized over the lives of the related debt securities. The
excess of cost over net assets of acquired companies is amortized using the
straight-line method over the period estimated to be benefitted, not exceeding
40 years. At each balance sheet date, management assesses whether there has been
a permanent
F-8
57
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
impairment of the excess of cost over net assets of acquired companies by
comparing anticipated undiscounted future cash flows from operating activities
with the carrying amount of the excess of cost over net assets of acquired
companies. The factors considered by management in performing this assessment
include current operating results, business prospects, market trends, potential
product obsolescence, competitive activities and other economic factors. Based
on this assessment, there was no permanent impairment related to the excess of
cost over net assets of acquired companies at December 31, 1999.
At December 31, 1999 and 1998, accumulated amortization of the excess of
cost over net assets of acquired companies and patents was $68.5 million and
$56.4 million, respectively. Amortization expense was $28.4 million, $31.8
million and $9.3 million in 1999, 1998 and 1997, respectively.
New Accounting Pronouncements and Reclassifications. On June 15, 1998, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. In June 1999, FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133." SFAS No. 137 defers the effective adoption date of SFAS No.
133 to January 1, 2001. The Company is currently evaluating the impact SFAS No.
133 will have on its financial statements, if any.
The American Institute of Certified Public Accountants' Statement of
Position No. 98-5, "Reporting on the Costs of Start-up Activities," became
effective on January 1, 1999 and did not have a material impact on the Company's
financial statements.
F-9
58
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EARNINGS PER SHARE:
The following are reconciliations of the numerators and denominators used
in the computations of basic and diluted earnings per common share:
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
1999 1998 1997
-------- -------- --------
Weighted average number of shares outstanding............... 41,110 43,630 40,300
======== ======== ========
Net income.................................................. $ 92,430 $ 97,470 $115,240
Less: Preferred stock dividends............................. -- -- (6,240)
-------- -------- --------
Earnings used for basic earnings per share
computation............................................ $ 92,430 $ 97,470 $109,000
======== ======== ========
Basic earnings per share.................................... $2.25 $2.23 $2.70
======== ======== ========
Total shares used for basic earnings per share
computation............................................... 41,110 43,630 40,300
Dilutive securities:
Stock options............................................. 530 1,060 1,250
Assumed conversion of preferred stock at January 1,
1997................................................... -- -- 5,210
Convertible debentures.................................... 9,840 10,000 10,000
Contingently issuable shares.............................. 3,720 3,830 2,160
-------- -------- --------
Total shares used for diluted earnings per share
computation....................................... 55,200 58,520 58,920
======== ======== ========
Earnings used for basic earnings per share computation...... $ 92,430 $ 97,470 $109,000
Add back of preferred stock dividends....................... -- -- 6,240
Add back of debenture interest.............................. 9,310 9,530 9,530
-------- -------- --------
Earnings used for diluted earnings per share
computation............................................ $101,740 $107,000 $124,770
======== ======== ========
Diluted earnings per share............................ $1.84 $1.83 $2.12
======== ======== ========
Diluted earnings per share reflect the potential dilution that would occur
if securities or other contracts to issue common stock were exercised or
converted into common stock.
SUPPLEMENTARY CASH FLOWS INFORMATION:
Significant transactions not affecting cash were: in 1999, the assumption
of approximately $10 million of liabilities in an acquisition; in 1998, the
issuance of $22 million of Company Common Stock in partial exchange for the
assets of an acquired company; the acquisition of TriMas for cash and the
assumption of liabilities of approximately $179 million; and in 1997, the
conversion of the Company's outstanding shares of Dividend Enhanced Convertible
Preferred Stock for approximately 10 million shares of Company Common Stock (see
"Shareholders' Equity" note); the exchange of approximately 9.9 million shares
of the outstanding common stock of Emco Limited ("Emco") with a value of
approximately $106 million, in addition to the cash payment of approximately $46
million, in payment of a promissory note due to Masco Corporation.
Income taxes paid were $54 million, $38 million and $44 million in 1999,
1998 and 1997, respectively. Interest paid was $79 million, $79 million and $39
million in 1999, 1998 and 1997, respectively.
ACQUISITIONS:
In January 1998, the Company completed the acquisition of TriMas
Corporation ("TriMas") by purchasing all the outstanding shares of TriMas not
already owned by the Company for approximately $920 million. The Company
previously owned 37 percent of TriMas. The results for 1998 reflect TriMas'
sales
F-10
59
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and operating results from the date of acquisition. The acquisition has been
accounted for as a purchase and the excess of the aggregate purchase price over
the fair value of net assets acquired of approximately $680 million is being
amortized over 40 years.
The Company acquired a business operation and a product line extension in
1999, which will provide annual sales of approximately $85 million, for an
aggregate purchase price of approximately $93 million. These transactions have
been accounted for as purchases and the excess of the aggregate purchase price
over the fair value of net assets acquired of approximately $51 million is being
amortized over 40 years. The results for 1999 reflect sales and operating
results from the dates of acquisition.
DISPOSITIONS OF BUSINESSES:
The Company received approximately $30 million of contingent consideration
($5 million in 1997 and $25 million in 1998) based on the subsequent operating
performance of certain businesses sold in 1996. This gain, which is non-taxable,
is included in the caption "gains (charge) on disposition of businesses, net" in
the consolidated statement of income.
On January 3, 1997, the Company sold its Technical Services Group
(comprised of the Company's engineering and technical business services units)
to MSX International, Inc. Also included in this transaction were the net assets
of APX International which were acquired by the Company in November 1996 for
approximately $44 million. The sale resulted in total proceeds to the Company of
approximately $145 million, subject to certain adjustments, consisting of cash,
$30 million of subordinated debentures, $18 million of preferred stock and an
approximate 45 percent common equity interest in MSX International, Inc. valued
at $2 million. In January 1998, the Company received $48 million of cash from
MSX International, Inc. in payment of the subordinated debentures and other
amounts due MascoTech, resulting in a realized gain in the first quarter 1998 of
$7 million. The remaining deferred gain of approximately $20 million will be
recognized upon the liquidation of the common and preferred stock holdings for
cash.
In the second quarter of 1998, the Company recorded a non-cash charge
aggregating approximately $41 million pre-tax (approximately $22 million
after-tax) to reflect the write-down of certain long-lived assets principally
related to the plan to dispose of certain businesses and to accrue exit costs of
approximately $8 million. In April 1999, the Company completed the sale of these
aftermarket-related and vacuum metalizing businesses for total proceeds
aggregating approximately $105 million, including $90 million of cash which was
applied to reduce the Company's indebtedness, a note receivable of $6 million
and retained equity interests in the ongoing businesses. These transactions
resulted in a pre-tax gain of approximately $26 million ($15 million after-tax).
