Document Mk7yXmGg3rBoMZB1EBQDdryM

~ _ Order # 11091790(3/3) pwmmm EXHIBIT U-672 # DCN Company Name 3 00006411 PPG INDUSTRIES INC:P673400000 Doc Type Doc Date Ex Qty. Ship ARS 12/31/1999 NYS l DEL PPG INDUSTRIES INC | Complete Document PPG Industries Contents To Our Shareholders Building A Belter Mix of Businesses Creating Breakthrough Products Improving Our Customers' Results Social Responsibility Corporate Director)Boanl ol Directors financial and Operating Review PPG Shareholder Information 2 6 8 10 12 14 15 lb 45 Responsible Care A Public Commitment eg 'coatings ca re 3 Printed On Recycled Paper 1999 Annual Report PPG IN D U S T R IE S , IN C . 1999 Annual Report . Financial Highlights 1999 Net sales Net income Earnings per share* As reported Non-recurring charges and (gains) Excluding non-recurring charges and (gains) Dividends per share Return on average capital Return on average equity Operating cash flow Capital spending -- including acquisitions Research and development Average shares outstanding* Average number of employees 1999 S7,757 $568 $3.23 $.45 $3.68 $1.52 12.7% 19.3% $902 $1,833 $301 175.5 33,800 For the Year Change 3% -29% -28% - -11% 7% -35% -34% -4% 109% 5% -2% 4% 1998 $7,510 $801 $4.48 $(35) $4.13 $1.42 19.6% 29.4% $942 $877 $287 178.7 32,500 Working capital Shareholders' equity Shareholders (at Jan. 31, '00 and '99) $678 $3,106 31,595 At Year End -9% 8% -3% $748 $2,880 32,680 Average shares outstanding and all dollar amounts except per share data are in millions. Net Sales (Millions of Dollars! 7800 7600 s- 7400 it -- 7200 8 (--| 7000 6800 6600 6400 6200 6000 5800 5600 Vi C I** 30 i i$s | Assumes dilution Net Income (Millions of Dollars) 900 b0 800 }! * ^00 600 500 400 300 200 100 0 v* $ ae 9 33 33 3 Earnings Per Share"' (Dollars! Dividends Per Share (Dollars) 5.00 s4.50 4.00 * a* 2 3.50 3.00 1.60 a Sn 1.40 g 2nj a uo 5 1.00 2.50 0.80 2.00 1.50 1.00 0.50 o.oo LJ <5 - r- CO &< 33333 0.60 0.40 0.20 0.00 trt ^ 00 9> 33 33 3 *Excludes non-recumng chaiges and (gains) l To Our Shareholders As I look back on 1999,1 have mixed emotions. Clearly, our financial performance didn't meet expectations. We reported net earnings of $568 million or $3.23 per share on sales of $7.76 billion. Excluding the 45 cents per share in one-time after-tax costs related to acquisitions as well as cost-reduction initiatives, we still fell short of 1998's performance. Excluding one-time gains and charges, our earnings per share were $4.13 in 1998. Financial crises in emerging markets, especially Asia, early in the year created excess supply in a number of key areas, which led to declining prices for many commodity products. Furthermore, consolidation among competitors and customers produced continuing pricing pressures. On the positive side, our continued strong cash flow allowed us to increase the dividend for the 30th consec utive yeaT, establishing an annual rate of $1.60 pef share in early 2000. This is consistent with our goal of sus taining our dividend, over time, at about one-third of earnings per share. We also made significant progress throughout 1999 in creating a strong foundation capable of producing faster and more predictable earnings growth by: 0 Building A Better Mix of Businesses; Creating Breakthrough Products; and Improving Our Customers' Results. Our lackluster financial performance in 1999 has only strengthened our resolve and added to our sense of urgency in implementing these strategies. Established in 1995, our Challenge 2000 goals were designed to be stretch targets that would require us to take our company's performance to a higher level. In particular, we wanted to renew our earnings growth advantage over Standard & Poor's 500 companies while making that earnings growth more consistent. Although we didn't achieve our specific sales and earnings targets, which were aggressive, we have come a long way in positioning the company to operate at that level because of the strategic steps we have taken. 2 1999 Annual Report Of the 20 key acquisitions and investments we've made or announced since the beginning of 1997, 18 have been in the coatings industry, which has displayed better earn ings growth and consistency than our portfolio of busi nesses as a whole. That's why we have been an active -- but disciplined -- participant in the consolidation of the coatings marketplace. We've acquired only those busi nesses that enhance our base business and provide opportunities for growth. Take, for example, our acquisition of IQ's global automo tive refinish and industrial coatings businesses. This transaction -- the largesc in PPG history -- and our acquisitions in Italy, Australia, New Zealand and South Africa over the past two years have doubled the size of out highly successful refinish business. We're now a truly global supplier. And the addition of ICI Autocolor, a high-end product line with powerful brand appeal and advanced paint technology, complements our broad range of product capabilities. As a result, we can com pete virtually anywhere and at any price point around the world. The same day we closed on our ICI transaction we also completed our acquisition of PRC-DeSoto International, a global supplier of coatings and sealants for aircraft, as well as sealants for architectural insulating glass units. With this acquisition, we established our newest strategic business unit, aerospace coatings and sealants. The Designed specifically for the professioqg^ refinisher, ICI Autocolor products are efficient and use advanced paint technology. ,, coatings that serve the world's airframe manufacturers and operators complement our existing product lines. Further more, because PPG is the world A Singapore Airlines Megatop 747-400 displays a special scheme of 17 colors using Desothane HS top coats from PRC-DeSoto International. leader in the manufacture of transparencies for the air craft industry, the PRC-DeSoto acquisition positions us to grow by providing more total value to the companies that manufacture and maintain commercial aircraft. In architectural coatings, we Porter Paints' new store in expanded our presence in ^rt Wayne, Ind., caters to company-owned stores with ,th, e acqu.is.in. on of WattyilnPam.t _, , Corp.s retail business m the Professional painting contrac. to.r with its openstore design. Carolinas, Georgia and Florida. In combination with our acquisition of Porter Paints in late 1998, we have estab lished a significant presence in the most attractive seg ment of the architectural coatings business in a little more than a year. Roughly 30 percent of our architectur al coatings sales were generated through the company- store channel in 1999. Wattyl also added to the critical mass we've established in the southeastern United States, where the majority of the Porter Paints stores are located, as are a substantial portion of Lowe's home center stores, exclusive distributors of Olympic paints. This regional density has reduced our manufacturing, distribution and marketing costs. 3 PPG Industries Since 1997 we hav^spenl approximately $2 billion on acquisitions that should generate roughly $1.5 billion in high-quality sales in 2000. 'oU Breakthrough Produncts Although our portfolio of businesses has changed in recent years, our commitment to research and development remains unchanged. That's because our investments in science and technology have served this company well throughout its history. During the past three years we've generated an average of 35 percent of sales from new products, or about $8 billion, which is roughly 10 times greater than the approximately $850 million we invested in R&D during that time. As impressive as that rate of return is, we must take our science and technology efforts to a higher level. That's why we're now also measuring the sales of what we call "breakthrough" products. These new products not only represent the potential for significant financial rewards, they have the patent pro tection that ensures we have the opportunity to realize the full potential of our technologies. In other words, each of these products is poised to make a dramatic impact on the value chains R&D 100 Awards in which they compete as well as PPG's bottom line. (?(? QssQiiiifksgJBcss Odskss ossein (lteracioflg&lX^ fVrTmgfWTyrrT^Tfhgi dr. mmno? grorOiBCB aoDd [jiiGxHgigee as A good example is the PowerPrime two-coat electrocoat system, which includes the world's first commercial primer-surfacer that can be applied by electrodeposition qyer another paint layer. The ..fflSt coat, which provides rust protection, is the result of a chemistry that PPG patented 20 years ago and today is the industry standard. We believe our success in rust-protection e-coating can be replicated in primer-surfacers because the Power-Prime system reduces capital and operating expenses while ensuring car bodies resist rust and chipping from stones. Furthermore, the system generates virtually no volatile organic compounds. This product, which received an R&D 100 Award as one of the year's 100 most-significant technology develop ments in new products and processes, has the potential to change the way car makers have been applying primersurfacers for the past 50 years. Another breakthrough product that's changing the way automakers design and manufacture cars is the Sungate antenna windshield. The windshield helps keep the sun's heat out of automobile interiors through the use of a high-performance coating incorporated with in the windshield's laminated layers. The transparent metallic coating keeps car interiors cooler than conventional tinted windshields, requiring smaller air con ditioners and improving fuel efficiency as a result of the weight reduction. The same coating can also act as an antenna capable of receiving the full range of sig nals for AM/FM radios as well as cellular telephones and navigation systems. Once thought of merely as a device for keeping out wind and rain, the windshield now performs a variety of functions, enabling the auto companies to simplify their manufacturing processes while improving the aesthetics of their automobiles. Sales of Sungate windshields rose sharply in 1999, especially among European car makers. This proves that even though we no longer manufacture or fabricate glass in Europe, our ability to serve the tech nology needs of that important market remains unchanged. Our Customers' Results Developing breakthrough products requires a relentless focus on customer requirements, which has been and continues to be a PPG hallmark. Our ability to under stand customers and anticipate their needs clearly dis tinguishes us from our competitors. For the second year in a row, we were judged "best of the best" among auto motive coatings and glass suppliers in voting by the readers of Automotive Industries magazine. In this sur vey, readers involved in automotive design, engineering, manufacturing, purchasing and management rated sup pliers on quality, price, delivery, service and innovation. 4 1999 Annua! Report Voice o f: * C ustom er My Nguyen, operator at the Evansville, Ind., automotive glass plant verifies size and bend conformance ofa Sungate automotive wind shield against a check fix ture in one of many quality checks that assure PPG parts fit precisely in a vehicle opening. The Quality Process, which we launched in the 1980s, helped us create a culture in which employees are focused on customer requirements. And we have renewed our commitment to the Quality Process with the addition of the Sigma Logic methodol ogy and the wider implementation of Value Focus or Lean Manufacturing. The Sigma Logic strategy is our statistical approach to reducing variations in our products and processes, which has the potential to improve customer satisfaction while increasing our efficiency and effectiveness. Last year 35 people earned the right to be called a "catalyst," which is the term we've chosen for the graduates of our training in the Sigma Logic methodology. It reflects their leadership role, which is to initiate the process and help it proceed. We expect 50 or more employees to become catalysts in 2000, bringing the power of statistical analy sis to the managers and employees who actually manage our products and processes on a daily basis. Already, the Sigma Logic methodology is starting to have an effect. A catalyst at our Natrium, WVa., chemicals plant, working with a team at that site, used thaafTOcess to increase the throughput of a crystallizer for paradichlorobenzene by 20 percent. With results such as (five, we expect training in the Sigma Logic strategy will be the underpinning of the development process for future leaders of the company Value Focus, sometimes referred to as Lean Manufacturing, is a process that enables us to understand what in our operations adds value from the customer's perspective, and to eliminate what doesn't. Facilities throughout PPG are using this tool to eliminate waste and anything that gets in the way of a continuous flow of the product or service to the customer. Employees at our Cleveland coatings plant, for example, used Value Focus to reduce work-in-process inventory, improving cycle time 43 percent over a two-year period. At our Huntsville, Ala., fabricating plant for aircraft transparen cies, Value Focus reduced cycle time by 30 percent and work-in-process inventory by 40 percent. As the Sigma Logic strategy and its catalysts spread throughout the organization and we continue to imple ment Value Focus, PPG will be better positioned to meet customer requirements and increase market share. The Quality Process PPG Quality Process Model illustrates just how much PPG people mean to this company. Our energy, creativity and intelligence pro vide PPG with a sig nificant competitive advantage. And we're clearly motivated to enhance our company's performance. Employees own 15 percent of the company's outstanding shares, making us the largest group of share holders. Nobody stands to benefit from an improved financial performance more than those who work here every day. I also wish to acknowledge Ned C. Lautenbach, who resigned from the board of directors in January 2000. His broad marketing skills and extensive knowledge of business were valuable assets to our company. Despite an ever-changing global economy fraught with uncertainty, I am confident that PPG is headed in the right direction. The repositioning of our portfolio to build a better mix of businesses, in combination with our break through technologies and our renewed commitment to the Quality Process, will position us to generate earnings growth and stability. With your continued support, 1 believe we can realize this potential and elevate our performance in 2000 and beyond. kL, uE Raymond W. LaBoouf Chairman ofthe Board and Chief Executive Officer PPG Industries A Better Mix of Businesses To increase earnings growth and consistency, PPG reshapes its business portfolio with 20 key acquisitions and investments since early 1997. industrial coatings expanded its presence in Europe with two key acquisitions in 1999. PPG purchased Id's German-based unit that supplies original equipment specialty coatings used by large-scale manufacturers of buses and trucks, as well as for rail car, military and industrial applications. The transaction didn't include the acquisition of manufacturing facilities. Meanwhile, PPG purchased a 60-percent interest in powder coatings maker Bellaria of Felizzano, Italy. The fastest-growing segment of the industrial coatings industry, powders are spray-applied and oven-fused on products as diverse as appliances, motor vehicle parts, lawn equipment and metal furniture. Architectural coatings expanded the distri bution of its Porter Paints brand with the acquisition of the retail business of Wattyl Paint Corp. Most of the 20 acquired stores in four Southeastern states are in cities or towns in ^ which Porter has one or more stores. Porter, which PPG acquired in late 1998, makes a broad range of paints and stains sold mostly to painting contractors. Automotive refinish added to its European presence with the acquisition of the commercial transport refinish business of Sigma Coatings. PPG acquired the portion of Sigma's business involving fleet finishes in Belgium, the Netherlands and the United Kingdom. The transaction didn't include manufacturing facilities. Meanwhile, automotive refinish, automotive coatings and industrial coatings extended their geographic reach when PPG and AECI Ltd. of Johannesburg, South Africa, agreed to join forces in a new unit, AECI Coatings Ltd. Michael Nichols, manager ofPorter Paints' new store in Fort Wayne, Ind., assists a customer with herpaint selection. 6 1999 Annual Report PPG enhanced its position as a global player in automotive refinish coatings with the acquisition of ICI's automotive refinish and industrial coatings businesses. As a result, PPG can generate approximately one-half of its refinish sales outside North America. And the addition of ICI Autocolor, one of the most respected brand names in the refinish industry, enhances PPG's ability to serve the needs of high-end customers. In addition to refinish coatings, PPG acquired Id's Asian and Latin American industrial powder and liquid coatings units. Also part of the transaction, PPG obtained Grow Automotive, which supplies a variety of North American industrial customers with flushing solvents to clean paint-spray equipment and reducing solvents to complete final paint formulation. Grow Automotive enhances automotive coatings' ability to provide assembly plant total fluids management. 77re ICI Autocolor 2K andAquabase product systems are complete and compact lines of easy-to-use products. The product systems provide an entire refinish process. The acquisition of PRC-DeSoto International positions PPG to provide more total value to the aircraft industry while complementing the company's strengths in the manufacture of glass and coatings. Already a world leader in the manufacture of air craft transparencies, PPG is now a leading supplier of coatings and sealants for the world's commercial, general and military aircraft. Sealants ensure that fuel tanks, windows, cabins, aircraft doors and other components remain tighdy sealed and withstand the rigors of flight. PRC-DeSoto also makes high-performance sealants for the insulating glass and utility industries. PRC-DeSoto coatings, meanwhile, cover. virtually every model of Boeing and Airbus airliner and numerous military aircraft, including the U S. Navy F-18 "Super Hornet" and European "Eurofighter Typhoon" fighter jets. PRC-DeSoto also makes a wide array of application systems, including dispensing guns, mixers, cartridges, nozzles and syringes. Application support centers in North America. Africa, Asia, Desothane HS top coat Australia and Europe support aircraft maintenance and after- mark, e,,t cust.omers. . .. ^om PRC-OeSoto Inter,,natio. nal is applied to a SouthwestAirlines 737 in Everett, Wash. Acquisitions & Investments mi Akzo, Argentina Automotive coatings Akzo, Brazil Automotive coatings Man-Gill Chemical Pretreatment and lubricants Phillips Paints Industrial coatings Iagricultural construction equipment) MaxMeyer Ouco Automotive refinish coatings BASF Container Coatings Packaging coatings Keeler and Long Industrial coatings (high performance, coil coatings) Sipsy Pharmaceutical intermediates m% Evart Automotive glass Bollig & Kemper Automotive coatings Orica Refinish, automotive, industrial and packaging coatings Porter Paints Architectural coatings 11999 Courtaulds Packaging Coatings Packaging coatings Sigma Coatings Refinish coatings (commercial transport) Waftyl Architectural coatings ICI Specialty Coatings Industrial coatings (buses, trucks, military vehicles, railroad) ICI Refinish and Industrial Coatings Refinish, industrial and automotive coatings PRC-OaSoto International Aircraft coatings and sealants Bellaria Industrial coatings (powder) AECI Coatings Automotive refinish and original equipment, industrial coatings 7 PPG Indusiries Breakthrough Products r PPG raises the bar in research and development, increasing its focus on products with the potential for a dramatic impact in the marketplace. PPG announced plans in 1999 to expand production capacity to meet the growing demand for Sungate wind shields. The solar-reflective windshields are produced from two pieces of glass with a vinyl interlayer sand wiched between. The outer glass has a transparent metallic coating that reflects solar infrared heat while transmitting visible light. As a result, Sungate wind shields reflect or absorb about 60 percent of the solar energy striking the glass. This enables auto manufacturers to install smaller cooling systems, which can generate a half-mile-per-gallon improvement in fuel efficiency, according to a study by the National Renewable Energy Laboratory in Golden, Colo. Sungate windshields have been installed on more than 3 million vehicles worldwide and global demand is expected to more than quadruple in the next five years. PPG introduced the Sungate auto motive windshield in 1989 on General Motors' APV minivans. Today, GM's minivans produced in North America and Europe sport the solar-reflective windshields, as do Renault vehicles in Europe. PPG enhanced the functionality of its windshield with the Sungate antenna windshield launched on GM's 1997 minivans. It was the world's first windshield providing solar reflectivity for fuel efficiency and comfort, while serving as the vehicle's radio antenna. In 1998 the Sungate antenna windshield was recognized as one of that year's 100 most significant technology breakthroughs in new products and process es when it received an R&D 100 Award. Technician Barry White double-checks the contour of bent glass for Sungate automotive windshields at the Evansville, Ind., glass plant to ensure measurements agree with automated Quality inspection system. 