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SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1995
Commission file number 1-3247
CORNING INCORPORATED
One Riverfront Plaza, Corning, NY 14831
607-974-9000
NEW YORK
(State of incorporation)
16-0393470
(I.R.S. employer identification no.)
Securities registered pursuant to Section 12(b) of the Act:
~Title~of~each~class~ Name~of~each~exchange~on~which~registered
~
Common Stock, $0.50 par value, New York Stock Exchange
with attached Preferred Share
Purchase Right
7 3/4% Sinking Fund Debentures, New York Stock Exchange
Due 1998
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- --
Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [x]
As of February 7, 1996, shares held by non-affiliates of Corning Incorporated
had an aggregate market value of $6,903,496,537.
As of February 7, 1996, 229,899,405 shares of Corning's common stock were
outstanding.
Documents incorporated by reference in this annual report:
Part III. Proxy Statement of the Registrant dated March 6, 1996 relating to the
annual meeting of stockholders on April 25, 1996.
Part IV. By-Laws of Corning Incorporated as amended to and effective as of
December 31, 1994.
1
PART I
ITEM 1. BUSINESS
-----------------
GENERAL
Corning traces its origins to a glass business established by the Houghton
family in 1851. The present corporation was incorporated in the State of New
York in December 1936, and its name was changed from Corning Glass Works to
Corning Incorporated on April 28, 1989.
Corning is an international corporation competing in four broadly-based
business segments: Specialty Materials, Communications, Health Care Services
(formerly Laboratory Services) and Consumer Products. Corning is engaged
principally in the manufacture and sale of products made from specialty glasses
and related inorganic materials having special properties of chemical
stability, electrical resistance, heat resistance, light transmission and
mechanical strength. Corning and its subsidiaries annually produce some 60,000
different products at 43 plants in 9 countries. In addition, Corning, through
subsidiaries and affiliates, engages in health care services businesses,
including clinical-laboratory testing, clinical research, and pharmaceutical-
development services, at 59 facilities in 11 countries.
A description of Corning and each of its segments is discussed in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, appearing on pages 6 through 16, and Note 3 (Information by
Industry Segment) of the Notes to Consolidated Financial Statements appearing
on pages 31 and 32.
COMPETITION
Corning competes across all of its product lines with many large and varied
manufacturers and health care service providers, both domestic and foreign.
Within the Specialty Materials segment, Corning's principal products face
competition from a variety of material manufacturers, some of which manufacture
similar products made from materials other than glass and ceramics. Among
other things, innovation, product quality, performance, and service are key
competitive elements.
Competition within the Communications segment's primary products is intense
among several significant companies. Corning represents an important market
presence in the segment's principal product lines. Price and new product
innovations are significant competitive factors.
The Health Care Services segment's clinical-laboratory business has several
major national competitors and numerous regional and local competitors,
including hospital laboratories. Pharmaceutical-services has several
substantial international competitors in certain of its businesses, as well as
numerous smaller competitors around the world. Price and quality of service
are significant competitive factors. In addition, government regulatory policy
affects competition in both the clinical-laboratory and pharmaceutical services
businesses.
Competition is also intense in the Consumer Products business. Corning
competes in a broad range of products and markets with equally diverse
competitors. Primary competitive influences include price, function, design,
customer service, and the overall retail economies in which Corning's products
compete. In certain consumer product lines, Corning has a sizeable market
presence.
Given Corning's position as a leader in many of its markets, the competition
requires that Corning maintain its market position through technology and
product innovation. For the future, Corning's competitive advantage lies in
its commitment to research and development, its financial resources, and its
commitment to quality.
RAW MATERIALS
Corning's production of specialty glasses and related materials requires
significant quantities of energy and batch materials.
Although energy shortages have not been a problem recently, Corning has
achieved flexibility through important engineering changes to take advantage of
the lowest-cost energy source in most significant processes. Specifically, the
Company's principal manufacturing processes can now be operated with natural
gas, propane, oil or electricity, or a combination of these energy sources.
2
As to resources (ores, minerals, and processed chemicals) required in
manufacturing operations, availability appears to be adequate. Corning's
suppliers from time to time may experience capacity limitations in their own
operations, or may eliminate certain product lines; nevertheless, the Company
believes it has adequate programs to ensure a reliable supply of batch
chemicals and raw materials. For many products, Corning has alternative glass
compositions that would allow operations to continue without interruption in
the event of specific materials shortages.
PATENTS AND TRADEMARKS
Inventions by members of Corning's research and engineering staff have been,
and continue to be, important to the Company's growth. Patents have been
granted on many of these inventions in the United States and other countries.
Some of these patents have been licensed to other manufacturers, including
Corning's associated companies. Many of the earlier patents have now expired.
Most of Corning's products are marketed under the following trademarks:
Corning, Corning Ware, Celcor, Corelle, Corguide, Pyrex, Visions and Vycor.
Subsidiaries of Corning frequently use their own trademarks, such as Revere
Ware, MetPath, and Costar.
PROTECTION OF THE ENVIRONMENT
Corning has a program to ensure that its facilities are in compliance with
state, federal and foreign pollution-control regulations. This program
resulted in capital and operating expenditures during the past several years.
In order to maintain compliance with such regulations, capital expenditures for
pollution control were approximately $5.8 million in 1995 and are estimated to
be $17.3 million in 1996.
Corning's 1995 operating results were charged with approximately $26.1 million
for depreciation, maintenance, waste disposal, and other operating expenses
associated with pollution control. The level of these costs is not expected to
change substantially in 1996. Corning believes that its compliance program
will not place it at a competitive disadvantage.
OTHER
Additional information in response to Item I is found in Note 17 (International
Activities) of the Notes to Consolidated Financial Statements appearing on page
49 and Five Years in Review - Historical Comparison appearing on pages 51 and
52.
Except as otherwise indicated by the context, the terms "Corning" or "Company"
as used herein, mean Corning Incorporated and its consolidated subsidiaries.
ITEM 2. PROPERTIES
------------------
Corning operates a total of 43 manufacturing plants and processing facilities,
35 of which are located in the United States. Corning also engages in health
care services businesses, including clinical-laboratory testing, clinical
research, and pharmaceutical-development services, at 59 facilities, 45 of
which are domestic. Corning owns substantially all of its executive and
corporate buildings, which are located in Corning, New York. Corning also owns
substantially all of its manufacturing and research and development facilities
and more than half of its sales and administrative facilities. Corning leases
a majority of its clinical-laboratory testing facilities.
During the last five years, Corning has invested $2.0 billion in property,
construction, expansion, and modernization. Of the $495.3 million spent in
1995, $35.0 million was spent on facilities outside the United States.
