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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, 1997 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 New York Stock Exchange, Inc.
Preferred Stock Purchase Rights
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 13, 1998 (based on the closing sale
price of $58 7/8 of the Registrant's Common Stock, as reported on the New York
Stock Exchange Composite Tape on such date) was approximately $9,669,730,000.
Number of shares outstanding of the Registrant's Common Stock at March 13, 1998:
169,634,252 shares of Common Stock, par value $1.00 per share
Portions of the Registrant's definitive Proxy Statement to be filed for its 1998
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.
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TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business.................................................... 2
2. Properties.................................................. 7
3. Legal Proceedings........................................... 9
4. Submission of Matters to a Vote of Security Holders......... 9
Supplementary Item. Executive Officers of Registrant........ 9
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 10
6. Selected Financial Data..................................... 10
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
8. Financial Statements and Supplementary Data................. 20
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 44
PART III
10. Directors and Executive Officers of the Registrant.......... 44
11. Executive Compensation...................................... 44
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 44
13. Certain Relationships and Related Transactions.............. 44
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 45
Signatures.................................................. 49
FINANCIAL STATEMENT SCHEDULES
Masco Corporation Financial Statement Schedule.............. 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 is engaged principally in the manufacture, sale and
installation of home improvement and building products. Masco believes that it
is the largest domestic manufacturer of faucets, kitchen and bath cabinets and
plumbing supplies and that it is a leading domestic producer of a number of
other home improvement and building products. Masco was incorporated under the
laws of Michigan in 1929 and in 1968 was reincorporated under the laws of
Delaware. Except as the context otherwise indicates, the terms "Masco" and the
"Company" refer to Masco Corporation and its consolidated subsidiaries.
The Company is among the country's largest manufacturers of brand name
consumer products designed for the home improvement and home building
industries. In addition to faucets, kitchen and bath cabinets and plumbing
supplies, the Company manufactures and sells kitchen appliances, bath and shower
enclosure units, spas and hot tubs, other shower, bath and plumbing specialties
and accessories, door locks and other builders' hardware, air treatment
products, venting and ventilating equipment and water pumps. These products are
sold through mass merchandisers, home centers, hardware stores, distributors,
wholesalers and other outlets to consumers and contractors. The Company also
supplies and installs insulation and other building products direct to builders
and consumers. The Company's operations are categorized into two industry
segments: Kitchen and Bath Products and Other Specialty Products.
INDUSTRY SEGMENTS
The following table sets forth for the three years ended December 31, 1997,
the contribution of the Company's industry segments to net sales and operating
profit:
NET SALES(1)
------------------------------------
1997 1996 1995
---------- ---------- ----------
Kitchen and Bath Products.................. $2,940,000 $2,519,000 $2,283,000
Other Specialty Products................... 820,000 718,000 644,000
---------- ---------- ----------
Total.................................... $3,760,000 $3,237,000 $2,927,000
========== ========== ==========
OPERATING PROFIT(1)(2)
------------------------------------
1997 1996 1995
---------- ---------- ----------
Kitchen and Bath Products.................. $ 539,000 $ 462,000 $ 411,000
Other Specialty Products................... 130,000 104,000 82,000
---------- ---------- ----------
Total.................................... $ 669,000 $ 566,000 $ 493,000
========== ========== ==========
(1) Results exclude the home furnishings products segment, which was classified
as discontinued operations in 1995 and sold in 1996. See the Note to the
Company's Consolidated Financial Statements captioned "Discontinued
Operations," included in Item 8 of this Report.
(2) Amounts are before general corporate expense.
Additional financial information concerning the Company's operations by
industry segments as of and for the three years ended December 31, 1997 is set
forth in the Note to the Company's Consolidated Financial Statements captioned
"Segment Information," included in Item 8 of this Report.
KITCHEN AND BATH PRODUCTS
The Company manufactures a variety of single and double handle faucets.
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 through manufacturers' representatives to major
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retail accounts and to distributors who sell the faucets to plumbers, building
contractors, remodelers, smaller retailers and others. PEERLESS faucets are sold
primarily through manufacturers' representatives directly to retail outlets such
as mass merchandisers, home centers and hardware stores and are also sold under
private label. The Company's ARTISTIC BRASS(R) faucets and accessories are
produced for the decorator markets and are sold through wholesalers, distributor
showrooms and other outlets. ALSONS(R) hand showers and shower heads and
MIXET(R) valves and accessories are distributed through manufacturers'
representatives to the wholesale market and to retailers.
Sales of faucets worldwide approximated $815 million in 1997, $757 million
in 1996 and $698 million in 1995. The percentage of operating profit on faucets
is somewhat higher than that on other products offered by the Company. The
Company believes that the simplicity, quality and reliability of its faucet
mechanisms, 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 United States
market. The faucet market in the United States is very competitive, with Moen,
Price Pfister, Sterling and American Standard as major brand competitors.
Competition from import products is also a factor in the Company's markets.
The Company manufactures economy, stock, semi-custom and custom kitchen and
bath cabinetry in a variety of styles and in various price ranges. The Company
sells cabinets under a number of trademarks, including MERILLAT(R),
KRAFTMAID(R), QUALITY CABINETS(R), STARMARK(R) and FIELDSTONE(R), with sales to
distributors, home centers, dealers and direct to builders for both the home
improvement and new construction markets. In addition to its domestic
manufacturing, the Company manufactures cabinetry in Germany, where sales are
made primarily through Company-owned showrooms to consumers, and in England,
with sales primarily to builders for the new construction market. Sales of
kitchen and bath cabinets were approximately $1,083 million in 1997, $832
million in 1996 and $758 million in 1995. During 1997, the Company acquired
Texwood Industries, Inc., a domestic manufacturer of kitchen and bath cabinetry.
Management believes that the Company is the largest manufacturer of kitchen and
bath cabinetry in the United States. Significant competitors are American
Woodmark Corporation, Aristokraft, Inc., WCI Group and Triangle Pacific
Corporation.
The Company's brass and copper plumbing system components and other
plumbing specialties 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 for the wholesale trade under the
BRASSCRAFT(R) trademark and for the "do-it-yourself" market under the PLUMB
SHOP(R), HOME PLUMBER(R) and MELARD(TM) trademarks and are also sold under
private label.
Other Kitchen and Bath Products sold by the Company include THERMADOR(R)
cooktops, ovens, ranges and related cooking equipment and refrigerators, which
are marketed through appliance distributors and dealers. The Company's AQUA
GLASS(R) acrylic and gelcoat bath and shower units and whirlpools are sold
primarily to wholesale plumbing distributors for use in the home improvement and
new home construction markets. Other bath and shower enclosure units, shower
trays and laundry tubs are sold to the home improvement market through hardware
stores and home centers under the brand names AMERICAN SHOWER & BATH(TM) and
TRAYCO(TM). HUPPE(R) luxury bath and shower enclosures are manufactured and sold
by the Company through wholesale channels primarily in Germany. The Company
manufactures bath and shower accessories, vanity mirrors and bath storage
products and sells these products under the brand name ZENITH PRODUCTS(R) and
other trademarks 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. In early 1997, the Company acquired Franklin Brass
Manufacturing Company, a leading manufacturer of bath accessories and bath
safety products.
Direct sales to home center retailers in all of the Company's product lines
have been increasing in recent years, and in 1997 sales to The Home Depot were
$392 million, approximately 10 percent of the
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Company's 1997 sales volume. Builders, distributors, wholesalers and other
retailers represent other channels of distribution for the Company's products.
OTHER SPECIALTY PRODUCTS
The Company's Other Specialty Products include 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. 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. During 1997, the Company acquired LaGard Inc., whose
electronic lock sets are used primarily by the banking industry on safes, ATMs,
vaults and cabinetry, and Liberty Hardware Manufacturing Corporation, a producer
of quality cabinet and builders' hardware. Key domestic competitors to Baldwin
and Weiser in the lock set business are Black & Decker Corporation and Schlage
Lock Company. Imported products are also becoming a major factor in this market.
The Company has recently begun to incorporate on many of its decorative
brass faucets and other products a durable coating that offers anti-tarnish
protection, under the trademarks BRILLIANCE(R) and THE LIFETIME FINISH FROM
BALDWIN(R). This innovative finish is currently available on certain of the
Company's kitchen and bath products and door hardware.
The Company manufactures ventilation products under the trademark AMP(R),
including grilles, registers, diffusers and humidifiers which are sold through
wholesale distribution and home centers. GEBHARDT(TM) commercial ventilating
products and JUNG(TM) water pumps are manufactured and distributed by the
Company in Europe. Through local offices of Gale Industries, Inc. 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.
COMPETITIVE FACTORS
The major domestic and foreign 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. A number of
companies of varying size compete with one or more of the Company's product
lines.
GENERAL INFORMATION
No material portion of the Company's business is seasonal or has special
working capital requirements, although the Company maintains a higher investment
in inventories for certain of its businesses than the average manufacturing
company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Cash Flows from Operating Activities," included in Item
7 of this Report. The Company does not consider backlog orders to be material
and no material portion of its business is subject to renegotiation of profits
or termination of contracts at the election of the federal 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 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.
INTERNATIONAL OPERATIONS
Through its subsidiaries, the Company also has home improvement and
building products manufacturing plants in Austria, Belgium, Canada, Denmark,
England, France, Germany, Italy, Mexico, Poland, Spain, Taiwan and Turkey. Home
improvement and building products manufactured by the Company outside of the
United States include faucets and accessory products, bath and shower
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enclosures, bath accessories, kitchen and bath cabinets, decorative accessories,
door lock sets and related hardware, floor registers, humidifiers, ventilating
equipment, submersible water pumps and special insulation materials. The
Company's European operations were expanded through the recent acquisition of
three manufacturers. In 1997, the Company acquired The SKS Group, a leading
German manufacturer and distributor of roller shutters and aluminum balcony
railings, and The Alvic Group, a leading Spanish manufacturer and distributor of
kitchen and bath cabinetry and components. In early 1998, the Company acquired
Vasco Corporation, a leading European manufacturer of residential decorative
hydronic radiators and heat convectors, based in Belgium.
The Company's foreign operations 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
operations in North America and in other geographic areas, as of and for the
three years ended December 31, 1997, is set forth in Item 8 of this Report in
the Note to the Company's Consolidated Financial Statements captioned "Segment
Information."
PATENTS AND TRADEMARKS
The Company holds a number of United States and foreign patents covering
various design features and valve constructions used in certain of its faucets,
and also holds a number of 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.
EMPLOYEES
At December 31, 1997, the Company employed approximately 28,100 people.
Satisfactory relations have generally prevailed between the Company and its
employees.
EQUITY INVESTMENTS
Information about the Company's equity investments is also set forth in the
Note to the Company's Consolidated Financial Statements captioned "Equity
Investments in Affiliates" included in Item 8 of this Report.
MascoTech, Inc.
In 1984, the Company transferred its industrial businesses to a newly
formed subsidiary, MascoTech, Inc. (formerly Masco Industries, Inc.), which
became a separate public company in July, 1984 when the Company distributed to
its stockholders certain shares of MascoTech common stock as a special dividend.
In October 1996, the Company reduced its common equity interest in MascoTech
from 45 percent to 21 percent through the sale to MascoTech of MascoTech common
stock and warrants to purchase shares of MascoTech common stock for total
consideration of approximately $266 million. Payment of $115 million of the
purchase price was made in cash at closing and the balance of approximately $151
million was paid by MascoTech on September 30, 1997, in accordance with its
agreement, in the form of 9.9 million shares (approximately 42%) of the
outstanding common stock of Emco Limited and $45.6 million in cash. As part of
that transaction, the Company granted MascoTech a right of first refusal, which
expires September 30, 2000, to purchase the remaining shares of MascoTech common
stock held by the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," included in Item 7 of this
Report, regarding the effect of this transaction on the Company. Emco is a
Canadian manufacturer and distributor of home improvement and building products.
See the discussion of "Emco Limited" below. MascoTech's conversion of its
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outstanding preferred stock into MascoTech common stock in mid-1997 further
reduced the Company's ownership in MascoTech to approximately 17 percent.
MascoTech is a leading supplier of metalworked components primarily for
vehicle engine and drivetrain applications and automotive aftermarket products
for the transportation industry. MascoTech's net sales for 1997 were
approximately $922 million. Approximately 72 percent of MascoTech's
transportation-related products sales in 1997 were original equipment automotive
products and services.
In January 1998, MascoTech acquired the remaining 63 percent of TriMas
Corporation that it did not previously own, including approximately 1.6 million
shares (4%) owned by the Company, for approximately $920 million. TriMas is a
diversified proprietary products company with leadership positions in
commercial, industrial and consumer niche markets. TriMas had sales of
approximately $668 million and net income of approximately $66 million for the
twelve months ended December 31, 1997.
TriMas' products include specialty fasteners, towing systems, specialty
container products and other industrial products.
Emco Limited
The Company owns approximately 42 percent of the outstanding common stock
of Emco Limited, as a result of the transactions described above under "Equity
Investments -- MascoTech, Inc." Emco is a leading Canadian distributor and
manufacturer of building products for the residential, commercial and industrial
construction markets, including roofing materials, wood fiber products and
sinks, and a distributor of plumbing and related products. Emco had sales of CDN
$1.26 billion for the twelve months ended December 31, 1997.
Hans Grohe
The Company has a 27 percent partnership interest in Hans Grohe GmbH & Co.
KG, a German manufacturer of faucets, handheld showers, shower heads, shower
cabins and other shower accessories.
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ITEM 2. PROPERTIES.
The following list sets forth the location of the Company's principal
manufacturing facilities and identifies the industry segments utilizing such
facilities.
Arizona............... Tucson (2)
California............ Carlsbad (1), Corona (1), Costa Mesa (2), Los Angeles (1),
Pico Rivera (1), Rancho Dominguez (1), Torrance (2) and
Vista (1)
Colorado.............. Longmont (1)
Delaware.............. New Castle (1)
Illinois.............. Chicago (2)
Indiana............... Cumberland (1), Greensburg (1) and Kendallville (2)
Iowa.................. Northwood (1)
Kentucky.............. Henderson (1), Morgantown (1) and Mt. Sterling (1)
Michigan.............. Adrian (1), Hillsdale (1), Lapeer (1), and Troy (2)
Minnesota............. Lakeville (1)
Mississippi........... Olive Branch (2)
Nevada................ Las Vegas (1)
New Jersey............ Moorestown (1), Passaic (1) and West Berlin (2)
North Carolina........ Thomasville (1)
Ohio.................. Jackson (1), Loudonville (1), Middlefield (1) and Orwell (1)
Oklahoma.............. Chickasha (1)
Oregon................ Klamath Falls (1)
Pennsylvania.......... Reading (1 and 2)
South Dakota.......... Rapid City (1) and Sioux Falls (1)
Tennessee............. Adamsville (1), Jackson (1), LaFollette (2) and McEwen (1)
Texas................. Lancaster (1), Cedar Hill (1) and Duncanville (1)
Virginia.............. Atkins (1), Culpeper (1), Lynchburg (1) and Mt. Jackson (1)
Austria............... Furstenfeld (2)
Belgium............... Brussels (2), Dilsen (2) and St. Niklaas (2)
Canada................ Cambridge (1), London (1) and St. Thomas (1), Ontario
Denmark............... Odense (1)
England............... Brownhills (1), Corby (1), Warminster (1) and Wetherby (1)
France................ Sevres (1)
Germany............... Ahaus (1), Bad Zwischenahn (1), Bielefeld (2), Duisburg (2),
Dortmund (2), Iserlohn (1), Kulmbach (2), Netzschkau (2),
Neuwied (1), Steinhagen (2), Stuttgart (2) and Waldenburg
(2)
Italy................. Lacchiarella (1) and Zingonia (1)
Mexico................ Mexicali (2)
Poland................ Krakow (2)
Spain................. Alcaudete (1), Barcelona (1) and Vic (1)
Taiwan................ Tai Chung (1)
Turkey................ Czerkezkoy (1)
Industry segments identified in the preceding table are: (1) Kitchen
and Bath Products and (2) Other Specialty Products. Multiple footnotes
within the same parentheses indicate that significant activities
relating to both segments are conducted at that location.
The three principal faucet manufacturing plants are located in Greensburg,
Indiana, Chickasha, Oklahoma and Jackson, Tennessee. The faucet manufacturing
plants and the majority of the Company's
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other manufacturing facilities range in size from approximately 10,000 square
feet to 900,000 square feet. The Company owns most of its manufacturing
facilities and none of the Company-owned properties is subject to significant
encumbrances. In addition to its manufacturing facilities, the Company operates
approximately 90 facilities (the majority of which are leased) which supply and
install insulation and other building products. The Company's corporate
headquarters are located in Taylor, Michigan and are owned by the Company. An
additional building near its corporate headquarters is used by the Company's
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 requirements.
The following list sets forth the location of MascoTech's principal
manufacturing facilities, and reflects its early 1998 acquisition of TriMas.
California..................... Commerce
Florida........................ Deerfield Beach and Ocala
Illinois....................... Wood Dale
Indiana........................ Auburn, Elkhart, Frankfort, Fort Wayne,
Goshen and North Vernon
Kentucky....................... Nicholasville
Louisiana...................... Baton Rouge
Massachusetts.................. Plymouth
Michigan....................... Burton, Canton, China Township, Detroit,
Farmington Hills, Fraser, Green Oak Township,
Hamburg, Holland, Livonia, Royal Oak, Troy,
Warren and Ypsilanti
New Jersey..................... Edison and Netcong
Ohio........................... Bucyrus, Canal Fulton, Lakewood, Lima,
Minerva and Port Clinton
Oklahoma....................... Tulsa
Pennsylvania................... Ridgway
Texas.......................... Houston and Longview
Wisconsin...................... Mosinee
Australia...................... Hampton Park, Victoria and Wakerley,
Queensland
Canada......................... Fort Erie and Oakville Ontario
Czech Republic................. Brno
England........................ Leicester and Wolverhampton
Germany........................ Neunkirchen, Nurnberg and Zell am Harmersbach
Italy.......................... Poggio Rusco
Mexico......................... Mexico City
MascoTech's principal manufacturing facilities range in size from
approximately 10,000 square feet to 420,000 square feet, substantially all of
which 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
requirements.
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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.
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 61 1962
Executive Officer
Raymond F. Kennedy..................... President and Chief Operating Officer 55 1989
Dr. Lillian Bauder..................... Vice President -- Corporate Affairs 58 1996
David A. Doran......................... Vice President -- Taxes 56 1984
Daniel R. Foley........................ Vice President -- Human Resources 56 1996
Eugene A. Gargaro, Jr.................. Vice President and Secretary 55 1993
John R. Leekley........................ Senior Vice President and General 54 1979
Counsel
Richard G. Mosteller................... Senior Vice President -- Finance 65 1962
Robert B. Rosowski..................... Vice President -- Controller and 57 1973
Treasurer
Samuel Valenti, III.................... Vice President -- Investments 52 1971
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 Messrs.