In 1999, management adopted a plan to sell its specialty tubing business
which resulted in a pre-tax loss of approximately $7 million and an after-tax
gain of approximately $5.5 million, due to the tax basis in the net assets of
the businesses exceeding book carrying values. This business was sold in January
2000 for proceeds of approximately $6 million consisting of cash and notes.
In addition, the Company recorded in the second quarter 1999 a non-cash
pre-tax charge of approximately $17.5 million related to impairment of certain
long-lived assets, which included its hydroforming equipment and related
intellectual property.
In the fourth quarter 1999, the Company announced the closure of a plant
and recorded a non-cash pre-tax charge of approximately $4 million ($2 million
after-tax) related principally to employee benefit costs and asset impairments.
Accrued exit costs at January 1, 1999 were approximately $12 million, new
accruals in 1999 were approximately $2 million, payments and adjustments to
accrued estimates approximated $2 million and the accrual at December 31, 1999
was approximately $12 million.
F-11
60
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES:
(IN THOUSANDS)
AT DECEMBER 31
-------------------
1999 1998
-------- --------
Finished goods........................................... $ 86,240 $ 87,810
Work in process.......................................... 45,940 47,960
Raw material............................................. 51,420 62,580
-------- --------
$183,600 $198,350
======== ========
EQUITY AND OTHER INVESTMENTS IN AFFILIATES:
Equity and other investments in affiliates consist of the following common
stock interests in publicly traded affiliates:
AT DECEMBER 31
------------------
1999 1998 1997
---- ---- ----
TriMas Corporation........................................ -- -- 37%
Titan International, Inc. ................................ 16% 16% 15%
Delco Remy International, Inc. (voting)................... 17% 17% 18%
Titan International, Inc. ("Titan") is a manufacturer of wheels, tires and
other products for agricultural, construction and off-highway equipment markets.
Delco Remy International, Inc. ("DRI") is a manufacturer of automotive
electronic motors and other components. The above companies are accounted for
under the equity method.
The carrying amount of investments in affiliates at December 31, 1999 and
1998 and quoted market values at December 31, 1999 for publicly traded
affiliates (which may differ from the amounts that could have been realized upon
disposition) are as follows:
(IN THOUSANDS)
1999
QUOTED 1999 1998
MARKET CARRYING CARRYING
VALUE AMOUNT AMOUNT
------- -------- --------
Common stock:
Titan International, Inc. ..................... $21,550 $ 40,880 $46,900
Delco Remy International, Inc. ................ 24,960 15,300 10,920
------- -------- -------
Investments in publicly traded affiliates........ $46,510 56,180 57,820
=======
Other non-public affiliates...................... 54,550 35,740
-------- -------
Total............................................ $110,730 $93,560
======== =======
The Company's carrying value in common stock of these equity affiliates
exceeded its equity in the underlying net book value by approximately $12
million at December 31, 1999. This excess is being amortized over 40 years.
In March 1997, TriMas called for redemption its 5% Convertible Subordinated
Debentures which resulted in the issuance of approximately 4.7 million common
shares, reducing the Company's common equity ownership in TriMas to
approximately 37 percent. The Company recognized pre-tax income of approximately
$13 million as a result of the change in the Company's common equity ownership
interest in TriMas.
F-12
61
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In September 1997, the Company exchanged its equity holdings in Emco
Limited, with a value approximating $106 million (resulting in a pre-tax gain of
approximately $46 million), and approximately $46 million in cash to satisfy an
indebtedness to Masco Corporation.
In December 1997, DRI completed an initial public offering reducing the
Company's common equity ownership interest in DRI to approximately 12 percent on
a diluted basis. As a result of the change in the Company's common equity
ownership interest in DRI, the Company recognized a pre-tax gain of
approximately $5 million.
In addition to its equity investments in publicly traded affiliates, the
Company has equity and other investment interests in privately held
automotive-related companies, including the Company's 36 percent common equity
ownership in Saturn Electronics & Engineering, Inc., a manufacturer of
electromechanical and electronic automotive components; a 45 percent common
equity ownership in MSX International, Inc., a provider of technology-based
business services and product development services; and a 16 percent common
equity ownership in Qualitor, Inc., a supplier of automotive aftermarket
products.
Equity in undistributed earnings of affiliates of $15 million at December
31, 1999, $6 million at December 31, 1998 and $68 million at December 31, 1997
are included in consolidated retained earnings.
Approximate combined condensed financial data of the Company's equity
affiliates (including TriMas through the date of acquisition in early 1998,
Qualitor since its formation in early 1999, and Emco through the date of
disposition September 30, 1997) accounted for under the equity method are as
follows:
(IN THOUSANDS)
AT DECEMBER 31
-----------------------
1999 1998
----------- ---------
Current assets.......................................... $ 1,180,990 $ 948,370
Current liabilities..................................... (708,150) (451,200)
----------- ---------
Working capital....................................... 472,840 497,170
Property and equipment, net............................. 632,530 473,460
Excess of cost over net assets of acquired companies and
other assets.......................................... 499,040 349,060
Long-term debt.......................................... (1,087,650) (846,330)
Deferred income taxes and other long-term liabilities... (70,250) (52,030)
----------- ---------
Shareholders' equity.................................. $ 446,510 $ 421,330
=========== =========
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31
------------------------------------
1999 1998 1997
---------- ---------- ----------
Net sales................................. $3,304,610 $2,764,860 $3,484,540
========== ========== ==========
Operating profit.......................... $ 177,220 $ 125,730 $ 264,590
========== ========== ==========
Earnings attributable to common stock..... $ 41,070 $ 32,480 $ 108,230
========== ========== ==========
F-13
62
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Equity and other income from affiliates consists of the following:
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31
---------------------------------
1999 1998 1997
------- ------- -------
The Company's equity in affiliates' earnings
available for common shareholders............ $10,300 $ 7,340 $31,330
Interest and dividend income................... 2,930 2,810 12,030
------- ------- -------
Equity and other income from affiliates........ $13,230 $10,150 $43,360
======= ======= =======
PROPERTY AND EQUIPMENT, NET:
(IN THOUSANDS)
AT DECEMBER 31
---------------------
1999 1998
---------- --------
Cost:
Land and land improvements............................ $ 30,650 $ 33,160
Buildings............................................. 184,170 179,870
Machinery and equipment............................... 830,400 777,710
---------- --------
1,045,220 990,740
Less: Accumulated depreciation.......................... 322,540 312,610
---------- --------
$ 722,680 $678,130
========== ========
Depreciation expense totalled $55 million, $52 million and $34 million in
1999, 1998 and 1997, respectively.