Manufacturing, health care services, and research and development facilities at
consolidated locations have an aggregate floor space of approximately 19
million square feet. Distribution of this total area is:
(million square feet) Total Domestic Foreign
------------------------------------------------------------------------
Manufacturing and health care services 17.8 14.1 3.7
Research and development 1.5 1.4 .1
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19.3 15.5 3.8
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3
Many facilities manufacture products included in more than one industry
segment. Total assets and capital expenditures by industry segment are
included in Note 3 (Information by Industry Segment) of the Notes to
Consolidated Financial Statements appearing on pages 31 and 32. Information
concerning lease commitments is included in Note 16 (Commitments, Contingencies
and Guarantees) of the Notes to Consolidated Financial Statements appearing on
page 48.
In the opinion of management, Corning's facilities are suitable and adequate
for production and distribution of the Company's products. At December 31,
1995 Corning did not own any significant amounts of surplus or idle property.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
There are no pending legal proceedings to which Corning or any of its
subsidiaries is a party or of which any of their property is the subject which
are material in relation to the consolidated financial statements.
ENVIRONMENTAL LITIGATION. Corning has been named by the Environmental
Protection Agency under the Superfund Act, or by state governments under similar
state laws, as a potentially responsible party for 19 hazardous waste sites.
Under the Superfund Act, all parties who may have contributed any waste to a
hazardous waste site, identified by such Agency, are jointly and severally
liable for the cost of cleanup unless the Agency agrees otherwise. It is
Corning's policy to accrue for its estimated liability related to Superfund
sites and other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued approximately $21 million for its estimated
liability for environmental cleanup and litigation at December 31, 1995.
BREAST IMPLANT LITIGATION. On May 15, 1995, Dow Corning Corporation sought
protection under the reorganization provisions of Chapter 11 of the United
States Bankruptcy Code. The effect of the bankruptcy, which is pending in the
United States Bankruptcy Court for the Eastern District of Michigan, Northern
Division (Bay City, Michigan), is to stay the prosecution against Dow Corning of
the 45 purported breast-implant product liability class action lawsuits and its
approximately 19,000 breast-implant product liability lawsuits. In June 1995,
Dow Corning and its shareholders (Corning and The Dow Chemical Company)
attempted to remove various state court implant lawsuits against itself and its
shareholders to federal court, and to transfer these cases to the United States
District Court for the Eastern District of Michigan, Southern District (the
"Michigan Federal Court"). The transfer motion also contemplated a trial of the
consolidated, transferred cases on the "common issue" of whether silicones cause
diseases as alleged by plaintiffs. On September 12, 1995, Judge Hood of the
Michigan Federal Court issued an order granting the motion to transfer the Dow
Corning cases to federal court, but denying the motion to the extent it
requested the transfer of cases against Dow Corning's shareholders to her court.
Judge Hood also denied the motion for the purpose of holding one causation trial
prior to the estimation process by the Bankruptcy Court, but without prejudice
to subsequent motions for one or more such trials to assist in the bankruptcy
estimation process. Dow Corning, Corning and Dow Chemical have filed an appeal
from Judge Hood's order in the United States Court of Appeals for the Sixth
Circuit. Oral argument of the appeal is scheduled for March 5, 1996.
In March 1994, Dow Corning along with other defendants and representatives of
breast implant litigation plaintiffs signed a breast implant litigation
settlement agreement (the "Global Settlement") under which industry participants
would contribute $4.2 billion over a period of more than thirty years to
establish several special purpose funds. Corning was not a signatory or
contributor to the Global Settlement. The Global Settlement, if implemented,
would have provided for a claims-based structured resolution of claims arising
out of silicone breast implants and defined periods during which breast implant
plaintiffs could "opt out" of the settlement and instead continue their
individual breast implant litigation against manufacturers and other defendants.
On October 10, 1995, the United States District Court for the Northern District
of Alabama entered an order declaring that claimants participating in the Global
Settlement would have an additional right to opt-out of that settlement. Those
who do opt-out will have the right to pursue individual lawsuits. The Global
Settlement has been effectively terminated.
Despite the bankruptcy filing of Dow Corning, Corning continues to be a
defendant in two types of cases previously reported involving the silicone-gel
breast implant products or materials formerly manufactured or supplied by Dow
Corning or a Dow Corning subsidiary. These cases include (1) several purported
federal securities class action lawsuits and shareholder derivative lawsuits
filed in the United States District Court for the Southern District of New York
against Corning by shareholders of Corning alleging, among other things,
misrepresentations and omissions of material facts, breach of duty to
shareholders and waste of corporate assets relative to the silicone-gel breast
implant business conducted by Dow Corning and (2) multiple lawsuits filed in
various state courts against Corning and others (including Dow Corning) by
persons claiming injury from the silicone-gel breast implant products or
materials formerly manufactured by Dow Corning or a Dow Corning subsidiary.
Several of the state court suits have been styled as class actions and others
involve multiple plaintiffs.
4
As of December 31, 1995, Corning had been named in approximately 11,400 state
and federal tort lawsuits. More than 4,300 tort lawsuits filed against Corning
in federal courts were consolidated in the United States District Court,
Northern District of Alabama. On April 25, 1995, that District Court issued a
final order dismissing Corning from those federal consolidated breast-implant
cases. The plaintiffs appealed the dismissal order but on January 17, 1996,
voluntarily dismissed their appeal. Certain state court tort cases against
Corning were also consolidated in various states for the purposes of discovery
and pretrial matters. During 1994 and 1995, Corning made several motions for
summary judgment in state courts and judges have dismissed Corning from over
6,400 tort cases filed in California, Connecticut, Indiana, Michigan,
Mississippi, New Jersey, New Mexico, New York, Pennsylvania, Tennessee and
Dallas, Harris and Travis Counties in Texas, some of which are on appeal.
Corning's motions seeking dismissal remain pending in various other states. In
certain Texas tort cases, Dow Chemical and Corning have each filed cross claims
against each other and against Dow Corning.
DEPARTMENT OF JUSTICE INVESTIGATIONS. In September 1993, MetPath and MetWest
Inc. ("MetWest"), a wholly owned subsidiary of Unilab, in which Corning had at
the time an interest of approximately 43%, entered into a Settlement Agreement
(the "MetPath Settlement Agreement") with the Department of Justice ("DOJ") and
the Inspector General of the Department of Health and Human Services (the
"Inspector General") in settlement of civil claims by the DOJ and the Inspector
General that MetPath and MetWest had wrongfully induced physicians to order
certain laboratory tests without realizing that such tests would be billed to
Medicare at rates higher than those the physicians believed were applicable.
Several state and private insurers have made claims based on the practices
covered by the MetPath Settlement Agreement. Several have settled but it is not
clear at this time what, if any, additional exposure Corning may have to these
entities and to other persons who may assert claims on the basis of these or
other practices.