Foley and Gargaro and Dr. Bauder. Mr. Foley was employed by MascoTech, Inc. as
its Vice President -- Human Resources from 1994 to 1996 and was President of
Executive Business Partners, Inc., a training and consulting firm, from 1993 to
1994. Mr. Gargaro joined the Company as its Vice President and Secretary in
October, 1993. Prior to joining the Company, Mr. Gargaro was a partner at the
Detroit law firm of Dykema Gossett PLLC. Mr. Gargaro has served as a director
and Secretary of MascoTech, Inc. since 1984. From 1984 to 1996, Dr. Bauder
served as President and Chief Executive Officer of Cranbrook Educational
Community.
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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
---------------------------------- DIVIDENDS
QUARTER HIGH LOW DECLARED
- ------- -------------- ------------- ---------
1997
Fourth.................................. $53 13/16 $41 7/16 $.21
Third................................... 48 1/4 40 9/16 .21
Second.................................. 43 3/8 35 .20
First................................... 37 5/8 33 3/4 .20
----
Total................................ $.82
====
1996
Fourth.................................. $36 7/8 $28 7/8 $.20
Third................................... 31 1/4 26 5/8 .20
Second.................................. 32 1/8 26 5/8 .19
First................................... 31 3/8 27 7/8 .19
----
Total................................ $.78
====
On March 13, 1998, there were approximately 6,400 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 future dividends will continue to depend
upon the Company's earnings, capital requirements, financial condition and other
factors.
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:
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Net sales.............................. $3,760,000 $3,237,000 $2,927,000 $2,583,000 $2,243,000
Income from continuing operations(1)... $ 382,400 $ 295,200 $ 200,050 $ 172,710 $ 215,210
Per share of common stock:
Income from continuing
operations:(1)(2)
Basic........................ $2.39 $1.87 $1.28 $1.10 $1.43
Diluted...................... $2.30 $1.82 $1.25 $1.08 $1.40
Dividends declared................... $ .82 $ .78 $ .74 $ .70 $ .66
Dividends paid....................... $ .81 $ .77 $ .73 $ .69 $ .65
At December 31:
Total assets......................... $4,333,760 $3,701,650 $3,778,630 $4,177,100 $3,864,850
Long-term debt....................... $1,321,470 $1,236,320 $1,577,100 $1,587,160 $1,413,480
(1) The year 1994 includes a $79 million after-tax ($.49 per diluted share)
non-cash equity investment charge.
(2) Income from continuing operations per share prior to 1997 have been restated
to conform to the 1997 presentation.
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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 following discussion and 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 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 those 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, sale and
installation 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.
Factors which 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 German Deutsche
Mark 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 with 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.
Net sales and operating profit from continuing operations for 1997 were
$3,760 million and $587 million, representing increases of 16 percent and 22
percent, respectively, over 1996. Net income from continuing operations for 1997
was $382 million representing an increase of 30 percent over 1996. Basic and
diluted earnings per share for 1997 were $2.39 and $2.30, respectively,
representing increases of 28 percent and 26 percent, respectively, over 1996
amounts. Increases in net sales typically result in operating profit
improvements that exceed the net sales increases on a percentage basis due to
the allocation of fixed and semi-fixed costs and expenses over a higher sales
base.
CORPORATE DEVELOPMENT
Acquisitions have historically contributed significantly to Masco's
long-term growth, even though generally the initial impact on earnings is
minimal after deducting acquisition-related costs and expenses such as interest
and added depreciation and amortization. The important earnings benefit to Masco
arises from subsequent growth of acquired companies, since incremental sales are
not handicapped by these expenses.
During 1997, the Company acquired Texwood Industries, Inc., a U.S.
manufacturer of kitchen and bath cabinetry, and five other home improvement and
building products companies, including two companies in Europe.
The results of operations for these acquisitions are included in the
consolidated financial statements from the dates of acquisition. Had these
companies been acquired effective January 1, 1996, pro forma unaudited
consolidated net sales and net income would have approximated $3,909 million and
$390 million for 1997 and $3,575 million and $309 million for 1996,
respectively, and pro forma
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unaudited consolidated diluted earnings per share would have approximated $2.33
and $1.87 for 1997 and 1996, respectively.
The combined purchase price for these acquisitions, including assumed debt,
aggregated approximately $430 million and included approximately 2.9 million
shares of Company common stock valued at approximately $119 million, with the
balance in cash and a short-term note. The acquisitions were accounted for as
purchase transactions.
DISCONTINUED OPERATIONS
In late November 1995, the Company's Board of Directors approved a formal
plan to dispose of the Company's home furnishings products segment. An aggregate
provision of $650 million was recorded in the fourth quarter of 1995 for the
estimated loss on the discontinued operations through the expected disposal
date, the reduction of assets to their estimated net realizable value and the
anticipated liabilities related to the disposal. The majority of the charge from
the disposition of the home furnishings products segment resulted in a capital
loss for tax purposes. The ultimate tax benefit from the disposition cannot be
determined currently and is reported if and when taxable capital gains are
realized.
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 percent
pay-in-kind junior debt securities, and equity securities totalling $57 million,
consisting of 13 percent 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; the Company is recording the 12
percent pay-in-kind interest income from these securities. The Company records
dividend income from the 13 percent 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 only. Of the cash proceeds received
from this sale, approximately $550 million was applied to reduce bank debt.
Under a transitional services agreement, the Company provided
corporate-related services for a fee to Furnishings International through April
1997. Substantially all of these services were discontinued after such date.
PROFIT MARGINS
Operating profit margin, before general corporate expense, improved to 17.8
percent in 1997 from 17.5 percent in 1996 and 16.8 percent in 1995 (general
corporate expense includes those expenses not specifically attributable to the
Company's business segments). The improvement in 1997 is principally due to a
reduction in selling, general and administrative expenses as a percentage of
sales. The Company's operating margin from faucet sales is somewhat higher than
that on other products offered by the Company due to the simplicity, quality and
reliability of its faucet mechanisms, manufacturing efficiencies and
capabilities, extensive marketing and merchandising activities and breadth of
product offering.
General corporate expense in 1997 was $82 million, as compared with $85
million in 1996 and $90 million in 1995. General corporate expense as a
percentage of sales decreased to 2.2 percent in 1997 from 2.6 percent in 1996
and 3.1 percent in 1995. Operating profit margin, after general corporate
expense, was 15.6 percent, 14.8 percent and 13.7 percent in 1997, 1996 and 1995,
respectively.
Net income from continuing operations as a percentage of sales increased to
10.2 percent in 1997 from 9.1 percent and 6.8 percent in 1996 and 1995,
respectively. After-tax profit return on shareholders'
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equity as measured by net income from continuing operations increased to 20.8
percent in 1997 from 17.8 percent and 9.4 percent in 1996 and 1995,
respectively.
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. At December 31,
1997, the Company's shelf-registration statement permits the issuance of up to a
combined $759 million of debt and equity securities.
Bank credit lines are maintained to ensure availability of short-term funds
on an as-needed basis. At December 31, 1997, the Company had available $750
million under its bank revolving-credit facility. Any outstanding balances under
this facility are due and payable in November 2001. Certain debt agreements
contain limitations on additional borrowings and requirements for maintaining a
certain level of tangible net worth. At December 31, 1997, the Company was in
compliance with these limitations and requirements, and the Company's tangible
net worth exceeded the most restrictive of such provisions by approximately $171
million.
Maintaining high levels of liquidity and cash flow are among the Company's
financial strategies. The Company's long-term debt as a percent of total
capitalization ratio improved to approximately 36 percent at December 31, 1997
from approximately 39 percent at December 31, 1996. (On a pro forma basis, the
Company's long-term debt as a percent of total capitalization ratio would have
been approximately 32 percent, assuming conversion of the Company's $178 million
of convertible debentures; this conversion was completed in February 1998.)
Aggregate short-term and long-term debt at December 31, 1997 was $146 million
higher than the 1996 aggregate amount due primarily to acquisition-related debt.
The Company's working capital ratio was 2.6 to 1 at December 31, 1997 compared
with 2.8 to 1 at December 31, 1996; excluding a $53 million short-term,
acquisition-related note payable which was paid in early 1998, the Company's
working capital ratio was 2.8 to 1 at December 31, 1997.
CASH FLOWS
Significant sources and uses of cash in the past three years are shown in
the following table, in thousands:
CASH SOURCES (USES) 1997 1996 1995
------------------- --------- --------- ---------
From continuing operations.................... $ 405,030 $ 340,140 $ 260,910
Collection of MascoTech receivable............ 45,580 -- --
Sale of discontinued operations............... -- 707,630 --
Sale of MascoTech investments................. -- 115,000 --
Sale of Formica investment.................... -- -- 74,470
Acquisition of companies, net of cash
acquired.................................... (186,920) (173,110) --
Capital expenditures.......................... (167,400) (138,540) (165,080)
Increase (decrease) in debt, net.............. 7,890 (368,160) (52,180)
Cash dividends paid........................... (131,680) (123,530) (116,350)
From discontinued operations, net............. -- -- 34,560
Other, net.................................... (4,900) 53,830 (12,390)
--------- --------- ---------
Cash increase (decrease)................. $ (32,400) $ 413,260 $ 23,940
========= ========= =========
CASH FLOWS FROM OPERATING ACTIVITIES
Continuing operations generated $64.9 million and $144.1 million more cash
in 1997 than in 1996 and 1995, respectively, primarily due to increased
earnings. During 1997, the Company's accounts receivable and inventories
increased by $92.2 million and $103.1 million, respectively, primarily as a
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result of acquisitions and higher actual and 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
Investing activities of continuing operations used cash of $313.6 million
in 1997 compared with cash provided from investing activities of $564.8 million
in 1996. Cash flows from investing activities for 1996 included an aggregate
$822.6 million of cash proceeds from the sales of discontinued operations and
certain MascoTech, Inc. investments.
During October 1996, the Company completed the sale to MascoTech of 17
million shares of MascoTech common stock and warrants to purchase 10 million
shares of MascoTech common stock. Under the sale agreement, the Company received
approximately $266 million, with $115 million cash paid at closing. The $151
million balance of the consideration was paid by MascoTech to the Company on
September 30, 1997; as provided for in the sale agreement, MascoTech at that
date delivered to the Company 9.9 million shares (approximately 42 percent) of
the outstanding common stock of Emco Limited and $45.6 million in cash.
MascoTech recognized a $29.3 million after-tax gain from the delivery to the
Company of the Emco Limited common stock. The Company's recording of equity
earnings from MascoTech for 1997 excludes the effect of such gain due to the
related-party nature of the transaction. Emco Limited is a leading Canadian
distributor and manufacturer of home improvement and building products.
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.
For the 1997 acquisitions of Texwood Industries and five other companies,
the combined purchase price was approximately $430 million, including the
assumption of debt and issuance of a short-term note aggregating $123 million,
2.9 million shares of Company common stock valued at approximately $119 million
and $187 million of cash paid.
Capital expenditures totalled $167.4 million in 1997 compared with $138.5
million in 1996. These amounts primarily pertain to expenditures for additional
facilities related to increased demand for existing products as well as for new
Masco products. The Company also continues to invest in automating its
manufacturing operations and increasing its productivity, in order to be a more
efficient producer and improve customer service and response time. The Company
expects capital expenditures for 1998, excluding those of potential 1998
acquisitions, to approximate the 1997 level. Depreciation and amortization
expense for 1997 totalled $116.1 million, compared with $99.7 million for 1996;
for 1998, depreciation and amortization expense, excluding 1998 acquisitions, is
expected to be approximately $128 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 FOR FINANCING ACTIVITIES
Cash used for financing activities decreased to $123.8 million in 1997 from
$491.7 million in 1996. During 1996, the Company paid the $250 million of 9
percent notes due April 15, 1996 through borrowings under its bank
revolving-credit agreement and applied approximately $550 million of the
proceeds from the 1996 sale of the home furnishings products segment to reduce
bank debt.
During 1997, the Company increased its dividend rate 5 percent to $.21 per
share quarterly. This marks the 39th consecutive year in which dividends have
been increased.
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
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flows from operations and, to the extent necessary, future financial market
activities, from proceeds from assets sales and from bank borrowings.
CONSOLIDATED RESULTS OF OPERATIONS
Sales and Operations
Net sales for 1997 were $3,760 million, representing an increase of 16
percent over 1996. After adjusting for acquisitions, net sales for 1997
increased 7 percent over 1996. After adjusting for acquisitions, net sales of
the Company's North American operations for 1997 increased 8 percent over 1996.
Net sales for 1996 increased 11 percent to $3,237 million from $2,927 million in
1995; after adjusting for acquisitions and the divestiture of two small
operations, net sales increased 7 percent in 1996 over 1995.
Cost of sales as a percentage of sales for 1997 remained unchanged at 63.3
percent compared with 1996 when it increased from 63.1 percent for 1995. The
modest increase in the cost of sales percentage for 1997 and 1996 as compared
with 1995 was primarily attributable to softness in the Company's European
markets, expenses associated with manufacturing process improvement initiatives
and product sales mix, which offset the benefits resulting from increased sales
volume and new product introductions.
Excluding amortization of acquired goodwill ($18.7 million, $12.1 million,
and $10.0 million in 1997, 1996 and 1995, respectively), selling, general and
administrative expenses as a percentage of sales were 20.6 percent in 1997
compared with 21.5 percent and 22.8 percent for 1996 and 1995, respectively. The
downward trend in the selling, general and administrative expenses percentage
results from the Company's continuation of cost-containment initiatives, the
substitution of contingent incentive-based compensation for the reduction in
fixed compensation for certain executives and the leverage of fixed and
semi-fixed costs over a higher sales base. The Company expects selling, general
and administrative expenses as a percentage of sales to approximate 20.0 percent
by the end of 1998.
Other Income (Expense), Net
Equity earnings from MascoTech, Inc. in 1997 reflect the Company's mid-1997
and late-1996 reductions in common equity ownership. Equity earnings from
MascoTech were $14.6 million for 1997 as compared with equity earnings of $13.9
million and $18.2 million for 1996 and 1995, respectively. Equity earnings from
MascoTech in 1996 include the Company's $11.7 million pre-tax equity share of
MascoTech's loss from the sale of its metal stamping businesses.
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.
During 1996, the Company recognized a $67.8 million net pre-tax gain ($40.7
million after-tax) from the fourth quarter 1996 sale to MascoTech of 17 million
shares of MascoTech common stock and warrants to purchase 10 million shares of
MascoTech common stock. This gain was largely offset by $36.3 million of fourth
quarter 1996 charges primarily related to adjustments of miscellaneous assets to
their estimated fair value.
Included in other, net under other income (expense), net is income from
cash and cash investments of $17.3 million, $6.9 million and $2.6 million for
1997, 1996 and 1995, respectively; the increase in 1997 resulted from a higher
average cash and cash investments balance during 1997 as compared with 1996 and
1995. The Company's cash balance for 1997 included residual proceeds from
transactions in the latter part of 1996, including the sale of certain MascoTech
investments, the sale of the Company's home furnishings businesses and European
borrowings.
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Included in other, net under other income (expense), net is interest income
for 1997 and 1996 of $36.8 million and $14.0 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 and 1996 is
interest income of $7.5 million and $1.7 million, respectively, from the $151
million note receivable from MascoTech, which was paid on September 30, 1997.
Included in other, net under other income (expense), net in 1997 are $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 assets and charges
aggregating approximately $30 million, principally for the adjustment of the
Company's Payless Cashways investment to its estimated fair value.
Included in other, net under other income (expense), net for 1995 was a
$15.9 million gain from the sale of the Company's investment in Formica
Corporation; this gain was offset primarily by charges for asset disposals.
Net Income and Earnings Per Share
After-tax income from continuing operations for 1997 was $382 million
compared with $295 million for 1996 and $200 million for 1995. Basic and diluted
earnings per share from continuing operations for 1997 were $2.39 and $2.30,
respectively, as compared with basic and diluted earnings per share from
continuing operations of $1.87 and $1.82 and $1.28 and $1.25, respectively, for
1996 and 1995. The Company's effective tax rate decreased to 39.4 percent in
1997 from 41.3 percent in 1996 due to the net utilization of the Company's
capital loss carryforward benefit, recognized primarily in the fourth quarter of
1997. The 1995 tax rate of 43.1 percent was higher due primarily to an increase
in higher-taxed foreign income as a percentage of total income. The Company
estimates that its effective tax rate will approximate 40 percent for 1998.
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 further
increases in both sales and earnings for 1998. The Company believes that its
results will 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 increase market share and
share of customer; and to actively pursue acquisition candidates that complement
or support the Company's core competencies.
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NET SALES BY PRODUCT GROUP AND GEOGRAPHIC AREA
The following table sets forth the Company's net sales from continuing
operations by product group and geographic area, in millions.
PERCENT CHANGE
------------------
NET SALES 1997 1996
------------------------------ VS. VS.
1997 1996 1995 1996 1995
------ ------ ------ ------ ------
Kitchen and Bath Products:
Faucets........................ $ 815 $ 757 $ 698 8% 8%
Cabinets....................... 1,083 832 758 30% 10%
Other.......................... 1,042 930 827 12% 12%
------ ------ ------
2,940 2,519 2,283 17% 10%
Other Specialty Products......... 820 718 644 14% 11%
------ ------ ------
Total....................... $3,760 $3,237 $2,927 16% 11%
====== ====== ======
North America.................... $3,072 $2,680 $2,441 15% 10%
Europe........................... 688 557 486 24% 15%
------ ------ ------
Total....................... $3,760 $3,237 $2,927 16% 11%
====== ====== ======
BUSINESS SEGMENT RESULTS
Kitchen and Bath Products
Net sales of the Company's Kitchen and Bath Products increased 17 percent
in 1997 over 1996 and 10 percent in 1996 over 1995; after adjusting for
acquisitions, net sales increased 7 percent for each of the last two years, 1997
over 1996 and 1996 over 1995. These increases are largely due to higher unit
sales volume of cabinets, faucets and other kitchen and bath products, and to a
lesser extent, new product introductions and selling price increases.
Operating profit of the Company's Kitchen and Bath Products, before general
corporate expense, was $539 million, $462 million and $411 million in 1997, 1996
and 1995, respectively. Operating margin, before general corporate expense,
remained unchanged at 18.3 percent for 1997 and 1996 compared with 18.0 percent
in 1995. Higher unit sales volumes in 1997 contributed to improved operating
results of the Company's U.S. cabinet, other kitchen and bath and faucet
businesses, including the leveraging of fixed and semi-fixed selling, general
and administrative expenses over a higher sales base. These improved results
were offset by the weaker results of the Company's European operations included
in this segment and the modestly lower margins of companies acquired in 1997.
Operating results of this business segment showed a net improvement in 1996
over 1995 as a result of higher unit sales volume, increased efficiency and
utilization of new and existing manufacturing facilities and the leverage of
fixed and semi-fixed selling, general and administrative expenses over a higher
sales base, which more than offset the modestly weaker results of the Company's
U.S. cabinet businesses and the lower results of European operations. Operating
results of the Company's U.S. cabinet businesses were modestly weaker in 1996
and 1995 due to the influence of a higher percentage of lower margin sales to
total sales and the recognition of certain expenses for various initiatives
undertaken to improve manufacturing processes and customer service and to
shorten product delivery time.