8 2999 .Annua! Repon PPG's excellence in producing coatings innovations for the automotive industry continued in 1999 with the intro duction of the Power-Prime two-coat electrocoat system. The system applies two coatings by immersing negatively charged vehicle bodies ih'^ositively charged electrocoat baths. The first coat is PPG's hallmark corrosion-inhibitor, which the company pioneered in the 1970s. The second is a full-body, anti-chip primer-surfacer that replaces conven tionally applied primer-surfacers. PPG's first commercial installation began operating at a DaimlerChrysler assembly plant in Brazil in 1999, and the Power-Prime system is being evaluated by automakers globally. The process improves coating application and performance with reduced cost and environmental effect. In addition, the Power-Prime system occupies about the same area as a typical primer e-coat and spray-on primer-surfacer line, depending on the facility. R&D 100 Awards 1999 Power-Prime system 1998 Surgate antenna windshield Enviracryl powder dear coat 1997 Relative Humidity Adaptive Application Process (coatings) 1996 Bairocade gas barrier coatings E-Coat Second Coat The first electrodeposition bath applies the corrosion-inhibiting coating. After it's rinsed and baked, the car body is cooled. Then the primer-surfacer is applied in the second bath. After a second rinse, the two coatings are baked on the car body as it proceeds through an oven. . To meet the electronics industry's need for higher perfor mance and lower costs, PPG has developed a resin-com patible fiber glass yam for use in printed circuit boards. Marketed by ZebraLink of PPG Industries, this technology eliminates three of four costly and capital-intensive steps in the weaving process. Circuit boards produced with Hybon laminate products using fabric made with resin-com patible yam have the potential to be stronger and smoother, giving circuit board manufacturers the ability to place more components on a circuit board surface. In addition, studies indicate this unique technology enables circuit board manufacturers to meet tighter tolerances and increase the efficiency in their drilling operations. Plans call for Hybon products, now in the final stages of testing and validation, to be integrated into industrial and consumer electronic equipment, ranging from mainframe computers to cellular telephones, as early as the fourth quarter of 2000. Jeane Sams, a development technician at the Lexington, N.C., fiberglass plant moni tors an air-jet loom weaving PPG's resin-compatible yam. The newest addition to the Transitions family of photochromic eyewear makes its debut in early 2000. The new polycar bonate lens contains the latest photochromic system from Transitions Optical. Like its prede cessors, these new lenses change from light to dark according to ultra violet light and tempera ture conditions -- only they do it faster. This new product positions Transitions Optical, a joint venture of PPG and James McCaskill, a Transitions production associate, inspects new polycarbonate lenses at the Pinellas Park, Fla., plant. Essilor International, to participate in the fastest-growing segment of the optical lens business. Polycarbonate lenses, which are thin, lightweight and have high-impact resis tance, constitute 22 percent of the market share in the United States and have grown 25 percent a year for the past four years. In addition, sales of polycarbonate lenses are on the rise in Europe, where they were recently introduced. 9 PPG Industries r\ n VJ Customers' Results Understanding customers - and the customers' customers - enables PPG to create value by helping all parties improve their performance. To help insurance companies and glass installers deliver superior value to consumers, PPG founded LYNX Services from PPG in 1994 to streamline automo tive glass claims management. Today, LYNX Services is the nation's leading auto glass claims processor, handling nearly one in every four claims. And in 1999, CIO mag azine presented LYNX Services with an Enterprise Value Award, which recognizes the innovative collaboration of information technology and business management. When a consumer calls his or her insurance agent to resolve a glass replacement or repair claim, the caller is connected with a LYNX Services representative who veri fies coverage, arranges service at a time and shop chosen by the consumer and completes the claim process online -- all in about six minutes. No additional telephone calls or paperwork are required. Insurance companies account for nearly 60 percent of auto glass replacement orders nationwide. For those insurers using LYNX Services, the PPG subsidiary audits and processes the invoices for consolidated electronic billing. Insurance companies benefit from reduced costs in claims processing. Glass installers benefit by having access to the insured through the LYNX Services network and fast turnaround on pay ment. The consumer, the ultimate customer, benefits from a one-stop, hassle-free experience. In 1999, PPG opened its second national call center in three years when a 36,000-square-foot facility in Paducah, Ky., began operations. A 60,000-square-foot center in Fort Myers, Fla., opened in 1997. With duplicate systems at both facilities, telephone calls can flow between the Paducah and Fort Myers centers, providing uninterrupted service in the event of a disaster in either area. As a result of its success in processing auto glass claims, LYNX Services has been asked to pursue additional areas of claims management. Team leader Kimberly Dobson processes an auto glass insurance claim at the Fort Myers, Pa., call center. to 1999 Annual Report PPG is actively pursuing Internet tech nology to move its strategic business units into electronic commerce and to improve their speed and efficiency in meeting cus tomer require ments. In early c=pd o^:COAOTURC 2000, PPG launched the OneSource Coatings Web site (www.onesourcecoat- ings.com), the first business to offer the industrial coatings marketplace the abili ty to order pretreatment products, liquid and powder coatings and related supplies online. In automotive replacement glass, PPG offers glass installers the ability to place orders, confirm availability and locate hard-to-find parts, during or after normal business hours on-line. Architectural coatings customers can order product, obtain technical information and communicate with PPG personnel through www.getpaint.com. Meanwhile, selected customers for flat glass trade and automotive products can use GlassNet, an Internet-based system to place new glass orders, release existing orders, review common inventory levels and review their own stocking program inventory levels. And in chlor-alkali and derivatives, PPG completed the first-ever real-time ethylene purchase when it bought 5 million pounds through the Internet exchange ChemConnect in November 1999. To create sustainable added value, PPG is encouraging suppliers to identify waste-reduction and cost-savings opportunities anywhere in the total supply chain. Through a program called Supplier Added Value Effort, or SAVE, suppliers are challenged to make proposals adding value or reducing costs by at least 5 percent annually. More than 60 percent of every sales dollar at PPG is attributed to materials, transportation and services, which means supply relationships offer the greatest potential for adding value. Innovative and effective management throughout the supply chain is expected to create winning opportunities for all. In SAVE's first year, more than 200 ideas recom mended by suppliers were implemented, generating in excess of $15 million in additional value and improving the competitiveness of customers and suppliers as well as PPG. I LYNX Services from PPG was featured in die Feb. 1, 1999, issue of CIO magazine as a winner of an Enterprise Value Award for creating business value with information technology. A panel ofjudges made its final selections after editors, consultants and academics reviewed all nominations and visited nominated companies to assemble detailed reports on technology application and business success. li PPG Industr.es Social Responsibility PPG's investments in envi ronment, health, safety, education and diversity initiatives recognize our responsibilities to employ ees, customers, communi ties, shareholders and society. PPG was among the first companies to endorse the new, performance-focused Guiding Principles of the Responsible Care initiative, the Chemical Manufacturers Association's com mitment to the responsible management of the chemicals that make life better for people around the world. Under the first 10 years of the Responsible Care initiative, companies were required to engage in specific practices that safeguarded workers, communities and the environment. In 1999, the CMAs board of directors raisedi the bar, adding requirements that companies must now continuously improve, set goals and report on their performance to the public ______________ A Putiflc Commitment To look at the gently rolling hills and meadows, it's hard to imagine that 15 years ago the 117-acre parcel of land at PPG's Barberton, Ohio, chemicals plant was virtually lifeless. No grass, flowers or trees grew there. Even the weeds struggled to survive. That's because the waste generated from more than 70 years of soda ash production -- mostly in the form of a limewater slurry -- was pumped into six ponds, referred to as lime lakes. The result: 600 acres incapable of supporting vegetation. In 1899, when the Barberton plant was built, the impact of industrial wastes, including those from making soda ash for the production of plate glass, was unrecognized. But in the 1980s, PPG discovered a way to reclaim the lakes. By mixing selected sludge with the lime, PPG was able to restore Lime Lake No. 4 to a vegetative state similar to the way it was 100 years ago. The result is a greenspace suitable for hiking, biking, picnics and wildlife observation. The new soil also helps to minimize the release of pollutants into the groundwater. Lake Nos. 3 and 5 are being treated with the same technology, and regulators recently issued permission to use the process on 250-acre Lake No. 6. PPG's award-winning technology brings flowers and trees amid rolling hills, above, to a oncebarren lime lake, right, in Barberton, Ohio. In keeping with PPG's strategic objective of supporting education, the PPG industries Foundation awarded more than $2 million in grants and scholarships in 1999. Through their participation in the Matching Gifts and Grant Incentives for Volunteerism by PPG Employees (GIVE) programs, employees determined which institutions received approximately one-half of those funds. Employees also donated their time and talents to school-age children in their communities, serving as mentors, tutors and guest speakers. In addition to enhancing the quality of life where employees and their families live, PPG is making an investment in the work force of the future. Approximately 75 percent of our employees live and received their primary and secondary education within a 15-mile radius of PPG's manufacturing facilities. For more information about the PPG Industries Foundation, which also supports health and human ser vices, civic-community affairs and cultural ini tiatives. visit the PPG corporate Web site: www.ppg.com. i 12 1999 .Annucii Report PPG is committed to developing and fostering a diverse and dynamic business environment in the belief that a work force comprising art%riety'of perspectives, experiences and backgrounds offers the best opportunity for recognizing our potential as a company and as individuals. That's why PPG formed a partnership with the American Chemical Society and developed the ACS/PPG Scholarships Plus program, which awards four-year scholarships to underrepresented minorities who plan to study chemistry or chemical engineering in college. Since 1997, the PPG Industries Foundation has funded 10 grants per year through this program. In addition, PPG provides an employee mentor to each of the 10 students throughout their academic careers. Furthermore, students are offered an opportunity to interview for a summer intern ship at a PPG facility between their junior and senior years. Another way PPG is promoting diversity among its employees is through cross-cultural communication training. This program is designed for employees who routinely work with other employees, customers or suppliers in countries differ ent from their own. Its purpose is to overcome the barriers that exist between people of different cultures. To communicate the company's commitment to diversity, Web pages dedicated to the subject were created for PPG's Intranet site in 1999. The content not only defines diversity and its benefits to the company, it provides news and infor mation on best practices and training programs. And in 1999, the company conducted a Work Climate survey, asking employees to rate PPG as a place to work. The individual responses from employees will remain confi dential. The collective results, however, as tabulated by an independent firm, will enable the company to identify which practices PPG should continue and which it should address. The objective is to improve PPG's ability to attract and retain the best and most talented employees possiblei which, in turn, will enhance the company's ability to create an inclusive work environment. To improve off-the-job health and safety, PPG established the Lifestyle Partnership in 1999. The objective is to pro vide retirees, employees and their families a similar level of information and support away from work that PPG people enjoy in the workplace, where the company has earned a reputation for safety. PPG wants to establish initiatives at all facilities worldwide within five years consistent with local cultures, needs and circumstances. These initiatives will build upon existing local wellness and away-fromwork safety efforts, supported by a number of tools, including the Wellness Checkpoint Web site, which debuted in early 2000. The site provides users with a con fidential, personal health assessment. In addition, the site acts as a personal coach, helpingusers to set goals and to establish a plan for meeting them. All personal information is password protected. In addition to improving the quality of life, the Lifestyle Partnership has the potential to reduce health care costs for the company and its employees. PA SHIP Environmental Performance Global Waste Generation Rate Index 5$ 10S 5 1-1,=, S 5 i0.75 U.S. Toxic Release Inventory* Aggregate reduction 1992-1998: 893 tons, 25% Sales increase 1992-1998:29% Excludes energy recovery and recycling 4,000 3,000 - s ii 0.50 2,000 0.25 1,000 o.oo LJ l_ ! | | f | | s. Index provides a standard progress measure for waste generation per unit ofproduction by excluding the volume effect ofpro duction rate variations. 35 05>' I3* 2O' JO' 23* IO' * Domestic emissions reported under the U.S. Emergency Planning and Community Rightto-KnowAct Charts reflect the most current data available. For more information about PPG's commitment to environment, health and safety, visit the PPG corporate Web site: www.ppg.com. 13 PPG Industries Corporate Directory Office of the Chief Executive Raymond W. LeBoeuf Chairman of the Board and Chief Executive Officer Operating Committee Frank A. Archinaco Co-Chairman Executive Vice President Frank A. Archinaco Executive Vice President E. Kears Pollock Executive Vice President Executive Committee Raymond W. LeBoeuf Chairman of the Board and Chief Executive Officer Frank A. Archinaco Executive Vice President Charles E. Bunch Senior Vice President Strategic Planning and Corporate Services Russell L Crane Senior Vice President Human Resources and Administration James C. Diggs Senior Vice President end General Counsel William H. Hernandez Senior Vice President Finance E. Kears Pollock Executive Vice President E. Kears Pollock Co-Chairman Executive Vice President Hae R. Burton Vice President Chior-Atkaii end Derivatives Garry A. Goudy Vice President Automotive Replacement Glass Gerald W. Gruber Vice President Science and Technology Ernest A. Hahn Vice President Automotive Glass Douglas C. Hopper Vice President Automotive Rafinish Richard B. Leggett Vice President Flat Glass Michael A. Ludlow Vice President Industrial Coatings Barry J. McGee Vice President Glass Technology and Manufacturing Services David B. Navikas ^mController Maurice V. Peconi s-lfice President, Architectural Coatings Kevin F. Sullivan Vice President Fiber Glass Thomas M. VOn Lehman Vice President Specialty Chemicals Richard Zalina Vice President Automotive Coatings Other Officers Oonald W. Bogus Vice President Government Affairs L Blaine Boswell Vice President Public Affairs David C. Cannon Jr. Vice President Environment Health ana Safety Michael C. Hanzel Secretary end Corporate Counsel Oan W. Kienei Treasurer Margant H. McGrath Vice President Purchasing and Distribution David W. Smith Vice President Information Technology Responsible Cara is a trademark of the Chemical Manufacturers Association. Coatings Can is a trademark of the National Paint & Coatings Association. Transitions is a trademark of Transitions Optical, Inc. Lucite, which is used under license by PPG, is a trademark of E.l. du Pont da Nemours & Co. LYNX Services and LYNX Services from PPG are service marks of LYNX Services from PPG LLC. Desothane is a trademark of PRC-Oe$oto International, Inc. ICI is a trademark of Imperial Chemical Industries pic. These trademarks and service mark of PPG are used In this report Aquabase, Autocolor, Bairocada, Emiracryf, Hybon. Olympic, OneSourca Coatings, Pittsburgh, Porter, Power-Prime, the PPG logo, PPG PROSTARS, Prist Sigma Logic, Sungata, Surface Seal and 2K. 14 < Board ~ of Directors 1999 Annual Report Erroll B. Davis, Jr. Erroll 8. Daw's, Jr., 5S, is president and chief executive officer of Alliant Energy, an electric, gas and water utility company. A PPG director since 