ACCRUED LIABILITIES:
(IN THOUSANDS)
AT DECEMBER 31
---------------------
1999 1998
---------- --------
Salaries, wages and commissions......................... $ 8,800 $ 16,550
Vacation, holiday and bonus............................. 18,550 19,420
Income taxes............................................ 3,940 8,790
Interest................................................ 5,250 4,300
Insurance............................................... 24,130 22,470
Property, payroll and other taxes....................... 5,380 5,490
Pension................................................. 20,850 13,600
Other................................................... 27,010 44,610
---------- --------
$ 113,910 $135,230
========== ========
F-14
63
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG-TERM DEBT:
(IN THOUSANDS)
AT DECEMBER 31
-----------------------
1999 1998
---------- ----------
4 1/2% Convertible Subordinated Debentures, due 2003
and convertible into Company Common Stock at $31 per
share............................................... $ 305,000 $ 310,000
Bank revolving credit agreement....................... 606,000 500,000
Bank term loan........................................ 383,000 475,000
Other................................................. 85,660 108,060
---------- ----------
1,379,660 1,393,060
Less: Current portion of long-term debt............... 6,770 4,820
---------- ----------
Long-term debt........................................ $1,372,890 $1,388,240
========== ==========
In connection with the TriMas acquisition in early 1998 (see "Acquisitions"
note), the Company entered into a new $1.3 billion credit facility. This
facility includes a $500 million term loan with remaining principal payments as
follows: 2000 -- $60 million; 2001 -- $75 million; 2002 -- $138 million; and
2003 -- $110 million. The credit facility also includes an $800 million revolver
which terminates in 2003. The Company has recorded the $60 million principal
payment due in 2000 as long-term because the Company has the ability and intent
to refinance amounts due in 2000 on a long-term basis utilizing the revolver.
Other debt at December 31, 1999 principally consists of borrowings
denominated in foreign currencies under the revolving credit agreement by the
Company's subsidiaries. At December 31, 1999, there was approximately $120
million unused under the revolving credit agreement.
The interest rates applicable to the revolver and term loan are principally
at alternative floating rates which approximated seven percent at December 31,
1999. Interest rate swaps covering a notional amount of $400 million of the
Company's floating rate debt were entered into in 1998 at an aggregate interest
rate of approximately seven percent including the current borrowing spread under
the Company's revolving credit agreement. These swap agreements expire at
various dates in 2000 through 2007.
The credit facility requires the maintenance of a specified level of
shareholders' equity plus subordinated debt, with limitations on the ratios of
total debt to cash flow (as defined) and cash flow less capital expenditures (as
defined) to interest plus taxes and scheduled debt payments. In addition, there
are limitations on dividends, share repurchases and subordinated debt
repurchases. Under the most restrictive of these provisions, approximately $26
million would have been available at December 31, 1999 for the payment of cash
dividends and the acquisition of Company capital stock. The facility is
collateralized by a pledge of the stock of TriMas.
Masco Corporation has agreed to purchase from the Company, at the Company's
option, up to $200 million of subordinated debentures through 2002.
The maturities of debt as at December 31, 1999 during the next five years
are as follows (in millions): 2000 -- $67; 2001 -- $84; 2002 -- $141;
2003 -- $1,033; and 2004 -- $2.
SHAREHOLDERS' EQUITY:
On June 27, 1997, the Company completed the conversion of all remaining
issued and outstanding shares of its Dividend Enhanced Convertible Preferred
Stock (DECS). Holders of DECS received in exchange for each share of DECS .955
of a share of the Company's Common Stock, par value $1.00 per share, resulting
in the issuance of approximately 10 million shares of Company Common Stock.
F-15
64
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company repurchased and retired approximately 1.3 million shares of its
common stock in 1999, 3.6 million shares of its common stock in 1998 and
approximately .3 million shares of its common stock and approximately .5 million
shares of its preferred stock in 1997, pursuant to Board of Directors'
authorized repurchase programs. At December 31, 1999, the Company may repurchase
approximately 3.3 million additional shares of Company Common Stock pursuant to
the repurchase authorization.
In 1996, the Company purchased from Masco Corporation 17 million shares of
MascoTech common stock and warrants to purchase 10 million shares of MascoTech
common stock for cash and notes approximating $266 million. In addition, Masco
Corporation has agreed to purchase from the Company, at the Company's option, up
to $200 million of subordinated debentures through 2002.
MascoTech has the right of first refusal to purchase the approximate 7.8
million shares of MascoTech common stock that Masco Corporation continues to
hold, should Masco Corporation decide to dispose of such shares.
On the basis of amounts paid (declared), cash dividends per common share
were $.30 ($.30) in 1999, $.26 ($.20) in 1998 and $.22 ($.28) in 1997.
STOCK OPTIONS AND AWARDS:
The Company's Long Term Stock Incentive Plan (the "Plan") provides for the
issuance of stock-based incentives in various forms. At December 31, 1999,
outstanding stock-based incentives are in the form of restricted long-term stock
awards and stock options.
Pursuant to the Plan, the Company granted long-term stock awards, net, for
622,000, 908,000 and 565,000 shares of Company Common Stock during 1999, 1998
and 1997, respectively, to key employees of the Company. The weighted average
fair value per share of long-term stock awards granted during 1999, 1998 and
1997 on the date of grant was $14, $19 and $19, respectively. Compensation
expense for the vesting of long-term stock awards was approximately $4.7
million, $5.2 million and $4.7 million in 1999, 1998 and 1997, respectively. The
unamortized value of unvested stock awards, aggregating approximately $44
million at December 31, 1999, are generally amortized over ten-year vesting
periods and are recorded in the financial statements as a deduction from
shareholders' equity.
Fixed stock options are granted to key employees of the Company and have a
maximum term of ten years. The exercise price of each fixed option equals the
market price of Company Common Stock on the date of grant. These options either
vest no later than ten years after grant or in installments beginning in the
third year and extending through the eighth year after grant.
F-16
65
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's stock options granted under the
Plan or prior plans for the three years ended December 31, 1999 is presented
below.
(SHARES IN THOUSANDS)
1999 1998 1997
----- ------ -----
Option shares outstanding, January 1........................ 3,950 3,770 4,290
Weighted average exercise price........................... $14 $10 $10
Option shares granted....................................... 180 1,480 80
Weighted average exercise price........................... $14 $19 $20
Option shares exercised..................................... (140) (1,160) (500)
Weighted average exercise price........................... $5 $10 $8
Option shares canceled...................................... (110) (140) (100)
Weighted average exercise price........................... $18 $15 $16
Option shares outstanding, December 31...................... 3,880 3,950 3,770
Weighted average exercise price........................... $14 $14 $10
Weighted average remaining option term (in years)......... 5.9 6.6 4.7
Option shares exercisable, December 31...................... 1,200 750 1,430
Weighted average exercise price........................... $9 $9 $9
The following table summarizes information about stock options outstanding
at December 31, 1999:
(SHARES IN THOUSANDS)
NUMBER NUMBER
RANGE OF OUTSTANDING WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/99 REMAINING LIFE EXERCISE PRICE AT 12/31/99 EXERCISE PRICE
- ----------------- ----------- ---------------- ----------------- ----------- ----------------
$4.50 -- $14 1,060 1.6 $ 5.46 790 $ 5.06
$14 -- $18 1,380 7.0 $14.51 360 $14.58
$18 -- $25 1,440 7.9 $19.20 50 $22.16
----- -----
Total Outstanding 3,880 Total Exercisable 1,200
===== =====
At December 31, 1999, 1998 and 1997, a combined total of 3,450,000,
3,820,000 and 5,223,000 shares, respectively, of Company Common Stock were
available for the granting of options and incentive awards under the above
plans.