Other Specialty Products
Net sales of the Company's Other Specialty Products increased 14 percent in
1997 over 1996 and 11 percent in 1996 over 1995. After adjusting for
acquisitions, net sales increased 7 percent in 1997 over 1996 and, after
adjusting for acquisitions and divestitures, increased 7 percent in 1996 over
1995. Operating profit of the Company's Other Specialty Products, before general
corporate expense, was
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$130 million, $104 million, and $82 million in 1997, 1996 and 1995,
respectively. Operating margin, before general corporate expense, improved to
15.9 percent in 1997 from 14.5 percent in 1996 and 12.7 percent in 1995.
The upward trend in operating results for this segment principally includes
the benefits of higher installation sales of fiberglass insulation and higher
unit sales volume of mechanical and electronic lock sets. Operating results of
this segment benefited in 1996 from the leverage of fixed and semi-fixed
selling, general and administrative expenses over a higher sales base and the
divestiture of two underperforming operations. Operating results were negatively
affected in 1997, 1996 and 1995 by lower results of European operations.
GEOGRAPHIC AREA RESULTS
North America
Net sales of North American operations increased 15 percent in 1997 over
1996 and 10 percent in 1996 over 1995. Net sales of North American operations,
after adjusting for acquisitions, increased 8 percent in 1997 over 1996 and,
after adjusting for acquisitions and divestitures, increased 9 percent in 1996
over 1995. Operating profit from North American operations, before general
corporate expense, was $570 million, $479 million and $407 million for 1997,
1996 and 1995, respectively. Operating margin, before general corporate expense,
improved to 18.6 percent in 1997 from 17.9 percent in 1996 and 16.7 percent in
1995.
Operating results of North American operations in 1997 and 1996 benefited
from higher sales volume which was partly driven by an increase in U.S. housing
transactions, including higher levels of new construction and existing home
sales. Operating results of North American operations in 1995 were lower, in
part due to plant start-up costs related to a major new faucet facility and
product sales mix. Operating results of the Company's Canadian operations
improved in 1997 over 1996 after being relatively flat in 1996 over 1995.
Europe
Net sales of European operations increased 24 percent in 1997 over 1996 and
15 percent in 1996 over 1995; after adjusting for acquisitions, net sales
decreased 5 percent in 1997 as compared with 1996 and decreased 1 percent in
1996 as compared with 1995. Operating profit from European operations, before
general corporate expense, was $99 million, $87 million and $86 million for
1997, 1996 and 1995, respectively. Operating margin from European operations,
before general corporate expense, decreased to 14.4 percent in 1997 following a
decline to 15.6 percent in 1996 from 17.7 percent in 1995.
Results of European operations were lower over the past three years, in
part due to softness in the Company's European markets beginning in mid-1995,
competitive pricing pressures on certain products and the influence 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 1997
compared with 1996 and 1996 compared with 1995, lowering European net sales by
approximately 12 percent and 3 percent, respectively. Excluding acquisitions,
net sales of European operations increased approximately 6 percent in local
currencies.
OTHER MATTERS
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information and other systems. The year 2000 issue is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Based on
preliminary information, costs of addressing the year
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2000 issue are not currently expected to have a materially adverse impact on the
Company's financial position, results of operations or cash flows in future
periods.
On January 22, 1998, MascoTech, Inc. announced the completion of its
acquisition of TriMas Corporation. The Company will record in the first quarter
of 1998, as a result of selling its common stock investment in TriMas to
MascoTech in the public tender offer, an approximate $29 million pre-tax gain.
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting of
Comprehensive Income," SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," and SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits," become effective in 1998 and should
not have a material effect on the Company's financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company 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, 1997. 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, 1997, 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.
Other discussion regarding the Company's business risks is presented in the
"Overview" caption above and in Item 1 "Business" of this Form 10-K.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Masco Corporation:
We have audited the accompanying consolidated balance sheets of Masco
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations and cash flows for each of the three years
in the period ended December 31, 1997 and the financial statement schedule as
listed in Item 14(a)(2) of the Form 10-K. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Masco
Corporation and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Detroit, Michigan
February 13, 1998
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MASCO CORPORATION
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
-------------- --------------
Current Assets:
Cash and cash investments................................. $ 441,330,000 $ 473,730,000
Receivables............................................... 559,050,000 466,900,000
Inventories............................................... 515,000,000 411,940,000
Prepaid expenses and other................................ 111,340,000 77,200,000
-------------- --------------
Total current assets................................. 1,626,720,000 1,429,770,000
Receivable from MascoTech, Inc.............................. -- 151,380,000
Equity investment in MascoTech, Inc......................... 52,780,000 10,150,000
Equity investments in other affiliates...................... 175,300,000 57,680,000
Securities of Furnishings International Inc................. 393,140,000 356,340,000
Property and equipment...................................... 1,037,320,000 940,590,000
Acquired goodwill, net...................................... 729,190,000 457,350,000
Other assets................................................ 319,310,000 298,390,000
-------------- --------------
Total assets......................................... $4,333,760,000 $3,701,650,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable............................................. $ 68,460,000 $ 7,590,000
Accounts payable.......................................... 166,310,000 149,500,000
Accrued liabilities....................................... 385,230,000 361,350,000
-------------- --------------
Total current liabilities............................ 620,000,000 518,440,000
Long-term debt.............................................. 1,321,470,000 1,236,320,000
Deferred income taxes and other............................. 163,270,000 107,080,000
-------------- --------------
Total liabilities.................................... 2,104,740,000 1,861,840,000
-------------- --------------
Shareholders' Equity:
Common shares authorized: 400,000,000;
issued: 1997-165,570,000; 1996-160,870,000............. 165,570,000 160,870,000
Preferred shares authorized: 1,000,000.................... -- --
Paid-in capital........................................... 304,560,000 140,010,000
Retained earnings......................................... 1,784,370,000 1,536,410,000
Cumulative translation adjustments........................ (25,480,000) 2,520,000
-------------- --------------
Total shareholders' equity........................... 2,229,020,000 1,839,810,000
-------------- --------------
Total liabilities and shareholders' equity........... $4,333,760,000 $3,701,650,000
============== ==============
See notes to consolidated financial statements.
21
23
MASCO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
-------------- -------------- --------------
Net sales...................................... $3,760,000,000 $3,237,000,000 $2,927,000,000
Cost of sales.................................. 2,378,250,000 2,048,070,000 1,846,330,000
-------------- -------------- --------------
Gross profit......................... 1,381,750,000 1,188,930,000 1,080,670,000
Selling, general and administrative expenses... 775,930,000 696,290,000 668,310,000
Amortization of acquired goodwill.............. 18,720,000 12,140,000 10,020,000
-------------- -------------- --------------
Operating profit..................... 587,100,000 480,500,000 402,340,000
-------------- -------------- --------------
Other income (expense), net:
Re: MascoTech, Inc.:
Equity earnings........................... 14,580,000 13,860,000 18,200,000
Gain from change in investment............ 29,500,000 -- --
Gain from sale of investments, net........ -- 67,800,000 --
Equity earnings, other affiliates............ 9,560,000 6,230,000 8,010,000
Other, net................................... 70,010,000 8,990,000 (2,960,000)
Interest expense............................. (79,850,000) (74,680,000) (73,800,000)
-------------- -------------- --------------
43,800,000 22,200,000 (50,550,000)
-------------- -------------- --------------
Income from continuing operations
before income taxes................ 630,900,000 502,700,000 351,790,000
Income taxes................................... 248,500,000 207,500,000 151,740,000
-------------- -------------- --------------
Income from continuing operations.... 382,400,000 295,200,000 200,050,000
-------------- -------------- --------------
Discontinued operations (net of income taxes):
Income from operations....................... -- -- 8,270,000
Loss on disposition, net..................... -- -- (650,000,000)
-------------- -------------- --------------
Net income (loss).................... $ 382,400,000 $ 295,200,000 $ (441,680,000)
============== ============== ==============
Earnings per share from continuing operations:
Basic................................ $2.39 $1.87 $1.28
===== ===== =====
Diluted.............................. $2.30 $1.82 $1.25
===== ===== =====
See notes to consolidated financial statements.
22
24
MASCO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------- ------------- -------------
Cash Flows From (For):
Operating Activities:
Income from continuing operations.......... $ 382,400,000 $ 295,200,000 $ 200,050,000
Depreciation and amortization.............. 116,050,000 99,680,000 90,090,000
Unremitted equity earnings of affiliates... (19,470,000) (12,310,000) (17,770,000)
Interest accrual on pay-in-kind notes
receivable............................... (36,800,000) (13,970,000) --
Deferred income taxes...................... 34,880,000 28,850,000 18,240,000
Gain from sale of MascoTech investments,
net...................................... -- (67,800,000) --
Gain from change in MascoTech investment... (29,500,000) -- --
Increase in receivables.................... (41,560,000) (7,510,000) (56,660,000)
Increase in inventories.................... (38,770,000) (1,890,000) (13,970,000)
Increase in accounts payable and accrued
liabilities, net......................... 44,960,000 38,410,000 42,110,000
Other, net................................. (7,160,000) (18,520,000) (1,180,000)
------------- ------------- -------------
Net cash from operating activities of
continuing operations............... 405,030,000 340,140,000 260,910,000
Operating activities of discontinued
operations............................... -- -- 60,370,000
------------- ------------- -------------
Net cash from operating activities.... 405,030,000 340,140,000 321,280,000
------------- ------------- -------------
Investing Activities:
Acquisition of companies, net of cash
acquired................................. (186,920,000) (173,110,000) --
Capital expenditures....................... (167,400,000) (138,540,000) (165,080,000)
Cash proceeds from sale of:
Discontinued operations.................. -- 707,630,000 --
MascoTech investments.................... -- 115,000,000 --
Formica investment....................... -- -- 74,470,000
Collection of MascoTech receivable......... 45,580,000 -- --
Other, net................................. (4,900,000) 53,830,000 (12,390,000)
Investing activities of discontinued
operations............................... -- -- (38,290,000)
------------- ------------- -------------
Net cash from (for) investing
activities.......................... (313,640,000) 564,810,000 (141,290,000)
------------- ------------- -------------
Financing Activities:
Retirement of notes........................ -- (250,000,000) (200,000,000)
Increase in other debt..................... 90,550,000 537,380,000 497,830,000
Payment of other debt...................... (82,660,000) (655,540,000) (350,010,000)
Cash dividends paid........................ (131,680,000) (123,530,000) (116,350,000)
Financing activities of discontinued
operations............................... -- -- 12,480,000
------------- ------------- -------------
Net cash (for) financing activities... (123,790,000) (491,690,000) (156,050,000)
------------- ------------- -------------
Cash and Cash Investments:
Increase (decrease) for the year.............. (32,400,000) 413,260,000 23,940,000
At January 1.................................. 473,730,000 60,470,000 36,530,000
------------- ------------- -------------
At December 31................................ $ 441,330,000 $ 473,730,000 $ 60,470,000
============= ============= =============
See notes to consolidated financial statements.
23
25
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 Company
classified its home furnishings products segment as discontinued operations in
1995. (See "Discontinued Operations" note.) Accordingly, the financial
statements and related notes present the home furnishings products segment as
discontinued operations. Certain amounts for prior years have been reclassified
to conform to the current year presentation.
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 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 a 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 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,
1997 and 1996 accounts and notes receivable are presented net of allowances for
doubtful accounts of $19.8 million and $17.9 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 operations. 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 $81.4
million, $71.7 million and $65.3 million in 1997, 1996 and 1995, respectively.
Acquired goodwill, resulting from acquisitions of companies, is being
amortized using the straight-line method over periods not exceeding 40 years; at
December 31, 1997 and 1996 such accumulated amortization totalled $82.8 million
and $70.2 million, respectively. At each balance sheet date, management
evaluates the recoverability of acquired goodwill by measuring 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, 1997 and 1996. 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 totalled
$34.6 million, $28.0 million and $24.8 million in 1997, 1996 and 1995,
respectively.
Fair Value of Financial Instruments. The carrying value of financial
instruments reported in the balance sheet for current assets and current
liabilities 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 approximates the risk of the underlying investments. The fair value of the
Company's long-term debt instruments was based principally on
24
26
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING POLICIES -- (CONCLUDED)
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, 1997 was approximately $509 million and $1,386 million, as
compared with the Company's aggregate carrying value of $498 million and $1,321
million, respectively, and at December 31, 1996 the aggregate market value was
approximately $631 million and $1,248 million, as compared with the Company's
aggregate carrying value of $601 million and $1,236 million, respectively.
ACQUISITIONS
During 1997, the Company acquired Texwood Industries, Inc., a U.S.
manufacturer of kitchen and bath cabinetry, and five other home improvement and
building products companies, including two companies in Europe.
The results of operations for these acquisitions are included in the
consolidated financial statements from the dates of acquisition. Had these
companies been acquired effective January 1, 1996, pro forma unaudited
consolidated net sales and net income would have approximated $3,909 million and
$390 million for 1997 and $3,575 million and $309 million for 1996,
respectively, and pro forma unaudited consolidated diluted earnings per share
would have approximated $2.33 and $1.87 for 1997 and 1996, respectively.
The combined purchase price for these acquisitions, including assumed debt,
aggregated approximately $430 million and included approximately 2.9 million
shares of Company common stock, with the balance in cash and a short-term note.
The acquisitions were accounted for as purchase transactions. The net cash paid
for companies acquired in 1997 is as follows, in thousands:
Combined purchase price, excluding $70 million of assumed
debt...................................................... $359,280
Common stock issued......................................... 119,360
Note issued (paid in early 1998)............................ 53,000
--------
Net cash paid............................................... $186,920
========
DISCONTINUED OPERATIONS
In late November 1995, the Company's Board of Directors approved a formal
plan to dispose of the Company's home furnishings products segment. An aggregate
provision of $650 million was recorded in the fourth quarter of 1995 for the
estimated loss on the discontinued operations through the expected disposal
date, the reduction of assets to their estimated net realizable value and the
anticipated liabilities related to the disposal.
Basic and diluted earnings per share for 1995 from discontinued operations
were both $.05. Basic and diluted loss per share for 1995 from the loss on
disposition of discontinued operations were $4.15 and $4.05, respectively.
25
27
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DISCONTINUED OPERATIONS -- (CONCLUDED)
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, in millions:
Cash........................................................ $ 708
Junior debt securities (12% pay-in-kind).................... 285
Preferred stock (13% cumulative)............................
Common stock (15% ownership)................................ 57
Convertible preferred stock.................................
------
Total proceeds from the sale................................ $1,050
======
The junior debt securities mature in 2008. 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 only. Of the
cash proceeds received from this sale, approximately $550 million was applied to
reduce bank debt.
Under a transitional services agreement, the Company provided
corporate-related services for a fee to Furnishings International through April
1997. Substantially all of these services were discontinued after such date.
INVENTORIES
(IN THOUSANDS)
AT DECEMBER 31
-------------------
1997 1996
-------- --------
Raw material............................................. $229,040 $185,500
Finished goods........................................... 161,920 135,190
Work in process.......................................... 124,040 91,250
-------- --------
$515,000 $411,940
======== ========
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 and partnership interests:
AT DECEMBER 31
------------------------
1997 1996 1995
---- ---- ----
MascoTech, Inc........................................... 17% 21% 45%
Emco Limited............................................. 42% -- --
Hans Grohe, a German partnership......................... 27% 27% 27%
TriMas Corporation....................................... 4% 4% 5%
Excluding the partnership interest in Hans Grohe, for which there is no
quoted market value, the aggregate market value of the Company's equity
investments at December 31, 1997 (which may differ from the amounts that could
then have been realized upon disposition), based upon quoted market prices at
that date, was $319 million, as compared with the Company's related aggregate
carrying value
26
28
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY INVESTMENTS IN AFFILIATES -- (CONTINUED)
of $182 million. The Company's carrying value in common stock of these equity
affiliates exceeds its equity in the underlying net book value by approximately
$79 million at December 31, 1997. This excess is being amortized over a period
not to exceed 40 years.
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.
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 the fourth quarter of 1996, the Company completed the sale to
MascoTech of 17 million shares of MascoTech common stock and warrants to
purchase 10 million shares of MascoTech common stock. This transaction reduced
the Company's common equity ownership in MascoTech from 45 percent to 21 percent
and resulted in a fourth quarter 1996 pre-tax gain of $67.8 million ($40.7
million after-tax). Under the sale agreement, the Company received approximately
$266 million, with $115 million paid at closing. The Company earned interest
income at 6.625% on the $151 million balance of the consideration, which was
paid by MascoTech to the Company on September 30, 1997; as provided for in the
sale agreement, MascoTech at that date delivered to the Company 9.9 million
shares (approximately 42 percent) of the outstanding common stock of Emco
Limited and $45.6 million in cash. MascoTech recognized a $29.3 million
after-tax gain from the delivery to the Company of the Emco Limited common
stock. The Company's recording of equity earnings from MascoTech for 1997
excludes the effect of such gain due to the related-party nature of the
transaction. Emco Limited is a leading Canadian distributor and manufacturer of
home improvement and building products.
On January 22, 1998, MascoTech announced the completion of its acquisition
of TriMas Corporation. The Company will record in the first quarter of 1998, as
a result of selling its common stock investment in TriMas to MascoTech in the
public tender offer, an approximate $29 million pre-tax gain.
27
29
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY INVESTMENTS IN AFFILIATES -- (CONCLUDED)
Approximate combined condensed financial data of the above-listed
affiliates, including Emco Limited at December 31, 1997 and for the year then
ended, are summarized in U.S. dollars as follows, in thousands:
1997 1996 1995
---------- ----------- ----------
Net sales................................. $2,745,570 $ 2,136,740 $2,488,900
========== =========== ==========
Income from continuing operations before
income taxes............................ $ 333,540 $ 181,710 $ 201,860
========== =========== ==========
Net income attributable to common
shareholders............................ $ 201,990 $ 109,500 $ 115,570
========== =========== ==========
The Company's net equity in above net
income.................................. $ 24,140 $ 20,090 $ 26,210
========== =========== ==========
Cash dividends received by the Company
from affiliates......................... $ 4,670 $ 7,780 $ 8,440
========== =========== ==========
At December 31:
Current assets.......................... $ 973,900 $ 770,980
Current liabilities..................... (436,250) (287,200)
---------- -----------
Working capital...................... 537,650 483,780
Property and equipment.................. 776,470 662,520
Other assets............................ 504,810 571,610
Long-term liabilities................... (980,990) (1,152,980)
---------- -----------
Shareholders' equity................. $ 837,940 $ 564,930
========== ===========
Equity in undistributed earnings of affiliates of $43 million at December
31, 1997, $32 million at December 31, 1996 and $30 million at December 31, 1995
are included in consolidated retained earnings.