During August 1993, MetPath, MetWest and Damon (which was acquired by Corning
earlier that month) together with other participants in the industry received
subpoenas from the Inspector General seeking information regarding their
practices with respect to 14 enumerated tests offered in conjunction with
automatic chemical test panels. MetPath, MetWest and Damon submitted
information pursuant to these subpoenas and the investigation into MetPath and
MetWest has been closed. Damon was also served with two additional subpoenas in
November 1994 and January 1995 from the Inspector General and was directed by
the U.S. Attorney's office in Boston, to which its investigation has been
referred, to submit additional information in response to the August 1993
subpoena. The November subpoena supplements the August 1993 subpoena and
requires the submission of supplemental information. The January subpoena seeks
information regarding the addition of the 14 enumerated tests to organ function
profiles rather than the automated multichannel chemistry profiles as in earlier
subpoenas. Damon has completed its production to each of the foregoing
subpoenas. In March 1995, Damon received a subpoena from the Department of
Defense Criminal Investigative Service on behalf of CHAMPUS, apparently covering
the same practices as the earlier subpoenas. Compliance with that subpoena has
been completed. In April 1995, Corning learned that a grand jury in Boston is
investigating Damon for possible criminal violations of the anti-fraud and abuse
provisions of the Social Security Act and Damon and Corning Life Sciences Inc.
("CLSI") for possible obstruction in connection with Damon's response to the
August 1993 subpoena. In August 1995, Corning Clinical Laboratories Inc.
("CCL", previously MetPath) and Damon received subpoenas from the Inspector
General seeking documents with regard to 14 common procedure terminology, or
CPT, codes used to bill Medicare, Medicaid and other payers for certain
hematology tests. CCL and Damon are complying with these subpoenas.
In August 1993, Nichols Institute (which Corning acquired in August 1994)
received a subpoena from the Inspector General comparable to those received by
MetPath, MetWest and Damon. Compliance with that subpoena has been completed.
In January 1996, Nichols received a subpoena from the Inspector General relating
to specific individuals who had tests performed at the Nichols laboratory in
Portland, Oregon. Compliance with that subpoena is ongoing.
In May 1994, MetPath received a subpoena from the Inspector General and a
subpoena from a federal grand jury, both investigating billing for tests not
performed or reported for which MetPath had voluntarily made corrective payments
in 1993. The civil matter was concluded by a payment by CLSI of $8.6 million,
and the criminal investigation was closed. The possibility of additional action
by the Inspector General or other federal agencies and claims or settlements
with parties other than DOJ and the Inspector General cannot be excluded. In
September 1995, CCL began voluntarily providing documents and information to the
DOJ concerning CCL's efforts to detect and correct billings for tests not
reported or performed. As part of these activities, which are ongoing, CCL made
certain payments to the United States in August 1995. In December 1995, CCL
received a subpoena from the Inspector General seeking information as to CCL
policies in instances in which specimens were received by the laboratory without
specific test requisitions. Compliance with the subpoena is ongoing.
5
In April 1995, CLSI received a subpoena from the Inspector General concerning
possible additions of the 14 enumerated tests to automated multichannel
chemistry profiles by Bioran Medical Laboratory (acquired by Corning in
September 1994). CLSI also received a comparable subpoena from the Department
of Defense Criminal Investigative Service on behalf of CHAMPUS. On February 20,
1996, CCL and Bioran entered into an agreement with the DOJ, CHAMPUS, several
state Medicaid programs, the Inspector General and several other government
agencies settling entirely the matters covered in the foregoing subpoenas for a
cash payment of $6.7 million.
~
~OTHER LEGAL PROCEEDINGS. During September 1993, two individuals filed in the
Supreme Court of the State of New York (one in New York County and one in
Suffolk County) separate purported derivative actions against Corning, as
nominal defendant, and Corning's Directors and certain of its officers seeking
on behalf of Corning compensatory and punitive damages in unspecified amounts
(and plaintiffs' costs and disbursements including attorneys' and experts' fees)
by reason of the alleged responsibility of the actual defendants for the conduct
which gave rise to the settlement in the MetPath litigation described above and
their alleged failure to cause Corning to make timely disclosure thereof. Such
actions have been consolidated into a single action before the Supreme Court of
the State of New York in New York County.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
None.
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
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This information is included in Quarterly Operating Results and Related Market
Data, Five Years in Review - Historical Comparison, and Investor Information,
appearing on pages 50 through 53.
ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
This information is included in Five Years in Review - Historical Comparison
appearing on pages 51 and 52.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------
Consolidated sales increased 11% from 1994 to $5.3 billion driven by the
continued growth in the Communications segment and strong performance by the
pharmaceutical-services business. Approximately 20% of the sales increase
resulted from acquisitions completed in 1994, net of divestitures of certain
businesses. Consolidated sales in 1994 advanced 19% over 1993 levels to $4.8
billion. Growth from acquisitions accounted for approximately half of the
increase with the remaining growth led by the Communications segment and the
environmental-products business.
Corning incurred a net loss of $50.8 million or $0.23 per share in 1995 compared
with net income of $281.3 million, or $1.32 per share, in 1994 and a net loss of
$15.2 million, or $0.09 per share, in 1993. The comparability of Corning's
earnings over the past three years has been significantly impacted by
restructuring and other special charges and Corning's decision to fully reserve
its investment in and discontinue recognition of equity earnings from Dow
Corning Corporation in the second quarter of 1995. The following table
summarizes the impact of these events on Corning's net income and earnings per
share:
1995 1994 1993
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Net income (loss)
Before Dow Corning Corporation and
restructuring and other special charges $337.7 $339.5 $256.7
Losses from Dow Corning Corporation (348.0) (2.8) (144.5)
Provision for restructuring and other special
charges (1) (40.5) (55.4) (127.4)
--------------------------
Net income (loss) $(50.8) $281.3 $(15.2)
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Net income (loss) per common share
Before Dow Corning Corporation and
restructuring and other special charges $ 1.49 $1.59 $1.33
Losses from Dow Corning Corporation (1.54) (0.01) (0.76)
Provision for restructuring and other
special charges (1) (0.18) (0.26) (0.66)
------------------------
Net income (loss) per common share $(0.23) $1.32 $(0.09)
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(1)The 1993 amount is net of a non-operating gain described in Note 7 of the
Notes to Consolidated Financial Statements.
Additional information on Dow Corning and restructuring and other special
charges is on page 13 and 14.
Excluding special charges and adjusted for the elimination of equity earnings
from Dow Corning, Corning's net income was flat and earnings per share decreased
6% in 1995 compared to 1994. Earnings in 1995 reflected strong performance in
the Communications and Specialty Materials segments. These improvements were
offset by weak performance in the Health Care Services (formerly Laboratory
Services) and Consumer Products segments. Equity earnings in 1995, excluding
Dow Corning, increased 29% over 1994 primarily as a result of solid performance
by the optical-fiber equity companies.
7
Corning's net income and earnings per share, excluding special charges and
adjusted for the elimination of equity earnings from Dow Corning, increased 32%
and 20%, respectively, in 1994 when compared with 1993. The increases were
principally due to strong performance in the Communications, Specialty Materials
and Consumer Products segments. Performance in the Health Care Services segment
improved principally due to acquisitions. Equity earnings in 1994, excluding
Dow Corning, were up significantly over 1993 primarily as a result of the
elimination of losses from Vitro Corning, S.A. de C.V., which was divested in
late 1993.
INDUSTRY SEGMENTS
Corning's products and services are grouped into four industry segments:
Specialty Materials, Communications, Health Care Services and Consumer Products.