1994, he is also a director of BP Amoco Corporation and Alliant Energy. Audit Committee Investment Committee Michele J. Hooper Michele J. Hooper, 48, is president and chief executive officer of Voyager Expanded Learning, Inc., a company that develops and implements learning programs and teacher training for public schools. A director since I99S, she is also a director of Target Corporation and The Seagram Company Ltd. Audit Committee Nominating and Governance Committee Allen J. Krowe Allen J. Krowe, 87, is a retired director and vice chairman of Texaco Inc., an international petroleum company. A PPG director since 1987, he is also a director ofl.B.J. Whitehall Bank & Trust Company and Navistar International Corporation. Nominatingjut Governance Committee Investment Committee Raymond W. LeBoenf Raymond W. LeBoeuf, S3, is chairman of the board and chief executive officer of PPG Industries, Inc. A director since 1995, ha is also a director of Praxair, inc. 15 Steven C. Mason Steven C. Mason, 64, is retired chairman of the board and chief executive officer of the Mead Corporation, a forest prod ucts company. A PPG director since 1990, he is also a director of Convergys Corp. and The Eider-Beerman Stores Corp. Audit Committee Officers-Oiractors Compensation Committee Robert Mehrabian Robert Mehrabian, 58, is president and chief execubve officer of Teledyne Technologies Inc., a provider of aerospace, electronic and communications products and systems engineering services. A PPG director since 1993 he is also a director of Teledyne Technologies Inc.. Mellon Financial Corporation and BE! Technologies, Inc. Audit Committee Qfhcers-Oirectors Compensation Committee Thomas J. Usher Thomas J. Usher, 57, is chairman of the board and chief executive officer of USX Corporation, a major producer of energy and metal products. A director of PPG since 1996, he is also a director of PNC Bank Corp. and Transtar, Inc. Ofhcers-Oirectors Compensation Committee Investment Committee David G. Vice David G. Vice, 68, is retired vice chairman, products and technology, of Northern Telecom Limited, a telecommunications systems company. A PPG director since 1988, he is also a director of Sun Life Assurance Company of Canada and Stackpole Limited. Nominating and Governance Committee Investment Committee David R. Whitwam David R. Whitwam, 58, is chairman of the board and chief executive officer of the Whirlpool Corporation, a manufacturer and distributor of household appliances and related products. He has been a director of PPG since 1991. Nominating and Governance Committee Officers-Directors Compensation Committee Financial and Operating Review Independent Auditors' Report Management Statement Statement of Income Balance Sheet Statement of Shareholders' Equity Statement of Comprehensive Income Statement of Cash Flows Management's Discussion and Analysis Business Segment Information Notes Eleven-Year Digest 17 17 18 19 20 20 21 22 29 32 44 1999 Annual Report Financial and Operating Review MajDagannieinjil Stattemem To the Board of Directors and Shareholders of PPG Industries, Inc.: We have audited the accompanying balance sheet of PPG Industries, Inc. and subsidiaries as of December 31,1999 and 1998, and the related statements of income, compre hensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assur ance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of PPG Industries, Inc. and subsidiaries as of December 31,1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31,1999 in conformity with generally accepted accounting principles. Responsibilityfor Preparation of the Financial Statements The management of PPG Industries, Inc. is responsible for the preparation of the financial statements included in this Annual Report. To ensure the reliability of financial data, PPG has established, and maintains, an internal control system. We believe the internal controls in use give reasonable assurance that financial reports do not contain any material misstate ment. We believe that the financial statements and related notes in this report are accurate in all material respects, and that they were prepared according to generally accepted accounting principles. The financial statements include amounts that are based on the best estimates and judgments of management. We believe, further, that the other financial information contained in this Annual Report is consistent with the finan cial statements. 1SL,.ju> Raymond W. LeBoeuf Chairman of the Board and Chief Executive Officer William H. Hernandez Senior Vice President, Finance Deloitte & Touche llp Pittsburgh, Pennsylvania January 20, 2000 PPC- Industries Statement of Income (Millions, except per share amounts) Net sales Cost of sales Gross profit Other expenses (earnings) Selling, general and administrative Depreciation Research and development -- net (See Note 17) Interest Amortization Business divestitures and realignments (See Note 2) Purchased in-process research and development (See Note 2) Other charges Other earnings (See Notes 2 and 14) Total other expenses -- net Income before income taxes and minority interest Income taxes (See Note 8) Minority interest Net income Earnings per common share (See Note 7) Earnings per common share -- ossumifq; dilution (See Note 7) The accompanying notes to thefinancial statements are an integral part of this statement. 1999 $7,757 4,719 3,038 For the'Year 1998 1997 $7,510 $7,379 4,476 3(034 4,397 2,982 1,230 366 284 133 49 42 40 45 (124) 2,065 973 377 28 1,133 354 271 110 27 31 -- 50 (236) 1,740 U94 466 27 1,068 348 250 105 19 102 -- 77 (162) 1,807 1,175 435 26 $ 568 $ 801 $ 714 $ 3.27 $ 4.52 $ 3.97 $ 3.23 $ 4.48 $ 3.94 18 1999 Annual Report Balance Sheet (Millions.) Assstts Current assets Cash and cash equivalents Receivables (See Note 3) Inventories (See Note 3) Deferred income taxes (See Note 8) Other Total current assets Property (See Note 4) Less accumulated depreciation Property -- net Investments Goodwill Less accumulated amortization Goodwill -- net Identifiable intangible assets Less accumulated amortization Identifiable intangible assets -- net Other assets (See Note 9) Total UsboOitfns attd Sfoarelhofldore' Equity Current liabilities Short-term debt and current portion of long-term debt (See Note 5) Accounts payable and accrued liabilities (See Note 3) Total current liabilities Long-term debt (See Note 5) Deferred income taxes (See Note 8) Accrued pensions (See Note 9) Other postretirement benefits (See Note 9) Other liabilities Total liabilities Commitments and contingent liabilities (See Note 10) Minority interest Shareholders'equity (See Notes 11 and 12) Common stock Additional paid-in capital Retained earnings * %. Treasury stock, at cost Unearned compensation Accumulated other comprehensive loss Total shareholders' equity Total Shares outstanding were 173,988,266 and 174,989396 at Dec 31,1999 and 1998, respectively. The accompanying notes to thefinancial statements are an integral part of this statement. 19 December 31 1999 1998 $ 158 1,594 1,016 165 129 3,062 6,859 3,926 2,933 261 1,102 100 1,002 723 63 660 996 $ 8,914 $ 128 1,366 917 146 103 2,660 6,739 3,834 2,905 263 660 84 576 184 . 36 148 835 $ 7,387 $ 954 1,430 2,384 1,836 520 123 548 299 5,710 $ 637 1,275 1,912 1,081 440 130 543 314 4,420 98 87 484 104 6,098 (3,268) (134) (178) 3,106 $ 8,914 484 105 5,791 (3,198) (149) (153) 2,880 $ 7,387 PPG Industries Statement of Shareholders' Equity ('Mi'/ifonsj Balance, Jan. 1, 1997 Net income Other comprehensive loss, net of tax Cash dividends Purchase of treasury stock Issuance of treasury stock Loans to ESOP Repayment of loans by ESOP Other Balance, Dec. 31,1<?97 Net income Other comprehensive income, net of tax Cash dividends Purchase of treasury stock Issuance of treasury stock Loans to ESOP Repayment of loans by ESOP Other Balance, Dec. 31,1998 Net income Other comprehensive loss, net of tax Cash dividends Purchase of treasury stock Issuance of treasury stock Loans to ESOP Repayment of loans by ESOP Other Balance, Dec. 31, 1999 Total $2,483 714 (141) (239) (343) 22 (27) 36 4 2,509 801 8 (252) (231) 29 (26) 39 3 2,880 568 (25) (264) (82) 11 (24) 39 3 $3,106 Common Stock $484 -- -- -- -- -- -- -- -- 484 --' -- -- -- -- -- -- -- 484 -- -- -- -- -- -- -- -- $484 Additional Paid-In Capital $ 97 -- -- -- -- 2 -- -- -- 99 -- -- -- -- 6 -- -- -- 105 -- -- -- -- (1) -- -- -- $104 Retained Earnings Treasury Stock $4,760 $(2,667) 714 -- ---- (239) -- -- (343) -- 20 ---- ---- 4-- 5,239 (2,990) 801 -- ---- (252) -- -- (231) -- 23 ---- ---- 3-- 5,791 (3,198) 568 -- ---- (264) -- -- (82) -- 12 ---- ---- 3-- $6,098 $(3,268) Unearned Compensation (See Note 13) $(171) -- -- -- -- -- (27) 36 -- (162) -- -- -- -- -- (26) 39 -- (149) -- -- -- -- -- (24) 39 -- $(134) Accumulated Other Comprehensive Loss (See Note t2) $ (20) -- (141) -- -- -- -- -- -- (161) -- 8 -- -- -- -- -- (153) -- (25) -- --' -- -- -- -- $(178) Statement of Comprehensive Income (Millions) Net income Other comprehensive' (loss) income, net of tax Currency translation adjustment Minimum pension liability adjustment Unrealized losses on marketable securities Other comprehensive Goss) income Comprehensive income The accompanying notes to thefinancial statements are an integral part of these statements. 1999 $568 (40) 18 (3) (25) $543 For the Year 1998 $801 14 (6) -- 8 $809 1997 $ 714 (126) (15) -- (141) $573 20 J 999 Annua/ Report Statement of Cash Flows (Millions) Operating) scflaviftisaa Net income Adjustments to reconcile to cash from operations Depreciation and amortization Business divestitures and realignments Purchased in-process research and development Gain on sale of business Increase in receivables Increase in inventories Increase in pension asset Increase in accounts payable and accrued liabilities Change in other noncurrent assets and liabilities and other -- net Cashfivm operating activities Umvestitm acttoyifliies Capital spending Additions to property and investments Business acquisitions, net of cash balances acquired Proceeds from business divestitures Proceeds from the sale of the Company's headquarters complex Reductions of other property and investments Cash usedfor investing activities Footairacm actovifcSss Net change in borrowings with maturities of three months or less Proceeds from other short-term debt Repayment of other short-term debt Proceeds from long-term debt Repayment of long-term debt Loans to employee stock ownership plan Repayment of loans by employee stock ownership plan Purchase of treasury stock Issuance of treasury stock Dividends paid Cash from (usedfor)financing activities Effect of currency exchange rate changes on cash and cash equivalents Nec increase (decrease) in cash aryl cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end tifjvear The accompanying notes to thefinancial statements art an integral part of this statement 1999 For the Year 1998 $ 568 $ 801 419 42 40 -- (128) (7) (110) 77 1 902 383 31 -- (85) (85) (73) (57) 55 (28) 942 1997 $ 714 373 102 -- (59) (124) (60) (41) 37 65 1,007 (490) (1,343) -- 152 37 (1,644) 492 252 (267) 821 (203) (24) 39 (82) 9 (264) 773 (1) 30 128 $ 158 (487) (390) 278 -- 18 . (581) 109 170 (154) 12 (64) (26) 39 (217) 22 (252) (361) (1) 0) 129 $ 128 (466) (363) 171 -- 75 (583) (223) 89 (78) 472 (63) (27) 38 (343) 14 (239) (360) (5) 59 70 $ 129 21 PPG Industries Management's Discussion and Analysis Performance 5m 119S9 Compared] wSfllfo 1998 Overall Performance Our sales increased 3% in 1999 to $7.8 billion from $7.5 bil lion in 1998. The combination of acquisitions in our coat ings segment and volume increases across all of our busi ness segments contributed 8% and 3%, respectively, to the increased sales levels in 1999. These sales increases were partially offset by a 4% decrease due to lower selling prices in all of our business segments and a 4% decrease due to the absence of sales from our European flat and automotive glass businesses, which were divested in July 1998. The gross profit percentage decreased to 39.2% in 1999 from 40.4% in 1998. The effects of lower selling prices across all of our business segments, particularly in our chemicals business for certain chlor-alkali products, increased raw material costs in our chemicals business and a charge representing the fair-market-value adjustment of acquired inventories that have been sold contributed to the lower gross margins. These negative factors were offset in pan by the benefits^ realized from improved manufacturing efficiencies across all of our segments and the margins from recent acquisitions. Net income and earnings per share, diluted, for 1999 were $568 million and $3.23, respectively, compared to $801 million and $4.48, respectively, in 1998. Net income in 1999 was affected by the same factors chat contributed to the change in sales.and gross profit, including $15 million for the fair-market-value adjustment on an after-tax basis of acquired inventories sold, the absence of an $82 million after-tax gain from the sale of our European flat and auto motive glass businesses, after-tax acquisition related charges of $33 million for purchased in-process research and devel opment and higher interest expense as a result of acquisition activity. Net income in 1999 was also affected by after-tax restructuring charges of $31 million, related to the integra tion of packaging coatings acquisitions and ongoing cost reduction efforts, which exceeded after-tax restructuring charges in 1998. These factors were partially offset by lower income tax expense as a result of a reduction in pre-tax earnings. Excluding the after-tax acquisition related and restructuring charges and the after-tax gain horn the sale of our European flat and automotive glass businesses, net income and earnings per shafeTdiluted, for 1999 were $647 million and $3.68, respectively compared to $738 million or $4.13, respectively in 1998. Results of Business Segments Coatings sales increased 18% to $4.1 billion in 1999 from $3.5 billion in 199'8. Sales increased 17% from acquisitions that affected all of bur coatings businesses and 3% due to volume increases iti our North American and European automotive original businesses and our North American industrial business. Sales in 1998 were impacted by the adverse effects of the General Motors strike. Sales declines of 1% from the negative effects of foreign currency translation and 1% from lower selling prices, principally within our North American and European automotive origi nal businesses, partially offset the sales increases. Operating income decreased to $522 million in 1999 from $546 mil lion in 1998. Operating income in 1999 was reduced by the lower selling prices discussed above and pre-tax restructur ing charges of $41 million related to the integration of pack aging acquisitions and on-going cost reduction efforts. Coatings operating income in 1999 was also negatively impacted by pre-tax acquisition related charges of $40 mil lion for purchased in-process research and development charges associated with the acquisitions of coatings and sealant maker PRC-DeSoto International, Inc. (PRC-DeSoto) and the majority of the global automotive refinish, automo tive and industrial coatings businesses of Imperial Chemical Industries PLC (the ICI business), and $23 million for the fair-market-value adjustment of acquired inventories that have been sold. A combination of increased sales volumes as previously discussed, earnings from acquisitions and improved manufacturing efficiencies, primarily within our North American and European industrial businesses, partial ly offset these reductions. Excluding the pre-tax acquisition related and restructuring charges, operating income in 1999 increased to $626 million as compared to $555 million in 1998. Glass sales decreased 11% to $2.3 billion in 1999 from $2.5 billion in 1998. Sales declined by 11% as a result of the divestiture of our European flat and automotive glass busi nesses in July 1998 and 3% due to lower selling prices for our fiber glass, automotive original and automotive replace ment glass products. These negative factors were offset in part by a 3% increase in sales volumes primarily from our North American automotive original glass business, our fiber glass reinforcement products and, to a lesser extent, our automotive replacement and flat glass businesses. Sales levels in 1998 were adversely affected by the General Motors strike. Operating income decreased to $386 million in 1999 from $478 million in 1998. The absence of an $85 million pre-tax gain from the sale of our European flat and automo tive glass businesses and the lower selling prices mentioned previously were partially offset by manufacturing efficiencies in our North American automotive original glass and fiber glass reinforcements businesses. Operating income in 1998 also included pre-tax restructuring charges of $21 million, related to the divestiture of our equity interests in Asian glass operations, cost reduction initiatives and the reversal of a reserve related to the Petty, Ga., plant Excluding the pre-tax restructuring charges and the pre-tax gain from the sale of our European flat and automotive glass businesses, operating income in 1999 was $386 million as compared to $414 million in 1998. Chemicals sales decreased 7% to $1.4 billion in 1999 from $1.5 billion in 1998. Sales declined 11% as a result of significantly lower selling prices for our chlorine and caustic soda products and 1% due to the negative effects of foreign currency translation. These negative factors were offset in 22 1999 Annual Report Management's Discussion and Analysis part by a 5% improvement in volumes primarily for certain chlor-alkali derivative products and, to a lesser extent, certain specialty chemical products. The volume increase for specialty chemicals related to optical products, including Transitions optical lenses. Operating income decreased to SI77 million in 1999 compared to $354 mil lion in 1998. The significant reduction in selling prices for chlorine and caustic soda products and higher raw material costs were only slightly offset by the previously discussed sales volume improvements and manufacturing efficiencies in our chlor-alkali and derivatives business. Other Significant Factors Earnings in 1999 and 1998 included net periodic pension income of $71 million and $57 million, respectively, due pri marily to returns on U.S. defined benefit pension plan assets. See Note 9 for information concerning the pension plan assets and the components of the net periodic pension income. Interest expense and long-term debt increased due to the issuance of $800 million aggregate principal amount of debt securities in August 1999 to repay a substantial portion of the short-term debt issued to finance the acquisitions of the ICI business and PRC-DeSoto. The increase in the overall effective tax rate is principal ly due to the non-deductibility of certain 1999 purchased inprocess research and development chaiges and the 1998 pre-tax gain from the sale of our European flat and automo tive glass businesses being almost entirely offset by the uti lization of capital loss carryforwards. Goodwill and identifiable intangible assets increased principally due to the acquisitions of the ICI business and PRC-DeSoto in 1999. The increase in other long-term assets was attributable to an increase in our prepaid pension asset. Outlook During 2000, the North American economy is expected to grow at a slower rate than in 1999 as a result of higher interest rates, which is likely to cause a decline in vehicle production and housing starts. Raw material prices and fuel costs could rise if oil prices remain high or trend upward. On the other hand, growth is projected in some European automobile markets and in the^Sfen economies. Also, the Brazilian economy is projected to slowly improve. If these trends occur, PPG should expeq&ve increased revenues in 2000 due to the increasing importance of the coatings and glass aftermarkets to our business, improving chlor-alkali chemical pricing, and the inclusion of a full year's results associated with acquisitions completed in 1999. Throughout most of 1999, certain of pur businesses were adversely affected by the economic weakness in Asia. Our chlor-alkali business experienced significandy lower selling prices as industry exports to Asia from North America declined resulting in excess supply in North America. Our fiber glass business was also affected by the economic weakness in Asia as exports to Asia declined and imports from Asia into North America and Europe resulted in significantly lower selling prices. Also during 1999, our automotive coatings and refinish operations were adversely affected by the economic weakness and currency devalua tion in Brazil. In the fourth quarter of 1999 and into 2000, an improvement in the Asian economic conditions has resulted in improved selling prices for our chlor-alkali prod ucts, particularly chlorine, which we expect to continue to strengthen during the remainder of 2000. The economic improvement in Asia has also led to a resurgence of the elec tronics industry and increased demand for certain of our fiber glass products. Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The effective date of this standard has been delayed to fiscal years beginning after June 15, 2000. The Company is currently evaluating the prospective impact of this standard on its financial position and results of operations. Parffomtonca Sm 11998 Conmparad) wtrUffti 11997 Overall Performance Our sales in 1998 increased 2% to $7.5 billion from $7.4 bil lion in 1997. The sales increase resulted from an 8% increase in volumes, including sales related to several acqui sitions made in late 1997 and in 1998, primarily within our coatings segment. These sales increases were offset in part by a 4% decline due to the absence of sales related to the divestitures of our European flat and automotive glass busi nesses in July 1998 and our surfactants business in November 1997, a 1% decline in sales associated with lower prices for chlorine products in our chemicals segment and a 1% decline from foreign currency translation due to the strengthening of the U.S. dollar. The gross profit percentage remained relatively constant at 40.4% in 1998 and 1997. The combination of improved manufacturing efficiencies across all of our business seg ments and lower raw materials costs in our chemicals seg ment was substantially offset by lower sales prices for chlo rine products and certain glass products and the negative effects of inflation in our coatings and glass segments. Net income and earnings per common share, diluted, for 1998 increased to $801 million and $4.48, respectively, compared to net income and earnings per common share, diluted, of $714 million and $3.94, respectively, for 1997. The increase in 1998 net income resulted from an $82 mil lion after-tax gain from the sale of our European flat and automotive glass businesses, a significant reduction in busi ness divestiture and realignment charges, insurance recover ies of certain past environmental costs and the same factors that contributed to the increased sales described above. 23 PPG Inciusiries Management's Discussion and Analysis These improvements were partially offset by the absence of the gain from the 1997 sale of our surfactants business, higher expenses associated with worldwide growth initiatives in our coatings segment, the negative effects of inflation, higher income tax expense due to increased pre tax earnings and the effects of the 1998 General Motors strike and the adverse economic conditions in Asia. Results of Business Segments Coatings sales increased 13% to $3.5 billion in 1998 from $3.1 billion in 1997. A 14% increase in sales volume includ ed sales from recent acquisitions and volume increases for our worldwide automotive refinish, industrial and architectural coatings products and for our automotive original coatings products in Europe and North America. These sales increases were slightly offset by a 1% decline from foreign currency translation. Sales generated from worldwide acquisitions in 1998 and late 1997 contributed substantially to the segments sales growth in 1998. The unfavorable effects of the General Motors strike partially off set the sales volume improvements in our North American automotive original and industrial coatings businesses. Operating income decreased to $546 million in 1998 com pared to $561 million in 1997. The decrease in operating income is attributable to higher expenses associated with worldwide growth initiatives in our automotive refinish and industrial businesses, the negative effects of inflation, partic ularly on our European businesses, restructuring charges related to cost reduction initiatives, the impact of the General Motors strike and reduced royalty income. These reductions were partially offset by the previously discussed volume improvements and the favorable effect of earnings from recendy acquired businesses. Glass sales decreased 5% to $2.5 billion in 1998 from $2.7 billion in 1997. Sales declined 7% as a result of the divestiture of our European flat and automotive glass busi nesses effective July 31,1998,1% due to the unfavorable effects of foreign currency translation and 1% from lower fiber glass product volumes. These negative factors were partially offset by a 4% sales volume increase, principally for North American automotive replacement glass products and an acquisition of an automotive original glass products facil ity in early 1998. Additionslht^orldwide sales price improvements for fiber glass products were more than offset by lower sales prices for NortjfAmerican automotive origi nal glass and flat glass products. The increase in operating income to $478 million in 1998 compared to $286 million in 1997 is attributable to an $85 million pre-tax gain from the sale of our European flat and automotive glass business es, a reduction in business divestiture and realignment charges to $21 million from $102 million in 1997, improved manufacturing efficiencies, particularly in our North American automotive original glass business, and increased equity affiliate earnings. These favorable factors were partial ly offset by the negative effects of inflation, the sales price reductions menuoned above and the impact of the General Motors strike. Chemicals sales decreased 7% to $1.5 billion in 1998 from $1.6 billion in 1997. A 7% reduction in sales volumes associated with the divestiture of the surfactants business in late 1997 and a 5% decline related to lower sales prices were partially offset by a 5% increase in sales volumes for special ty chemicals. Significantly lower sales prices were experi enced for chlor-alkali and derivative products. Specialty chemical volumes increased due primarily to demand for Transitions optical lenses and the acquisition in late 1997 of a pharmaceutical intermediates company. Operating income in 1998 decreased to $354 million from $428 million in 1997. The decrease in operating income is attributable to a decline in chlor-alkali and derivative product prices and the absence of a $59 million pre-tax gain from the sale of and earnings associated with our surfactants business. These unfavorable factors were partially offset by lower raw mate rial costs within our chlor-alkali and derivatives business, lower environmental costs, an insurance recovery of certain past environmental costs and the sales volume increases disr cussed above. Other Significant Factors The reduction in the overall effective tax rate in 1998 was primarily attributable to the realization of the benefits of capital loss carryforwards on the gain from the sale of our European flat and automotive glass businesses. Goodwill increased due to acquisition activity in 1998. The increase in other long-term assets was attributable prin cipally to an increase in our prepaid pension asset and to an increase in other intangible assets resulting from 1998 acquisition activity. Business Divestitures and ReaDignments During 1999, we approved restructuring plans associated with the integration of our recent packaging coatings acqui sitions and cost reduction activities across all of our busi nesses that resulted in a pre-tax charge of $47 million. The components of the plans included severance benefits for 519 employees and estimated losses of $17 million on the dis posal of a redundant European facility and the disposition of the assets of a U.S. coatings facility. As of Dec. 31,1999, $7 million had been paid under the plans to 215 employees. At Dec. 31,1999 the remaining reserves associated with the 1999 restructuring plans covered 304 employees. We antici pate that the remaining severance benefits will be paid and the asset dispositions will be completed in 2000. We also recorded reversals of $2 million and $1 million, originally recorded in 1997, related to the sale of our equity interest in an Asian float glass plant and the closure of our Perry, Ga., flat glass plant, respectively, and a $2 million reversal related to reserves established in 1999 and 1998 for cost reduction initiatives in our glass and coatings businesses. Finally in 1999, we completed the sale of our equity interest in one of 24 I999 Annual Report Management's Discussion and Analysis the Asian float glass plants. We-also reached agreements to dispose of our remaining equity interest in another Asian float glass plant and the Asian downstream fabrication facili ties. These dispositions are expected to be completed in the first quarter of 2000. During 1998, we recorded a pre-tax charge of $19 mil lion in connection with a restructuring plan to reduce costs in our glass and coatings operations. The components of the plan included severance benefits for 283 employees. During 1999 and 1998, approximately $14 million was paid out under the restructuring plan and $1 million was reversed for amounts that will not be paid under the plan. At Dec. 31, 1999, the remaining reserve associated with the 1998 restructuring plan covered 73 employees. In 1998 we also recorded an additional pre-tax charge of $15 million related to the disposition of our equity interests in two Asian float glass plants and two Asian downstream fabrication facilities. The additional charge for the disposition of these facilities resulted from a reassessment of the proceeds expected to be realized on the dispositions of $14 million and additional asset write-offs of $1 million. We also recorded a $3 million reversal of a reserve in 1998, originally recorded in 1997, related to the closure of our Perry Ga., flat glass plant. At Dec. 31,1999, the remaining reserves associated with the 1999 and 1998 restructuring plans totaled $26 mil lion and are expected to be paid in 2000. In 1997 we recorded a pre-tax restructuring charge of $102 million related to certain glass businesses that were not meeting strategic performance objectives. The principal components of the 1997 restructuring program included the closure of our Perry, Ga., flat glass plant and the disposition of our equity interests in two Asian float glass plants. The pre-tax restructuring charge in 1997 included $61 million of asset write-offs and $41 million associated with cash outlays primarily for severance costs for 317 employees, a propor tionate share of equity investee indebtedness, and demoli tion and environmental costs, net of proceeds from sale. During 1999 and 1998, cash outlays and asset write-offs associated with both the 1997 restructuring program and the additional restructuring charge recorded in 1998 related to this program totaled $32 million. We also reversed $3 million of these restructuring charges in each of the years 1999 and 1998, respectively. Afcfiec. 31,1999, approximate ly $40 million of reserves related to the 1997 restructuring program are outstanding and will be paid out in the first quarter of 2000 when the remaSuftg equity interest in the Asian float glass plant and the Asian downstream fabrication facilities are sold. Comnrtriftmants and Contingent Uabillitias, incOudSmg Environments Matters PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial money damages are sought. These lawsuits and claims relate to product liability; contract, patent, environmental, antitrust and other matters arising.out of the conduct of PPG's business. See Note 10, "Commitments and Contingent Liabilities," to the financial statements in this 1999 Annual Report for an expanded description of certain of these lawsuits. PPG's lawsuits and claims against others include claims against insurers and other third parties with respect to actual and contingent losses related to environmental and other matters. Management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG will not have a mate rial effect on PPG's consolidated financial position, results of operations or liquidity. It is PPG's policy to accrue expenses for environmental contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimat ed. Reserves for environmental contingencies are exclusive of claims against third parties and are not discounted. As of Dec. 31,1999 and 1998, PPG had reserves for environmen tal contingencies totaling $82 million and $94 million, respectively. Pre-tax charges against income for environmen tal remediation costs in 1999,1998 and 1997 totaled $10 million, $10 million and $34 million, respectively, and are included in "Other charges" in the statement of income. Cash outlays related to such environmental remediation aggregated $22 million, $16 million and $25 million in 1999,1998 and 1997, respectively. Management anticipates that the resolution of the Company's environmental contingencies, which will occur over an extended period of time, will not result in future annual charges against income that are significandy greater than those recorded in recent years. It is possible, however, that technological, regulatory and enforcement develop ments, the results of environmental studies and other factors could alter this expectation. In management's opinion, the Company operates in an environmentally sound manner and the outcome of the Company^ environmental contingencies will not have a material effect on PPG^ finan cial position or liquidity. In addition to the amounts currently reserved, the Company may be subject to loss contingencies related to environmental matters estimated to be as much as $200 mil lion to $400 million, which range is unchanged from the prior year end. Such unreserved losses are reasonably possible but are not currendy considered to be probable of occurrence. Although insurers and other third parties may cover a portion of these costs, to the extent they are incurred, any potential recovery is not included in this unre served exposure to future loss. The Company's environmen tal contingencies are expected to be resolved over an extended period of time. Although the unreserved exposure to future loss relates to all sites, a significant portion of such exposure involves three operating plant sites. Initial remedial actions are occur ring at these sites. Studies to determine the nature of the contamination are reaching completion and the need for 25 PPG Industries Management's Discussion and Analysis additional remedial actions, if any, is presendy being evaluated. The loss contingencies related to the remaining portion of such unreserved exposure include significant unresolved issues such as the nature and extent of contami nation, if any, at sites and the methods that may have to be employed should remediation be required. With respect to certain waste sites, the financial condi tion of any other potentially responsible parties also con tributes to the uncertainty of estimating PPG's final costs. Although contributors of waste to sites involving other potentially responsible parties may face governmental agen cy assertions ofjoint and several liability in general, final allocations of costs are made based on the relative contribu tions of wastes to such sites. PPG is generally not a major contributor to such sites. The impact of evolving programs, such as natural resource damage claims, industrial site reuse initiatives and state voluntary remediation programs, also adds to the present uncertainties with regard to the ultimate resolution of this unreserved exposure to future loss. The Company's assessment of the potential impact of these envi ronmental contingencies is subject to considerable uncer tainty due to the complex, ongoing and evolving process of investigation and remediation, if necessary of such environmental contingencies. Ompactt tf QotflMon PPG's financial statements are prepared on a historical cost hasis, which does not completely account for the effects of inflation. In 1999 the decline in selling prices and negative effects of inflation on our production costs were partially offset by improved manufacturing efficiencies. In 1998 the overall decline in selling prices was partially offset by improved manufacturing efficiencies and the overall positive impacts of lower raw material and other production costs. In 1997 the increase in production costs due to the negative effects of inflation was not fully recovered through price increases and manufacturing efficiencies. While inflationary pressure on costs is expected to be experienced in 2000, we antici pate that ongoing improvements in manufacturing efficien cies and increases in selling prices for certain products will mitigate the negative effect ofiliation on 2000 operating income to a significant extent^ FimameoaO Resources, Capital Spending During the past three years, we continued to have sufficient financial resources to meet operating requirements, to fund our capital spending, share repurchase programs and pen sion contributions, and to pay increased dividends to share holders. Cash from operating activities was $902 million in 1999, $942 million in 1998 and $1,007 million in 1997. Dividends paid to shareholders totaled $264 million in 1999, $252 million in 1998 and $239 million in 1997. During 1999, 1998 and 1997, the Company repur chased approximately 1.2 million, 2.1 million and 5.3 mil lion shares of common stock at a cost of $68 million, $122 million and $302 million, respectively, under various share repurchase programs. The most recent program authorized the repurchase of 10 million shares of common stock, and was initiated in November 1998. As of Dec. 31,1999, 3.2 million shares of common stock had been repurchased under the most recent program at a cost of $182 million. The repurchase of common stock was financed principally by cash from operations and proceeds from long-term debt. In 1999 long-term debt was increased principally by the issuance of $800 million of notes and debentures at rates ranging from 63A% to 7.4%. In 1997 long-term debt was increased principally by the issuance of $450 million of notes at rates ranging from 6`A% to 67/e%, partially offset by scheduled debt repayments. The proceeds from the issuance of the notes were used to fund acquisitions and for general corporate purposes, including the repayment of U.S. com mercial paper borrowings. Capital spending in 1999 totaled $1,833 million, com- * pared with $877 million in 1998 and $829 million in 1997. This spending related to business acquisitions totaling $1,343 million, $390 million and $363 million, in 1999, 1998 and 1997, respectively modernization and productivity improvements, expansion of existing businesses, and envi ronmental control projects. Capital spending of a similar nature, excluding acquisitions, is expected to total about $525 million during 2000. We periodically review our array of businesses in com parison to our overall strategic or performance objectives. As part of this review, we routinely acquire or divest of cer tain businesses. During 2000, we anticipate that any acquisi tions completed will be funded through a combination of cash generated from operations and external funding sources, but with no major impact on our current capital structure. The ratio of total debt, including capital leases, to total debt and equity was 47% and 37% at Dec. 31,1999 and 1998, respectively Cash from operations and the Company's debt capacity are expected to continue to be sufficient to fund capital spending, dividend payments, share repurchas es and operating requirements. See Note 5, "Debt and Bank Credit Agreements and Leases," for details regarding the use and availability of committed and uncommitted lines of credit. In addition to the lines of credit, the Company may issue up to $500 million aggregate principal amount of debt securities under a shelf registration statement filed with the Securities and Exchange Commission (SEC) injuly 1999. Comversion tto affte Euro On Jan. 1,1999, eleven of the member countries of the European Monetary Union converted from their sovereign 26 1999 Annual Report Management's Discussion and Analysis currencies co a common currency, the euro. At that time, fixed conversion rates between the legacy currencies and the euro were set. The legacy currencies will remain legal tender throughjuly 1, 2002. Beginningjan. 