PROPERTY AND EQUIPMENT
(IN THOUSANDS)
AT DECEMBER 31
------------------------
1997 1996
---------- ----------
Land and improvements................................. $ 70,120 $ 68,750
Buildings............................................. 465,920 428,860
Machinery and equipment............................... 1,089,330 976,470
---------- ----------
1,625,370 1,474,080
Less, accumulated depreciation........................ 588,050 533,490
---------- ----------
$1,037,320 $ 940,590
========== ==========
28
30
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCRUED LIABILITIES
(IN THOUSANDS)
AT DECEMBER 31
----------------------
1997 1996
-------- --------
Salaries, wages and related retirement benefits......... $ 96,160 $ 92,450
Advertising and sales promotion......................... 86,170 51,150
Insurance............................................... 48,930 49,260
Dividends payable....................................... 34,000 31,240
Interest................................................ 26,990 22,130
Property, payroll and other taxes....................... 24,760 26,330
Other................................................... 68,220 88,790
-------- --------
$385,230 $361,350
======== ========
LONG-TERM DEBT
(IN THOUSANDS)
AT DECEMBER 31
------------------------
1997 1996
---------- ----------
Notes, 6.625%, due September 15, 1999................. $ 200,000 $ 200,000
Notes, 9%, due October 1, 2001.................... 175,000 175,000
Notes, 6.125%, due September 15, 2003................. 200,000 200,000
Notes, 7.125%, due August 15, 2013.................... 200,000 200,000
European bank debt.................................... 329,300 275,050
Convertible subordinated debentures, 5.25%, due
2012................................................ 177,920 177,920
Other, principally acquisition-related in 1997........ 107,710 15,940
---------- ----------
1,389,930 1,243,910
Less, current portion................................. 68,460 7,590
---------- ----------
$1,321,470 $1,236,320
========== ==========
All of the notes above are nonredeemable.
European bank debt relates to borrowings of local currency for acquisitions
and expansion, primarily in Germany. At December 31, 1997, approximately $222
million of European debt related to a term loan facility expiring in 2002. The
balance of $107 million represents borrowings under lines of credit primarily
expiring in 2002. Interest is payable on European borrowings based upon various
floating rates as selected by the Company (approximately 4 percent at December
31, 1997).
The Company called the 5.25% subordinated debentures due 2012 for
redemption on February 12, 1998. Substantially all holders exercised their right
to convert these debentures into Company common stock (at the conversion price
of $42.28 per share), resulting in the issuance of approximately 4.2 million
shares of Company common stock in February 1998.
Certain debt agreements contain limitations on additional borrowings and
requirements for maintaining a certain level of tangible net worth. At December
31, 1997, the Company was in compliance with these limitations and requirements,
and the Company's tangible net worth exceeded the most restrictive of such
provisions by approximately $171 million.
29
31
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT -- (CONCLUDED)
At December 31, 1997, the maturities of long-term debt during each of the
next five years were approximately as follows: 1998-$68.5 million; 1999-$232.0
million; 2000-$16.0 million; 2001-$186.6 million; and 2002-$5.6 million.
The Company has a $750 million bank revolving-credit agreement, with any
outstanding balance due and payable in November 2001. There was no outstanding
balance as of December 31, 1997. Interest is payable on borrowings under this
agreement based upon various floating rates as selected by the Company.
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 $759 million of debt and equity securities.
Interest paid was approximately $75 million, $102 million and $115 million
in 1997, 1996 and 1995, respectively. Amounts paid in 1996 and 1995 include
interest pertaining to discontinued operations.
SHAREHOLDERS' EQUITY
(IN THOUSANDS)
1997 1996 1995
---------- ---------- ----------
Common Shares, $1 Par Value
Balance, January 1....................... $ 160,870 $ 160,380 $ 156,990
Shares issued............................ 4,700 490 3,390
---------- ---------- ----------
Balance, December 31..................... 165,570 160,870 160,380
---------- ---------- ----------
Paid-In Capital
Balance, January 1....................... 140,010 128,550 44,840
Shares issued............................ 164,550 11,460 83,710
---------- ---------- ----------
Balance, December 31..................... 304,560 140,010 128,550
---------- ---------- ----------
Retained Earnings
Balance, January 1....................... 1,536,410 1,366,330 1,924,740
Net income (loss)........................ 382,400 295,200 (441,680)
Cash dividends declared.................. (134,440) (125,120) (116,730)
---------- ---------- ----------
Balance, December 31..................... 1,784,370 1,536,410 1,366,330
---------- ---------- ----------
Cumulative Translation Adjustments
Balance, December 31..................... (25,480) 2,520 170
---------- ---------- ----------
Shareholders' Equity
Balance, December 31..................... $2,229,020 $1,839,810 $1,655,430
========== ========== ==========
On the basis of amounts paid (declared), cash dividends per share were $.81
($.82) in 1997, $.77 ($.78) in 1996 and $.73 ($.74) in 1995.
In December 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.
30
32
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SHAREHOLDERS' EQUITY -- (CONCLUDED)
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.
At December 31, 1997, the Company had remaining authorization to repurchase
up to 7.2 million shares of its common stock in open-market transactions or
otherwise.
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, 1997,
outstanding stock-based incentives were primarily in the form of restricted
long-term stock awards and stock options.
The Company granted long-term stock awards, net of cancellations, for
790,000, 540,000 and 1,250,000 shares of Company common stock during 1997, 1996
and 1995, 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 1997, 1996 and 1995 was $42, $31 and $27,
respectively. Compensation expense for the annual vesting of long-term stock
awards was $14.0 million, $14.9 million and $13.3 million in 1997, 1996 and
1995, respectively. The unamortized costs of unvested stock awards, aggregating
approximately $95.5 million at December 31, 1997, are included in other assets
and are being amortized over the typical 10-year vesting periods.
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 of each fixed option, other than the option described below to
the Company's Chief Executive Officer granted during 1996 at an exercise price
in excess of the current market price, equals the market price of Company common
stock on the date of grant. These options generally vest in installments
beginning in the third year and extending through the eighth year after grant.
During 1997, the Company granted original stock options for 2,840,000
shares of Company common stock with an exercise price of $39 per share (equal to
the market price on the grant date). Twenty percent of such options became
exercisable in late 1997 when the Company's common stock price exceeded $50 per
share for the required period. An additional twenty percent will become
exercisable if the price of Company common stock exceeds $55 for the required
period by May 2000; the remaining sixty percent (eighty percent if the $55
target was not exceeded) of such options will become exercisable if the price of
Company common stock reaches $60 per share for the required period by May 2001.
If neither target is met, the remaining eighty percent of such options become
exercisable in March 2007; however, the recipients of these options have stated
that they will not exercise them unless they become exercisable earlier as a
result of meeting the price targets. The Company also granted restoration stock
options for 139,000 shares of Company common stock with grant date exercise
prices ranging from $35 to $52 (the market prices on the grant dates) and stock
options for 28,000 shares of Company common stock to non-employee Directors of
the Company with an exercise price of $39.
To demonstrate his commitment to increase the market value of Company
common stock for the benefit of shareholders, in 1996 the Company's Chief
Executive Officer requested that his annual salary and bonus be reduced
indefinitely to $1 per year effective January 1, 1996. The Compensation
Committee of the Board of Directors, in acceding to this request, considered
alternative compensation
31
33
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS AND AWARDS -- (CONTINUED)
arrangements for the Chief Executive Officer and in April 1996 granted the Chief
Executive Officer a 10-year option, with a $41 exercise price when the market
price was $27 7/8 per share, to purchase one million shares of Company common
stock. This option became exercisable in 1997 when the price of Company common
stock exceeded $41 per share.
As a demonstration of their commitment to enhance shareholder value and
alignment with shareholder interests, in 1996 other officers and certain other
key employees of the Company voluntarily accepted an effective 15 percent salary
reduction with salaries frozen indefinitely 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 $32 (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 $41 per share for the
required period. Such options were granted for approximately 1,615,000 shares of
Company common stock. In addition, in 1996 when the market price of Company
common stock was $32 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 $50 per share for the required period in
late 1997.
A summary of the status of the Company's stock options granted for the
three years ended December 31, 1997 is presented below.
(SHARES IN THOUSANDS)
1997 1996 1995
----- ----- -----
Option shares outstanding, January 1.................. 7,308 5,456 5,510
Weighted average exercise price..................... $28 $23 $23
Option shares granted................................. 3,007 2,680 205
Weighted average exercise price..................... $39 $35 $28
Option shares exercised............................... 2,138 467 196
Weighted average exercise price..................... $25 $21 $21
Option shares cancelled............................... 77 361 63
Weighted average exercise price..................... $21 $22 $21
Option shares outstanding, December 31................ 8,100 7,308 5,456
Weighted average exercise price..................... $33 $28 $23
Weighted average remaining option term (in years)... 7.2 5.5 4.3
Option shares exercisable, December 31................ 2,294 2,807 2,916
Weighted average exercise price..................... $31 $24 $24
Of the 2,294,000 option shares exercisable at December 31, 1997, 1,004,000
were exercisable at per share prices ranging from $21 to $25, with a weighted
average exercise price of $21; 290,000 were exercisable at per share prices
ranging from $28 to $39, with a weighted average exercise price of $32; and
1,000,000 were exercisable at $41 per share.
At December 31, 1997, a combined total of 5,668,000 shares of Company
common stock was available for the granting of stock options and long-term stock
awards under the Plan.
During 1997, the Company adopted the "1997 Non-Employee Directors Stock
Plan" (the "Directors Stock Plan"), which provides for the payment of
compensation to non-employee Directors in part in Company common stock.
Approximately 51,000 shares of Company common stock were granted in 1997 in the
form of stock options and long-term stock awards under this plan. Such options
and long-term stock awards are included in the information provided above. At
December 31, 1997, a
32
34
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS AND AWARDS -- (CONCLUDED)
combined total of 449,000 shares of Company common stock was available for the
granting of stock options and long-term stock awards under the Directors Stock
Plan.
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 operations. 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 $.05 and $.03 in 1997
and 1996, respectively, with no effect in 1995.
For SFAS 123 calculation purposes, the weighted average grant date fair
values of options granted in 1997, 1996 and 1995 were $12.54, $11.20 and $8.44,
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
1997, 1996 and 1995, respectively: risk free interest rate -- 6.7%, 6.7% and
6.5%; dividend yield -- 2.5% (all years); volatility factor -- 27%, 25% and 27%;
and expected option life -- 7 years (all years).
Pursuant to the 1984 Restricted Stock (MascoTech) Incentive Plan, the
Company may award to key employees of the Company and affiliated companies
shares of common stock of MascoTech, Inc. held by the Company. No such awards
were granted in 1997, 1996 or 1995. At December 31, 1997, there were 4,695,000
of such shares available for granting future awards under this plan.
The data in this note include discontinued operations.
EMPLOYEE RETIREMENT PLANS
The Company sponsors defined-benefit pension plans and defined-contribution
retirement 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 pension and profit-sharing plans were $23.9 million
in 1997, $24.4 million in 1996 and $24.0 million in 1995.
Net periodic pension cost for the Company's qualified pension plans
includes the following components:
(IN THOUSANDS)
1997 1996 1995
------- ------- --------
Service cost...................................... $ 7,090 $ 6,220 $ 5,050
Interest cost..................................... 10,170 9,450 8,430
Actual return on assets........................... (6,760) (7,070) (11,550)
Net amortization and deferral..................... (3,900) (2,610) 2,550
------- ------- --------
Net periodic pension cost......................... $ 6,600 $ 5,990 $ 4,480
======= ======= ========
33
35
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE RETIREMENT PLANS -- (CONCLUDED)
The funded status of the Company's qualified pension plans is summarized as
follows, in thousands, at December 31:
1997 1996
--------------- -------------------------------
ACCUMULATED ASSETS EXCEED ACCUMULATED
BENEFITS EXCEED ACCUMULATED BENEFITS EXCEED
ASSETS BENEFITS ASSETS
--------------- ------------- ---------------
Actuarial present value of benefit obligations:
Vested benefit obligation......................... $115,060 $ 71,060 $30,920
======== ======== =======
Accumulated benefit obligation.................... $123,480 $ 73,400 $32,110
======== ======== =======
Projected benefit obligation...................... $152,320 $ 97,430 $32,110
Assets at fair value................................ 106,520 76,910 25,130
-------- -------- -------
Projected benefit obligation in excess of plan
assets......................................... (45,800) (20,520) (6,980)
Reconciling items:
Unrecognized net loss............................. 40,340 18,830 6,210
Unrecognized prior service cost................... 3,110 60 3,690
Unrecognized net asset at transition.............. (2,800) (2,530) (890)
Requirement to recognize minimum liability........ (16,320) -- (9,010)
-------- -------- -------
Accrued pension cost.............................. $(21,470) $ (4,160) $(6,980)
======== ======== =======
Major assumptions used in accounting for the Company's pension plans are as
follows:
1997 1996 1995
----- ----- ------
Discount rate for obligations......................... 7.0% 7.5% 7.25%
Rate of increase in compensation levels............... 5.0% 5.0% 5.0 %
Expected long-term rate of return on plan assets...... 11.0% 11.0% 11.0 %
In addition to the Company's qualified pension plans, the Company has
non-qualified unfunded supplemental pension plans covering certain employees,
which provide for pension 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 totalled $30.8 million and $39.1 million, and $24.7 million and
$30.2 million at December 31, 1997 and 1996, respectively; net periodic pension
cost for these plans was $4.7 million, $4.9 million and $3.7 million in 1997,
1996 and 1995, respectively.
The Company sponsors certain postretirement 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, 1997,
the aggregate present value of the unfunded accumulated postretirement benefit
obligation approximated $4.0 million.
34
36
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT INFORMATION
The Company's operations in the industry segments detailed below consist of
the manufacture, installation and sale of the following home improvement and
building products:
Kitchen and Bath Products -- kitchen and bath cabinets; kitchen
appliances; faucets; plumbing fittings; bath and shower tubs and
enclosures; whirlpools and spas; and bath accessories.
Other Specialty Products -- builders' hardware, including mechanical and
electronic lock sets; venting and ventilating equipment; insulation;
rolling shutters; balcony railing systems; and water pumps.
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.
Corporate assets consist primarily of real property, cash and cash
investments and other investments.
Pursuant to a corporate services agreement to provide MascoTech, Inc. and
TriMas Corporation with certain corporate staff and administrative services, the
Company charges a fee approximating .8 percent of MascoTech and TriMas net
sales. The fees charged to MascoTech and TriMas approximated $6 million and $4
million in 1997, $7 million and $3 million in 1996 and $9 million and $3 million
in 1995, respectively, and are included as a reduction of general corporate
expense.
35
37
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT INFORMATION -- (CONCLUDED)
The following table presents information about the Company by industry
segment and geographic area:
(IN THOUSANDS)
NET SALES(1)(2)(3) OPERATING PROFIT ASSETS AT DECEMBER 31
------------------------------------ ------------------------------ ------------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
---------- ---------- ---------- -------- -------- -------- ---------- ---------- ----------
The Company's
operations by
segment were:
Kitchen and Bath
Products...... $2,940,000 $2,519,000 $2,283,000 $539,000 $462,000 $411,000 $2,023,000 $1,646,000 $1,445,000
Other Specialty
Products...... 820,000 718,000 644,000 130,000 104,000 82,000 834,000 632,000 591,000
---------- ---------- ---------- -------- -------- -------- ---------- ---------- ----------
Total......... $3,760,000 $3,237,000 $2,927,000 $669,000 $566,000 $493,000 $2,857,000 $2,278,000 $2,036,000
========== ========== ========== ======== ======== ======== ========== ========== ==========
The Company's
operations by
geographic area
were:
North America... $3,072,000 $2,680,000 $2,441,000 $570,000 $479,000 $407,000 $2,146,000 $1,667,000 $1,623,000
Europe.......... 688,000 557,000 486,000 99,000 87,000 86,000 711,000 611,000 413,000
---------- ---------- ---------- -------- -------- -------- ---------- ---------- ----------
Total......... $3,760,000 $3,237,000 $2,927,000 669,000 566,000 493,000 2,857,000 2,278,000 2,036,000
========== ========== ========== -------- -------- -------- ---------- ---------- ----------
Other (income) expense, net............................... 44,000 22,000 (51,000)
General corporate expense, net............................ (82,000) (85,000) (90,000)
-------- -------- --------
Income from continuing operations before income taxes(4).. $631,000 $503,000 $352,000
======== ======== ========
Equity investments in and receivable from affiliates....................................... 228,000 220,000 265,000
Securities of Furnishings International Inc................................................ 393,000 356,000 --
Corporate assets........................................................................... 856,000 848,000 425,000
Net assets of discontinued operations...................................................... -- -- 1,053,000
---------- ---------- ----------
Total assets......................................................................... $4,334,000 $3,702,000 $3,779,000
========== ========== ==========
PROPERTY ADDITIONS(5)
------------------------------
1997 1996 1995
-------- -------- --------
The Company's operations by segment were:
Kitchen and Bath Products.................................................................. $149,000 $116,000 $111,000
Other Specialty Products................................................................... 61,000 42,000 43,000
-------- -------- --------
Total.................................................................................. $210,000 $158,000 $154,000
======== ======== ========
DEPRECIATION AND
AMORTIZATION
------------------------------------
1997 1996 1995
---------- ---------- ----------
The Company's operations by segment were:
Kitchen and Bath Products............................ $69,000 $58,000 $51,000
Other Specialty Products............................. 28,000 21,000 20,000
---------- ---------- ----------
Total............................................ $97,000 $79,000 $71,000
========== ========== ==========
(1) Included in net sales in 1997, 1996 and 1995 are export sales from the U.S.
of $58.8 million, $46.2 million and $40.9 million, respectively.
(2) Intra-company sales among segments and geographic areas represented less
than one percent of consolidated net sales in 1997, 1996 and 1995.
(3) Includes net sales to one customer in 1997 of $392 million.
(4) Income from continuing operations before income taxes and net income
pertaining to continuing foreign operations were $93 million and $45
million, $82 million and $40 million, and $96 million and $52 million for
1997, 1996 and 1995, respectively.
(5) Property additions include assets of acquired companies.
36
38
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER INCOME (EXPENSE), NET
(IN THOUSANDS)
1997 1996 1995
-------- -------- --------
Re: MascoTech, Inc.:
Equity earnings............................... $ 14,580 $ 13,860 $ 18,200
-------- -------- --------
Gain from change in investment................ 29,500 -- --
-------- -------- --------
Gain from sale of investments, net............ -- 67,800 --
-------- -------- --------
Equity earnings, other affiliates............... 9,560 6,230 8,010
-------- -------- --------
Other, net:
Income from cash and cash investments......... 17,280 6,910 2,600
Other interest income......................... 47,550 20,710 4,500
Other items................................... 5,180 (18,630) (10,060)
-------- -------- --------
70,010 8,990 (2,960)
-------- -------- --------
Interest expense................................ (79,850) (74,680) (73,800)
-------- -------- --------
$ 43,800 $ 22,200 $(50,550)
======== ======== ========
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.