The sales and earnings of equity affiliates which are closely associated with
Corning's operating segments are discussed in terms of these same four industry
segments. Additional information on the acquisitions and divestitures discussed
in the segment analysis is in Note 2 of the Notes to Consolidated Financial
Statements.
SPECIALTY MATERIALS
(In millions)
1995 1994 1993
--- --- ---
Consolidated sales $872.9 $846.0 $758.7
Income before taxes 174.7 (1) 164.3 73.6 (2)
(1)Includes $6.6 million of restructuring charges.
(2)Includes $26.5 million of restructuring charges.
~Consolidated~Operations~: Consolidated sales of this segment increased modestly
in 1995 over 1994 due primarily to sales gains in the environmental-products
business. Segment earnings increased in 1995 as a result of strong performance
in the environmental-products and other advanced-materials businesses driven by
re-engineering activities, offset somewhat by weaker results in the science-
products business. Sales increased significantly in 1994 over 1993 primarily
from increased sales in the environmental-products and science-products
businesses. Earnings increased substantially in 1994 in all businesses in this
segment as a result of increased volumes, cost-reduction efforts and strategic
acquisitions and divestitures.
Sales of the environmental-products business increased modestly in 1995
primarily as a result of volume gains in the automotive substrate market in
Europe which offset second half softness in the North American market. In
addition, sales of diesel substrates increased in 1995 over 1994. Earnings
increased substantially in 1995 as a result of volume and manufacturing
efficiency gains. Sales and earnings of this business were up significantly in
1994 over 1993 due to strong sales volume in North America and strong
manufacturing performance.
Sales of the science-products business declined slightly in 1995 compared to
1994 as a result of the mid-year 1994 divestiture of the Parkersburg, West
Virginia, glass-tubing products plant. Excluding the impact of this
transaction, sales were flat due primarily to consolidation in distribution
channels and softness in sales to the pharmaceutical industry. Earnings
decreased in 1995 due to volume related manufacturing inefficiencies. Sales and
earnings increased in 1994, reflecting strong demand, the impact of the Costar
acquisition in 1993 and efficiencies realized from the successful combining of
Corning's existing plastics science-products business with Costar in 1994.
Sales of Corning's other Specialty Materials businesses, consisting of optical
products, lighting and other advanced materials increased in 1995 due to
moderate volume increases in substantially all product lines. Sales in 1994
declined when compared to 1993 as a result of the sale of Corning's process-
systems business in late 1993. However, both 1995 and 1994 reflect significant
earnings increases due to manufacturing efficiencies, cost reduction efforts and
the elimination of losses from the process-systems business.
8
~Equity~companies:
~ (In millions)
1995 1994 1993
--- --- ---
Net sales $290.8 $196.0 $104.8
Corning's share of net income (loss) 6.4 5.7 (1.0)
Equity companies in the Specialty Materials segment primarily include EuroKera,
S.N.C., a French-based manufacturer of glass-ceramic cook-tops, and Quanterra
Incorporated, an environmental-testing business which was formed in June 1994
and transferred to the environmental-products business from the Health Care
Services segment in 1995.
Sales and earnings of EuroKera have increased in both 1995 and 1994 as demand
for glass-ceramic cook-tops has increased significantly. As a result of
increased demand in North America, EuroKera formed EuroKera-North America Inc.
which opened a new manufacturing facility in South Carolina during 1995.
Approximately 50% of the increase in equity company sales in this segment in
both 1995 and 1994 is due to the mid-year 1994 formation of Quanterra.
Quanterra's 1995 sales and earnings have been negatively impacted by lower
prices from a competitive market. In January 1996, Corning completed a
transaction whereby Corning increased its ownership in Quanterra to 81% in
exchange for an investment of approximately $20 million. As a result, Corning
will consolidate Quanterra's results beginning in 1996.
~Outlook~: The 1995 sales and earnings trends in this segment are expected to
continue in 1996 but at a slower rate of growth. Sales growth is expected to
come primarily from the environmental-products business, driven by continued
strength in Europe and new product applications, and the science-products
business. Consolidated earnings are expected to keep pace with sales growth as
a result of manufacturing efficiencies and cost reductions.
~
~
COMMUNICATIONS
(In millions)
1995 1994 1993
--- --- ---
Consolidated sales $1,711.7 $1,458.3 $1,192.0
Income before taxes 434.9 (1) 345.8 243.3 (2)
(1)Includes $9.3 million of restructuring charges.
(2)Includes $10.7 million of restructuring charges.
~Consolidated~Operations~: Consolidated sales and earnings in this segment
increased in 1995 and 1994 primarily due to the continued growth in worldwide
demand for optical fiber and optical cable and strength in the conventional-
video components and projection-video businesses. Approximately one-third of
the sales growth in 1995 and 1994 was due to acquisitions in 1994.
Sales of Corning's optical-fiber and optical-cable businesses increased
significantly in 1995 and 1994. Significant volume growth is being driven by
domestic customers who are installing fiber to reduce operating cost and add new
services. In addition, international volume increased due to developing
countries which are modernizing telecommunications infrastructures and developed
countries which are privatizing government-owned networks and deregulating the
telecommunications industry. Sales growth also resulted from the acquisition of
the optical-fiber and optical-cable businesses of Northern Telecom Limited in
February 1994. Despite stable pricing during 1995, volume growth was offset by
lower year over year price comparisons. Earnings in this business increased
significantly in both 1995 and 1994, primarily as a result of the increased
sales.
9
As a result of the increased demand for optical fiber, Corning is currently
producing at maximum manufacturing capacity. To keep pace with the expected
continued growth in this market, Corning is investing approximately $250 million
to significantly expand its optical-fiber production facility in Wilmington,
North Carolina, over the next three years. Capacity is expected to increase in
1996 as a result of manufacturing process enhancements, and capacity increases
from the major facility expansion are expected to begin in 1997 and be fully on
line in 1998.
Sales and earnings of Corning's optical-hardware and equipment-components
businesses increased significantly in 1995 and 1994, due primarily to
acquisitions in 1994 and 1993. In December 1994, Siecor acquired certain assets
relating to the hardware and equipment-components businesses of Northern Telecom
Limited. In 1993, Siecor acquired the telecommunications-products businesses of
GTE Control Devices Incorporated which manufactures single- and multi-line
network interface devices, solid state protection devices, and optical-hardware
products.
Sales in the conventional-video components business increased in both 1995 and
1994. Volume shifted from smaller- to larger-size video components as a result
of consumer demand for larger-screen televisions. Earnings increased in both
1995 and 1994 as a result of continued manufacturing efficiencies and the
favorable shift to larger-size products.
Sales of the projection-video components business increased significantly in
1995 and 1994 due primarily to increased consumer demand as a result of improved
set quality and aggressive marketing by the set manufacturers and increased
capacity in 1995. Earnings increased in 1995 primarily as a result of volume
gains. Earnings increased in 1994 as a result of higher volume and
manufacturing efficiencies.