1, 2002, euro-denominated currency will be issued. No later than July 1, 2002, the participating countries will withdraw all bills and coins . so that their legacy currencies will no longer be considered legal tender. PPG has identified and substantially addressed the sig nificant issues that may have resulted from the euro conver sion. These issues include increased competitive pressures from greater price transparency, changes to information sys tems to accommodate various aspects of the new currency and exposure to market risk with respect to financial instru ments. The impact on PPG's operating results and financial condition from the conversion to the euro has not been, and is not expected to be, material. Ftttnsjatrafl-LsokSmg Suaiamami* The Private Securities Litigation Reform Act of 1995 pro vides a safe harbor for forward-looking statements made by or on behalf of the Company. Management's Discussion and Analysis and other sections of this Annual Report contain forward-looking statements that reflea the Company!* current views with respect to future events and financial performance. Forward-looking statements are identified by the use of the words "aim," "believe," "expect," "anticipate," "intend," "estimate" and other expressions that indicate future events and trends. Any forward-looking statement speaks only as of the date on which such statement is made and the Company undertakes no obligation to update any forwardlooking statement, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports to the SEC. Also, note the following caution ary statements. Many factors could cause actual results to differ materi ally from the Company's forward-looking statements. Among these factors are increasing price and product com petition by foreign and domestic competitors, fluctuations in the cost and availability of raw materials, the ability to maintain favorable supplier reliftonships and arrangements, economic and political conditions in international markets, the ability to penetrate existing^Sweloping and emerging foreign and domestic markets, which also depends on economic and political conditions, foreign exchange rates and fluctuations in those rates. Further, it is not possible to predict or identify all such factors. Consequently, while the list of factors presented here is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. The consequences of material differences in the results as compared to those anticipated in the forward-looking statements could include, among other things, business dis ruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on the Company's consolidated finan cial condition, operations or liquidity Yaatr 2000 DoscOosusro Many information technology products and systems were expected to experience miscalculations, malfunctions or dis ruptions when attempting to process information containing dates subsequent to Dec. 31,1999, if they were not success fully remediated. These potential problems were collectively referred to as the "Year 2000" problem. The Company successfully completed the testing and remediation of all systems prior to Dec. 31,1999. The Company has not experienced any significant Year 2000 problems. Abo, the Company's suppliers and customers have not experienced any significant Year 2000 problems that have affected PPG. The Company used internal and external resources to execute its Year 2000 compliance plan and spent a total of $12 million in 1999 and $7 million in 1998. Mairkatt Risk PPG is exposed to certain market risks arising from transac tions that are entered into in the normal course of business. The Company may enter into derivative financial instru ment transactions in order to manage or reduce this market risk. PPG's policies do not permit active trading of, or specu lation in, derivative financial instruments. A discussion of the Company's primary market risk exposures and the management of those exposures is presented below. PPG generates revenues and costs that are subject to fluctuations due to changes in foreign currency exchange rates when transactions are denominated in currencies other than the functional currency. Since the Company manufac tures its products in a number of locations around the world, principally North America and Europe, it has a cost base that is diversified over a number of different currencies as well as the U.S. dollar, which serves to counterbalance partially its foreign currency transaction risk. PPG manages its foreign currency transaction risk to minimize the volatility of cash flows caused by currency fluctuations by forecasting foreign currency-denominated cash flows of each subsidiary for a 12-month period and aggregating these cash inflows and outflows in each currency to determine the overall net transaction exposures. Decisions on whether to use derivative financial instruments to hedge the net transaction exposures are made based on the amount of those exposures, by currency, and an assess ment of the near-term oudook for each currency The Company's policy permits the use of foreign currency for ward and option contracts to hedge approximately 30% to PPG Industries Management's Discussion and Analysis 70% of its anticipated net foreign currency cash flows over the next 12-month period. PPG does not hedge its exposure to translation gains and losses; however, by borrowing in local currencies, it reduces such exposure. The Company does not hedge its foreign currency exposures in a manner that eliminates the effect of changes in foreign currency rates on consolidated net income. The fair value of the for eign currency contracts outstanding as of Dec. 31,1999 and 1998 was not material. The market value of such contracts has a high correlation to the price changes in the currencies of the related hedged transactions. The potential reduction in PPG's future earnings resulting from adverse changes in the exchange rates of its outstanding foreign currency hedge contracts of 10% for European currencies and 20% for Asian and South American currencies would have totaled approxi mately $9 million, $12 million and $5 million as of Dec. 31, 1999,1998 and 1997, respectively In addition, PPG had for eign currency-denominated debt of $598 million and $332 million as of Dec. 31,1999 and 1998, respectively The increase in the foreign currency-denominated debt balance is principally attributable to PPG's initiation of a euro com mercial paper program, which financed a portion of PPG's European acquisitions. A weakening of the U.S. dollar rela tive to this foreign currency-denominated debt of 10% for debt denominated in European currencies and 20% for debt denominated in Asian and South American currencies would have resulted in unrealized translation losses of approximately $75 million, $43 million and $52 million as of Dec. 31,1999,1998 and 1997, respectively. The Company manages its interest rate risk in order to balance its exposure between fixed and variable rates while attempting to minimize its interest costs. Generally the Company maintains variable interest rate debt at a level of 25% to 50% of total borrowings. PPG principally manages its interest rate risk by retiring and issuing debt from time to time. To a limited extent, PPG manages its interest rate risk through the use of interest rate swaps. As of Dec. 31,1999 and 1998, the fair value of interest rate swaps was not mate rial. A 10% increase in interest rates in the United States and Europe and a 20% increase in Asia and South America would have affected PPG's variable rate debt obligations by increasing interest expense by approximately $6 million as of Dec. 31,1999 and $3 million as of both Dec. 31,1998 and 1997. Further, a 10% reduction in interest rates would have increased the present value of the Company^ fixed rate debt by approximately $93 million and $54 million as of Dec. 31,1999 and 1998, respectively. Such changes would not have had a near-term effect on PPG's future earnings or cash flows. Long-term fixed rate borrowings substantially increased from 1998 as a result of PPG's issuance of $800 million of notes and debentures which were used to finance business acquisitions and for general corporate purposes, including repayment of U.S. commercial paper borrowings. This higher debt load is the principal contributor to the changes in the fixed rate debt sensitivity analyses from 1998 to 1999. The Company enters into commodity swap and option contracts to reduce its exposure to fluctuations in prices for natural gas. The fair values of these contracts as of Dec. 31, 1999 and 1998, were not material. As a result of a 10% reduction in the price of natural gas, the Company would have experienced potential losses in the fair value of the underlying commodity swap and option contracts as of Dec. 31,1999,1998 and 1997 of approximately $0.1 million, $3 million and $8 million, respectively 28 1999 Annual Rtpon Business Segment Information Segment Organization and Products PPG is a multinational manufacturer with three reportable segments: coatings, glass and chemicals. The Company's segments are organized based on differences in products. The glass and fiber glass operations have been aggregated into a single reportable segment. The coatings segment sup plies a variety of protective and decorative coatings and fin ishes along with adhesives, sealants and metal pretreatment products for automotive original equipment and aftermarket refinish, aerospace, industrial, packaging and architectural applications. In addition to specific products, the coatings segment supplies technical expertise, engineering and pur chasing services to the automotive original and industrial portions of the business. The glass segment supplies flat glass and continuous-strand fiber glass for residential and commercial construction, automotive original and replace ment markets and other transportation and industrial appli cations. The chemicals segment supplies chlor-alkali and specialty chemicals products. The primary chlor-alkali prod ucts are chlorine, caustic soda, vinyl chloride monomer, chlorinated solvents and chlorinated benzenes. The primary specialty chemicals products are Transitions lenses, optical monomers, silicas and fine chemicals. Production facilities and markets for the coatings and glass segments are pre dominantly in North America and Europe, while the chemi cals segment operates primarily in North America. Each of the businesses in which PPG is engaged is highly competi tive. However, the diversification of product lines and worldwide markets served tends to minimize the impact on total sales and earnings of changes in demand for a particu lar product line or in a particular geographic area. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company allocates resources to segments and evaluates the performance of segments based upon reported segment income before interest expense and income, income taxes and minority interest. Substantially all corpo rate expenses are allocated to the segments. Net periodic pension income and expense is allocated to the segments; however, prepaid pension assets for defined benefit plans that cover certain U.S. employees are not allocated to the segments mid are included in corporate assets. Intersegment sales and transfers are recorded at selling prices that approx imate market prices. (Millions} Soemsntts H9S Net sales to external customers Intersegment net sales Total net sales Operating income Interest--net Income before income taxes and minority interest Depreciation and amortization Share of net earnings in equity affiliates Segment assets'" Investments in equity affiliates Expenditures for long lived assets (continued on next page) Coatingsm $4,079 3 $4,082 $ 522 f $ 154 $3 $4,380 $ 21 $1,414 Class0 $2,255 -- $2,255 $ 386 $ 152 $ 14 $1,799 $ 87 $ 145 Chemicals0 $1,423 8 $1,431 $ 177 $ 91 $3 $1,252 $ 33 $ 125 Corporate" Consolidated Totals $ (ID $ (ID $ 12 $ 22 $8 $1,483 $ 54 $ 54 $7,757 -- $7,757 $1,097 (124) $ 973 $ 419 $ 28 $8,914 $ 195 $1,738 PPG industries Business Segment Information (continued) (Millions) Segments -- 1998 Net sales to external customers Intersegment net sales Total net sales Operating income Interest--net Income before income taxes and minority interest Depreciation and amortization Share of net earnings in equity affiliates Segment assets15' Investments in equity affiliates Expenditures for long lived assets 1997 Net sales to external customers Intersegment net sales Total net sales Operating income (loss) Interest--net Income before income taxes and minority interest Depreciation and amortization Share of net earnings in equity affiliates Segment assets15' Investments in equity affiliates Expenditures for long lived assets Coatings'1' $3,459 2 $3,461 $ 546 $ 108 $1 $2,976 $ 16 $ 580 $3,059 -- $3,059 $ 561 $ 91 $-- $2,239 $ 10 $ 370 Glass $2,527 -- $2,527 $ 478 $ 161 $ 14 $1,791 $ 74 $ 167 $2,673 -- $2,673 $ 286 $ 169 $-- $2,115 $ 79 $ 168 ChemicaW3* $1,524 9 $1,533 $ 354 $ 88 $2 $1,187 $ 31 $ 97 $1,647 37 $1,684 $ 428 $ 87 $1 $1,183 $ 31 $ 147 Corporatel,! Consolidated Totals $-- (11) s (11) 5 14 1 $ 26 $ 13 $1,433 $ 55 $ 22 $7,510 -- $7,510 $1,392 (98) $1,294 $ 383 $ 30 $7,387 $ 176 $ 866 $-- (37) $ (37) $ (3) $ 26 $9 $1331 $ 51 $ 22 $7379 -- $7,379- $1,272 (97) $1,175 $ 373 $ 10 $6,868 $ 171 $ 707 (Millions) Geographic Bnrffomation Wet sfflOas United States, Europe Canada Other Total Operating income United States?" Europe1*' Canada1" Other1"1 Total ! Interest -- net Other unallocated .corporate income (expenses) -- net Income before income taxes and minority interest (continued on next page) 1999 $5,180 1,533 531 513 $7,757 $ 888 121 63 13 $1,085 (124) 12 $ 973 1998 $5,023 1,606 476 405 $7,510 $1,063 244 83 (12) $1378 (98) 14 $1,294 1997 $4,960 1360 477 382 $7,379 $1,037 156 82 -- $1,275 (97) (3) $1,175 30 J 999 Annual Report Business Segment Information (continued) (Millions) ~* (Sscjjireplho'E SmlfofJirrfflODetn: Lonif-iJveii] assess United States Europe Canada Other Total OdeotftSiTi&ya assails United States110 Europe Canada Other Total 1999 1998 1997 $3,676 1,082 235 545 $5,538 $3,064 825 191 367 $4,447 $2,799 836 220 197 $4,052 $5,625 1,943 390 956 $8,914 $4,889 1,505 323 670 $7,387 $4,442 1,641 346 439 $6,868 0) Coatings segment Income in 1999 Includes a pre-tin restructuring charge of 542 million for cost reduction initiatives, the Integration of our recent packaging coatings acquisitions, the disposal of a redundant Europeanfacility anathe disposition of the assets of a US coatingsfacility. In 1999, coatings segment Income also includes a $40 million pre-tax charge for purchased in-process research and development, a $23 million pre-tax charge representing the fair-market-value adjustment of acquired inventories that have been sold, a So million pre-tax charge related to the bankruptcy of a home-center chain, and a pre-tax restructuring (credit) of$(l) million related to the res'ersal of previously established restructuring reserves. Coatings segment income in 1998 includes a pre-tax restructuring charge of59 million related to cost reduction initiatives. (2) Class segment income in 1999 includes a pre-tax restructuring^chargc of $4 million related to cost reduction initiatives and a pre-tart restructuring (credit) of 5(4) million related to the reversal of.reserves established In 1997for the disposition of an equity interest in an Asianfloatpass plant and the closure ofthe Perry, Ga., plant. Class segment income in 1998 includes a pre-tax gain of 585 million related to the sale of the Europeanflat and automotive glass businesses and pre-tax restructuring charges (credit) of $15 million, 59 million, and 5(3) million, respectively, related u> Ore disposition of equity interests in two Asian float glass plants and two Asian downstream fabrication facilities, cost reduction initiatives and the reversal of a reserve related to the Perry, Ga., plant. Glass seg ment income in 1997 includes a pre-tax restructuring charge of $102 million cf which $65 million principally related to the closure of the Perry, Ga., plant and $37 million related to the disposition of equity interests in two Asianfloat glass plants. (3) Chemicals segment income in 1999 Includes a pre-tax restructuring charge of SI milliomrelated to cost reduction Initiatives. Chemicals segment Income in 1997 includes a pre-tax gain of 559 million related to the sole of the surfactants business. (4) Corporate intersegment net sales represents intersegment net sales eliminations. Corporate income (loss) represents unallocated corporate income and expenses. (5) Segment assets are the total assets used in the operation of each segment Corporate assets are principally cash and cash equivalents, income tax assets and pre paid pensions. See Note 9. In 1998 and 1997, corporate assets also included the Companyi headquarters complex. (6) Net sales to external customers are attributed to individual countries based upon the location of the operating unit shipping the product. (7) Operating income in 1999 includes pre-tax charges (credit) of $40 million, 518 million, 56 million, 56 million and 5(5) million, respectively, related to purchased in-process research and development, cost reduction initiatives, thefair-market-value adjustment ofacquired inventories that have been sold, the bankruptcy of a home-center chain and the reversal of previously established restructuring reserves. Operating income in 1998 includes pre-tax restructuring charges (credit) of 515 million, 514 million, and 50) million, respectively related to the disposition of equity interests In two Asianfloat glass plants and two Aslan downstream fabricationfacilities, cost reduction initiatives and the reversal ofa reserve related to the Perry Ga., plant Operating income in 1997 includes a pre-tax gain of559 million related to the sale ofthe surfactants business and pre-tax restructuring charges of558 million and $37 mitllcm principally related to the divestiture ofthe Perry, Ga., plant and the disposition of equity interests in two Asianfloat glass plants, respectively (8) Operating income in 1999 includes pre-tax charges of$29 million and $13 million, respectively related to cost reduction initiatives and thefair-market-value adjustment of acquired inventories that have been sold. Operating income in 1998 includes a pre-tax gain of 585 million related to the sale of the Europeanflat and automotive glass businesses and a pre-tax restructuring charge of 54 million related to cost reduction initiatives. Operating income in 1997 includes pre-tax restructuring charges of $7 million related to cost reduction initiatives. (9) Operating income in 1999 includes a pre-tax charge of 51 million related to the /air-marhet-value adjustment of acquired inventories that have been sold Operating income in 1998 includes a pre-tax restructuring charge of 51 million related to cost reduction initiatives. (10) Operating income in 1999 includes a pre-tax charge ofS3 million related to thefair-market-value adjustment ofacquired inventories that have been sold (11) Includes corporate assets which are principally cash and cash equivalents, income tax assets and prepaid pensions. In 1996 and 1997, corporate assets also included the Companyt headquarters complex. 