Other interest income for 1997 and 1996 includes $36.8 million and $14.0
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 and 1996 also includes $7.5 million and $1.7 million,
respectively of interest income from the $151 million note receivable from
MascoTech which was paid on September 30, 1997.
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 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. Other items in 1996 include $36.3 million of fourth
quarter charges primarily related to adjustments of miscellaneous assets to
their estimated fair value.
Interest expense in 1996 and 1995 is presented net of interest expense
pertaining to discontinued operations of $21.8 million and $44.0 million,
respectively.
37
39
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
(IN THOUSANDS)
1997 1996 1995
-------- -------- --------
Income from continuing operations before
income taxes:
Domestic................................... $537,760 $420,560 $256,190
Foreign.................................... 93,140 82,140 95,600
-------- -------- --------
$630,900 $502,700 $351,790
======== ======== ========
Provision for income taxes:
Currently payable:
Federal.................................... $146,940 $119,250 $ 84,230
State and local............................ 25,570 18,280 14,740
Foreign.................................... 41,110 41,120 34,530
Deferred:
Federal.................................... 28,240 27,880 9,300
Foreign.................................... 6,640 970 8,940
-------- -------- --------
$248,500 $207,500 $151,740
======== ======== ========
Deferred tax assets at December 31:
Intangibles................................... $ 24,110 $ 27,350
Inventories................................... 11,380 12,870
Accrued liabilities........................... 54,650 53,660
Capital loss carryforward..................... 149,470 163,960
Other, principally equity investments......... 34,940 46,470
-------- --------
274,550 304,310
Valuation allowance........................... (174,960) (206,310)
-------- --------
99,590 98,000
-------- --------
Deferred tax liabilities at December 31:
Property and equipment........................ 149,220 116,000
Other......................................... 13,830 10,580
-------- --------
163,050 126,580
-------- --------
Net deferred tax liability at December 31....... $ 63,460 $ 28,580
======== ========
Net deferred tax liability at December 31, 1997 and 1996 consists of net
short-term deferred tax assets of $19.0 million and $14.5 million, respectively,
and net long-term deferred tax liabilities of $82.5 million and $43.1 million,
respectively.
A valuation allowance of approximately $175.0 million and $206.3 million
was recorded at December 31, 1997 and 1996, 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
resulted from a $149.5 million and $164.0 million after-tax capital loss
carryforward on the disposition of the Company's home furnishings products
segment at December 31, 1997 and 1996, respectively, and a $25.5 million and
$42.3 million after-tax future deductible temporary difference of a capital
nature on the Company's equity and other investments at December 31, 1997 and
1996, respectively.
38
40
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES -- (CONCLUDED)
The following is a reconciliation of the U.S. federal statutory rate to the
effective tax rate allocated to income from continuing operations before income
tax:
1997 1996 1995
---- ---- ----
U.S. federal statutory rate................................. 35% 35% 35%
State and local taxes, net of federal tax benefit........... 2 2 3
Higher taxes on foreign earnings............................ 3 3 5
Dividends-received deduction................................ (1) -- --
Amortization in excess of tax............................... 1 1 1
Change in valuation allowance............................... (2) 1 --
Other, net.................................................. 1 (1) (1)
-- -- --
Effective tax rate on income from continuing operations... 39% 41% 43%
== == ==
Income taxes paid were approximately $178 million, $201 million and $170
million in 1997, 1996 and 1995, respectively. Amounts paid in 1996 and 1995
include taxes on discontinued operations.
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, 1997 for U.S. or additional foreign withholding
taxes on approximately $6.0 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
At December 31, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share," which replaces the
presentation of primary and fully diluted earnings per share, as computed under
Accounting Principles Board ("APB") Opinion No. 15, with a presentation of basic
and diluted earnings per share. The financial statements have been retroactively
restated to conform with the earnings per share presentation required under SFAS
No. 128.
The following are reconciliations of the numerators and denominators used
in the computations of basic and diluted earnings per share, in thousands:
1997 1996 1995
-------- -------- --------
Numerator:
Basic (income from continuing operations)..... $382,400 $295,200 $200,050
Add convertible debenture interest, net (1)... 5,880 5,880 --
-------- -------- --------
Diluted (income from continuing operations)... $388,280 $301,080 $200,050
======== ======== ========
Denominator:
Basic shares (based on weighted average)...... 159,700 157,500 156,800
Add:
Contingently issued shares................. 3,300 3,100 2,800
Stock option dilution...................... 1,600 900 700
Convertible debentures (1)................. 4,200 4,200 --
-------- -------- --------
Diluted shares................................ 168,800 165,700 160,300
======== ======== ========
(1) Effect of convertible debentures in 1995 was antidilutive. 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.
39
41
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED FINANCIAL STATEMENTS (UNAUDITED)
The following presents the combined financial statements of the Company,
MascoTech, Inc. and TriMas Corporation as one entity, with Masco Corporation as
the parent company. These combined financial statements present the Company's
former home furnishings products segment as discontinued operations. (See
"Discontinued Operations" note.) Intercompany transactions have been eliminated.
Amounts, except earnings per share, are in thousands.
DECEMBER 31
-----------------------
1997 1996
---------- ----------
COMBINED BALANCE SHEETS
Assets
Current assets:
Cash and cash investments........................... $ 587,820 $ 599,020
Marketable securities............................... 45,970 37,760
Receivables......................................... 768,030 674,530
Prepaid expenses and other.......................... 85,250 81,320
Deferred income taxes............................... 80,520 53,670
Net current assets of businesses held for
disposition...................................... -- 85,980
Inventories:
Raw material..................................... 286,120 238,250
Finished goods................................... 237,340 209,590
Work in process.................................. 162,460 125,950
---------- ----------
685,920 573,790
---------- ----------
Total current assets........................... 2,253,510 2,106,070
Equity investments in affiliates...................... 280,970 221,380
Securities of Furnishings International Inc........... 393,140 356,340
Property and equipment................................ 1,654,840 1,523,590
Acquired goodwill, net................................ 925,120 660,690
Net non-current assets of businesses held for
disposition......................................... -- 22,850
Other assets.......................................... 421,170 415,280
---------- ----------
Total assets................................... $5,928,750 $5,306,200
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable....................................... $ 72,340 $ 16,620
Accounts payable.................................... 264,980 241,420
Accrued liabilities................................. 535,300 501,800
---------- ----------
Total current liabilities...................... 872,620 759,840
Long-term debt........................................ 1,959,440 2,020,400
Deferred income taxes and other....................... 365,470 300,170
Other interests in combined affiliates................ 502,200 385,980
---------- ----------
Total liabilities.............................. 3,699,730 3,466,390
Equity of shareholders of Masco Corporation........... 2,229,020 1,839,810
---------- ----------
Total liabilities and shareholders' equity..... $5,928,750 $5,306,200
========== ==========
40
42
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED FINANCIAL STATEMENTS (UNAUDITED)-- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
COMBINED STATEMENTS OF OPERATIONS
Net sales............................................. $ 5,323,450 $ 5,095,710 $ 5,141,160
Cost of sales......................................... (3,535,070) (3,476,820) (3,598,140)
Selling, general and administrative expenses.......... (990,850) (933,250) (938,480)
Gains (charge) on disposition of businesses, net...... 4,980 (31,520) 5,290
----------- ----------- -----------
Operating profit............................... 802,510 654,120 609,830
----------- ----------- -----------
Other income (expense), net:
Interest expense.................................... (114,300) (115,460) (137,230)
Other, net.......................................... 153,290 106,810 26,990
----------- ----------- -----------
38,990 (8,650) (110,240)
----------- ----------- -----------
Income from continuing operations before income
taxes and other interests................... 841,500 645,470 499,590
Income taxes.......................................... (347,110) (279,830) (230,850)
Other interests in combined affiliates................ (111,990) (70,440) (68,690)
----------- ----------- -----------
Income from continuing operations.............. 382,400 295,200 200,050
----------- ----------- -----------
Discontinued operations (net of income taxes):
Income from operations.............................. -- -- 8,270
Loss on disposition, net............................ -- -- (650,000)
----------- ----------- -----------
Net income (loss).............................. $ 382,400 $ 295,200 $ (441,680)
=========== =========== ===========
Earnings per share from continuing operations:
Basic............................................... $2.39 $1.87 $1.28
=========== =========== ===========
Diluted............................................. $2.30 $1.82 $1.25
=========== =========== ===========
Basic and diluted earnings per share for 1995 from discontinued operations
were both $.05. Basic and diluted loss per share for 1995 from the loss on
disposition of discontinued operations were $4.15 and $4.05, respectively.
41
43
MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- (CONCLUDED)
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------
1997 1996 1995
--------- ----------- ---------
COMBINED STATEMENTS OF CASH FLOWS
Cash Flows From (For) Operating Activities:
Income from continuing operations........ $ 382,400 $ 295,200 $ 200,050
Depreciation and amortization............ 185,190 167,080 158,640
Interest accrual on pay-in-kind notes
receivable............................ (36,800) (13,970) --
Unremitted equity earnings of
affiliates............................ (9,060) (12,730) (5,860)
Deferred income taxes.................... 57,230 39,590 75,130
(Gains) charge on disposition of
businesses, net....................... (4,980) 31,520 (5,290)
Gain from change in investment........... (4,980) -- (5,100)
Other interests in net income of
combined affiliates, net.............. 111,990 70,440 68,690
(Increase) decrease in receivables....... (40,250) 1,230 (83,240)
(Increase) decrease in inventories....... (41,870) 14,870 (15,250)
Increase in accounts payable and accrued
liabilities, net...................... 46,200 93,700 28,640
Discontinued operations, net............. -- (19,240) 62,560
Other, net............................... (16,360) (26,080) (2,500)
--------- ----------- ---------
Net cash from operating
activities..................... 628,710 641,610 476,470
--------- ----------- ---------
Cash Flows From (For) Investing Activities:
Capital expenditures..................... (250,740) (207,600) (284,350)
Acquisitions, net of cash acquired....... (198,020) (247,800) (23,850)
Cash proceeds from sale of:
Discontinued operations............... -- 707,630 --
Subsidiaries.......................... 76,560 223,720 122,190
Formica investment.................... -- -- 74,470
Other, net............................... (66,920) (34,200) 52,440
Discontinued operations, net............. -- -- (38,290)
--------- ----------- ---------
Net cash from (for) investing
activities..................... (439,120) 441,750 (97,390)
--------- ----------- ---------
Cash Flows From (For) Financing Activities:
Increase in debt......................... 121,380 570,520 577,290
Payment of debt.......................... (155,230) (1,063,720) (855,250)
Repurchase of common stock............... (14,970) (14,040) (13,130)
Cash dividends paid...................... (151,970) (146,340) (137,380)
Discontinued operations, net............. -- -- 12,480
--------- ----------- ---------
Net cash for financing
activities..................... (200,790) (653,580) (415,990)
--------- ----------- ---------
Cash and Cash Investments:
Increase (decrease) for the year......... (11,200) 429,780 (36,910)
At January 1............................. 599,020 169,240 206,150
--------- ----------- ---------
At December 31........................... $ 587,820 $ 599,020 $ 169,240
========= =========== =========
42
44
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
---------- ----------- ------------ -------- --------
1997:
Net sales............. $3,760,000 $990,000 $1,003,000 $913,000 $854,000
Gross profit.......... $1,381,750 $363,450 $ 369,000 $334,800 $314,500
Net income............ $ 382,400 $105,500 $ 101,800 $ 91,600 $ 83,500
Income per share:
Basic............... $2.39 $.65 $.63 $.58 $.53
Diluted............. $2.30 $.62 $.61 $.56 $.51
1996:
Net sales............. $3,237,000 $843,000 $ 843,000 $787,000 $764,000
Gross profit.......... $1,188,930 $293,830 $ 321,000 $290,430 $283,670
Net income............ $ 295,200 $ 83,400 $ 81,800 $ 68,000 $ 62,000
Income per share:
Basic............... $1.87 $.53 $.52 $.43 $.39
Diluted............. $1.82 $.51 $.51 $.42 $.38
Fourth quarter net income in 1997 benefited (approximately $.02 per diluted
share) from a reduction in the effective tax rate to 38.0% from 40.0% due
primarily to the net utilization of the Company's capital loss carryforward
benefit.
The fourth quarter of 1996 includes a $67.8 million net pre-tax gain from
the sale of certain MascoTech, Inc. investments ($40.7 million after-tax or $.25
per diluted share). This gain was principally offset by fourth quarter charges
aggregating $49.1 million pre-tax ($37.5 million after-tax or $.23 per diluted
share) primarily for adjustments of miscellaneous assets to their estimated fair
value.
43
45
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 1998 Annual
Meeting of Stockholders, to be filed on or before April 30, 1998, 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 1998 Annual Meeting of Stockholders, to be
filed on or before April 30, 1998, 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 1998 Annual Meeting of Stockholders, to be
filed on or before April 30, 1998, 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 1998 Annual Meeting of Stockholders, to be
filed on or before April 30, 1998, and such information is incorporated herein
by reference.
44
46
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,
1997 and 1996, and for the years ended December 31, 1997, 1996 and
1995, consist of the following:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
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, 1997, 1996 and
1995, consists of the following:
II. Valuation and Qualifying Accounts
(ii) (A) MascoTech, Inc. and Subsidiaries Consolidated Financial
Statements appended hereto, at December 31, 1997 and 1996,
and for the years ended December 31, 1997, 1996 and 1995,
consist of the following:
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
(B) MascoTech, Inc. and Subsidiaries Financial Statement
Schedule appended hereto, for the years ended December 31,
1997, 1996 and 1995, consists of the following:
II. Valuation and Qualifying Accounts
(3) Exhibits.
3.i Restated Certificate of Incorporation of Masco Corporation
and amendments thereto. (filed herewith)
3.ii Bylaws of Masco Corporation, as amended.(5)
4.a.i Indenture dated as of December 1, 1982 between Masco
Corporation and Morgan Guaranty Trust Company of New York,
as Trustee, and Directors' resolutions establishing Masco
Corporation's: (i) 9% Notes Due October 1, 2001(7), (ii)
6 5/8 Notes Due September 15, 1999 (filed herewith), (iii)
6 1/8 Notes Due September 15, 2003(6), and (iv) 7 1/8%
Debentures Due August 15, 2013.(6)
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.(4)
4.a.iii Supplemental Indenture dated as of July 26, 1994 between
Masco Corporation and The First National Bank of Chicago.(4)
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(7) and Amendment No. 1 dated April 30, 1997. (filed
herewith)
4.c Rights Agreement dated as of December 6, 1995, between Masco
Corporation and The Bank of New York, as Rights Agent.(2)
45
47
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, and
Directors' resolutions establishing Masco Industries, Inc.'s 4 1/2% Convertible
Subordinated Debentures Due 2003(5), 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 and Supplemental Indenture dated as of
August 5, 1994 among MascoTech, Inc. and The First National Bank of Chicago.(3)
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.
(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.).(2)
10.b Corporate Services Agreement dated as of January 1, 1987 between Masco Corporation and
Masco Industries, Inc. (now known as MascoTech, Inc.) (filed herewith), Amendment No. 1
dated as of October 31, 1996(1), and related letter agreement dated January 22,
1998.(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.)(2) and Amendment No. 1 dated as of
October 31, 1996(1).
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 (7), and
amendment to Stock Repurchase Agreement included in Agreement dated as of November 23,
1993.(5)
NOTE: Exhibits 10.e through 10.r constitute the management contracts and executive compensatory
plans or arrangements in which certain of the Directors and executive officers of the
Company participate.
10.e Masco Corporation 1991 Long Term Stock Incentive Plan (Amended and Restated April 23,
1997). (filed herewith)
10.f Masco Corporation 1988 Restricted Stock Incentive Plan (Restated December 6, 1995).(2)
10.g Masco Corporation 1988 Stock Option Plan (Restated December 6, 1995).(2)
10.h Masco Corporation 1984 Restricted Stock (Industries) Incentive Plan (Restated December 6,
1995).(2)
10.i Masco Corporation Supplemental Executive Retirement and Disability Plan.(3)
10.j Masco Corporation Benefits Restoration Plan.(3)
10.k Masco Corporation 1997 Annual Incentive Compensation Plan. (filed herewith)
46
48
10.1 Masco Corporation 1997 Non-Employee Directors Stock Plan.(filed herewith)
10.m MascoTech, Inc. 1991 Long Term Stock Incentive Plan (Amended and Restated April 23,
1997). (filed herewith)
10.n MascoTech, Inc. 1984 Restricted Stock Incentive Plan (Restated December 6, 1995).(2)
10.o MascoTech, Inc. 1984 Stock Option Plan (Restated December 6, 1995).(2)
10.p MascoTech, Inc. 1997 Annual Incentive Compensation Plan.(filed herewith)
10.q MascoTech, Inc. 1997 Non-Employee Directors Stock Plan.(filed herewith)
10.r Description of the Masco Corporation Program for Estate, Financial Planning and Tax
Assistance. (filed herewith)
10.s 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 (5), Agreement dated as of November 23, 1993 relating thereto (5),
and Amendment No. 1 to the Securities Purchase Agreement dated as of October 31, 1996.(1)
10.t Registration Agreement dated as of March 31, 1993, between Masco Corporation and Masco
Industries, Inc. (now known as MascoTech, Inc.).(5)
10.u Stock Purchase Agreement between Masco Corporation and Masco Industries, Inc. (now known
as MascoTech, Inc.) dated as of December 23, 1991 (regarding Masco Capital
Corporation)(7) and Amendment thereto dated May 21, 1997. (filed herewith)
10.v 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.(7)
10.w Stock Purchase Agreement dated as of October 15, 1996 between Masco Corporation and
MascoTech, Inc.(1)
12 Computation of Ratio of Earnings to Fixed Charges. (filed herewith)
21 List of Subsidiaries. (filed herewith)
23.a Consent of Coopers & Lybrand L.L.P. relating to Masco Corporation's Financial Statements
and Financial Statement Schedule. (filed herewith)
23.b Consent of Coopers & Lybrand L.L.P. relating to MascoTech, Inc.'s Financial Statements
and Financial Statement Schedule. (filed herewith)
27.a Financial Data Schedule as of and for the year ended December 31, 1997. (filed herewith)
27.b Financial Data Schedule as of and for the year-to-date periods ended September 30, 1997,
June 30, 1997 and March 31, 1997. (filed herewith)
27.c Financial Data Schedule as of and for the year-to-date periods ended December 31, 1996,
September 30, 1996, June 30, 1996 and March 31, 1996. (filed herewith)
27.d Financial Data Schedule as of and for the year ended December 31, 1995. (filed herewith)
- -------------------------
(1) Incorporated by reference to the Exhibits filed with Masco Corporation's
Current Report on Form 8-K dated November 13, 1996.
(2) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1995.
47
49
(3) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1994.
(4) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(5) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1993.
(6) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
(7) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1996.
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.