As a result of strong markets, both the conventional and projection-video
components businesses are expanding capacity. Corning is planning an
approximate $130 million expansion of its television glass plant in State
College, Pennsylvania, which is expected to be completed in 1997. At its
manufacturing facility for projection-video components in Cincinnati, Ohio,
Corning has completed the first phase of an approximate $60 million expansion
with the second phase scheduled to be completed in 1996.
Sales in the advanced-display products business, which produces liquid-crystal
display glass for flat panel displays, increased significantly in 1995, although
the rate of growth slowed somewhat during the fourth quarter. The sales
increase is due to volume gains resulting from strong market demand and the
addition of new melting capacity in Japan. Sales in 1994 increased over 1993,
but the rate of growth was impacted by increased competition and the delay by
some customers in bringing new capacity on line. The business incurred a loss
in both 1995 and 1994 due to manufacturing inefficiencies in 1995, start-up
costs for the capacity expansion in 1994 and development spending for improved
manufacturing capabilities and the next-generation substrate glass in both 1995
and 1994.
In 1994, Corning decided to delay the launch of its glass-ceramic memory-disk
product due to technical problems detected in the final stages of customer
testing. After significant development efforts in the first half of 1995,
Corning decided that, although it had developed a product which met the market's
technical requirements, the projected profitability of the product did not
warrant gearing production for commercial quantities. As a result, the 1995
restructuring charge reflected management's decision to exit the manufacturing
facility for this product and significantly reduce the amount of development
spending on this project.
~
~E~quity~companies:
~
(In millions)
1995 1994 1993
--- --- ---
Net sales $982.2 $788.9 $680.2
Corning's share of net income 47.4 38.1 35.4
10
Samsung-Corning Company, Ltd., a South Korean-based manufacturer, produces glass
panels and funnels for entertainment television and display monitors. Samsung-
Corning's sales increased in 1995; however, earnings decreased slightly as a
result of start-up and higher financing costs associated with the significant
global expansion program which began in 1994. Sales increased in 1994 versus
1993, but earnings were down primarily due to the impact of a major glass
furnace repair and the cost of exiting the integrated circuit packaging
business. Samsung-Corning's global expansion activities have included the
acquisition and building of manufacturing and sales facilities in Germany and
Malaysia. Additionally, Corning and Samsung-Corning have formed a new venture,
Samsung-Corning Precision Glass Company, which will produce liquid-crystal
display glass in Korea, with production expected to be on line in early 1997.
During 1995, Corning and Asahi Glass of America invested in the American Video
Glass Company, a partnership with Sony Electronics, Inc. which was formed to
manufacture and supply television glass components to Sony's North American
operations. Business and manufacturing facilities will be established near
Sony's Display Device Operations in Pittsburgh, Pennsylvania, and will be on
line in 1997.
Sales and earnings of Corning's optical-fiber equity companies increased
significantly in 1995 compared to 1994 due to strong volume growth in Europe and
Australia. Sales and earnings increased in 1994 over 1993 as a result of strong
European volumes offset somewhat by a weaker optical-fiber market in Australia
in the first part of 1994.
~Outlook~: Sales and earnings of this segment are expected to continue to grow
in 1996. Strong sales volumes are expected in the opto-electronics businesses.
Corning's optical-fiber prices are expected to remain stable and manufacturing
enhancements should offset the costs of expansion. Sales in the information-
display businesses are also expected to increase but earnings growth is expected
to moderate due to start-up costs of the capacity expansions and continued
development spending in the advanced-display products business. Equity earnings
from the optical-fiber equity companies are expected to increase modestly and
Samsung-Corning's earnings are expected to remain fairly consistent with 1995
levels.
HEALTH CARE SERVICES
(Formerly Laboratory Services)
(In millions)
1995 1994 1993
--- --- ---
Consolidated sales $2,055.0 $1,687.1 $1,319.5
Income before taxes 106.3 (1) 156.6 (2) 125.3 (3)
(1) Includes $40.5 million of restructuring charges.
(2) Includes $82.3 million of restructuring and other special charges.
(3) Includes $95 million of restructuring and other special charges.
~
~C~onsolidated~Operations~: Corning operates the businesses of this segment
through its wholly-owned subsidiary, Corning Life Sciences, Inc. (CLSI).
Consolidated sales of CLSI increased in 1995, primarily reflecting the impact of
acquisitions in the clinical-laboratory testing business and strong volume
growth in the pharmaceutical-services business. Sales increased in 1994 over
1993 due to acquisitions and improved volumes in each of CLSI's businesses.
Earnings in all years presented were impacted by restructuring and other special
charges. Excluding these charges and despite a strong performance in the
pharmaceutical-services business, earnings in 1995 decreased in comparison to
1994 as a result of weak performance in the clinical-laboratory testing
business. Earnings in 1994 increased over 1993, but at a slower pace than prior
years as a result of significant pricing pressures and uncertainty in health
care markets worldwide.
11
Sales in the clinical-laboratory testing businesses increased in both 1995 and
1994 primarily as a result of acquisitions. Sales volume (excluding
acquisitions) was flat in 1995 following an increase in 1994. Price decreases,
caused by a shift to lower-priced managed care business and reductions in
Medicare reimbursement rates, also negatively impacted sales in both years.
Excluding the impact of restructuring and other special charges, earnings
decreased in 1995 as a result of price declines, higher expenses relating to
integration issues from the 1994 acquisitions and a $62 million operating charge
to increase accounts receivable reserves in the third quarter of 1995.
The increased accounts receivable reserves reflect the impact of billing systems
implementation and integration problems at certain laboratories and increased
regulatory complexity which caused deterioration in the collection of
receivables during the third quarter of 1995. In addition to the $62 million
charge, the ongoing expense associated with uncollectible receivables was
increased in each quarter of 1995 and is expected to continue at an increased
level until the billing system problems are resolved. Results were also
negatively impacted by increased reserves for government claims in 1995.
Excluding the impact of restructuring and other special charges, earnings in
1994 increased modestly over 1993 due to significant cost-reduction efforts.
During 1995, CLSI recorded a $40.5 million restructuring charge which included
severance for workforce reduction programs primarily in the clinical-laboratory
testing business and the costs of exiting a number of leased facilities. In
1994, CLSI recorded a charge of $82.3 million which included $50.7 million of
integration costs, $21.6 million of transaction expenses, and $10 million of
other reserves, primarily related to the acquisitions of Nichols Institute,
Maryland Medical Laboratory Inc. and Bioran Medical Laboratory. The integration
costs included the costs of closing clinical laboratories in certain markets
where duplicate Corning and Nichols, Maryland Medical or Bioran facilities
existed at the time of the acquisitions.
In 1993, CLSI recorded restructuring and other special charges totaling $95
million which included $40.6 million of reserves primarily for the costs of
closing certain Corning clinical-laboratory testing facilities as a result of
the integration of Damon Corporation into existing clinical-laboratory testing
operations, $11.4 million of other restructuring charges, and $43 million of
other special charges. The other special charges primarily included a charge of
$36.5 million to reflect the settlement and related legal expenses associated
with the compromise agreement with the Civil Division of the Department of
Justice to settle claims brought on behalf of the Inspector General, U.S.