31 PPG industries Notes H. Saomnraatrv of Sofijmtfieairati Accounting) PoOociss Principles of consolidation The consolidated financial statements include the accounts of PPG Industries, Inc. (PPG or the Company), and all sig nificant subsidiaries, both U.S. and non-U.S., of which we own more than 50% of the voting stock. Investments in companies of which we own 20% to 50% of the voting stock are carried at equity and our share of the earnings or losses of such equity affiliates is included in the statement of income. Transactions between PPG and its subsidiaries are eliminated in consolidation. Use of estimates in the preparation offinancial statements The preparation of financial statements in conformity with generally accepted accounting principles requires manage ment 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, as well as the reported amounts of income and expenses during the reporting period. Actual outcomes could differ from those estimates. Revenue recognition Revenue from sales is recognized when title to inventory passes to the customer. Foreign currency translation For all significant non-U.S. operations, the functional cur rency is the local currency. Assets and liabilities of those operations are translated into U.S. dollars using year-end exchange rates; income and expenses are translated using the average exchange rates for the reporting period. Translation adjustments are deferred in accumulated other comprehensive income, a separate component of sharehold ers' equity. Inventories Most U.S. and certain non-U.S. inventories are stated at cost, using the last-in, first-out (LIFO) method, which does not exceed market. Other inventories are stated at the lower of cost or market We determine cost using either average or standard factory costs, which approximate actual costs, excluding certain fixed costs fuch as depreciation and prop erty taxes. Property Property is recorded at cost. We compute depreciation by the straight-line method based on the estimated useful lives of depreciable assets. Additional expense is recorded when facilities or equipment are subject to abnormal economic conditions or obsolescence. Significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs for repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and related depreciation are removed from the accounts and any related gains or losses are included in income. Amortization of the cost of capital ized leased assets is included in depreciation expense. Identifiable intangible assets and goodwill Identifiable intangible assets acquired in business combina tions accounted for by the purchase method are recorded based upon fair market value at the date of acquisition. Indentifiable intangible assets are amortized on a straightline basis over their estimated useful lives (3 to 40 years) and primarily consist of core developed technology, trade marks and tradenames and customer lists. Goodwill, representing the excess of the cost over the net tangible and identified intangible assets of acquired busi nesses, is stated at cost and amortized on a straight-line basis over the estimated future periods to be benefited, prin cipally 40 years. Identified intangible assets and goodwill are reviewed for impairment at each balance sheet date or whenever events or circumstances indicate that the carrying amounts may not be recoverable. Employee Stock Ownership Plan We account for our employee stock ownership plan (ESOP) in accordance with Statement of Position (SOP) No. 93-6 for PPG common stock purchased after Dec. 31,1992 (new ESOP shares). As permitted by SOP No. 93-6, shares pur chased prior to Dec. 31,1992 (old ESOP shares), continue to be accounted for in accordance with SOP No. 76-3. ESOP shares are released and allocated to participants based upon debt service paid during the year on loans used by the ESOP to purchase the shares. These loans are a combination of borrowings guaranteed by PPG and borrowings direcdy from PPG. Borrowings from third parties are included in debt in our balance sheet (see Note 5). Unearned compensa tion, reflected as a reduction of shareholders' equity, princi pally represents the unpaid balance of such ESOP loans. Dividends received by the ESOP are used to pay debt service. For old ESOP shares, compensation expense is equal to amounts contributed, or committed to be contributed, to the ESOP by the Company less the ESOP interest expense element of such contributions. Dividends on old ESOP shares are deducted from retained earnings. Old ESOP shares are considered to be outstanding in computing earn ings per share. For new ESOP shares, compensation expense is equal to the Company's matching contribution (see Note 13). Dividends on released new ESOP shares are deducted from retained earnings, and dividends on unreleased shares are reported as a reduction of debt or accrued interest. Only new ESOP shares that have been released are considered outstanding in computing earnings per share. Cash equivalents Cash equivalents are highly liquid investments (valued at cost, which approximates fair value) acquired with an origi nal maturity of three months or less. 32 1999 Annual Report Notes Derivative financial instruments. Derivative financial instruments are used to hedge a portion of the Company's foreign currency and interest rate expo sures. Income and expense are recorded in the same caption as that arising from the related asset or liability being hedged. Premiums paid on option contracts are amortized over the lives of the contracts. Gains and losses related to hedges of firm commitments are deferred and recognized over the expected remaining lives of the related assets and liabilities. Unrealized gains and losses from option contracts that hedge anticipated transac tions are also deferred and recognized in income in the same period as the hedged transactions. Unrealized gains and losses from forward contracts that hedge anticipated transac tions are not deferred. The Company also uses commodity swap and option contracts to reduce its exposure to fluctuations in prices for natural gas. Gains and losses on these contracts are deferred and recognized in income in the same period as the hedged transactions as an adjustment to cost of sales. The fair value of derivative instruments held as of Dec. 31,1999 and 1998, was not material. The Company does not enter into derivative transactions for speculative purposes and therefore holds no derivative instruments for trading purposes. Reclassifications Certain amounts in the 1998 and 1997 financial statements have been reclassified to be consistent with the 1999 presentation. 2. iftcqjuDsotioinis, Business OivesttsHuires aindl Rsaflllgini mantra* During the past three years, we have acquired a number of businesses, all of which were recorded using the purchase method of accounting. Accordingly, the results of operations of the acquired companies have been included in our con solidated results from their respective acquisition dates. In October 1999, we acquired a majority interest in pri vately held powder coatings maker Bellaria S.p.A. In July 1999, we acquired the global automotive refinish, automo tive and industrial coatings businesses of Imperial Chemical Industries PLC (the IC1 business),,except for the businesses in the Indian subcontinent, for approximately $677 million and aerospace coatings and sealaqt maker PRC-DeSoto International, Inc (PRQDeSotoTfftm Akzo Nobel N.V (Akzo) for approximately $524 million. Although included as part of the original purchase price, the majority of the ICI business in Asia was not acquired until the fourth quarter of 1999 and the PRC-DeSoto and ICI businesses in France were not acquired until November 1999. We also acquired the U S. architectural coatings business of Australian based Wattyl, Ltd. and we completed the acquisition of the German-based specialty coatings business of Imperial Chemical Industries PLC in July 1999. In February 1999, we acquired the commercial transport refinish coatings busi ness of Sigma Coatings B.V, a subsidiary of Belgian refiner PetroFina SA. Finally, in January 1999, we completed the acquisition of the remaining portion of the global packaging coatings business formerly owned by Courtaulds pic (Courtaulds) from Akzo and the purchase of certain leased assets associated with our 1998 acquisition of the technical coatings business of Orica Ltd. (Orica). The preliminary purchase price allocations for the 1999 acquisitions are subject to adjustment in 2000 when final ized. In each of the 1999 acquisitions, the preliminary allo cation resulted in an excess of purchase price over the fair value of net assets acquired being allocated to goodwill, which is being amortized on a straight-line basis over 40 years. In connection with the acquisitions of PRC-DeSoto and the ICI business, a portion of the purchase price for each acquisition was allocated to purchased in-process research and development (IPR&D) which totaled $21 million and $19 million, respectively The amounts attributed to IPR&D were expensed at the dates of acquisition as the IPR&D pro jects had not reached technological feasibility nor had any alternative future use. The IPR&D projects, which totaled more than 40, pri marily related to developing improved environmentally compliant product offerings, such as high solids (low sol vents) or waterborne products, were valued through the application of the income approach by independent valua tion specialists. The income approach includes an analysis of the markets, projected net cash flows, and technical and commercial risks associated with achieving such cash flows. With respect to the IPR&D projects of PRC-DeSoto and the ICI business, the estimated cash flows were projected over periods ranging from ten to twenty years after the date of the acquisitions, and were discounted at rates ranging from 15% to 30% (the average discount rate utilized was approxi mately 20%). The discount rates were selected on a projectby-project basis and were based on the Company's weighted average cost of capital adjusted for the risks associated with the estimated growth, profitability, and technical and com mercial risks of the acquired IPR&D projects. The nature of the efforts to develop the acquired IPR&D into commercial ly viable products consists principally of planning, designing and testing activities necessary to determine that the prod ucts can meet market expectations, including functionality, technical and performance requirements and specifications. The financial assumptions utilized in the valuation of the IPR&D are consistent with the acquired businesses' histori cal results, PPG's specific experience and expectations, and general industry levels. Anticipated cost savings and other synergies were not included in the valuation analysis of the IPR&D. The Company expects that the products incorpo rating the acquired technology will generally be completed and begin to generate cash flows over the three to twentyfour month period after the acquisitions. However, 33 PPG industries Notes development of these technplogies remains a significant risk due to the remaining effort to achieve technical viability; evolving customer markets, uncertain standards and perfor mance specifications for new products, and significant com petitive threats from numerous companies. The valuatioriof the acquired IPR&rD also gave consid eration to the stage of completion of the projects at the time of the acquisition and the degree to which the projects relied on prior, existing technology. With respect to the stage of completion, the PRC-DeSoto and the ICI business IPR&rD projects were, on average, approximately 46% and 56% complete, respectively, at the dates of acquisition. Similarly, the 1PR&D projects' degree of leverage from the applicable developed technologies was approximately 33% for PRCDeSoto and 36% for the IGI business. We are currently in the process of refining plans, origi nally developed at; the date of the acquisition, to integrate the operations of the IQ business and PRC-DeSoto that will likely result in certain severance costs. These costs, once determinable, will be accrued as part of the purchase price allocation and will result in an increase in goodwill. From September to December 1998, we completed the purchase of the Australian automotive refinish, automotive original equipment, coil, packaging and industrial coatings businesses of Orica and the U.S. architectural coatings busi ness and.a portion of the global packaging coatings business formerly owned by Courtaulds from Akzo. In January and February 1998, we acquired the assets of a U.S. automotive glass plant from Chrysler Corporation and the automotive coatings business of Helios-Lacke Bollig & Kemper GmbH & Co. KG of Germany. From September to December 1997, we acquired the U.S. industrial pretreatment business of Man-Gill Chemical Company; Max Meyer Duco S.p.A., a European supplier of automotive refinish, fleet finish and decorative coatings; Phillips Paint Products, a Canadian industrial coatings man ufacturer; the worldwide packaging coatings businesses of BASF Lacke + Farben AG; Keeler & Long, a U.S. manufac turer of high performance coatings and coil coatings, and Sipsy Chimie Fine S.CA, a French manufacturer of phar maceutical intermediates formerly owned by Warner Lambert Company. We also increased our ownership interest in two related automotive original coatings compa nies located in Brazil and Argentina from 45% to 100%. The cost of the acquisitions was $1,343 million in 1999, $390 million in 1998 4WM363 million in 1997 plus the assumption of indebtedness of $5 million, $11 million and $42 million, respectively. The following table reflects the results of our operations on a pro forma basis as if the 1999 acquisitions had been completed on January 1,1998, the 1998 acquisitions had been completed on January 1,1997, and the 1997 acquisi tions had been completed on January 1,1997. Further, the pro forma results of operations do not include after-tax charges of $33 million for IPR&D and $15 million for the fair-market-value adjustment of acquired inventories sold, both of which are associated with the 1999 acquisitions of the ICI business and PRC-DeSoto. The following unaudited pro forma information also excludes the effects of synergies and cost reduction initiatives directly related to all acquisi tions. These actions have already commenced and are expected to continue in the year 2000. (Millions, except per share amounts) Net sales Earnings before interest, income taxes and minority interest Net income Earnings per common share Earnings per common share-- assuming dilution 1999 1998 1997 $8,178 $8,626 $8,014 $1,191 $ 597 $ 3.44 $1,469 $ 788 $ 4.45 $1,313 $ 740 $ 4.12 $ 3.40 $ 4.41 $ 4.08 The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the dates indicated, nor are they necessarily indicative of future operating results. InJuly 1999, the Company completed the sale of its Pittsburgh headquarters complex for $186 million and con currently entered into a long-term operating lease for the portion of the complex occupied by the Company The pre tax gain of $7 million on the sale was deferred and will be amortized over the term of the long-term operating lease. In July 1998, we completed the sale of our European flat and automotive glass businesses to Glaverbel S.A. of Brussels, Belgium, for $266 million in cash plus the assump tion of certain indebtedness, which resulted in a pre-tax gain of approximately $85 million. We also completed certain business divestitures in 1997, primarily the sale of the sur factants business, which resulted in a net pre-tax gain of $58 million. The net sales of these divested businesses totaled $271 million in 1998 and $550 million in 1997. Additionally, in August 1998, we sold the European decora tive coatings business acquired in the 1997 Max Meyer acquisition. The selling price approximated the canying value of the net assets sold. During 1999, we approved restructuring plans associat ed with the integration of our recent packaging coatings acquisitions and cost reduction activities across all of our businesses that resulted in pre-tax charges of $47 million. The components of the plans included severance benefits for 519 employees and estimated losses of $17 million on the disposal of a redundant European facility and the dispo sition of the assets of a U.S. coatings facility. As of Dec. 31, 1999, $7 million had been paid under the plans to 215 employees. At Dec 31,1999 the remaining reserves associ ated with the 1999 restructuring plans covered 304 employ ees. We anticipate that the remaining severance benefits will be paid and the asset dispositions will be completed in 2000. We also recorded reversals of $2 million and 34 1999 Annual Report Notes $1 million, originally-reJordecf in 1997, related to the sale of our equity interest in an Asian float glass plant and the clo sure of our Perry, Ga., flat glass plant, respectively, and a $2 million reversal related to reserves established in 1999 and 1998 for cost reduction initiatives in our glass and coatings operations. Finally, in 1999, we completed the sale of our equity interest in one of the Asian float glass plants. We also reached agreements to dispose of our remaining equity interest in another Asian float glass plant and the Asian downstream fabrication facilities. These dispositions are expected to be completed in the first quarter of 2000. During 1998, we recorded a pre-tax charge of $19 mil lion in connection with a restructuring plan to reduce costs in our glass and coatings businesses. The components of the plan included severance benefits for 283 employees. During 1999 and 1998, approximately $14 million was paid out under the restructuring plan and $1 million was reversed for amounts that will not be paid under the plan. At Dec. 31, 1999, the remaining reserves associated with the 1998 restructuring plan covered 73 employees. In 1998 we also recorded an additional pre-tax charge of $15 million related to the disposition of our equity interests in two Asian float glass plants and two Asian downstream fabrication facilities. The additional charge for the disposition of these facilities resulted from a reassessment of die proceeds expected to be realized on the dispositions of $14 million and additional asset write-offs of $1 million. We also recorded a $3 million reversal of a reserve in 1998, originally recorded in 1997, related to the closure of our Perry, Ga., flat glass plant At Dec. 31,1999, the remaining reserves associated with the 1999 and 1998 restructuring plans totaled $26 mil lion and are expected to be paid in 2000. In 1997 we recorded a pre-tax restructuring charge of $ 102 million related to certain glass businesses that were not meeting strategic performance objectives. The principal components of the 1997 restructuring program included the closure of our Peny, Ga., flat glass plant and the disposition of our equity interests in two Asian float glass plants. The pre-tax restructuring charge in 1997 included $61 million of asset write-offs and $41 million associated with cash outlays primarily for severance costs for 317 employees, a propor tionate share of equity investee indebtedness, and demoli tion and environmental costs, net of proceeds from sale. During 1999 and 1998, cash outlays and asset write-offs associated with both the 1997 restructuring program and the additional restructuring chargocecorded in 1998 related to this program totaled $32 million. We also reversed $3 million of these restructuring charges in each of the years 1999 and 1998, respectively. At Dec. 31,1999, approx imately $40 million of reserves related to the 1997 restruc turing program are outstanding and will be paid out in the first quarter of 2000 when the remaining equity interest in the Asian float glass plant and the Asian downstream fabrication facilities are sold. 3. WforkSing CapcHaJ DeflaSI (Millions) Receivables Customers Other Allowance for doubtful accounts Total Inventories0* Finished products and work in process Raw materials Supplies Total Accounts payable and accrued liabilities Trade creditors Accrued payroll Other poscretirement and pension benefits Income taxes Other Total December 3i 1999 1998 $1,489 131 (26) ___ $1,594 _ $1,246 141 (21) $1,366 $ 716 189 111 $1,016 $ 638 174 105 $ 917 $ 755 219 $ 630 213 64 26 366 $1,430 57 11 364 $1,275 (1) Inventories valued using the UFO method comprised 63% and 68f6 of total gross inventory values at Dec. 31,1999 and 1998, respectively. Total gross inventory values exelude the UFO reserve and supply bal ances. Ifthe first-in. first-out method of inventory valuation had been used. Inventories would have been $164 miltton and S1S3 million higher at Dec. 31.1999 and 1998, respectively. (Millions) Property"' Land and land improvements Buildings Machinery and equipment Other Construction in progress Total December 31 1999 1998 $ 308 1,058 4,864 348 281 $6,859 $ 317 1,194 4,697 323 208 $6,739 (1) Interest capitalited In 1999, 1998 and 1997 was SU million, $9 million and S10 million, respectively 35 PPG Industries Notes 5. 