The Company has elected to continue to apply the provisions of Accounting
Principles Board Opinion No. 25 and, accordingly, no stock option compensation
expense is included in the determination of net income in the statement of
income. The weighted average fair value on the date of grant of options granted
was $3.60, $6.30 and $7.70 in 1999, 1998 and 1997, respectively. Had stock
option compensation expense been determined pursuant to the methodology of SFAS
No. 123, "Accounting for Stock-Based Compensation," the pro forma effects on the
Company's earnings per share would have been a reduction of approximately $.04,
$.04 and $.02 in 1999, 1998 and 1997, respectively.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
1999 1998 1997
----- ----- -----
Risk-free interest rate............................... 5.1% 5.5% 6.5%
Dividend yield........................................ 1.9% 1.3% 1.4%
Volatility factor..................................... 26.2% 28.8% 35.0%
Expected option life (in years)....................... 5.5 5.5 5.5
F-17
66
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE BENEFIT PLANS:
Pension and Profit-Sharing Benefits. The Company sponsors defined-benefit
pension plans for most of its employees. In addition, substantially all salaried
employees participate in noncontributory profit-sharing plans, to which payments
are approved annually by the Board of Directors. Aggregate charges to income
under these plans were $21 million in 1999, $15 million in 1998 and $9 million
in 1997.
Net periodic pension cost for the Company's defined-benefit pension plans
includes the following components for the three years ended December 31, 1999:
(IN THOUSANDS)
1999 1998 1997
------- -------- -------
Service cost..................................... $ 7,590 $ 6,470 $ 3,480
Interest cost.................................... 12,640 11,380 6,650
Expected return on assets........................ (9,670) (11,430) (6,600)
Amortization of transition obligation (asset).... 130 (170) (120)
Amortization of prior-service cost............... 650 750 690
Amortization of net loss......................... 1,440 670 410
------- -------- -------
Net periodic pension cost........................ $12,780 $ 7,670 $ 4,510
======= ======== =======
Major assumptions used in accounting for the Company's defined-benefit
pension plans are as follows:
1999 1998 1997
----- ------ ------
Discount rate for obligations...................... 7.75% 6.75% 7.25%
Rate of increase in compensation levels............ 5.00% 5.00% 5.00%
Expected long-term rate of return on plan assets... 9.00% 11.00% 11.00%
F-18
67
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following provides a reconciliation of the changes in the
defined-benefit pension plans' projected benefit obligations and fair value of
assets for each of the two years ended December 31, 1999, and the funded status
as of December 31, 1999 and 1998:
(IN THOUSANDS)
1999 1998
--------- ---------
CHANGES IN PROJECTED BENEFIT OBLIGATIONS
Benefit obligations at January 1........................ $(184,030) $ (99,150)
Acquisitions.......................................... -- (63,720)
Service cost.......................................... (7,130) (5,900)
Interest cost......................................... (12,640) (11,380)
Plan amendments....................................... (1,460) (650)
Actuarial gain (loss)................................. 22,830 (9,580)
Benefit payments...................................... 8,660 6,350
--------- ---------
Projected benefit obligations at December 31............ $(173,770) $(184,030)
--------- ---------
CHANGES IN PLAN ASSETS
Fair value of plan assets at January 1.................. $ 110,760 $ 63,020
Actual return on plan assets.......................... (12,110) 1,890
Acquisitions.......................................... -- 46,420
Contributions......................................... 11,520 6,430
Benefit payments...................................... (8,480) (6,350)
Expenses/Other........................................ (430) (650)
--------- ---------
Fair value of plan assets at December 31................ $ 101,260 $ 110,760
========= =========
FUNDED STATUS
Plan assets less than projected benefits at December
31.................................................... $ (72,510) $ (73,270)
Unamortized transition obligation (asset)............. 270 (1,100)
Unamortized prior-service cost........................ 7,500 7,640
Unamortized net loss.................................. 29,340 36,600
--------- ---------
Net liability recognized at December 31................. $ (35,400) $ (30,130)
========= =========
The following provides the amounts related to the plans at December 31,
1999 and 1998:
(IN THOUSANDS)
1999 1998
-------- --------
Accrued benefit liability................................ $(56,650) $(51,370)
Intangible asset......................................... 11,250 10,540
Accumulated other comprehensive income................... 10,000 10,700
-------- --------
Net liability recognized............................... $(35,400) $(30,130)
======== ========
F-19
68
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Postretirement Benefits. The Company provides postretirement medical and
life insurance benefits, none of which are funded, for certain of its active and
retired employees. Net periodic postretirement benefit cost includes the
following components for the years ended December 31, 1999, 1998 and 1997:
(IN THOUSANDS)
1999 1998 1997
------ ------ ------
Service cost......................................... $ 400 $ 300 $ 300
Interest cost........................................ 1,200 1,200 1,400
Net amortization..................................... 500 (100) 700
------ ------ ------
Net periodic postretirement benefit cost............. $2,100 $1,400 $2,400
====== ====== ======
The following provides a reconciliation of the changes in the
postretirement benefit plans' benefit obligations for each of the two years
ended December 31, 1999 and the status as of December 31, 1999 and 1998:
(IN THOUSANDS)
1999 1998
-------- --------
CHANGES IN BENEFIT OBLIGATIONS
Benefit obligations at January 1.......................... $(18,900) $(12,400)
Acquisitions............................................ -- (4,400)
Service cost............................................ (400) (300)
Interest cost........................................... (1,200) (1,200)
Employee contributions.................................. (100) (100)
Actuarial gain (loss)................................... 1,000 (1,900)
Benefit payments........................................ 1,300 1,200
Curtailment............................................. 100 200
-------- --------
Benefit obligations at December 31........................ $(18,200) $(18,900)
======== ========
STATUS
Benefit obligations at December 31........................ $(18,200) $(18,900)
Unamortized transition obligation....................... 8,400 9,300
Unrecognized prior-service cost......................... 400 500
Unrecognized net gain................................... (6,700) (6,200)
-------- --------
Net liability at December 31.............................. $(16,100) $(15,300)
======== ========
The discount rate used in determining the accumulated postretirement
benefit obligation increased from 6.75 percent in 1998 to 7.75 percent in 1999.