Department of Health and Human Services.
Corning's clinical-laboratory testing business has entered into several
settlement agreements with various governmental and private payors during recent
years. At present, government investigations of certain practices by clinical
laboratories acquired in recent years are ongoing. In addition, certain payors
are reviewing their reimbursement practices for laboratory tests. The results
of these investigations and reviews may result in additional settlement payments
or reductions in reimbursements for certain tests. Corning believes it has
recorded reserves that adequately provide for the estimated exposure from these
investigations; however, it is possible that claims could arise that could be in
excess of amounts reserved.
The clinical-laboratory testing business has expanded into major health care
markets throughout the United States through acquisitions during the past three
years. In the first half of 1995, a number of small clinical-testing businesses
were acquired. Acquisitions in 1994 included Maryland Medical, Bioran and
Nichols, a provider of esoteric-testing services. CLSI acquired Damon in August
1993 and then sold the California operations of Damon in April 1994. CLSI also
completed a transaction with Unilab Corporation in late 1993 in which CLSI
acquired Unilab's laboratories in Dallas, Denver, and Phoenix.
Sales and earnings of the pharmaceutical-services business increased
significantly in 1995 primarily as a result of volume growth as the level of
clinical trial work outsourced by pharmaceutical and biotechnology companies
continues to increase. Growth was particularly strong at SciCor Inc. as
worldwide demand for clinical trials and related laboratory testing
strengthened. Sales increased in 1994, but at a lower rate than in previous
years. Earnings in 1994 were level with 1993 as a result of pricing pressures
and the postponement of certain customers' contracts.
In 1995, CLSI's pharmaceutical-services business also grew with the acquisition
of National Packaging Systems, Inc., a supplier of clinical-trial packaging and
related services. Also in 1995, CLSI announced the formation of Corning Bio
Inc., a majority-owned venture, which will offer contract manufacturing of new
biological products to pharmaceutical and biotechnology companies. Corning Bio
expects to commence operations in late 1996 and will be an extension of CLSI's
existing pharmaceutical-services business. CLSI also acquired the Franklin
Health Group which provides complex disease management services to large
corporate clients and health plans.
12
In June 1994, Corning and International Technology Corporation established
Quanterra, a jointly-owned company, to which Corning transferred the net assets
of its Enseco environmental-testing laboratory business and International
Technology transferred the assets of its IT Analytical Services business. As a
result of this transaction, Corning and International Technology each owned 50%
of Quanterra. Since the date of the transaction, Quanterra has been accounted
for using the equity method of accounting for investments. In 1995, Quanterra
was transferred to the environmental business in the Specialty Materials
segment.
~Equity~companies:
~ (In millions)
1995 1994 1993
--- --- ---
Net sales $12.6 $9.3 $18.0
Corning's share of net loss (0.5) (0.4) (0.5)
Equity earnings of this segment are not significant.
~Outlook~: The profitability of the clinical-laboratory testing business will
continue to be impacted by adverse market conditions, including pricing
pressure, intense competition and a high level of ongoing expense for
uncollectible receivables, at least through the first half of 1996. To address
these challenges, Corning has reorganized the management team at CLSI and is
focusing on base volume growth and operating efficiencies in the laboratory
business. The favorable market conditions and performance in the
pharmaceutical-services business are expected to continue.
CONSUMER PRODUCTS
(In millions)
1995 1994 1993
--- --- ---
Consolidated sales $673.5 $779.1 $734.6
Income (loss) before taxes 10.1 55.6 (35.4) (1)
(1)Includes $46.5 million of restructuring charges.
~Consolidated~Operations~: Consolidated sales in the Consumer Products segment
declined in 1995 primarily due to the sale of the European consumer products
business in November 1994. Excluding the impact of this transaction, sales in
1995 were flat due to an adverse domestic retail market and declines in Mexico
resulting from weak economic conditions. Consolidated sales in 1994 increased
over 1993 due primarily to strong U.S. sales volume.
Earnings of this segment decreased in 1995 due to lower sales volume, increased
costs associated with several glass furnace repairs and the incremental cost
related to new product promotions and new factory outlet stores. Consolidated
sales and earnings, excluding the impact of the 1993 restructuring charge,
increased in 1994 over 1993 due primarily to strong U.S. sales volume,
manufacturing efficiencies and cost-reductions.
Excluding the impact of the sale of the European consumer products business,
1995 sales of Corelle dinnerware increased, reflecting volume gains at factory
outlet stores. Sales of Corning Ware cookware increased due to strong
performance in the mass market channels. Pyrex ware sales increased slightly
but were impacted by weak performance in the mass market channels. A decline in
sales of Revere Ware occurred as a result of weak department store sales. Sales
increases were due in part to the introduction of several new products,
including Pyrex Portables and Casual Elegance. During 1995 Corning consumer
products business was named vendor of the year at Wal-Mart. All major brands
had increased sales in 1994 over 1993 as North American volume improved, driven
primarily by strength in the U.S. mass market channels.
13
In February 1994, Corning and Vitro S.A. of Mexico ended their cross-ownership
of Corning Vitro Corporation in the United States and Vitro Corning in Mexico.
Restructuring charges in 1993, totaling $46.5 million, included costs for the
reduction of the salaried workforce and the consolidation of the North American
packaging operations and worldwide Pyroceram manufacturing operations.
~Equity~companies:
~ (In millions)
1995 1994 1993
--- --- ---
Net sales $95.0 $99.2 $285.2
Corning's share of net
income (loss) 1.2 2.3 (15.7)
Equity in earnings were not significant in 1995 and 1994, but improved over 1993
reflecting the elimination of losses from Vitro Corning, which was divested in
late 1993.
~Outlook~: Sales and earnings of this segment are expected to improve in 1996
but will continue to be impacted by retail market conditions. Management is
focusing on cost reductions and re-engineering efforts to position itself to
benefit from anticipated market improvements. The incremental inefficiencies
and increased costs caused by the higher level of furnace repairs and other
factors are not expected to reoccur in 1996.
CORPORATE INVESTMENTS
~Other~than~Dow~Corning~Corporation
~ (In millions)
1995 1994 1993
--- --- ---
Net sales $223.3 $210.7 $173.9
Corning's share of net income 12.0 5.8 6.3
Corning's corporate investments include Pittsburgh Corning, Pittsburgh Corning
Europe, N.V., Biosym/MSI, Inc. and several other small strategic investments
that are not integrated with Corning's operating segments.
Sales from Pittsburgh Corning and Pittsburgh Corning Europe were up slightly in
1995 following a significant increase in 1994 resulting principally from volume
increases for architectural glass blocks in the U.S. and strong European demand
for FOAMGLAS(R) insulation. Earnings improved in both years due to the volume
increases.
During 1995, Corning merged its Biosym molecular modeling subsidiary with
Molecular Simulations, Inc. As a result of this transaction, Corning owns
approximately 50% of this new venture.