(1) A Current Report on Form 8-K dated October 9, 1997 was filed by Masco
Corporation during the quarter ended December 31, 1997 reporting under
Item 5, "Other Events" the Company's acquisition of approximately 42%
of the outstanding shares of Emco Limited.
(2) A Current Report on Form 8-K dated February 23, 1998 was filed by Masco
Corporation during the quarter ended March 31, 1998 reporting under
Item 5. "Other Events" the Company's redemption on February 12, 1998 of
all of its outstanding 5 1/4% Convertible Subordinated Debentures Due
2012 and the announcement of its 1997 earnings.
48
50
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 27, 1998
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/ JOSEPH L. HUDSON, JR. Director
- ---------------------------------------------
JOSEPH L. HUDSON, JR.
/s/ VERNE G. ISTOCK Director
- ---------------------------------------------
VERNE G. ISTOCK
/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
March 27, 1998
49
51
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, 1997, 1996 and
1995:
PAGE
----
II. Valuation and Qualifying Accounts....................... F-2
MascoTech, Inc. and Subsidiaries Consolidated Financial
Statements and Financial Statement Schedule............... F-3
F-1
52
MASCO CORPORATION
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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:
1997....................... $17,950,000 $2,650,000 $2,500,000 $(3,340,000) $19,760,000
=========== ========== ========== =========== ===========
1996....................... $16,260,000 $5,060,000 $ 640,000 $(4,010,000) $17,950,000
=========== ========== ========== =========== ===========
1995....................... $12,050,000 $6,450,000 $ 80,000 $(2,320,000) $16,260,000
=========== ========== ========== =========== ===========
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
53
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of MascoTech, Inc.:
We have audited the accompanying consolidated balance sheet of MascoTech,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income and cash flows for each of the three years in
the period ended December 31, 1997 and the financial statement schedule as
listed in Item 14(a)(2)(ii)(A) and (B) of this Form 10-K. These financial
statements and the 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MascoTech, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
As discussed in the footnotes to the consolidated financial statements,
effective January 1, 1996, the Company changed its method of accounting for the
impairment of long-lived assets and for long-lived assets to be disposed of.
COOPERS & LYBRAND L.L.P.
Detroit, Michigan
February 17, 1998
F-3
54
MASCOTECH, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
-------------- --------------
Current assets:
Cash and cash investments................................. $ 41,110,000 $ 19,400,000
Marketable securities..................................... 45,970,000 37,760,000
Receivables............................................... 125,930,000 127,530,000
Inventories............................................... 73,860,000 69,640,000
Deferred and refundable income taxes...................... 36,270,000 39,180,000
Prepaid expenses and other assets......................... 13,310,000 14,480,000
Net current assets of businesses held for disposition..... -- 85,980,000
-------------- --------------
Total current assets................................. 336,450,000 393,970,000
Equity and other investments in affiliates.................. 263,300,000 282,470,000
Property and equipment, net................................. 417,030,000 388,460,000
Excess of cost over net assets of acquired companies........ 65,610,000 69,140,000
Notes receivable and other assets........................... 62,290,000 45,950,000
Net non-current assets of businesses held for disposition... -- 22,850,000
-------------- --------------
Total assets......................................... $1,144,680,000 $1,202,840,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 67,240,000 $ 58,170,000
Accrued liabilities....................................... 114,650,000 96,910,000
Current portion of long-term debt......................... 2,880,000 3,370,000
-------------- --------------
Total current liabilities............................ 184,770,000 158,450,000
Long-term debt held by Masco Corporation.................... -- 151,380,000
Convertible subordinated debentures......................... 310,000,000 310,000,000
Other long-term debt........................................ 282,000,000 291,020,000
Deferred income taxes and other long-term liabilities....... 157,250,000 153,170,000
-------------- --------------
Total liabilities.................................... 934,020,000 1,064,020,000
-------------- --------------
Shareholders' equity:
Preferred stock, $1 par:
Authorized: 25 million; Outstanding: 10.8 million in
1996................................................. -- 10,800,000
Common stock, $1 par:
Authorized: 250 million; Outstanding: 47.3 million and
37.3 million......................................... 47,250,000 37,250,000
Paid-in capital........................................... 34,340,000 41,080,000
Retained earnings......................................... 157,790,000 61,060,000
Other..................................................... 4,160,000 14,770,000
Less: Restricted stock awards............................. (32,880,000) (26,140,000)
-------------- --------------
Total shareholders' equity........................... 210,660,000 138,820,000
-------------- --------------
Total liabilities and shareholders' equity........... $1,144,680,000 $1,202,840,000
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
55
MASCOTECH, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------- --------------- ---------------
Net sales.................................... $ 922,130,000 $ 1,281,220,000 $ 1,678,210,000
Cost of sales................................ (735,470,000) (1,048,110,000) (1,397,880,000)
------------- --------------- ---------------
Gross profit............................ 186,660,000 233,110,000 280,330,000
Selling, general and administrative
expenses................................... (89,930,000) (132,260,000) (176,810,000)
Gains (charge) on disposition of businesses,
net........................................ 4,980,000 (31,520,000) 5,290,000
------------- --------------- ---------------
Operating profit........................ 101,710,000 69,330,000 108,810,000
------------- --------------- ---------------
Other income (expense), net:
Interest expense, Masco Corporation........ (7,500,000) -- --
Other interest expense..................... (29,030,000) (29,970,000) (49,900,000)
Equity and other income from affiliates.... 43,360,000 40,460,000 31,420,000
Gain from disposition of an equity
affiliate............................... 46,160,000 -- --
Gains from changes in investments in equity
affiliates.............................. 18,190,000 -- 5,100,000
Other, net................................. 17,400,000 (2,600,000) 4,850,000
------------- --------------- ---------------
88,580,000 7,890,000 (8,530,000)
------------- --------------- ---------------
Income before income taxes and
cumulative effect of accounting
change, net........................... 190,290,000 77,220,000 100,280,000
Income taxes................................. 75,050,000 37,300,000 41,090,000
------------- --------------- ---------------
Income before cumulative effect of
accounting change, net................ 115,240,000 39,920,000 59,190,000
Cumulative effect of accounting change
(net of income taxes)...................... -- 11,700,000 --
------------- --------------- ---------------
Net income.............................. $ 115,240,000 $ 51,620,000 $ 59,190,000
============= =============== ===============
Preferred stock dividends.................... $ 6,240,000 $ 12,960,000 $ 12,960,000
============= =============== ===============
Earnings attributable to common stock... $ 109,000,000 $ 38,660,000 $ 46,230,000
============= =============== ===============
BASIC DILUTED BASIC DILUTED BASIC DILUTED
----- ------- ----- ------- ----- -------
Earnings per share:
Income before cumulative effect of
accounting change, net............. $2.70 $2.12 $.54 $.50 $.85 $.81
Cumulative effect of accounting
change, net........................ -- -- .23 .22 -- --
----- ----- ---- ---- ---- ----
Earnings attributable to common
stock.............................. $2.70 $2.12 $.77 $.72 $.85 $.81
===== ===== ==== ==== ==== ====
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
56
MASCOTECH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ------------- -------------
CASH FROM (USED FOR):
OPERATING ACTIVITIES:
Net income.................................. $115,240,000 $ 51,620,000 $ 59,190,000
Adjustments to reconcile net income to net
cash provided by operating activities,
excluding reclassification of businesses
held for disposition:
(Gains) charge on disposition of
businesses, net........................ (4,980,000) 31,520,000 (5,290,000)
Gains from changes in investments in
equity affiliates...................... (18,190,000) -- (5,100,000)
Gain from disposition of an equity
affiliate.............................. (46,160,000) -- --
Depreciation and amortization............. 43,460,000 44,470,000 47,070,000
Equity earnings, net of dividends......... (27,180,000) (31,650,000) (23,360,000)
Deferred income taxes..................... 17,520,000 8,640,000 51,330,000
(Increase) decrease in marketable
securities, net........................ (8,210,000) (24,890,000) 57,990,000
Decrease (increase) in receivables........ 2,670,000 10,200,000 (21,910,000)
Decrease in inventories................... 1,950,000 19,190,000 4,650,000
(Increase) decrease in prepaid expenses
and other current assets............... (1,280,000) 38,650,000 (1,900,000)
Increase (decrease) in accounts payable
and accrued liabilities................ 11,140,000 9,320,000 (9,070,000)
Other, net................................ (7,480,000) (8,820,000) 2,390,000
Net assets of businesses held for
disposition, net, including cumulative
effect of accounting change............... -- (19,240,000) 2,190,000
------------ ------------- -------------
Net cash from operating activities... 78,500,000 129,010,000 158,180,000
------------ ------------- -------------
FINANCING ACTIVITIES:
Increase in debt............................ 7,080,000 5,220,000 79,460,000
Payment of debt............................. (16,590,000) (114,900,000) (253,770,000)
Payment of note due to Masco Corporation.... (45,580,000) -- --
Retirement of preferred stock............... (8,360,000) -- --
Retirement of Company Common Stock.......... (6,610,000) (14,040,000) (13,130,000)
Repurchase of Company Common Stock and
warrants from Masco Corporation for
cash...................................... -- (116,000,000) --
Payment of dividends........................ (15,900,000) (22,940,000) (21,000,000)
Other, net.................................. (9,070,000) (8,610,000) (2,250,000)
------------ ------------- -------------
Net cash used for financing
activities........................ (95,030,000) (271,270,000) (210,690,000)
------------ ------------- -------------
INVESTING ACTIVITIES:
Cash received from sale of businesses....... 76,560,000 223,720,000 122,190,000
Acquisition of businesses................... (11,100,000) (47,200,000) (23,850,000)
Capital expenditures........................ (54,780,000) (42,390,000) (95,800,000)
Receipt of cash from notes receivable....... 17,330,000 9,300,000 6,570,000
Other, net.................................. 10,230,000 1,850,000 (2,170,000)
------------ ------------- -------------
Net cash from investing activities... 38,240,000 145,280,000 6,940,000
------------ ------------- -------------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the year............ 21,710,000 3,020,000 (45,570,000)
At January 1................................ 19,400,000 16,380,000 61,950,000
------------ ------------- -------------
At December 31....................... $ 41,110,000 $ 19,400,000 $ 16,380,000
============ ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
57
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 consolidated balance sheet at December 31, 1996 reflects the
segregation of net current and net non-current assets related to the disposition
of the Company's Technical Services Group ("TSG").
The Company has a corporate services agreement with Masco Corporation,
which at December 31, 1997 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, which are determined
principally as a percentage of net sales, aggregated approximately $5.5 million
in 1997, $7.1 million in 1996, and $9.1 million in 1995.
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. The carrying amount reported in the balance sheet for cash and cash
investments approximates fair value.
Marketable Securities. The Company's marketable equity securities holdings
are categorized as trading and, as a result, are stated at fair value. Changes
in the fair value of trading securities are recognized in earnings. Derivative
financial instruments, consisting principally of S&P futures contracts, 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.
Receivables. Receivables are presented net of allowances for doubtful
accounts of approximately $1.2 million and $2.0 million at December 31, 1997 and
1996, respectively.
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 impairment of the excess of cost over net assets of acquired
companies by
F-7
58
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1997.
At December 31, 1997 and 1996, accumulated amortization of the excess of
cost over net assets of acquired companies and patents was $33.2 million and
$29.4 million, respectively. Amortization expense was $9.3 million, $8.5 million
and $13.7 million in 1997, 1996 and 1995, respectively.
Income Taxes. The Company records income taxes in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 109 ("SFAS No. 109"), "Accounting
for Income Taxes." SFAS No. 109 is an asset and liability approach that requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, SFAS No. 109
generally allows consideration of all expected future events other than
enactments of changes in the tax law or tax rates. A provision has not been made
for U.S. or additional foreign withholding taxes on approximately $49 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.
New Accounting Pronouncements and Reclassifications. At December 31, 1997,
the Company adopted SFAS No. 128, "Earnings Per Share," which replaces the
presentation of primary and fully diluted earnings per share, as computed under
Accounting Principles Board Opinion No. 15, with a presentation of basic and
diluted earnings per share. The financial statements have been retroactively
restated to conform with the earnings per share presentation required under SFAS
No. 128.
In addition, the Company has reclassified the unamortized cost of unvested
restricted stock awards from other assets to a separate component of
shareholders' equity (see "Stock Options and Awards" note). Prior periods have
been reclassified to conform to this and other presentations adopted in calendar
year 1997.
At January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which resulted in a pre-tax gain (because the fair value of the businesses being
held for sale at January 1, 1996 exceeded the carrying value for such
businesses) of $16.7 million ($11.7 million after-tax), recorded as the
cumulative effect of an accounting change. The pro forma effect of the
retroactive application of the change on the financial statements for 1995 has
not been presented because the new method did not have a material effect on the
reported earnings.
In 1998, the Company will adopt the disclosure requirements of SFAS No.
130, "Reporting of Comprehensive Income," SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," and SFAS No. 132,
"Employers' Disclosure about Pensions and Other Postretirement Benefits." The
adoption of these disclosures will not impact earnings per common share in 1998.
F-8
59
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 share:
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
1997 1996 1995
-------- -------- --------
Weighted average number of shares outstanding............... 40,300 50,190 54,090
======== ======== ========
Income before cumulative effect of accounting change, net... $115,240 $ 39,920 $ 59,190
Less preferred stock dividends.............................. (6,240) (12,960) (12,960)
-------- -------- --------
Earnings used for basic earnings per share
computation....................................... $109,000 $ 26,960 $ 46,230
======== ======== ========
Basic earnings per share before cumulative effect of
accounting change, net.................................... $2.70 $.54 $.85
======== ======== ========
Total shares used for basic earnings per share
computation............................................... 40,300 50,190 54,090
Dilutive securities:
Stock options and warrants................................ 1,250 1,430 860
Assumed conversion of preferred stock at January 1,
1997................................................... 5,210 -- --
Convertible debentures.................................... 10,000 -- --
Contingently issuable shares.............................. 2,160 2,170 2,100
-------- -------- --------
Total shares used for diluted earnings per share
computation....................................... 58,920 53,790 57,050
======== ======== ========
Earnings used for basic earnings per share computation...... $109,000 $ 26,960 $ 46,230
Add back of preferred stock dividends....................... 6,240 -- --
Add back of debenture interest.............................. 9,530 -- --
-------- -------- --------
Earnings used for diluted earnings per share
computation....................................... $124,770 $ 26,960 $ 46,230
======== ======== ========
Diluted earnings per share before cumulative effect of
accounting change, net.................................... $2.12 $.50 $.81
======== ======== ========
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. The Company's preferred stock and convertible
debentures did not have a dilutive effect on earnings per share in 1996 and
1995.
SUPPLEMENTARY CASH FLOWS INFORMATION:
Significant transactions not affecting cash were: in 1997: the conversion
of the Company's outstanding shares of Dividend Enhanced Convertible Preferred
Stock on June 27, 1997 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; in 1996: in addition to cash received, approximately $25 million
comprised of both common stock and warrants (with a portion of the common stock
subsequently sold for approximately $14 million of cash), as consideration from
the sale of MascoTech Stamping Technologies, Inc.; in addition to the cash
payment by the Company of $121 million, notes approximating $159 million were
issued for the purchase of 18 million shares of the Company's Common Stock and
warrants to purchase 10 million shares of the Company's Common Stock (see
"Shareholders' Equity" note); in 1995: in addition to cash received,
approximately
F-9
60
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$34 million comprised of both notes receivable due from, and a 29 percent equity
interest in, the acquiring company, as consideration for a non-core business
unit.
Income taxes paid (refunded) were $44 million, $(12) million and $11
million in 1997, 1996 and 1995, respectively. Interest paid was $39 million, $30
million and $55 million in 1997, 1996 and 1995, respectively.
DISPOSITIONS OF OPERATIONS:
In late 1994, the Company adopted a plan to dispose, by sale or
liquidation, a number of businesses, including its architectural products,
defense and certain of its transportation-related products and services
businesses, as part of its long-term strategic plan to increase the focus on its
core operating capabilities. The Company has completed the disposition of such
businesses.
During 1995, the Company divested a number of such businesses, in separate
transactions, for aggregate proceeds of approximately $180 million, which
resulted in net gains of approximately $25 million. These net gains were
substantially offset by reductions in the estimated net proceeds the Company
expected to receive from certain remaining businesses to be sold, aggregating
approximately $12 million, and by certain exit costs incurred in 1995
aggregating approximately $8 million.
In May 1996, the Company sold MascoTech Stamping Technologies, Inc.
("MSTI"), a wholly owned subsidiary, to Tower Automotive, Inc. ("Tower")
resulting in an after-tax loss of approximately $26 million ($.49 per common
share), including after-tax losses of approximately $1 million related to the
closure of a MSTI manufacturing facility not included in the sale. The Company
received initial consideration of approximately $80 million, consisting
principally of $55 million in cash, 785,000 shares of Tower common stock and
warrants to purchase additional Tower common stock (200,000 shares at $18 per
share expiring May 31, 1999). The Company applied the cash proceeds (including
approximately $14 million received from the subsequent sale of 600,000 shares of
Tower common stock) to reduce its indebtedness. The Company may receive
additional consideration (up to $30 million), of which approximately $5 million
was earned in 1997, contingent upon the future earnings of MSTI through May 31,
1999.
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
(gain recognition was deferred at the time of the transaction pending cash
receipt) of approximately $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. The net assets of the Technical Services
Group and APX International are reflected on the consolidated balance sheet as
net assets of businesses held for disposition at December 31, 1996. The Company
did not reflect any revenues or expenses in the consolidated statement of income
related to APX International from the date of acquisition through January 3,
1997 as control was deemed to be temporary.
The disposition of businesses did not meet the criteria for discontinued
operations treatment for accounting purposes; accordingly, the sales and results
of operations of these businesses were included in continuing operations until
disposition. Businesses held for sale or sold, including MSTI and TSG,
F-10
61
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
had sales of $0, $412 million and $874 million in 1997, 1996 and 1995,
respectively, and operating income (losses) before gains (charge) on disposition
of businesses, net of $0, $(13) million and $5 million in 1997, 1996 and 1995,
respectively.
Amounts included in the consolidated balance sheet for net assets of
businesses held for disposition consist of the following at December 31, 1996:
(IN THOUSANDS)
1996
--------
Receivables................................................. $ 59,110
Other current assets........................................ 46,050
Current liabilities......................................... (19,180)
--------
Net current assets..................................... 85,980
--------
Property and equipment, net................................. 22,090
Other non-current assets and liabilities, net............... 760
--------
Net non-current assets................................. 22,850
--------
Net assets of businesses held for disposition.......... $108,830
========
INVENTORIES:
(IN THOUSANDS)
AT DECEMBER 31
------------------
1997 1996
------- -------
Finished goods............................................. $22,160 $21,020
Work in process............................................ 22,990 20,360
Raw material............................................... 28,710 28,260
------- -------
$73,860 $69,640
======= =======
EQUITY AND OTHER INVESTMENTS IN AFFILIATES:
Equity and other investments in affiliates consist primarily of the
following common stock interests in publicly traded affiliates:
AT DECEMBER 31
--------------------
1997 1996 1995
---- ---- ----
TriMas Corporation.......................................... 37% 41% 41%
Emco Limited................................................ -- 43% 43%
Titan International, Inc. .................................. 15% 12% 15%
Delco Remy International, Inc. (voting)..................... 18% 26% 25%
TriMas Corporation ("TriMas") is a diversified manufacturer of commercial,
industrial and consumer products (see "Subsequent Event" note). Emco Limited
("Emco") is a Canadian-based manufacturer and distributor of building and other
industrial products. 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.