The assumed health care cost trend rate in 1999 was eight percent, decreasing to
an ultimate rate in the year 2007 of five percent. If the assumed medical cost
trend rates were increased by one percent, the accumulated postretirement
benefit obligations would increase by $1.3 million and the aggregate of the
service and interest cost components of net periodic postretirement benefit
obligations cost would increase by $.1 million. If the assumed medical cost
trend rates were decreased by one percent, the accumulated postretirement
benefit obligations would decrease by $1.1 million and the aggregate of the
service and interest cost components of net periodic postretirement benefit cost
would decrease by $.1 million.
F-20
69
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION:
The Company has defined a segment as a component, with business activity
resulting in revenue and expense, that has separate financial information
evaluated regularly by the Company's chief operating decision maker in
determining resource allocation and assessing performance. The Company has five
operating segments involving the manufacture and sale of the following:
Specialty Metal Formed Products -- Precision products, principally
engine and drivetrain components and subassemblies, generally produced
using advanced metalworking technologies with significant proprietary
content for the transportation industry.
Towing Systems -- Vehicle hitches, jacks, winches, couplers and related
towing accessories.
Specialty Fasteners -- Cold formed fasteners and related metallurgical
processing.
Specialty Packaging and Sealing Products -- Industrial container
closures, pressurized gas cylinders and metallic and nonmetallic
gaskets.
Specialty Industrial Products -- Specialty drills, cutters and
specialized metal finishing services, and flame-retardant facings and
jacketings and pressure-sensitive tapes.
The Company purchased TriMas in January 1998 and the segment data for 1998
reflects TriMas as though the transaction had occurred on January 1, 1998,
consistent with the Company's internal management reporting.
Included in the Specialty Metal Formed Products segment are sales to one
customer of $197 million, $184 million and $156 million in 1999, 1998 and 1997,
respectively; sales to another customer, attributed mainly to the Specialty
Metal Formed Products segment, of $140 million in 1997; sales to a third
customer, attributed mainly to the Specialty Metal Formed Products segment, of
$79 million in 1997; and sales to a fourth customer, attributed mainly to the
Specialty Metal Formed Products segment, of $62 million in 1997. Specialty Metal
Formed Products' operating profit for 1997 was reduced by $17 million of
nonrecurring charges.
The Company's export sales approximated $143 million, $142 million and $71
million in 1999, 1998 and 1997, respectively.
F-21
70
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intersegment transactions represent principally transactions occurring in
the ordinary course of business.
SPECIALTY (IN THOUSANDS)
SPECIALTY PACKAGING SPECIALTY COMPANIES
METAL FORMED TOWING SPECIALTY AND SEALING INDUSTRIAL SOLD OR HELD
PRODUCTS SYSTEMS FASTENERS PRODUCTS PRODUCTS FOR SALE TOTAL
------------ -------- --------- ----------- ---------- ------------ ----------
1999
- -----------------------------
Revenue from external
customers.................. $817,000 $260,000 $241,000 $216,000 $107,000 $ 39,000 $1,680,000
Intersegment revenue......... 9,000 8,000 4,000 -- 1,000 1,000 23,000
Depreciation and
amortization............... 35,000 10,000 12,000 13,000 5,000 2,000 77,000
Segment operating profit..... 112,000 37,000 35,000 41,000 14,000 4,000 243,000
Segment net assets........... 602,000 289,000 329,000 422,000 140,000 -- 1,782,000
Capital expenditures......... 87,000 9,000 12,000 19,000 7,000 -- 134,000
1998
- -----------------------------
Revenue from external
customers.................. $760,000 $238,000 $226,000 $223,000 $110,000 $115,000 $1,672,000
Intersegment revenue......... 5,000 6,000 3,000 -- 1,000 3,000 18,000
Depreciation and
amortization............... 34,000 9,000 10,000 11,000 5,000 6,000 75,000
Segment operating profit..... 106,000 34,000 38,000 46,000 16,000 12,000 252,000
Segment net assets........... 494,000 281,000 328,000 423,000 140,000 102,000 1,768,000
Capital expenditures......... 63,000 8,000 14,000 16,000 4,000 3,000 108,000
1997
- -----------------------------
Revenue from external
customers.................. $711,000 -- $ 44,000 -- $ 37,000 $130,000 $ 922,000
Intersegment revenue......... 9,000 -- 1,000 -- -- 2,000 12,000
Depreciation and
amortization............... 29,000 -- 1,000 -- 2,000 6,000 38,000
Segment operating profit..... 88,000 -- 8,000 -- 7,000 16,000 119,000
Segment net assets........... 444,000 -- 17,000 -- 18,000 109,000 588,000
Capital expenditures......... 46,000 -- 1,000 -- 2,000 5,000 54,000
The following table presents the Company's revenues for each of the years
ended December 31 and net assets at each year ended December 31 by geographic
area, attributed to each subsidiary's continent of domicile. Revenue and net
assets from no single foreign country was material to the consolidated revenues
and net assets of the Company.
(IN THOUSANDS)
1999 1998 1997
---------------------- ---------------------- ----------------------
SALES NET ASSETS SALES NET ASSETS SALES NET ASSETS
-------- ---------- -------- ---------- -------- ----------
Europe.......................... $165,000 $182,000 $149,000 $171,000 $100,000 $111,000
Australia....................... 23,000 14,000 18,000 10,000 -- --
Other North America............. 12,000 18,000 16,000 12,000 -- --
-------- -------- -------- -------- -------- --------
Total foreign................. $200,000 $214,000 $183,000 $193,000 $100,000 $111,000
======== ======== ======== ======== ======== ========
F-22
71
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of reportable segment revenue from
external customers, segment operating profit and segment net assets to the
Company's consolidated totals:
(IN THOUSANDS)
1999 1998 1997
---------- ---------- --------
REVENUE FROM EXTERNAL CUSTOMERS
Revenue from external customers for reportable segments.... $1,680,000 $1,672,000 $922,000
TriMas sales prior to acquisition.......................... -- (36,000) --
---------- ---------- --------
Total net sales.................................. $1,680,000 $1,636,000 $922,000
========== ========== ========
(IN THOUSANDS)
1999 1998 1997
---------- ---------- --------
OPERATING PROFIT
Total operating profit for reportable segments............. $ 243,000 $ 252,000 $119,000
General corporate expense.................................. (24,000) (24,000) (22,000)
Gain (loss) on disposition of businesses................... 14,000 (41,000) --
Charge for asset impairment................................ (18,000) -- --
MSTI earnout............................................... -- 25,000 5,000
TriMas operating profit prior to acquisition............... -- (5,000) --
---------- ---------- --------
Total operating profit........................... $ 215,000 $ 207,000 $102,000
========== ========== ========
(IN THOUSANDS)
1999 1998 1997
---------- ---------- --------
NET ASSETS AT DECEMBER 31
Total net operating assets for reportable segments......... $1,782,000 $1,768,000 $588,000
Corporate net assets....................................... 91,000 72,000 372,000
---------- ---------- --------
Total net assets................................. $1,873,000 $1,840,000 $960,000
========== ========== ========
The information that the chief operating decision maker utilizes includes
total net assets as presented in the table above. Total net assets is defined by
the Company as total assets less current liabilities. Included in corporate net
assets for 1999 were capital expenditures of $2 million.