~Dow~Corning~Corporation
~
Corning is a 50% owner of Dow Corning Corporation, a manufacturer of silicones.
The other 50% of Dow Corning is owned by The Dow Chemical Company.
On May 15, 1995, Dow Corning voluntarily filed for protection under Chapter 11
of the United States Bankruptcy Code as a result of several negative
developments related to the breast-implant litigation. At that time, Corning
management believed it was impossible to predict if and when Dow Corning would
successfully emerge from Chapter 11 proceedings. As a result, Corning recorded
an after-tax charge of $365.5 million in the second quarter of 1995 to fully
reserve its investment in Dow Corning.
14
Corning also discontinued recognition of equity earnings from Dow Corning
beginning in the second quarter of 1995. Corning recognized equity earnings
from Dow Corning of $17.5 million in the first quarter 1995 and losses of $2.8
million and $144.5 million in 1994 and 1993, respectively. The 1994 and 1993
results include significant charges related to the breast-implant litigation.
Note 4 of the Notes to Consolidated Financial Statements includes additional
financial information related to this investment.
Dow Corning is expected to file a reorganization plan with the Federal
Bankruptcy Court in the first half of 1996; however, the plan is not expected to
be approved by the creditors and the Court for some time. As such, Corning
continues to believe that it is impossible to predict if and when Dow Corning
will successfully emerge from Chapter 11 proceedings.
PROVISION FOR RESTRUCTURING AND OTHER SPECIAL CHARGES
In the second quarter 1995, Corning recorded a restructuring charge of $67
million ($40.5 million after tax). Of this charge, $40.5 million related to
Corning's Health Care Services segment and included severance for workforce
reduction programs primarily in the clinical-laboratory testing business and the
costs of exiting a number of leased facilities. The remaining charge included
severance for additional workforce reductions, primarily in corporate staff
groups, a curtailment loss in Corning's primary pension plan attributable to
workforce reductions and the write-off of production equipment caused by the
decision to exit the manufacturing facility for glass-ceramic memory-disks.
Management believes that these actions will reduce costs and will be
substantially complete by mid-1996.
In the third quarter 1994, Corning recorded a charge of $82.3 million ($55.4
million after tax) which included $50.7 million of integration costs, $21.6
million of transaction expenses and $10 million of other reserves primarily
related to the Nichols, Maryland Medical and Bioran acquisitions. These
programs are substantially complete.
In the third quarter 1993, Corning recorded a charge of $207 million ($120.5
million after tax and minority interest) which included $156 million of
restructuring charges and $51 million of other special charges. In the fourth
quarter 1993, Corning also recognized a reduction in equity earnings of $9.5
million as a result of restructuring charges taken by Vitro Corning. The
consolidated restructuring charges included costs to integrate the Damon
acquisition and costs of a planned company-wide restructuring program to reduce
assets and overhead costs which is substantially complete at the end of 1995.
The other special charges totaling $51 million primarily included a charge of
$36.5 million to reflect the settlement and related legal expenses associated
with the compromise agreement with the Civil Division of the Department of
Justice to settle claims brought on behalf of the Inspector General, U.S.
Department of Health and Human Services, and $8 million of investment banking,
legal and accounting fees and other transaction expenses related to the Costar
acquisition.
Certain severance and facility exit costs have payment terms extending into
1997. Corning management believes that these costs will be financed by cash
from operations and does not anticipate any significant impact on its liquidity
as a result of restructuring plans.
A detailed discussion of the restructuring and other special charges is in Note
8 of the Notes to Consolidated Financial Statements.
TAXES
Corning's effective tax rate in recent years has been impacted by certain non-
operating gains and losses and restructuring charges. The effective tax rate,
excluding these items, was 34% in 1995, 36% in 1994, and 31% in 1993. The
decrease in the 1995 rate is due to an increase in the percentage of Corning's
earnings from consolidated entities with lower effective tax rates. The
increase in the 1994 rate was primarily due to an increase in non-deductible
amortization of intangibles and other expenses and lower foreign and other tax
credits in 1994, and a gain from the revaluation of Corning's net deferred tax
assets in 1993. Note 6 of the Notes to Consolidated Financial Statements
reconciles the effective tax rate to the statutory tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Corning's working capital of $669.2 million at the end of 1995 increased from
$652.1 million at the end of 1994. The ratio of current assets to current
liabilities was 1.6 at the end of 1995 and 1994. Corning's ratio of long-term
debt to total capital increased to 34% at the end of 1995 from 33% at the end of
1994.
15
In February 1994, Corning issued 8 million shares of common stock in a single-
block transaction. The net proceeds from this offering totaled $233 million and
were used to finance the acquisition of the shares of capital stock of Corning
Vitro Corporation held by Vitro and the acquisition of assets relating to
Northern Telecom's optical-fiber and optical-cable businesses. In July 1994,
Corning, through Corning Delaware L.P., completed a public offering of a new
issue of 6% Convertible Monthly Income Preferred Securities (MIPS) guaranteed by
Corning, and convertible into Corning common stock. The net proceeds from this
offering totaled $364.4 million and were used to repay the remaining Damon
acquisition debt. In August 1994, Corning issued $100 million of 30-year
debentures and used the proceeds to repay borrowings assumed in connection with
acquisitions in 1994.
Corning's working capital position is reinforced by available bank credit lines
totaling $788 million and the ability to issue up to $375 million of medium- and
long-term debt under existing shelf-registration statements filed with the
Securities and Exchange Commission. As a result, Corning's management believes
the company has sufficient financial flexibility and ready access to funds to
meet seasonal working capital requirements, capital expenditures, acquisitions
and other longer-term growth opportunities.
CASH FLOWS
Cash and short-term investments at the end of 1995 increased from 1994 by $53.6
million due to operating activities which provided cash of $698.6 million,
offset by investing and financing activities which used cash of $543.2 million
and $103 million, respectively. Cash and short-term investments at the end of
1994 were consistent with 1993 as operating activities and financing activities
provided cash of $402.2 million and $154.8 million, respectively, offset by
investing activities which used cash of $559.8 million.
Cash flows from operating activities in 1995 increased compared with 1994
primarily due to a smaller increase in working capital in 1995 than in 1994.
Cash flows from operating activities decreased in 1994 from 1993 due to higher
earnings before depreciation, amortization and special charges offset by an
increase in net working capital.
Cash used in investing activities in 1995 was consistent with 1994 reflecting
increased capital spending offset by lower acquisitions and divestitures. Cash
used in investing activities in 1994 decreased from 1993 primarily due to lower
capital spending and an increase in proceeds from asset dispositions in 1994.
Cash used for business acquisitions declined slightly from 1993 levels. Corning
anticipates capital spending will approximate $700 million in 1996.
Financing activities in 1995 resulted in a net use of cash as dividends paid
were in excess of net borrowings. Cash provided by financing activities in 1994
declined in comparison with 1993 primarily due to a significantly reduced level
of borrowings offset by the issuance of common stock in February 1994 and the
MIPS offering in July 1994.