F-11
62
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The carrying amount of investments in affiliates at December 31, 1997 and
1996 and quoted market values at December 31, 1997 for publicly traded
affiliates (which may differ from the amounts that could have been realized upon
disposition) are as follows:
(IN THOUSANDS)
1997
QUOTED 1997 1996
MARKET CARRYING CARRYING
VALUE AMOUNT AMOUNT
-------- -------- --------
Common stock:
TriMas Corporation............................ $522,190 $137,740 $101,880
Emco Limited.................................. -- -- 49,400
Titan International, Inc. .................... 66,110 44,080 42,280
Delco Remy International, Inc. ............... 37,820 9,320 10,440
-------- -------- --------
Common stock holdings........................... 626,120 191,140 204,000
Subordinated debt of Emco Limited............... 35,130
--------
Investments in publicly traded affiliates....... $626,120 191,140 239,130
========
Other non-public affiliates..................... 72,160 43,340
-------- --------
Total........................................... $263,300 $282,470
======== ========
In June 1995, Titan sold newly issued common stock in a public offering and
issued common stock as a result of the conversion of convertible securities. The
Company recognized pre-tax income of approximately $5.1 million as a result of
the change in the Company's common equity ownership interest in Titan. In
December 1996, Titan called for redemption its 4 3/4% Convertible Subordinated
Notes which resulted in the issuance of approximately 4.5 million common shares,
reducing the Company's common equity ownership interest in Titan to
approximately 12 percent. As a result, the investment in Titan at December 31,
1996 was accounted for as available-for-sale. In March 1997, Titan repurchased
approximately 5.6 million shares of its common stock, increasing the Company's
common equity ownership interest in Titan to approximately 15 percent. As a
result, the investment in Titan has been accounted for under the equity method
of accounting.
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.
In September 1997, the Company exercised its option and exchanged its
equity holdings in Emco, with a value approximating $106 million, and
approximately $46 million in cash to satisfy the indebtedness to Masco
Corporation incurred in 1996 in connection with the Company's purchase and
retirement of certain of its securities held by Masco Corporation. This
transaction resulted in a pre-tax gain of approximately $46 million. In
addition, the Company has an investment in Emco subordinated notes which are
classified as available-for-sale and, as a result, are recorded at fair value.
As a result of the sale of Emco equity, the Emco subordinated notes were
reclassified to other assets in 1997. The Company has recorded unrealized gains
of approximately $1 million and $2 million in 1997 and 1996, respectively, which
have been recorded as an adjustment to shareholders' equity.
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 (the Company owns approximately 18 percent of the voting common
stock). As a result of the change in the Company's
F-12
63
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
common equity ownership interest in DRI, the Company recognized pre-tax income
of approximately $5 million.
In addition to its equity and other investments in publicly traded
affiliates, the Company has equity and other investment interests in privately
held automotive related companies, including the Company's common equity
ownership in Saturn Electronics & Engineering, Inc., a manufacturer of
electromechanical and electronic automotive components, and MSX International,
Inc., a transportation-focused engineering and technical services company.
Equity in undistributed earnings of affiliates of $68 million at December
31, 1997, $57 million at December 31, 1996 and $38 million at December 31, 1995
are included in consolidated retained earnings.
Approximate combined condensed financial data of the Company's equity
affiliates accounted for under the equity method are as follows:
(IN THOUSANDS)
AT DECEMBER 31
-----------------------
1997 1996
---------- ---------
Current assets......................................... $1,117,940 $ 839,250
Current liabilities.................................... (520,900) (342,980)
---------- ---------
Working capital...................................... 597,040 496,270
Property and equipment, net............................ 612,060 453,350
Excess of cost over net assets of acquired companies... 371,190 257,160
Other assets........................................... 145,000 78,990
Long-term debt......................................... (702,390) (655,370)
Deferred income taxes and other long-term
liabilities.......................................... (82,610) (73,680)
---------- ---------
Shareholders' equity................................. $ 940,290 $ 556,720
========== =========
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------
1997 1996 1995
---------- ---------- ----------
Net sales.................................. $3,484,540 $2,959,980 $2,729,260
========== ========== ==========
Operating profit........................... $ 264,590 $ 269,440 $ 235,510
========== ========== ==========
Earnings attributable to common stock...... $ 108,230 $ 128,820 $ 92,700
========== ========== ==========
Equity and other income from affiliates consists of the following:
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31
---------------------------------
1997 1996 1995
------- ------- -------
The Company's equity in affiliates' earnings
available for common shareholders............. $31,330 $35,190 $26,230
Interest and dividend income.................... 12,030 5,270 5,190
------- ------- -------
Equity and other income from affiliates......... $43,360 $40,460 $31,420
======= ======= =======
F-13
64
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT, NET:
(IN THOUSANDS)
AT DECEMBER 31
----------------------
1997 1996
-------- --------
Cost:
Land and land improvements............................ $ 19,820 $ 17,530
Buildings............................................. 116,270 109,730
Machinery and equipment............................... 545,590 513,010
-------- --------
681,680 640,270
Less accumulated depreciation........................... 264,650 251,810
-------- --------
$417,030 $388,460
======== ========
Depreciation expense totalled $34 million, $37 million and $38 million in
1997, 1996 and 1995, respectively.
ACCRUED LIABILITIES:
(IN THOUSANDS)
AT DECEMBER 31
---------------------
1997 1996
-------- -------
Salaries, wages and commissions.......................... $ 17,690 $15,930
Income taxes............................................. 7,760 2,810
Interest................................................. 1,740 4,050
Insurance................................................ 24,740 33,940
Property, payroll and other taxes........................ 3,340 5,500
Other.................................................... 59,380 34,680
-------- -------
$114,650 $96,910
======== =======
F-14
65
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG-TERM DEBT:
(IN THOUSANDS)
AT DECEMBER 31
----------------------
1997 1996
-------- --------
6 5/8% Note held by Masco Corporation................... $ -- $151,380
4 1/2% Convertible Subordinated Debentures, due 2003 and
convertible into Company Common Stock at $31 per
share................................................. 310,000 310,000
Bank revolving credit agreement......................... 245,000 250,000
Other................................................... 39,880 44,390
-------- --------
594,880 755,770
Less current portion of long-term debt.................. 2,880 3,370
-------- --------
Long-term debt.......................................... $592,000 $752,400
======== ========
The interest rates applicable to the Company's revolving credit agreement
at December 31, 1997 are principally at alternative floating rates provided for
in the agreement (approximately six percent at December 31, 1997).
In connection with the TriMas acquisition in early 1998 (see "Subsequent
Event" note), the Company entered into a new $1.3 billion credit facility. This
facility includes a $500 million term loan with principal payments as follows:
1998 - $25 million; 1999 - $40 million; 2000 - $60 million; 2001 - $75 million;
and 2002 - $190 million. The remainder of the term loan and the $800 million
revolver terminate in 2003. The Company has the ability and intent to refinance
amounts due in 1998 on a long-term basis.
The interest rates applicable to the new credit facility are principally at
alternative floating rates which would have approximated 6.5 percent at December
31, 1997. The new 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 scheduled debt payments. In addition, there are
limitations on dividends, share repurchases and subordinated debt repurchases.
Under the most restrictive of these provisions, approximately $40 million would
have been available at December 31, 1997 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.
The note held by Masco Corporation was part of the consideration paid by
the Company in 1996 for the purchase of 17 million shares of MascoTech common
stock and warrants to purchase 10 million shares of MascoTech common stock from
Masco Corporation. In September 1997, the Company exercised its option and
exchanged its equity holdings in Emco Limited, with a value approximating $106
million, and approximately $46 million in cash to Masco Corporation to satisfy
this indebtedness.
The maturities of debt as at December 31, 1997 during the next five years
are as follows (not taking into account the new credit facility) (in millions):
1998 - $3; 1999 - $4; 2000 - $2; 2001 - $.7; and 2002 - $.5.
F-15
66
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHAREHOLDERS' EQUITY:
(IN THOUSANDS)
RETAINED RESTRICTED
PREFERRED COMMON PAID-IN EARNINGS STOCK SHAREHOLDERS'
STOCK STOCK CAPITAL (DEFICIT) OTHER AWARDS EQUITY
--------- -------- --------- --------- -------- ---------- -------------
Balance, January 1, 1995.... $ 10,800 $ 56,610 $ 318,960 $ (7,590) $ 2,360 $(19,050) $ 362,090
Net income................ -- -- -- 59,190 -- -- 59,190
Preferred stock
dividends.............. -- -- -- (12,960) -- -- (12,960)
Common stock dividends.... -- -- -- (6,260) -- -- (6,260)
Retirement of common
stock.................. -- (1,210) (11,920) -- -- -- (13,130)
Translation adjustments,
net.................... -- -- -- -- 6,210 -- 6,210
Exercise of stock
options................ -- 120 870 -- -- -- 990
Stock award purchases, net
of amortization........ -- -- -- -- -- 2,000 2,000
-------- -------- --------- -------- -------- -------- ---------
Balance, December 31,
1995...................... 10,800 55,520 307,910 32,380 8,570 (17,050) 398,130
Net income................ -- -- -- 51,620 -- -- 51,620
Preferred stock
dividends.............. -- -- -- (12,960) -- -- (12,960)
Common stock dividends.... -- -- -- (9,980) -- -- (9,980)
Retirement of common stock
and warrants........... -- (18,720) (270,320) -- -- -- (289,040)
Translation adjustments
and other.............. -- -- -- -- 6,200 -- 6,200
Exercise of stock
options................ -- 450 3,490 -- -- -- 3,940
Stock award purchases, net
of amortization........ -- -- -- -- -- (9,090) (9,090)
-------- -------- --------- -------- -------- -------- ---------
Balance, December 31,
1996...................... 10,800 37,250 41,080 61,060 14,770 (26,140) 138,820
Net income................ -- -- -- 115,240 -- -- 115,240
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 -- -- -- --
Translation adjustments
and other.............. -- -- -- -- (10,610) -- (10,610)
Exercise of stock
options................ -- 430 4,000 -- -- -- 4,430
Stock award purchases, net
of amortization........ -- -- -- -- -- (6,740) (6,740)
-------- -------- --------- -------- -------- -------- ---------
Balance, December 31,
1997...................... -- $ 47,250 $ 34,340 $157,790 $ 4,160 $(32,880) $ 210,660
======== ======== ========= ======== ======== ======== =========
F-16
67
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
On October 31, 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.
As part of this 1996 transaction, Richard A. Manoogian, Chairman of both Masco
Corporation and MascoTech, also sold to MascoTech one million shares of
MascoTech common stock (at the then current market price) for approximately
$13.6 million. In addition, as part of this transaction, Masco Corporation's
agreement to purchase from the Company, at the Company's option, up to $200
million of subordinated debentures was extended through 2002, and the corporate
services agreement with Masco Corporation was extended until September 30, 1998.
Masco Corporation also agreed that MascoTech will have 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.
In addition, the Company repurchased and retired approximately .3 million
shares of its common stock and approximately .5 million shares of its preferred
stock in 1997, and approximately one million shares of its common stock in each
of 1996 and 1995 in open-market purchases, pursuant to a Board of Directors'
authorized repurchase program. At December 31, 1997, the Company may repurchase
approximately three million additional shares of Company Common Stock pursuant
to this repurchase authorization.
On the basis of amounts paid (declared), cash dividends per common share
were $.22 ($.28) in 1997, $.18 ($.18) in 1996 and $.14 ($.11) in 1995.
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, 1997,
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
565,000, 480,000 and 461,000 shares of Company Common Stock during 1997, 1996
and 1995, respectively, to key employees of the Company and affiliated
companies. The weighted average fair value per share of long-term stock awards
granted during 1997, 1996 and 1995 on the date of grant was $19, $14 and $12,
respectively. Compensation expense for the vesting of long-term stock awards was
approximately $4.7 million, $2.3 million and $4.8 million in 1997, 1996 and
1995, respectively. The unamortized costs of unvested stock awards, aggregating
approximately $33 million at December 31, 1997, are being amortized over the
ten-year vesting periods and are a deduction from shareholders' equity.
Fixed stock options are granted to key employees of the Company and
affiliated companies and have a maximum term of 10 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 10 years after grant or in
installments beginning in the third year and extending through the eighth year
after grant.
F-17
68
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, 1997 is presented
below.
(SHARES IN THOUSANDS)
1997 1996 1995
----- ----- -----
Option shares outstanding, January 1........................ 4,290 3,440 3,620
Weighted average exercise price........................... $10 $ 8 $ 7
Option shares granted....................................... 80 1,370 --
Weighted average exercise price........................... $20 $15 --
Option shares exercised..................................... (500) (450) (120)
Weighted average exercise price........................... $ 8 $ 7 $ 7
Option shares canceled...................................... (100) (70) (60)
Weighted average exercise price........................... $16 $ 5 $ 5
Option shares outstanding, December 31...................... 3,770 4,290 3,440
Weighted average exercise price........................... $10 $10 $ 8
Weighted average remaining option term (in years)......... 4.7 5.3 4.4
Option shares exercisable, December 31...................... 1,430 1,710 1,640
Weighted average exercise price........................... $ 9 $ 9 $ 9
At December 31, 1997, options have been granted and are outstanding with
exercise prices ranging from $4 1/2 to $25 per share, the fair market values at
the dates of grant.
At December 31, 1997 and 1996, a combined total of 5,223,000 and 4,656,000
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 $7.70 and $6.20 in 1997 and 1996, respectively. Had stock option
compensation expense been determined pursuant to the methodology of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the pro forma effects on the Company's earnings per share would
have approximated $.02 and $.01 in 1997 and 1996, respectively, and had no
effect in 1995.
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:
1997 1996 1995
----- ----- -----
Risk free interest rate................................ 6.5% 6.5% 7.3%
Dividend yield......................................... 1.4% 1.1% 1.1%
Volatility factor...................................... 35.0% 39.0% 39.0%
Expected option life (in years)........................ 5.5 5.5 5.5
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 Directors. Aggregate charges to income under these
plans were $9 million in 1997, $11 million in 1996 and $13 million in 1995.
F-18
69
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic pension cost for the Company's defined-benefit pension plans
includes the following components for the three years ended December 31, 1997:
(IN THOUSANDS)
1997 1996 1995
------- ------- -------
Service cost -- benefits earned during the year.... $ 3,480 $ 5,230 $ 4,680
Interest cost on projected benefit obligations..... 6,650 6,490 6,330
Actual return on assets............................ (2,830) (3,970) (6,540)
Net amortization and deferral...................... (2,790) (740) 1,600
------- ------- -------
Net periodic pension cost.......................... $ 4,510 $ 7,010 $ 6,070
======= ======= =======
Major assumptions used in accounting for the Company's defined-benefit
pension plans are as follows:
1997 1996 1995
----- ----- -----
Discount rate for obligations............................ 7.25% 7.50% 7.25%
Rate of increase in compensation levels.................. 5.00% 5.00% 5.00%
Expected long-term rate of return on plan assets......... 11.00% 11.00% 11.00%
The funded status of the Company's defined-benefit pension plans at
December 31, 1997 and 1996 is as follows:
(IN THOUSANDS)
1997 1996
----------- -----------
ACCUMULATED ACCUMULATED
BENEFITS BENEFITS
EXCEED EXCEED
RECONCILIATION OF FUNDED STATUS ASSETS ASSETS
------------------------------- ----------- -----------
Actuarial present value of benefit obligations:
Vested benefit obligation........................... $ 81,180 $ 72,450
======== ========
Accumulated benefit obligation...................... $ 87,830 $ 77,380
======== ========
Projected benefit obligation........................ $ 99,150 $ 89,620
Assets at fair value.................................. 63,020 59,710
-------- --------
Projected benefit obligation in excess of plan
assets........................................... (36,130) (29,910)
Reconciling items:
Unrecognized net loss............................... 21,270 14,690
Unrecognized prior service cost..................... 8,290 8,050
Unrecognized net asset at transition................ (810) (930)
Adjustment required to recognize minimum
liability........................................ (17,580) (12,580)
-------- --------
Accrued pension cost.................................. $(24,960) $(20,680)
======== ========
Postretirement Benefits. The Company provides postretirement medical and
life insurance benefits for certain of its active and retired employees.
The Company records its postretirement benefit plans in accordance with
Statement of Financial Accounting Standards No. 106 ("SFAS No. 106"),
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
statement requires the accrual method of accounting for postretirement health
care and life insurance based on actuarially determined costs to be recognized
over the period from the date of hire to the full eligibility date of employees
who are expected to qualify for such benefits. In conjunction with SFAS No. 106,
the Company recognizes the transition obligation on a
F-19
70
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
prospective basis with the net transition obligation amortized over its
remaining life. Net periodic postretirement benefit cost includes the following
components for the years ended December 31, 1997, 1996 and 1995:
(IN THOUSANDS)
1997 1996 1995
------ ------ ------
Service cost................................................ $ 300 $ 400 $ 300
Interest cost............................................... 1,400 1,600 1,900
Net amortization............................................ 700 800 1,100
------ ------ ------
Net periodic postretirement benefit cost.................... $2,400 $2,800 $3,300
====== ====== ======
Postretirement benefit obligations, none of which is funded, are summarized
as follows at December 31, 1997 and 1996:
(IN THOUSANDS)
1997 1996
-------- --------
Accumulated postretirement benefit obligations:
Retirees.................................................. $ 8,300 $ 13,900
Fully eligible active plan participants................... 500 800
Other active participants................................. 3,600 5,300
-------- --------
Total accumulated postretirement benefit obligation......... 12,400 20,000
Unrecognized prior service cost........................... (500) (300)
Unrecognized net gain..................................... 9,000 700
Unamortized transition obligation......................... (10,300) (11,000)
-------- --------
Accrued postretirement benefits............................. $ 10,600 $ 9,400
======== ========
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.25 percent in both 1997 and 1996. The change in the
accumulated postretirement benefit obligation and the unrecognized net gain
amounts is the result of the change in the actuarial assumptions concerning the
health care cost trend rate. The assumed health care cost trend rate in 1997 was
nine 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 obligation would increase by $.7 million and
the aggregate of the service and interest cost components of net periodic
postretirement benefit cost would increase by $.1 million.
F-20
71
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION:
The Company's business segments involve the sale of the following products
and services:
Transportation-Related Products and Services:
Precision products, generally produced using advanced metalworking
technologies with significant proprietary content, and
aftermarket products for the transportation industry.
Engineering and technical business services.