OTHER SIGNIFICANT ITEMS
(IN THOUSANDS)
1999 1998 1997
---------- ---------- --------
DEPRECIATION AND AMORTIZATION
Segment totals............................................. $ 77,000 $ 75,000 $ 38,000
Adjustments................................................ 6,000 9,000 5,000
---------- ---------- --------
Consolidated totals.............................. $ 83,000 $ 84,000 $ 43,000
========== ========== ========
The above adjustments to depreciation and amortization are principally the
result of compensation expense related to stock award amortization and prepaid
debenture expense amortization.
F-23
72
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER INCOME (EXPENSE), NET:
(IN THOUSANDS)
1999 1998 1997
------- ------- -------
Other, net:
Net realized and unrealized gains from
marketable securities....................... $ -- $ 3,330 $13,130
Interest income................................ 2,170 4,180 3,440
Other, net..................................... (7,390) (5,450) 830
------- ------- -------
$(5,220) $ 2,060 $17,400
======= ======= =======
INCOME TAXES:
(IN THOUSANDS)
1999 1998 1997
-------- -------- --------
Income before income taxes:
Domestic...................................... $123,610 $115,630 $173,410
Foreign....................................... 15,860 28,890 16,880
-------- -------- --------
$139,470 $144,520 $190,290
======== ======== ========
Provision for income taxes:
Currently payable:
Federal.................................... $ 26,810 $ 28,210 $ 40,290
State and local............................ 5,450 3,950 6,810
Foreign.................................... 5,220 15,000 10,430
Deferred:
Federal.................................... 7,390 590 18,840
Foreign.................................... 2,170 (700) (1,320)
-------- -------- --------
Income taxes............................... $ 47,040 $ 47,050 $ 75,050
======== ======== ========
The components of deferred taxes at December 31, 1999 and 1998 are as
follows:
(IN THOUSANDS)
1999 1998
-------- --------
Deferred tax assets:
Inventories............................................ $ 2,920 $ 2,990
Accrued liabilities and other long-term liabilities.... 47,880 51,910
Expected capital loss benefit from disposition of
businesses.......................................... 8,900 7,910
-------- --------
59,700 62,810
-------- --------
Deferred tax liabilities:
Property and equipment................................. 111,680 101,640
Other, principally equity investments in affiliates.... 26,710 26,170
-------- --------
138,390 127,810
-------- --------
Net deferred tax liability............................... $ 78,690 $ 65,000
======== ========
F-24
73
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of tax computed at the U.S. federal
statutory rate to the provision for income taxes allocated to income before
income taxes:
(IN THOUSANDS)
1999 1998 1997
------- ------- -------
U.S. federal statutory rate......................... 35% 35% 35%
------- ------- -------
Tax at U.S. federal statutory rate.................. $48,810 $50,580 $66,600
State and local taxes, net of federal tax benefit... 3,540 2,570 4,430
Higher effective foreign tax rate................... 1,840 4,210 3,200
Non-taxable additional consideration from previously
sold business..................................... -- (8,190) (1,710)
Disposition of businesses........................... (7,870) (2,400) --
Amortization in excess of tax, net.................. 2,950 1,390 (760)
Other, net.......................................... (2,230) (1,110) 3,290
------- ------- -------
Income taxes...................................... $47,040 $47,050 $75,050
======= ======= =======
A provision has not been made at December 31, 1999 for U.S. or additional
foreign withholding taxes on approximately $93 million of undistributed earnings
of foreign subsidiaries as those earnings are intended to be permanently
reinvested. Generally, such earnings become subject to U.S. tax upon the
remittance of dividends and under certain other circumstances. It is not
practicable to estimate the amount of deferred tax liability on such
undistributed earnings.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
In accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments," the following methods
were used to estimate the fair value of each class of financial instruments:
CASH AND CASH INVESTMENTS
The carrying amount reported in the balance sheet for cash and cash
investments approximates fair value.
MARKETABLE SECURITIES, NOTES RECEIVABLE AND OTHER ASSETS
Fair values of financial instruments included in marketable securities,
notes receivable and other assets were estimated using various methods including
quoted market prices and discounted future cash flows based on the incremental
borrowing rates for similar types of investments. In addition, for variable-rate
notes receivable that fluctuate with the prime rate, the carrying amounts
approximate fair value.
LONG-TERM DEBT
The carrying amount of bank debt and certain other long-term debt
instruments approximate fair value as the floating rates inherent in this debt
reflect changes in overall market interest rates. The fair values of the
Company's subordinated debt instruments are based on quoted market prices. The
fair values of certain other debt instruments are estimated by discounting
future cash flows based on the Company's incremental borrowing rate for similar
types of debt instruments.
DERIVATIVES
The Company has limited involvement with derivative financial instruments,
and does not use derivatives for trading purposes. The derivatives, principally
consisting of futures contracts and interest rate swap
F-25
74
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
agreements, are intended to reduce the market risk associated with the Company's
marketable equity securities portfolio and floating rate debt.
The Company's investment in futures contracts increases in value as a
result of decreases in the underlying index and decreases in value when the
underlying index increases. The contracts are financial instruments (with
off-balance sheet market risk), as they are required to be settled in cash. The
Company's market risk is subject to the price differential between the contract
market value and contract cost. The average monthly notional amount of futures
contracts in 1997 was approximately $17 million. Futures contracts trade on
organized exchanges, and as a result, settlement of such contracts has little
credit risk. Initial margin requirements are met in cash or other instruments,
and changes in the contract values are settled periodically. Initial margin
requirements are recorded as cash investments in the balance sheet. Futures
contracts are short-term in nature, usually less than six months. There were no
contracts outstanding at December 31, 1999 or 1998.
Interest rate swap agreements covering a notional amount of $400 million of
the Company's floating rate debt were entered into in 1998 at an aggregate
interest rate of approximately seven percent including the current borrowing
spread under the Company's revolving credit agreement. The fair value of the
swap agreements was not recognized in the consolidated financial statements
since they are accounted for as hedges of the floating rate exposure. These swap
agreements expire at various dates in 2000 to 2007.
The estimated fair value of the interest rate swap agreements, based on
current market rates, approximated a net receivable of $13 million at December
31, 1999. Exposure to credit loss occurs when the fair value of the agreements
is a net receivable. The interest rate swaps are with major banks of high credit
quality; therefore, the risk of non-performance by the counterparties is
considered to be negligible.