0ib4 amd BaWfe Crogis Agreemeaills and Hanses (Millions.) 67,% non-callable notes, due 2004 7.05% notes, due 2009 7.4% notes, due 2019 9.3% notes, due 1999 6'/.% non-callable notes, due 2002 67% non-callable debentures, due 2005 67;% notes, due 2007 67s% notes, due 2012 75/b% notes, due 2016 67s% notes, due 2017 9% non-callable debentures, due 2021 ESOP notes0' Weighted average 8.5% fixed-rate notes Variable-rate notes, weighted average 5.4% at Dec. 31, 1999 Various other debt, weighted average 5.6% at Dec.-31,1999 Non-U.S. subsidiary borrowings 12.7% notes, maturing in 1999 Various other debt, weighted average 4.8% at Dec. 31,1999 Capital lease obligations Total Less payments due within one year Long-term debt December 31 1999 1998 $ 299 S -- 298 -- 199 -- -- 123 100 100 100 100 150 150 100 100 149 149 99 99 148 148 51 56 77 83 54 38 -- 13 34 10 1,868 32 $1,836 53 34 1,246 165 $1,081 (i) See Note 13 for discussion ofESOP borrowings. Thefixed- and variablerate notes mature in 2009 and require annualprincipal payments from 2000 to 2008. Aggregate maturities during the next five years are (in millions) $32 in 2000, $30 in 2001, $134 in 2002, $26 in 2003 and $314 in 2004. The Company has revolving credit agreements with credit lines totaling $1.2 billion. Of these credit lines, $800 million will expire in December 2001 and requires pay ment of annual fees equal rn jgven basis points on the unused portion of the lines. An additional $403 million of the Company's credit lines will expire in October 2000 and requires payment of annual f?e?from lOVi to 12V2 basis points on the unused portion of the lines. These lines sup port our commercial paper programs in the United States, Europe and Canada. The remaining $25 million of credit lines, relating to a subsidiary, will expire in October 2000 and requires payment of annual fees equal to 10 basis points on the unused portion of the line. PPG may cancel all or pan of these credit agreements at any time without penalty or premium. At Dec. 31,1999, we had used $20 million of these lines of credit. Our non-U.S. operations have other committed and uncommitted lines of credit totaling $39 million and $315 million, respectively, of which $11 million and $82 million, respectively, were used at Dec. 31, 1999. The committed lines of credit, which expire between 2000 and 2001, do not require significant commitment fees. The uncommitted lines of credit are subject to cancellation at any time and are not subject to any commitment fees. PPG is in compliance with the restrictive covenants under its various credit agreements, loan agreements and indentures. The Dec. 31,1999 and 1998, balances for "Short-term debt and current portion of long-term debt" include, respec tively, $757 million and $147 million of commercial paper and $165 million and $325 million of short-term notes. Of the $757 million in commercial paper, $460 million relates to our euro-denominated commercial paper program. The weighted-average interest rates of short-term borrow ings as of Dec. 31,1999 and 1998, were 5.0% and 5.1%, respectively. Interest payments in 1999,1998 and 1997 totaled $123 million, $121 million and $106 million, respectively. Rental expense for operating leases was $92 million, $75 million and $70 million in 1999,1998 and 1997, respectively. Minimum lease commitments for operating leases that have initial or remaining lease terms in excess of one year at Dec. 31,1999, are (in millions) $55 in 2000, $43 in 2001, $33 in 2002, $24 in 2003, $21 in 2004 and $101 thereafter. 0. Financial Onsttnuinnieinrts included in PPG's financial instrument portfolio are cash and cash equivalents, Company-owned life insurance, derivative financial instruments and short- and long-term debt instruments. The most significant instrument, long term debt (excluding capital lease obligations), had carrying and fair values totaling $1,858 million and $1,794 million, respectively, at Dec. 31,1999. The corresponding amounts ar Dec. 31,1998, were $1,212 million and $1,317 million, respectively. The fair values of the other instruments approximated their carrying values, in the aggregate. The fair values of the debt instruments were based upon quoted market prices of the same or similar instru ments or on the rates available to the Company for instru ments of the same remaining maturities. 36 1999 Annual Report Notes 7. Earnings Pr Connmion-SIhiar The earnings per common share calculations for the three years ended Dec. 31, 1999 are as follows: (Millions, except per share amounts) Earnings per common share Net income Weighted average com mon shares outstanding Earnings per common share Earrings per common share -- assuming dilution Net income Weighted average com mon shares outstanding Effect of dilutive securities Stock options Other stock compen sation plans Potentially dilutive com mon shares Adjusted common shares outstanding Earnings per common share -- assuming dilution 1999 $ 568 173.8 $3.27 S 568 173.8 0.5 1.2 1.7 175.5 $3.23 1998 1997 $ SOI $ 714 177.0 $ 4.52 179.8 S 3.97 $ 801 $ 714 177.0 179.8 0.6 0.7 1.1 1.0 1.7 1.7' 178.7 181.5 $ 4.48 $ 3.94 8. Imcm Taxes The following is a reconciliation of the statutory U.S. corpo rate federal income tax rate to the effective income tax rate. Percent ofPre-tax Income U.S. federal income tax rate Changes in rate due to: State and local taxes -- U.S. Taxes on non-U.S. earnings net of related tax credits Other Effective income tax rate 1999 35.0% 1.9 3.5 (1.6) 38.8% 1998 35.0% 3.2 1997 35.0% 3.2 .9 (3.1) 36.0% .1 (1-3) 37.0% The following table gives details of income tax expense in the statement of income. A portion of these taxes will be payable within one year and is therefore shown below as "Current income taxes," while the balance is shown as "Deferred income taxes." (Millions) Current income taxes U.S. federal Non-U.S. State and local -- U.S. Total current Deferred income taxes U.S. federal Non-U.S. State and local -- U5. Total deferred Total 1999 1998 1997 $310 87 28 425 $308 97 60 465 $284 93 58 435 (43) (2) (3) (48) $377 6 (6) 1 1 $466 2 (1) (1) -- $435 Net deferred income tax assets and liabilities as of Dec. 31, 1999 and 1998, are as follows: (Millions) Deferred income tax assets related to Employee benefits Environmental Operating loss and other carryforwards Inventories Property Restructuring Intangibles Other Valuation allowance Total Deferred income tax liabilities related to Property Employee benefits Intangibles Other Total Deferred income tax liabilities -- net 1999 1998 $333 32 80 35 27 26 12 42 (46) 541 $337 36 46 32 17 24 4 24 (24) 496 406 461 296 263 147 32 38 29 887 785 $346 $289 PPG industries Notes The non-deductibility-ef certain purchased in-process research and development charges recorded by PPG in 1999 has resulted in an increase in the effective tax rate. Dispositions of certain non-U.S. subsidiaries in 1997 generated U.S. capital losses of approximately $180 million. A portion of these losses was realized by offsetting it against capital gains from previous years and a 1997 capital gain from the sale of certain U.S. businesses. The remaining $88 million capital loss carryforward was offset with a valuation allowance at Dec. 31,1997, because PPG's ability to realize the amount carried forward was uncertain. In July 1998, PPG recognized a gain from the sale of its European flat and automotive glass businesses, of which a considerable por tion was capital, the tax on which was offset by the capital loss carryforward. |As a result of the realization of the tax benefit from the capital loss carryforward, the valuation allowance that was recorded in the prior year was reversed in 1998. This benefit from the realization of the capital loss in both 1997 and 1998 reduced the effective tax rate in each year. At Dec. 31,1999, subsidiaries of the Company had available net operating loss (NOL) carryforwards of approxi mately $210 million for income tax purposes, of which $167 million has an indefinite expiration. The remaining $43 million expires between the years 2002 and 2010. The majority'of the NOL carryforwards relate to opera tions of subsidiaries in countries permitting indefinite carry forward of losses.': Generally, a valuation allowance has been established for these carryforwards because the ability to uti lize them is uncertain. Income before income taxes of our non-U.S. operations for 1999,1998 and 1997 was $190 million, $273 million and $232 million! respectively No deferred U.S. income taxes have been provided on certain undistributed earnings of non-U.S. subsidiaries, which amounted Ito $750 million at Dec. 31,1999 and $681 million at Dec. 31,1998. These earning? are consid ered to be reinvested for an indefinite period of time or will be repatriated when it is tax effective to do so. It is not practicable to determine the deferred tax liability on these earnings, j The Internal, Revenue Service has examined our U.S. federal income tax returns though 1993, and we have paid all tax claims. Income tax payments ini999,1998and 1997 totaled $394 million, $385 million and $452 million, respectively. 9. (PsDtsDoros amf OnDiair IPosftrattoiremairolt We have noncontributory defined benefit pension plans that cover certain employees worldwide. PPG also sponsors defined benefit plans that provide medical and life insurance benefits for certaiin active and retired U.S. and Canadian employees and dependents. The Company has the right to modify or terminate certain of these defined benefit plans in the future. Salaried and certain wage employees hired after Jan. 31,1993, will not be entitled to postretirement medical benefits. At Dec. 31,1999 and 1998, the U.S. plans had pro visions that capped the cost of postretirement medical bene fits at 2003 levels for certain current and future retirees cov ered by bargaining plans and non-baigaining plans. The following table sets forth the changes in benefit obligations, plan assets, the funded status and the amounts recognized in our balance sheet for our defined benefit pen sion and other poscretirement benefit plans. Other Postretiremen! Pensions_________Benefits (Millions) 1999 1998 1999 1998 Benefit obligation, fan. 1 $2,201 $2,023 $ 729 $ 704 Service cost 48 41 8 8 Interest cost 140 137 45 48 Plan amendments 26 . 10 2 (2) Actuarial (sains) losses (285) 116 (95) 22 Benefits paid (134) (130) (58) (50) Businesses acquired 20 7 4 1 Businesses disposed -- (6) -- -- Foreign currency translation adjustments Special termination benefits and other Benefit obligation, Dec. 31 (10) 2 ' 6 3-- $2,012 $2,201 $ 637 (2) -- $ 729 Fair value of plan assets, lan. 1 Actual return on plan assets Contributions Benefits paid Businesses acquired Plan expenses and other -- net Foreign currency translation adjustments Fair value ofplan assets, Dec. 31 $2,536 $2,308 307 349 76 (127) (121) 17 2 (4) (4) (6) (4) $2,730 $2,536 Funded status Unrecognized actuarial (gains) lasses Unrecognized prior service cost Unrecognized transition asset Minimum pension liability Net prepaid (accrued) benefit cost $ 718 $ 335 $(637) $(729) (72) 246 19 . 116 84 (13) (23) 71 (19) (56) 13 -- -- 18 -- -- $ 694 $ 577 $(605) $(595) 38 i 999 Annua/ Report Notes The following summarizes-the amounts recognized in the balance sheet: Other Postretirement Pensions____________Benefits (Mi/lioniJ 1999 1998 1999 1998 Prepaid benefit cost Accrued benefit cost $817' S 707 $ -- $ -- (123) (130) (605) (595) Net prepaid (accrued) benefit cost $694 $ 577 $(605) $(595) The minimum pension liability impacted the following balance sheet captions: (Millions) Other assets Accumulated other comprehensive loss Deferred income taxes 1999 $4 $13 $6 1998 $7 $31 $18 The projected benefit obligation, accumulated benefit obligadon and fair value of plan assets for the pension plans with benefit obligations in excess of plan assets were $137 million, $116 million and $4 million, respectively, at Dec. 31, 1999, and were $200 million, $178 million and $53 million, respectively, at Dec. 31,1998. The accrued pension benefit cost reflected in the balance sheet includes $5 million, at Dec. 31,1999 and 1998, for defined contribution plans. Net periodic benefit (income) cost includes the foDowing: Other Postretirement Pensions______________ Benefits (Millions) 1999 1998 1997 1999 1998 1997 Service cost $ 48 $ 41 $ 36 $ 8 $ 8 $ 7 Interest cost 140 137 134 45 48 48 Expected return on plan assets Amortization of transition assets Amortization of pnor service cost Amortization of actuarial losses (271) (245) (212) (5) (5) (3) 12 11 10 5 4 12 52 54 4 2 Net periodic benefit (income) cost ,, S (71)..n$ (a3t7--) $r"(2-5) - $63 $62 $61 In determining net periodic benefit (income) cost, unrecognized prior service costs are amortized over periods ranging from six to 14 years. The following weighted average assumptions were used to determine the benefit obligations and net periodic benefit (income) cost for our defined benefit pension and other postretirement benefit plans: Discount rate"' Expected return on assets Rate of compensation increase 1999 7.8% 10.9% 4.1% 1998 6.4% 10.9% 4.1% 1997 7.0% 10.9% 4.6% (1) Net periodic benefit (income) cost is determined using the previous years discount rate. (2) Applies only to defined benefit pension plans. The weighted-average medical healthcare cost trend rate used was 6.0% for 1999 and 5.7% for 2000, declining ratably to 3.5% in the year 2007. If these trend rates were increased or decreased by one percentage point per year, such increases or decreases would have the following effects: (Millions) One-Percenmge Point Increase Decrease Increase (decrease) in the aggregate of service and interest cost components $ 2 $ (2) Increase (decrease) in the benefit obligation $21 $(32) The Company also incurred costs for multi-employer pension plans of $1 million in each of the years 1999,1998 and 1997. Multi-employer healthcare costs totaled $1 mil lion in each of the years 1999,1998 and 1997. 10. ComiunJum^* amf Conwtiiimgamt UalbollJitll# PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial money damages are sought. These lawsuits and claims relate to product liability, contract, patent, environmental, antitrust and other matters arising out of the conduct of PPGls business. The Company has been named in a number of antitrust lawsuits alleging that PPG acted with competitors to fix prices and allocate markets for certain glass products. These antitrust proceedings are in an early stage. For over 30 years, the Company has been a defendant in lawsuits involving claims alleging personal injury from exposure to asbestos. Aggregate settlements by PPG to date have been immaterial. Over the past few years, the number of asbestos-related claims against the Company, as well as numerous other defendants, has increased. At Dec. 31,1999, the Company was one of many defendants in numerous asbestos-related lawsuits involving approximately 110,000 claims. In many of the cases, the plaintiffs allege that the Company should be liable for injuries from products manufactured and dis tributed by Pittsburgh Coming Corporation ("PC"). The Company and Coming Incorporated are each 50% share holders of PC. The Company believes it is not responsible for arty injuries caused by PC products and intends to defend against such claims. PPG has successfully defended such claims in the past. In January 2000, for the first time, a 39 PPG hduscnes Notes trial court found PP^TliabfeJor injuries to five plaintiffs alleged to be caused by PC products. The Company intends to appeal that verdict. Separately from the claims against the Company described above, as a shareholder of PC, any loss to the Company due to losses incurred by PC arising from asbestos-related claims would not involve a cash payment and would be limited to the diminution in value of the Company's investment in PC. If such a loss were to occur, it would be approximately $34 million on an after-tax basis, based on the Company's investment in PC as of Dec. 31, 1999. The Company and others are also defendants in three cases involving claims alleging injury from exposure to lead. PPG believes it has adequate insurance for the personal injury and property damage claims against the Company described above. PPG's lawsuits and claims against others include claims against insurers and other third parties with respect to actual and contingent losses related to environ mental, asbestos and other matters. Management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG will not have a material effect on PPG's con solidated financial position, results of operations or liquidity. It is PPG's policy to accrue expenses for environmental contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimat ed. Reserves for environmental contingencies are exclusive of claims against third parties and are not discounted. As of Dec. 31,1999 and; 1998, PPG had reserves for environmen tal contingencies totaling $82 million and $94 million, respectively. Pre-tax charges against income for environmen tal remediation costs in 1999,1998 and 1997 totaled $10 million, $10 million and $34 million, respectively, and are included in "Other charges" in the statement of income. Cash oudays related to such environmental remediation aggregated $22 million, $16 million and $25 million in 1999,1998 and 1997, respectively. Management anticipates that the resolution of the Company's environmental contingencies, which will occur over an extended period of time, will not result in future annual charges against income that are significantly greater than those recorded in recent years. It is possible, however, that technological] regulatory and enforcement develop ments, the results of environmental studies and other factors could alter this expectation.Jajnartagement's opinion, the Company operates in an environmentally sound manner and the outcome of the Company^ environmental contin gencies will not hive a matefiaffeffect on PPG's financial position or liquidity. In addition to the amounts currendy reserved, the Company may bejsubject to loss contingencies related to environmental matters estimated to be as much as $200 million to $400 million, which range is unchanged from the prior year end. Such unreserved losses are reasonably possi ble but are not currendy considered to be probable of occur rence. Although insurers and other third parties may cover a portion of these costs, to the extent they are incurred, any potential recovery is not included in this unreserved exposure to future loss. The Company's environmental contingencies are expected to be resolved over an extended period of time. Although the unreserved exposure to future loss relates to all sites, a significant portion of such exposure involves three operating plant sites. Initial remedial acdons are occur ring at these sites. Studies to determine the nature of the contamination are reaching completion and the need for additional remedial actions, if any, is presendy being evaluat ed The loss contingencies related to the remaining portion of such unreserved exposure include significant unresolved issues such as the nature and extent of contamination, if any, at sites and the methods that may have to be employed should remediation be required With respect to certain waste sites, the financial condi tion of any other potentially responsible parties also con tributes to the uncertainty of estimating PPG's final costs. Although contributors of waste to sites involving other potentially responsible parties may face governmental agen cy assertions of joint and several liability, in general, final allocations of costs are made based on the relative contribu tions of wastes to such sites. PPG is generally not a major contributor to such sites. The impact of evolving programs, such as natural resource damage claims, industrial site reuse initiatives and state voluntary remediation programs, also adds to the present uncertainties with regard to the ultimate resolution of this unreserved exposure to future loss. The Company's assessment of the potential impact of these envi ronmental contingencies is subject to considerable uncer tainty due to the complex, ongoing and evolving process of investigation and remediation, if necessary, of such environmental contingencies. 