Specialty Products:
Other Industrial -- Principally doors, windows, security grilles and
office panels and partitions for commercial and residential
markets.
The Company's export sales approximated $71 million, $75 million and $85
million in 1997, 1996 and 1995, respectively.
Corporate assets consist primarily of cash and cash investments, marketable
securities, equity and other investments in affiliates and notes receivable.
F-21
72
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET SALES OPERATING PROFIT(B)
---------------------------------- ------------------------------
1997 1996 1995 1997 1996 1995
-------- ---------- ---------- -------- -------- --------
The Company's operations by
industry segment are:
Transportation-Related Products
and Services(A)................. $922,000 $1,151,000 $1,340,000 $124,000 $ 90,000 $144,000
Specialty Products:
Other Industrial................ -- 130,000 338,000 -- 1,000 (3,000)
-------- ---------- ---------- -------- -------- --------
Total......................... $922,000 $1,281,000 $1,678,000 124,000 91,000 141,000
======== ========== ==========
Other income (expense), net....... 88,000 8,000 (9,000)
General corporate expense......... (22,000) (22,000) (32,000)
-------- -------- --------
Income before income taxes and
cumulative effect of accounting
change, net..................... $190,000 $ 77,000 $100,000
======== ======== ========
Corporate assets..................
Total assets..................
Foreign Operations(F)............. $100,000 $ 170,000 $ 166,000 $ 15,000 $ 17,000 $ 22,000
======== ========== ========== ======== ======== ========
(IN THOUSANDS)
ASSETS EMPLOYED AT
DECEMBER 31(C)
------------------------------------
1997 1996 1995
---------- ---------- ----------
The Company's operations by
industry segment are:
Transportation-Related Products
and Services(A)................. $ 712,000 $ 742,000 $ 870,000
Specialty Products:
Other Industrial................ -- 55,000 150,000
---------- ---------- ----------
Total......................... 712,000 797,000 1,020,000
Other income (expense), net.......
General corporate expense.........
Income before income taxes and
cumulative effect of accounting
change, net.....................
Corporate assets.................. 433,000 406,000 402,000
---------- ---------- ----------
Total assets.................. $1,145,000 $1,203,000 $1,422,000
========== ========== ==========
Foreign Operations(F)............. $ 138,000 $ 155,000 $ 140,000
========== ========== ==========
DEPRECIATION AND
PROPERTY ADDITIONS(D) AMORTIZATION(E)
---------------------------- -------------------------------
1997 1996 1995 1997 1996 1995
------- ------- -------- ------- ------- -------
The Company's operations by
industry segment are:
Transportation-Related Products and Services................ $55,000 $41,000 $ 96,000 $43,000 $44,000 $45,000
Specialty Products:
Other Industrial.......................................... -- 3,000 14,000 -- 2,000 7,000
------- ------- -------- ------- ------- -------
Total................................................... $55,000 $44,000 $110,000 $43,000 $46,000 $52,000
======= ======= ======== ======= ======= =======
(A) Included within this segment are sales to one customer of $140 million, $232
million and $397 million in 1997, 1996 and 1995, respectively; sales to
another customer of $79 million, $146 million and $182 million in 1997, 1996
and 1995, respectively; sales to a third customer of $62 million, $122
million and $178 million in 1997, 1996 and 1995, respectively; and sales to
a fourth customer of $156 million, $155 million and $136 million in 1997,
1996 and 1995, respectively.
(B) Operating profit in 1996 includes a $32 million pre-tax loss principally
from the sale of MascoTech Stamping Technologies, Inc. ("MSTI"). Operating
profit in 1997 includes approximately $5 million of additional pre-tax
consideration earned from the sale of MSTI which was sold in 1996. These
items impacted the Company's Transportation-Related Products and Services
industry segment. The Company may receive additional consideration
contingent upon the future earnings of MSTI through May 31, 1999. Operating
profit in 1995 includes $25 million in net gains resulting from sales of
non-core businesses. These net gains were substantially offset by reductions
in the estimated proceeds the Company expected to receive from businesses to
be sold, aggregating $12 million, and by certain exit costs incurred in 1995
aggregating approximately $8 million. The net gains (charge) impact the
Company's industry segments as follows: Transportation-Related Products and
Services - $21 million and Specialty Products - $(2) million. The remaining
$(14) million of the net gains (charge) was allocated to General Corporate
Expense.
(C) Assets employed at December 31, 1996 and 1995 include net assets related to
the disposition of certain operations (see "Dispositions of Operations"
note).
(D) Property additions include approximately $2 million and $14 million in 1996
and 1995, respectively, of capital expenditures for those businesses held
for disposition related to the plan adopted in late 1994.
(E) Depreciation and amortization expense includes approximately $5 million in
1995 of expense for those businesses held for disposition related to the
plan adopted in late 1994.
(F) The Company's foreign operations are located principally in Western Europe.
F-22
73
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER INCOME (EXPENSE), NET:
(IN THOUSANDS)
1997 1996 1995
------- ------- ------
Other, net:
Net realized and unrealized gains (losses) from marketable
securities............................................. $13,130 $ (160) $ 730
Interest income........................................... 3,440 1,160 2,390
Dividend income........................................... 650 420 950
Other, net................................................ 180 (4,020) 780
------- ------- ------
$17,400 $(2,600) $4,850
======= ======= ======
INCOME TAXES:
(IN THOUSANDS)
1997 1996 1995
-------- ------- --------
Income before income taxes and cumulative effect of
accounting change, net:
Domestic............................................. $173,410 $59,870 $ 78,870
Foreign.............................................. 16,880 17,350 21,410
-------- ------- --------
$190,290 $77,220 $100,280
======== ======= ========
Provision for income taxes (credit):
Federal, current........................................ $ 40,290 $16,170 $(24,210)
State and local......................................... 6,810 4,650 6,110
Foreign, current........................................ 10,430 7,840 7,860
Deferred, principally federal........................... 17,520 8,640 51,330
-------- ------- --------
Income taxes on income before cumulative effect of
accounting change, net............................. $ 75,050 $37,300 $ 41,090
======== ======= ========
The components of deferred taxes at December 31, 1997 and 1996 are as
follows:
(IN THOUSANDS)
1997 1996
-------- --------
Deferred tax assets:
Inventories............................................ $ 2,440 $ 2,860
Accrued liabilities.................................... 35,660 35,170
Alternative minimum tax................................ -- 6,750
-------- --------
38,100 44,780
-------- --------
Deferred tax liabilities:
Property and equipment................................. 64,630 59,580
Other, principally equity investments in affiliates.... 62,240 57,370
-------- --------
126,870 116,950
-------- --------
Net deferred tax liability............................... $ 88,770 $ 72,170
======== ========
F-23
74
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 and cumulative effect of accounting change, net:
(IN THOUSANDS)
1997 1996 1995
------- ------- --------
U.S. federal statutory rate....................... 35% 35% 35%
------- ------- --------
Tax at U.S. federal statutory rate................ $66,600 $27,020 $ 35,100
State and local taxes, net of federal tax
benefit......................................... 4,430 3,020 3,970
Higher effective foreign tax rate................. 3,200 2,100 2,710
Non-deductible portion of charge for disposition
of businesses................................... -- 5,780 --
Amortization in excess of tax, net................ (760) (140) 1,630
Other, net........................................ 1,580 (480) (2,320)
------- ------- --------
Income taxes before cumulative effect of
accounting change, net....................... $75,050 $37,300 $ 41,090
======= ======= ========
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:
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 S&P futures contracts, are intended to reduce the market risk
associated with the Company's marketable equity securities portfolio. 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 derivative contracts in
1997 was approximately $17 million and there were no contracts outstanding at
December 31, 1997.
F-24
75
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1997 and 1996 are as follows:
(IN THOUSANDS)
1997 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Cash and cash investments........................... $ 41,110 $ 41,110 $ 19,400 $ 19,400
Marketable securities, notes receivable and other
assets............................................ $ 80,760 $ 81,590 $124,270 $125,460
Long-term debt:
Bank debt......................................... $267,000 $267,000 $265,000 $265,000
4 1/2% Convertible Subordinated Debentures........ $310,000 $269,700 $310,000 $252,650
6 5/8% Note held by Masco Corporation............. -- -- $151,380 $151,380
Other long-term debt.............................. $ 15,000 $ 14,500 $ 26,020 $ 24,490
F-25
76
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
-------- --------- -------- --------
1997:
- -----
Net sales................................... $233,620 $222,030 $233,040 $233,440
Gross profit................................ $42,020 $ 34,350 $ 53,990 $ 56,300
Net income:
Income.................................... $19,270 $ 38,660 $ 24,650 $ 32,660
Income attributable to common stock....... $19,270 $ 38,660 $ 21,650 $ 29,420
Per common share:
Basic............................. $.43 $.86 $.61 $.83
Diluted........................... $.37 $.70 $.46 $.59
Market price per common share:
High...................................... $21 5/16 $22 1/2 $23 1/2 $21 1/4
Low....................................... $16 1/2 $20 $18 1/2 $16
1996:
- -----
Net sales................................... $271,450 $290,790 $345,060 $373,920
Gross profit................................ $58,160 $ 55,580 $ 57,930 $ 61,440
Income (loss) before accounting change
item...................................... $16,450 $ 19,390 $ (6,660) $ 10,740
Per common share:
Basic............................. $.32 $.30 $(.19) $.14
Diluted........................... $.28 $.28 $(.19) $.13
Net income (loss):
Income (loss)............................. $16,450 $ 19,390 $ (6,660) $ 22,440
Income (loss) attributable to common
stock.................................. $13,210 $ 16,150 $ (9,900) $ 19,200
Per common share:
Basic............................. $.32 $.30 $(.19) $.36
Diluted........................... $.28 $.28 $(.19) $.34
Market price per common share:
High...................................... $17 $15 1/2 $16 1/8 $13 5/8
Low....................................... $13 1/2 $13 $12 1/2 $10 3/8
Results for the first and fourth quarters 1997 include pre-tax gains of
approximately $13 million and $5 million, respectively, as a result of equity
transactions by affiliates of the Company.
Results for the first, second, third and fourth quarters 1997 include
pre-tax marketable securities gains (losses) of approximately $5.0 million, $4.0
million, $4.4 million and $(.3) million, respectively.
Results for the third quarter 1997 include a pre-tax gain of approximately
$46 million related to the transfer of the Company's equity holdings in Emco
Limited to Masco Corporation. This gain was partially offset by pre-tax costs
approximating $14 million associated with a plant closure and the Company's
share of a special charge recorded by an equity affiliate and other expenses.
Results for the fourth quarter 1997 include approximately $5 million
pre-tax of additional consideration earned from the sale of MascoTech Stamping
Technologies, Inc. which was sold in the second quarter 1996.
F-26
77
MASCOTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
Results for the fourth quarter 1997 were negatively impacted by charges
aggregating approximately $10 million pre-tax principally related to severance,
the Company's share of a charge recorded by an equity affiliate, write-off of
deferred charges and loss on disposition of fixed assets.
Convertible securities were anti-dilutive in the first quarter 1996 for
purposes of computing diluted earnings per common share and earnings per common
share on income before accounting change.
Results for the second quarter 1996 include an after-tax loss of
approximately $26 million related to the sale of MascoTech Stamping
Technologies, Inc.
Net income for the first quarter of 1996 includes an after-tax gain of
approximately $12 million as a result of the adoption of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," effective January 1, 1996
which was recorded as a cumulative effect of an accounting change.
The 1997 and 1996 income (loss) per common share amounts for the quarters
do not total to the full year amounts due to the purchase and retirement of
shares throughout the year.
SUBSEQUENT EVENT:
In January 1998, the Company completed its tender offer for all of the
outstanding shares of common stock of TriMas Corporation not held by the Company
for approximately $920 million in accordance with the terms of the Company's
previously announced acquisition agreement with TriMas.
The acquisition will be accounted for as a purchase in 1998. The purchase
price will be allocated to the previously unowned assets acquired and
liabilities assumed based upon their estimated fair values. The excess of the
purchase price over the net assets acquired will be amortized over a period not
exceeding 40 years. The purchase price allocation will be determined during 1998
when appraisals, other studies and additional information become available.
Results of operations for TriMas will be included with those of the Company for
periods subsequent to the date of the acquisition.
TriMas is a diversified proprietary products company with leadership
positions in commercial, industrial and consumer niche markets.
The following is summarized financial data of TriMas as of and for the year
ended December 31, 1997:
(IN THOUSANDS)
1997
--------
Current assets.............................................. $290,630
========
Total assets................................................ $708,460
========
Total liabilities........................................... $159,060
========
Net sales................................................... $667,910
========
Operating profit............................................ $113,700
========
F-27
78
MASCOTECH, INC.
FINANCIAL STATEMENT SCHEDULE
PURSUANT TO ITEM 14(A)(2) OF FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1997
Schedule, as required for the years ended December 31, 1997, 1996 and 1995:
PAGE
----
II. Valuation and Qualifying Accounts....................... F-29
F-28
79
MASCOTECH, INC.
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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:
1997............................ $2,000,000 $500,000 $ 60,000 $1,380,000 $1,180,000
========== ======== ======== ========== ==========
1996............................ $1,880,000 $890,000 $ 20,000 $ 790,000 $2,000,000
========== ======== ======== ========== ==========
1995............................ $1,590,000 $400,000 $410,000 $ 520,000 $1,880,000
========== ======== ======== ========== ==========
(A) Allowance of companies acquired, and other adjustments, net in 1997 and
1995. Allowance of companies reclassified for businesses held for
disposition, and other adjustments, net in 1996 and 1995.
(B) Deductions, representing uncollectible accounts written off, less recoveries
of accounts written off in prior years.
F-29
80
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.i Restated Certificate of Incorporation of Masco Corporation
and amendments thereto. (filed herewith)
3.ii Bylaws of Masco Corporation, as amended.(5)
4.a.i Indenture dated as of December 1, 1982 between Masco
Corporation and Morgan Guaranty Trust Company of New York,
as Trustee, and Directors' resolutions establishing Masco
Corporation's: (i) 9% Notes Due October 1, 2001(7), (ii)
6 5/8 Notes Due September 15, 1999 (filed herewith), (iii)
6 1/8 Notes Due September 15, 2003(6), and (iv) 7 1/8%
Debentures Due August 15, 2013.(6)
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.(4)
4.a.iii Supplemental Indenture dated as of July 26, 1994 between
Masco Corporation and The First National Bank of Chicago.(4)
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(7) and Amendment No. 1 dated April 30, 1997. (filed
herewith)
4.c Rights Agreement dated as of December 6, 1995, between Masco
Corporation and The Bank of New York, as Rights Agent.(2)
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, and
Directors' resolutions establishing Masco Industries, Inc.'s
4 1/2% Convertible Subordinated Debentures Due 2003(5),
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 and Supplemental Indenture dated as of
August 5, 1994 among MascoTech, Inc. and The First National
Bank of Chicago.(3)
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.
(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.).(2)
10.b Corporate Services Agreement dated as of January 1, 1987
between Masco Corporation and Masco Industries, Inc. (now
known as MascoTech, Inc.) (filed herewith), Amendment No. 1
dated as of October 31, 1996(1), and related letter
agreement dated January 22, 1998.(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.)(2) and Amendment No. 1 dated as of
October 31, 1996(1).
81
EXHIBIT
NUMBER DESCRIPTION
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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 (7), and amendment to Stock Repurchase
Agreement included in Agreement dated as of November 23,
1993.(5)
NOTE: Exhibits 10.e through 10.r constitute the management
contracts and executive compensatory plans or arrangements
in which certain of the Directors and executive officers of
the Company participate.
10.e Masco Corporation 1991 Long Term Stock Incentive Plan
(Amended and Restated April 23, 1997). (filed herewith)
10.f Masco Corporation 1988 Restricted Stock Incentive Plan
(Restated December 6, 1995).(2)
10.g Masco Corporation 1988 Stock Option Plan (Restated December
6, 1995).(2)
10.h Masco Corporation 1984 Restricted Stock (Industries)
Incentive Plan (Restated December 6, 1995).(2)
10.i Masco Corporation Supplemental Executive Retirement and
Disability Plan.(3)
10.j Masco Corporation Benefits Restoration Plan.(3)
10.k Masco Corporation 1997 Annual Incentive Compensation Plan.
(filed herewith)
10.1 Masco Corporation 1997 Non-Employee Directors Stock
Plan.(filed herewith)
10.m MascoTech, Inc. 1991 Long Term Stock Incentive Plan (Amended
and Restated April 23, 1997). (filed herewith)
10.n MascoTech, Inc. 1984 Restricted Stock Incentive Plan
(Restated December 6, 1995).(2)
10.o MascoTech, Inc. 1984 Stock Option Plan (Restated December 6,
1995).(2)
10.p MascoTech, Inc. 1997 Annual Incentive Compensation
Plan.(filed herewith)
10.q MascoTech, Inc. 1997 Non-Employee Directors Stock
Plan.(filed herewith)
10.r Description of the Masco Corporation Program for Estate,
Financial Planning and Tax Assistance. (filed herewith)
10.s 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 (5), Agreement dated as of November 23, 1993
relating thereto (5), and Amendment No. 1 to the Securities
Purchase Agreement dated as of October 31, 1996.(1)
10.t Registration Agreement dated as of March 31, 1993, between
Masco Corporation and Masco Industries, Inc. (now known as
MascoTech, Inc.).(5)
10.u Stock Purchase Agreement between Masco Corporation and Masco
Industries, Inc. (now known as MascoTech, Inc.) dated as of
December 23, 1991 (regarding Masco Capital Corporation)(7)
and Amendment thereto dated May 21, 1997. (filed herewith)
10.v 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.(7)
10.w Stock Purchase Agreement dated as of October 15, 1996
between Masco Corporation and MascoTech, Inc.(1)
12 Computation of Ratio of Earnings to Fixed Charges. (filed
herewith)
21 List of Subsidiaries. (filed herewith)
23.a Consent of Coopers & Lybrand L.L.P. relating to Masco
Corporation's Financial Statements and Financial Statement
Schedule. (filed herewith)
82
EXHIBIT
NUMBER DESCRIPTION
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23.b Consent of Coopers & Lybrand L.L.P. relating to MascoTech,
Inc.'s Financial Statements and Financial Statement
Schedule. (filed herewith)
27.a Financial Data Schedule as of and for the year ended
December 31, 1997. (filed herewith)
27.b Financial Data Schedule as of and for the year-to-date
periods ended September 30, 1997, June 30, 1997 and March
31, 1997. (filed herewith)
27.c Financial Data Schedule as of and for the year-to-date
periods ended December 31, 1996, September 30, 1996, June
30, 1996 and March 31, 1996. (filed herewith)
27.d Financial Data Schedule as of and for the year ended
December 31, 1995. (filed herewith)
(1) Incorporated by reference to the Exhibits filed with Masco Corporation's
Current Report on Form 8-K dated November 13, 1996.
(2) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1995.
(3) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1994.
(4) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(5) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1993.
(6) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
(7) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1996.