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1999 and 1998 are as follows:
(IN THOUSANDS)
1999 1998
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
Cash and cash investments.................... $ 4,490 $ 4,490 $ 29,390 $ 29,390
Notes receivable and other assets............ $ 4,180 $ 4,560 $ 5,290 $ 4,480
Long-term debt:
Bank debt.................................. $1,039,890 $1,039,890 $1,051,260 $1,051,260
4 1/2% Convertible Subordinated
Debentures.............................. $ 305,000 $ 225,700 $ 310,000 $ 251,100
Other long-term debt....................... $ 28,000 $ 27,850 $ 26,980 $ 25,580
F-26
75
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTERIM AND OTHER SUPPLEMENTAL FINANCIAL DATA (UNAUDITED):
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE QUARTERS ENDED
------------------------------------------------------------------------
DECEMBER SEPTEMBER JUNE MARCH
31ST 30TH 30TH 31ST
-------- --------- -------- --------
1999:
- ------------------------------------------
Net sales................................. $395,220 $399,300 $436,510 $448,660
Gross profit.............................. $103,980 $ 99,340 $113,690 $116,020
Net income................................ $22,260 $ 20,200 $ 26,110 $ 23,860
Per common share:
Basic........................... $.54 $.49 $.64 $.58
Diluted......................... $.45 $.41 $.51 $.47
Market price per common share:
High.................................... $17 1/16 $17 11/16 $17 3/4 $17
Low..................................... $10 5/8 $15 9/16 $15 1/8 $14
1998:
- ------------------------------------------
Net sales................................. $401,760 $399,500 $433,480 $400,760
Gross profit.............................. $104,960 $100,150 $117,070 $104,390
Net income................................ $18,120 $ 16,790 $ 29,820 $ 32,740
Per common share:
Basic........................... $.43 $.38 $.68 $.74
Diluted......................... $.36 $.33 $.54 $.60
Market price per common share:
High.................................... $18 3/4 $24 1/8 $26 7/16 $23 1/4
Low..................................... $15 1/4 $16 1/4 $22 5/16 $17 11/16
In the first quarter and second quarter of 1999, the Company recognized
non-cash charges aggregating approximately $6 million pre-tax to reflect the
other than temporary decline in value of equity affiliates of the Company.
In 1999, the Company completed the sale of its aftermarket-related and
vacuum metalizing businesses. These transactions resulted in a pre-tax gain of
approximately $26 million, of which approximately $10 million was recognized in
the first quarter 1999 and approximately $16 million in the second quarter 1999.
In the second quarter 1999, the Company recorded a non-cash pre-tax charge
of approximately $17.5 million related to impairment of certain long-lived
assets, which included its hydroforming equipment and related intellectual
property.
In the fourth quarter 1999, the Company recognized pre-tax charges
aggregating approximately $12 million, principally related to the closure of a
plant and the sale of a business.
In January 1998, the Company completed the acquisition of TriMas
Corporation ("TriMas") by purchasing all the outstanding shares of TriMas not
already owned by the Company for approximately $920 million. The results for
1998 reflect TriMas' sales and operating results from the date of acquisition.
Results for first quarter 1998 benefitted from pre-tax gains aggregating
approximately $12 million which resulted from partial recognition of a deferred
gain related to the 1997 divestiture of a business and gains from the Company's
marketable securities portfolio.
Second quarter results for 1998 were impacted by a charge (approximately
$41 million pre-tax) principally related to the disposition of certain
businesses. This charge more than offset the gain related to additional
consideration received by the Company in the second quarter of 1998 resulting
from the disposition of MascoTech Stamping Technologies, Inc. in 1996.
F-27
76
MASCOTECH, INC.
FINANCIAL STATEMENT SCHEDULES
PURSUANT TO ITEM 14(a)(2) OF FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1999
Schedules, as required for the years ended December 31, 1999, 1998 and 1997:
PAGE
----
II. Valuation and Qualifying Accounts....................... F-29
F-28
77
MASCOTECH, INC.
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------ ---------- ------------------------- ---------- -------------
ADDITIONS
-------------------------
CHARGED
BALANCE AT CHARGED (CREDITED)
BEGINNING TO COSTS TO OTHER BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ------------------------------ ---------- ------------ ---------- ---------- -------------
(A) (B)
Allowance for doubtful
accounts, deducted from
accounts receivable in the
balance sheet:
1999........................ $3,410,000 $1,080,000 $ 20,000 $ 220,000 $4,290,000
========== ========== ========== ========== ==========
1998........................ $1,180,000 $ 750,000 $2,590,000 $1,110,000 $3,410,000
========== ========== ========== ========== ==========
1997........................ $2,000,000 $ 500,000 $ 60,000 $1,380,000 $1,180,000
========== ========== ========== ========== ==========
NOTES:
(A) Allowance of companies acquired, and other adjustments, net.
(B) Deductions, representing uncollectible accounts written off, less
recoveries of accounts written off in prior years.
F-29
78
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.i Restated Certificate of Incorporation of Masco Corporation
and amendments thereto.(5)
3.ii Bylaws of Masco Corporation, as amended.(7)
4.a.i Indenture dated as of December 1, 1982 between Masco
Corporation and Morgan Guaranty Trust Company of New York,
as Trustee,(3) and Directors' resolutions establishing Masco
Corporation's: (i) 9% Notes Due October 1, 2001(3), (ii)
6 1/8 Notes Due September 15, 2003(7), (iii) 7 1/8%
Debentures Due August 15, 2013(7), (iv) 6.625% Debentures
Due April 15, 2018(7), (v) 5.75% Notes Due 2008(7) and (vi)
7 3/4% Debentures Due August 1, 2029. (filed herewith)
4.a.ii Agreement of Appointment and Acceptance of Successor Trustee
dated as of July 25, 1994 among Masco Corporation, Morgan
Guaranty Trust Company of New York and The First National
Bank of Chicago. (filed herewith)
4.a.iii Supplemental Indenture dated as of July 26, 1994 between
Masco Corporation and The First National Bank of Chicago.