11. Shareholders' Equity A class of 10 million shares of preferred stock, without par value, is authorized but unissued. Common stock has a par value of $1.66% per share; 600 million shares are authorized and 290,573,068 were issued at Dec. 31,1999,1998 and 1997. Shares outstanding at Dec. 31,1999 and 1998, exclude unreleased new ESOP shares (see Note 13). PPG has a Shareholders' Rights Plan, under which each share of the Company^ outstanding common stock has an associated preferred share purchase right. The rights are exercisable only under certain circumstances and allow holders of such rights to purchase common stock of PPG or an acquiring company at a discounted price, which would generally be 50% of the respective stocks' current fair mar ket value. Treasury shares held at Dec. 31,1999 and 1998, were 116,472,619 shares and 115,448,529 shares, respectively. Purchases of treasury stock totaled 1,452,600,3,793,300 and 5,964,792 in 1999,1998 and 1997, respectively. Issuances of treasury stock totaled 428,510,863,016 and 804,507 in 1999,1998 and 1997, respectively 40 1999 Annual Report Notes Per share cash dividends paid were $1.52 in 1999, $1.42 in 1998 and $1.33 in 1997. 112. Accminniuilailed) UMneo- CompiraJisjusov Loss (Millions! Balance, Jan. 1,1997 Net change Balance, Dec. 31, 1997 Net change Balance, Dec. 31, 1998 Net change Balance, Dec. 31,1999 Currency Translation Adjustment Minimum Pension Liability Adjustment Unrealized Losses on Marketable Securities Accumulated Other Comprehensive Loss $ (10) (126) $(10) (15) S---- $ (20) (141) (136) 14 (122) (40) (25) (6) (31) 18 --- . _ (3) (161) 3 (153) (25) $(162) $(13) $(3) $(178) Foreign currency translation adjustments exclude income tax expense (benefit) given that the earnings of nonU.S. subsidiaries are deemed to be reinvested for an indefi nite period of time. The income tax expense (benefit) asso ciated with the minimum pension liability adjustment was $12 million in 1999 and $(3) million in 1998. H3. EmpBoysa Stock Ownership PSam Our employee stock ownership plan (ESOP) covers substan tially all U. S. employees. The Company makes matching contributions to the ESOP based upon participants' savings, subject to certain limitations, the matching percentage being based upon our return on average capital for the previous year. Prior to 1999, the matching percentage was based on the previous yearis return on equity. Compensation expense related to the ESOP for 1999, 1998 and 1997 totaled $18 million, $9 million and $11 mil lion, respectively. Interest expense totaled $9 million, $10 mil lion and $11 million for 1999,1998 and 1997, respectively Dividends on PPG shares held by the ESOP to service ESOP debt, totaled $40 million, $39 million and $39 million for 1999,1998 and 1997, respectively. The fair value of unre leased new ESOP shares was ST^Ulion and $8 million at Dec. 31,1999 and 1998, respectively Shares held by the ESOP as of Dec. 31,1999 and ld&g, are as follows: 1999 1998 Old Shares New Shares Old Shares New Shares Allocated shares 8,640,224 2,833,460 8,085,473 2.382376 Unreleased shares 4,760,110 112,183 5,314,861 134,943 Total 13,400,334 2,945,663 13,400334 2,517,519 114. omhair Eamomgs (Millions) Interest income Royalty income Shares of net earnings in equity affiliates Gain on sale of businesses Other Total 1S99 $8 26 1998 $ 12 18 1997 $8 25 28 -- 62 $124 30 85 91 $236 10 59 60 $162 PPG's share of undistributed earnings of equity affiliates was $122 million and $106 million at Dec. 31,1999 and 1998, respectively. Dividends received from equity affiliates were $16 million, $16 million and $14 million in 1999, 1998 and 1997, respectively. US. Stock G)pH6m Ptams Under PPG's stock option plan, certain employees of the Company have been granted options to purchase shares of common stock at prices equal to the fair market value of the shares on the date the option was granted. Options are exer cisable beginning from six to 12 months after granting and have a maximum term of 10 years. Shares available for future grants were 7,234,550 and 8,808,178 at Dec. 31, 1999 2nd 1998, respectively. OnJuly 1,1998, the Company granted to substantially all active employees of the Company and its majority owned subsidiaries the option to purchase 100 shares of common stock at its then fair market value of $70 per share. Options are exercisable beginning July 1, 2003 and expire on June 30, 2008. If the Company's earnings per common share for the year ended Dec. 31, 2000 is $7.00 or more, the options become exercisable beginning Jan. 31, 2001. 41 PPG lndustr.es Notes PPG applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock-based compensation. Accordingly, no compensation cost for PPG's stock option plan has been recognized in the accompanying financial statements. Had compensation cost been deter mined based upon the fair value at the grant date for awards granted in 1999,1998 and 1997 consistent with the methodology prescribed in SFAS No. 123, "Accounting for Stock-Based Compensation," net income and earnings per common share, assuming dilution, would have been reduced by $26 million and $0.14 in 1999, $24 million and $0.13 in 1998 and $20 million and $0.11 in 1997. The fair value of scock options is estimated at the grant date using the Black-Scholes option pricing model with the following weighted average ajssumpuons. Risk-free interest rate Expected life of option in years Expected dividend yield Expected volatility : 1999 1998 5.4% 5.4% 5.2 4.8 2.6% ' 2.7% 22.2% 21.0% 1997 6.0% 3.4 2.8% 21.0% The following table summarizes stock option activity under all plans forj the three years ended Dec. 31,1999. Stock option activity optionsper share Outstanding, Jan. 1,'' 1997 Granted Exercised Terminated Number of shares subject to Weighted average exercise price 6,724,965 3,177,322 (2,474,445) (45,500) $41.92 56.91 40.41 51.90 Outstanding, Dec. 31, 1997 Granted 7,382342 6,255,259 48.82 66.47 Exercised Terminated 1 (2,607,468) (269,103) 47.29 61.72 Outstanding, Dec. 31, 1998 Granted i Exercised 10.761,030 3,117,845 (1,711,732) 59.13 57.40 51.21 Terminated - (374,022) 66.58 Outstanding, Dec, 31, 1999 - ........ .........-.......... 11,793,121 59.58 The following table summarizes information about stock options outstanding and exercisable at Dec. 31,1999. Range of exercise price per share Options outstanding_____ Number Weighted average remaining contractual Weighted average exercise price of shares life (years) per share Options exercisable Number of shares Weighted average exerase price per share $19.75-533.00 368,637 2.28 $30.04 368,637 $30.04 $34.68-$49.37 1,221,521 5.05 43.71 1.221,521 43.71 $50.50-563.00 5,567,213 7.09 57.12 3,606,632 59.22 $63.06-576 31 4,635,750 6.68 69.08 1,761,688 68 00 11,793,121 6,958,478 At Dec. 31, 1998, options were exercisable for 5.7 mil lion shares at a weighted average exercise price of $52.83 per common share. The corresponding amounts at Dec. 31, 1997, were 5.1 million and $45.06 per common share, respectively. U. AdvanHsJng Costts Advertising costs are expensed as incurred and totaled $101 million, $93 million and $88 million in 1999,1998 and 1997, respectively. 17. Research and DeveOoponeinitt (Millions) Research and development -- total Less depreciation Research and development--net 1999 $301 17 $284 1998 $287 16 $271 1997 $266 16 $250 42 1999 Annua! Report Notes 18. Ouaoteriy FiiiniameSoO linffQiTimiaiijooi) (onauidlSted)) Net Sales (Millions) Gross Profit (Millions) Net Income (Millions) Earnings Per Common Share Earnings Per Common Share-- Assuming Dilution 1999 quarter ended March 31!l) lone 30 September 30" December 3101 Total 31,803 1,947 1,954 ' 2,053 $7,757 $ 700 782 748 808 $3,038 $123 184 99 162 $568 $ .71 1.06 .57 .93 $3.27- $ .70 1.05 .56 .92 $3.23 1998 quarter ended March 31 June 30" September 3CP December SI*1 . Total $1,913 2,004 1,804 1.789 $7,510 $ 768 818 722 726 $3,034 $192 199 248 162 $801 $1.08 1.13 1.40 .91 $4.52 $1.07 1.11 1.39 .91 $4.48 (1) First-quarter 1999 earnmgs were reduced by a pre-tax charge of $24 mil lionfor disposal ofa redundant European packaging coatings facility and workforce reductions. (2) Third-quarter 1999 earnings were reduced by pre-tax charges of $40 mil lionfor purchased in-process research and development, $19 million repre senting thefair-market-value adjustment of acquired ICI and PRC-DeSour inventories that have been sold. $19 million af restructuring charges relat ed to cost reduction initiatives and the closure cfa coatings facility and $6 million related to the bankruptcy ofa home-center chain. (3) Fourth-quarter 1999 earnings war reduced by pre-tax charges of $4 mil lion representing thefair-market-value adjustment cf acquired ICI and PRC-DtSoto inventories that have been sold, and $4 million related to cost reduction initiatives in our coatings and glass businesses and increased by a reversal of S5 million for previously established restructuring reserves in our glass and coatings operations. (4) Second-quarter 1998 earnings were reduced by a pre-tax charge of $15 million related to the divestiture of equity interests m two Mian float glass plants and two Asian downstreamfabricationfacilities. (3) Third-quarter 1993 earnings were increased by a pre-tax gain of$85 mil lion related to the sale of the European flat and automotive glass business es and reduced by a pre-tax charge of $3 million related to cost reduction initiatives In our gloss businesses. (6) Fourth-quarter 1998 earnings were reduced by a pre-tax charge of $16 million related to cost reduction initiatives principally in our glass and coatings businesses and increased by a reversal of $3 million related to a 1997 restructuring reserve in our glass businesses. US). (Biaaimaaa Sagtnroentt flmfonmitiioin Refer to pages 29 through 31 for information on our busi ness segments for 1999,1998 and 1997. 43 PPG Indusiries Eleven-Year Digest i Suattsmamt off Income Net sales Gross profit (%) , Income before income taxes Income taxes Income before accounting changes Cumulative effect of Accounting changes'1' Net income Return on average capital (%)(ao1 Return on average equity (%)"' Earnings per common share before accounting changes 1999 7,757 39.2 945 377 568 _ 568 12.7 19.3 3.27 1998 7,510 40.4 1,267 466 801 801 19.6 29.4 4.52 1997 7,379 40.4 1,149 435 714 714 19.1 28.8 3.97 1996 7,218 39.9 1,215 471 744 _ 744 20.3 29.5 3.96 1995 7,058 40.3 1,248 480 768 _ 768 21.6 28.8 3.80 1994 1993 1992 1991 6,331 38.9 840 325 5,754 36.9 531 236 5,814 36.4 538 218 5,673 35.2 348 147 515 295 _ (273) 515 22 15.3 2.2Z8.9 20.1 .9/10.7 319 201 319 9.7 11.8 75 276 8.7/7.0 10.7/8.0 2.43 1.39 1.51 .95 1990 1989 6,021 37.8 767 292 5,734 37. L 749 284 475 465 __ 475 14.0 19.7 465 14.8 21.0 2.22 2.09 Cumulative effect ohaccounting changes on earnings: per common share (1.29) .35 Earnings per common share 3.27 4.52 3.97 3.96 3.80 2.43 .10 1.51 1.30 2.22 2.09 Average number of common shares 173.8 Earnings per common share -- assuming dilution : 3.23 Dividends 264 Per share 1.52 177.0 4.48 252 1.42 179.8 3.94 239 1.33 187.8 202.0 3.93 237 1.26 3.78 239 1.18 211.9 2126 212.2 2.42 238 1.12 .10 221 1.04 1.50 200 .94 212.4 214.4 222.6 1.29 183 .86 2.21 176 .82 2.08 165 .74 Balance Sheet Current assets Current liabilities Working capital 3,062 2,384 678 2,660 1,912 748 2,584 1,662 922 2,296 1,769 527 2,275 1,629 646 2,168 1,425 743 2,026 1,281 745 1,951 1,253 698 2,173 1,341 832 2,217 1,471 746 2,056 U38 718 Property (net) 1 Total assets Long-term debt Shareholders' equity Per share 2,933 8,914 1,836 3,106 17.86 2,905 7,387 1,081 2,880 16.46 2,855 6,868 1,257 2,509 14.11 2,913 6,441 834 2,483 13.57 2,835 6,194 736 2,569 13.23 2,742 5,894 773 2,557 12.35 2,787 5,652 774 2,473 11.57 2,972 5,662 905 2,699 12:71 3,183 6,056 1,190 2,655 12.50 3,255 6,108 1,210 2,547 12.01 3,007 5,645 1,198 2,282 10.49 Other Data Capital spending''" Depreciation expense Quoted market price High Low Year-end 1,833 877 829 489 454 356 293 283 366 354 348 340 332 318 331 352 703/* 47/i6 62/i 765/8 49Ve 58Vw 67>/2 485/8 571/8 62>A 427/s 561/8 4-77/a 347/s 453A 42Ve 335/4 371/8 381/s 295/8 377/8 341/a 25 327/8 335 567 671 351 324 292 295/8 205/4 251/4 275/a 171/4 23V: 23 18V: 197/s Price/eamings ratio'51 High Low Average number of employees 22 15 33,800 17 11 32,500 17 12 31,900 16 11 31,300 13 9 31,200 17 14 30,800 27 23 21 17 31,400 32,300 31 22 33,700 12 11 89 35,100 35,500 All amounts air in millions ofdollars (per dune data and number ofemployees. Data was adjusted, os appropriate, to reflect the two-for-one stock split payable on June 10,1994. CD The 1993 changes',in methods <4accounting relate to the adoption ofSFAS No. 106, `Employers' Accountingfor PostretiremeruBenefits Other Than Pensions'; SPAS No. 109, "Accounting/or Income Taxes, " and SFAS No. 112, "Employers' Accountingfor Postemploymeru Benefits. ' The 1991 change in the method of accounting relatesto the cost of rebuilding glass andfiberglass meicingfacilities. The effect ofall the changes on net income in the years ofchange, exclusive of the cumulative effect toJan. 1 ofdie year of change and the pro forma effect on individual prior years' net income, was not material. (2) Return on average capital and return on average equity/or 1993 and 1991 were calculated and presented inclusive and occlusive of the cumulative effect of the accounting changes. (3) Return on average, capital is calculated using pre-interest, after-tax earnings and average debt and equity during the yens (4) Includes the cost of businesses acquired. C5) Price/eamings ratios were calculated based on high and low market prices during the year and the respective years earnings per common share. The 1993 and 1991 ratios were calculated and presented occlusive ofthe cumulative effect ofthe accounting changes. 44 1999 Annua/ Report PPG Shareholder Information World Headquarters -- One PPG Place Pittsburgh, PA 15272, U.S.A. Phone (412) 434-3131 Internet: wwwppg.com Annual Meeting Thursday. April 20, 2000, 11:00 A.M. Sheraton Hotel Station Square Pittsburgh, PA 15219 Transfer Agent & Registrar ChaseMellon Shareholder Services, LLC Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07660 PPG-dedicated phone 1-800-648-8160 Internet inquiries: www.chasemellon.com Shareholders with specific questions regarding dividend checks, transfer or replacement of stock certificates or divi dend tax information should contact ChaseMellon Shareholder Services -- the dividend paying agent, dividend reinvestment agent, transfer agent and registrar for PPG at the above address. Toll-Free Quarterly Financial Results Shareholders may dial the toll-free number 1-888-NEWSPPG (1-888-639-7774) at any time, 24 hours a day, to hear quarterly financial results. By dialing this number, sharehold ers also may request copies of financial news releases via fax, electronic mail or conventional mail. Publications Available to Shareholders Copies of the following publications will be furnished without charge upon written request to Corporate Communications, 7W PPG Industries, One PPG Place, Pittsburgh, PA 15272. Form 10-K -- the Company's Annual Report filed with the Securities and Exchange Commission. PPG Industries Blueprint -- a booklet summarizing PPG's mission, values, strategy and goals. PPG's Global Code of Ethics -- an employee guide to corpo rate conduct policies, including those concerning personal conduct, relationships with customers, suppliers and competi tors, protection of corporate assot responsibilities to the pub lic, and PPG as a global organization. PPG's Environment, Health an3 Safety Policy -- a brochure describing the Company^ commitment, worldwide, to manu facturing, selling and distributing products in a manner that is safe and healthful for its employees, neighbors and customers, and that protects the environment. PPG's Environment, Health and Safety Progress Report -- a report of progress during the year with respect to the Company's environment, health and safety commitment. PPG's Responsible Care Commitment -- a brochure outlin ing the Company's voluntary activities under the Responsible Care initiative of the Chemical Manufacturers Association for safe and ethical management of chemicals. Dividend Information PPG has paid uninterrupted dividends since 1899. The latest quarterly dividend of 40 cents per share, voted by the board of directors on Jan. 20, 2000, results in an annual dividend rate of $1.60 per share. Stock Exchange Listings PPG common stock is traded on the New York, Pacific and Philadelphia stock exchanges (symbol: PPG). Direct Purchase Plan with Dividend Reinvestment Option The Direct Purchase Plan wich Dividend Reinvestment Option is offered as a service and convenience to shareholders. It allows purchase of shares of PPG stock directly through the plan, as well as dividend reinvestment and safekeeping of PPG stock certificates. Shareholders may also have their dividends deposited directly into their bank accounts. . For more information regarding the plan, call 1-800-648-8160. Investor Relations General information about PPG common stock may be obtained from Douglas B. Atkinson, Director of Investor Relations. Phone (412) 434-3312, or write Director of Investor Relations, 40E, PPG Industries, One PPG Place, Pittsburgh, PA 15272. Quarterly Stock Market Price Quarter Ended High 1999 Low Close High 1998 Low Close March 31 $643/4 S493/g $5194 $684/16 $52'/4 $6713/16 June 30 703/4 4715/16 591/16 765/8 635/8 699/16 Sept 30 67 57 60 705/8 49'A 544/16 Dec. 31 63 55>/i 624/16 633/8 513/4 583/16 The number of holders of record of PPG common stock as of Jan. 31, 2000, was 31,595, as shown on the records of the Company's transfer agent. Dividends Month of Payment March June September December Total 1999 Amount Per {Millions) Short $ 66 S .38 66 .38 66 .38 66 .38 $264 $1.52 1998 Amount Per (MtflfonO Shonr $ 60 $ .34 64 .36 64 .36 64 .36 $252 $1.42 45 PPG Industries, Inc. One PPG Place Pittsburgh, PA 15272 U.S.A. (412) 434-3131 www.ppg.com