(filed herewith)
4.b $750,000,000 Amended and Restated Credit Agreement dated as
of November 14, 1996 among Masco Corporation, the banks
party thereto and Morgan Guaranty Trust Company of New York,
as agent(3) and Amendment No. 1 dated April 30, 1997(4) and
Amendment dated as of March 30, 1998.(5)
4.c Rights Agreement dated as of December 6, 1995, between Masco
Corporation and The Bank of New York, as Rights Agent(1) and
Amendment No. 1 to Rights Agreement dated as of September
23, 1998.(6)
4.d Indenture dated as of November 1, 1986 between Masco
Industries, Inc. (now known as MascoTech, Inc.) and Morgan
Guaranty Trust Company of New York, as Trustee; Agreement of
Appointment and Acceptance of Successor Trustee dated as of
August 4, 1994 among MascoTech, Inc., Morgan Guaranty Trust
Company of New York and The First National Bank of Chicago;
Supplemental Indenture dated as of August 5, 1994 among
MascoTech, Inc. and The First National Bank of Chicago, as
Trustee (7); Directors' resolutions establishing Masco
Industries, Inc.'s 4 1/2% Convertible Subordinated
Debentures Due 2003(7); and Form of Note. (filed herewith)
4.e $1,300,000,000 Credit Agreement dated as of January 16, 1998
among MascoTech, Inc., MascoTech Acquisition, Inc., the
banks party thereto from time to time, The First National
Bank of Chicago, as Administrative Agent, Bank of America
NT&SA and NationsBank, N.A., as Syndication Agents, and
Amendment No. 1 thereto dated as of February 10, 1998.(4)
4.f DM 350,000,000 Multicurrency Revolving Credit Facility dated
September 14, 1998 among Masco GmbH, as Borrower, Masco
Corporation, as Guarantor, Commerzbank Aktiengesellschaft
(Arranger) and Commerzbank International S.A. (Agent).(7)
4.g DM 400,000,000 Term Loan Facility dated July 9, 1997 among
Masco GmbH, as Borrower, Masco Corporation, as Guarantor,
Commerzbank Aktiengesellschaft (Arranger) and Commerzbank
International S.A. (Agent) for the banks party thereto, and
Amendment dated as of June 12, 1998 to Credit Agreement.(7)
4.h $1,000,000,000 Amended and Restated Credit Agreement dated
as of March 20, 2000 among Masco Corporation, the banks
party thereto, Commerzbank Aktiengesellschaft and Bank of
America, N.A., as syndication agents, and Bank One, NA, as
administrative agent. (filed herewith)
NOTE: Other instruments, notes or extracts from agreements
defining the rights of holders of long-term debt of Masco
Corporation or its subsidiaries have not been filed since
(i) in each case the total amount of long-term debt
permitted thereunder does not exceed 10 percent of Masco
Corporation's consolidated assets, and (ii) such
instruments, notes and extracts will be furnished by Masco
Corporation to the Securities and Exchange Commission upon
request.
79
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.a Assumption and Indemnification Agreement dated as of May 1,
1984 between Masco Corporation and Masco Industries, Inc.
(now known as MascoTech, Inc.).(1)
10.b Corporate Services Agreement and Annex dated as of January
1, 1987 between Masco Corporation and Masco Industries, Inc.
(now known as MascoTech, Inc.), Amendment No. 1 dated as of
October 31, 1996, and related letter agreements dated
January 22, 1998 and June 17, 1998. (all filed herewith)
10.c Corporate Opportunities Agreement dated as of May 1, 1984
between Masco Corporation and Masco Industries, Inc. (now
known as MascoTech, Inc.)(1) and Amendment No. 1 dated as of
October 31, 1996.(2)
10.d Stock Repurchase Agreement dated as of May 1, 1984 between
Masco Corporation and Masco Industries, Inc. (now known as
MascoTech, Inc.) and related letter dated September 20,
1985, Amendment to Stock Repurchase Agreement dated as of
December 20, 1990, and Amendment to Stock Repurchase
Agreement included in Agreement dated as of November 23,
1993.(7)
10.e Amended and Restated Securities Purchase Agreement dated as
of November 23, 1993 ("Securities Purchase Agreement")
between MascoTech, Inc. and Masco Corporation, including
form of Note, Agreement dated as of November 23, 1993
relating thereto, and Amendment No. 1 to the Securities
Purchase Agreement dated as of October 31, 1996.(7)
10.f Registration Agreement dated as of March 31, 1993, between
Masco Corporation and Masco Industries, Inc. (now known as
MascoTech, Inc.).(7)
NOTE: Exhibits 10.g through 10.q constitute the management
contracts and executive compensatory plans or arrangements
in which certain of the Directors and executive officers of
the Company participate.
10.g Masco Corporation 1991 Long Term Stock Incentive Plan
(Restated July 10, 1998).(7)
10.h Masco Corporation 1988 Restricted Stock Incentive Plan
(Restated December 6, 1995).(1)
10.i Masco Corporation 1988 Stock Option Plan (Restated September
22, 1999). (filed herewith)
10.j Masco Corporation Supplemental Executive Retirement and
Disability Plan. (filed herewith)
10.k Masco Corporation 1997 Annual Incentive Compensation
Plan.(4)
10.l Masco Corporation 1997 Non-Employee Directors Stock Plan (as
amended July 10, 1998).(7)
10.m MascoTech, Inc. 1991 Long Term Stock Incentive Plan
(Restated July 15, 1998).(7)
10.n MascoTech, Inc. 1984 Restricted Stock Incentive Plan
(Restated December 6, 1995).(1)
10.o MascoTech, Inc. 1984 Stock Option Plan (Restated September
21, 1999). (filed herewith)
10.p MascoTech, Inc. 1997 Non-Employee Directors Stock Plan.(4)
10.q Description of the Masco Corporation Program for Estate,
Financial Planning and Tax Assistance.(4)
10.r 12% Senior Note Due 2008 by Furnishings International Inc.
to Masco Corporation and Registration Rights Agreement dated
as of August 5, 1996 between Furnishings International Inc.
and Masco Corporation.(3)
10.s Stock Purchase Agreement dated as of October 15, 1996
between Masco Corporation and MascoTech, Inc.(2)
10.t Registration Rights Agreement among Masco Corporation and
the Investors listed therein dated as of August 31, 1999.(8)
12 Computation of Ratio of Earnings to Fixed Charges. (filed
herewith)
80
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
21 List of Subsidiaries. (filed herewith)
23.a Consent of PricewaterhouseCoopers LLP relating to Masco
Corporation's Consolidated Financial Statements and
Financial Statement Schedules. (filed herewith)
23.b Consent of PricewaterhouseCoopers LLP relating to MascoTech,
Inc.'s Consolidated Financial Statements and Financial
Statement Schedule. (filed herewith)
27.a Financial Data Schedule as of and for the year ended
December 31, 1999. (filed herewith)
27.b Financial Data Schedule as of and for the year-to-date
period ended March 31, 1998, amended for transactions
accounted for as poolings of interests in the third quarter
of 1999. (filed herewith)
27.c Financial Data Schedule as of and for the year ended
December 31, 1997, restated for transactions accounted for
as poolings of interests in the third quarter of 1999.
(filed herewith)
- ---------------
(1) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1995.
(2) Incorporated by reference to the Exhibits filed with Masco Corporation's
Current Report on Form 8-K dated November 13, 1996.
(3) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1996.
(4) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1997.
(5) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
(6) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(7) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1998.
(8) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.