Corning repurchased 1.2 million and 1.3 million shares of its common stock in
1995 and 1993, respectively, pursuant to a systematic plan authorized by the
Board of Directors. Corning's systematic plan is designed to provide shares for
Corning's various employee-benefit programs. No shares were purchased in 1994
as Corning temporarily suspended its share repurchase program between May 1993
and the end of 1994 as a result of the impact of acquisition financing on
certain lending agreements.
Dividends paid to common shareholders in 1995 totaled $165.2 million compared
with $150.1 million in 1994 and $134.1 million in 1993. The increases in
dividends paid is a result of increases in both the dividend rate and common
shares outstanding.
ENVIRONMENT
Corning has been named by the Environmental Protection Agency under the
Superfund Act, or by state governments under similar state laws, as a
potentially responsible party for 19 hazardous waste sites. Under the Superfund
Act, all parties who may have contributed any waste to a hazardous waste site,
identified by such Agency, are jointly and severally liable for the cost of
cleanup unless the Agency agrees otherwise. It is Corning's policy to accrue
for its estimated liability related to Superfund sites and other environmental
liabilities related to property owned and operated by Corning based on expert
analysis and continual monitoring by both internal and external consultants.
Corning has accrued approximately $21 million for its estimated liability for
environmental cleanup and litigation at December 31, 1995.
16
EFFECTS OF INFLATION
Amounts reflected in the financial statements do not provide for the effect of
inflation on operations or financial position. The expenses and asset values,
specifically those related to long-lived assets, reflect historical cost and do
not necessarily represent replacement cost or charges to operations based on
replacement cost. Corning's operations are geared to provide funds from
operations which, along with other sources, would be sufficient to replace fixed
assets as necessary. Net income would be lower than reported if the effects of
inflation were reflected by charging operations for replacement costs.
ITEM 8. FINANCIAL STATEMENTS
-----------------------------
See Item 14 (a) 1.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
--------------------------------------------------------------
None.
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
------------------------------------------
A list of Directors of the Company, appearing under the caption "Nominees for
Election as Directors" in the Proxy Statement relating to the annual meeting of
stockholders to be held on April 25, 1996, is incorporated by reference in this
Annual Report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
James R. Houghton (59)~Chairman~of~the~Board~and~Chief~Executive~Officer
~
Mr. Houghton joined Corning in 1962. In 1965 he was appointed European Area
manager. In 1968 he was elected a vice president and appointed general manager
of the Consumer Products Division. He was elected a director in 1969, and in
1971 was elected vice chairman with responsibility for the company's
international operations. In 1983, Mr. Houghton was elected chairman.
Roger G. Ackerman (57)~President~and~Chief~Operating~Officer
~
Mr. Ackerman joined Corning in 1962. In 1972 he was appointed president of
Corhart Refractories Co. He was elected senior vice president and general
manager of Corning Ceramics in 1980, director of the Manufacturing and
Engineering Division in 1981, and president and chief executive officer of
MetPath Inc. in 1983. In 1985, he was elected group president and a director.
Mr. Ackerman was elected president in 1990.
Van C. Campbell (57)~Vice~Chairman~and~Chief~Financial~Officer
~
Mr. Campbell joined Corning in 1964. He was elected assistant treasurer in
1971, treasurer in 1972, a vice president in 1973, financial vice president in
1975 and senior vice president for finance in 1980. He became general manager
of the Consumer Products Division in 1981. Mr. Campbell was elected vice
chairman and a director in 1983 and during 1995 was appointed to the additional
position of chairman of Corning Life Sciences, Inc.
Dr. David A. Duke (60)~Vice~Chairman~and~Chief~Technology~Officer
~
Dr. Duke joined Corning in 1962 and subsequently served in research and
management positions. He was elected vice president of the Telecommunications
Products Division in 1980 and elected a senior vice president in 1984. In
1985, he was made director of research and development, and became responsible
for research, development and engineering in 1987. Mr. Duke was elected vice
chairman and a director in 1988.
Kenneth W. Freeman (45)
President and Chief Executive Officer of Corning ClinicalLaboratories,Inc.
~
Mr. Freeman joined Corning in 1972 and has served in a variety of key financial
and managerial positions. He was elected controller and a vice president in
1985, senior vice president in 1987, and general manager of the Science
Products Division in 1989. He was appointed president and chief operating
officer of Corning Asahi Video Products Company in 1990. In 1993, he was
elected executive vice president. During 1995 he resigned as executive vice
president and was appointed president and chief executive officer of Corning
Clinical Laboratories, Inc.
Norman E. Garrity (54)~~Executive~Vice~President
~
Mr. Garrity joined Corning in 1966 and subsequently served in a variety of
manufacturing and engineering management positions. In 1979 he was appointed
sales and marketing manager for Corning Electronics. In 1984 he was appointed
general manager of the Electrical Products Division and subsequently appointed
vice president. He was elected senior vice president in 1986 and executive
vice president in 1990, responsible for the Specialty Materials Group and the
manufacturing and engineering function.
John W. Loose (53)~Executive~Vice~President
~
Mr. Loose joined Corning in 1964 and subsequently held a variety of sales and
marketing positions in the Consumer Products Division. In 1986 he was
appointed vice president and general manager for the Asia-Pacific area. In
1988 he was appointed vice president for Corning International Corporation and
president and chief executive officer of Corning Asahi Video Products Company.
In April 1990 he was elected senior vice president. He was elected executive
vice president responsible for the Information Display Group in 1990. In 1993,
Mr. Loose became responsible for the consumer business and was elected
president and chief executive officer of Corning Consumer Products Company.
18
James M. Ramich (50)~Executive~Vice~President~
Mr. Ramich joined Corning in 1973 and served in a variety of managerial
positions in Purchasing, Treasury, and the Electronic Components Division. In
1988, he was appointed director of Corporate Development, vice president in
1990 and became vice president and general manager of the Advanced Display
Products business the same year. Mr. Ramich was elected executive vice
president responsible for the Information Display Group in 1993.
Jan H. Suwinski (54)~Executive~Vice~President
~
Mr. Suwinski joined Corning in 1965 and subsequently held various managerial
positions in the Technical Products and Latin America/Asia Pacific areas. In
1985 he was appointed a vice president and general manager of the
Telecommunications Products Division, and in 1986 was appointed a senior vice
president. Mr. Suwinski was elected executive vice president responsible for
the Opto-Electronics Group in 1990.
Larry Aiello, Jr. (46~)~~~Vice~President~and~Controller
~
Mr. Aiello joined Corning in 1973 and has served in various accounting and
management positions. He was appointed an assistant controller in 1989, and
division vice president and general manager of the Opto-Electronic Components
Products Division in 1990. In 1993, he was elected vice president and
controller.
Katherine A. Asbeck (39)~Chief~Accounting~Officer~
Ms. Asbeck joined Corning in 1991 as director of accounting. She was appointed
assistant controller in 1993 and designated chief accounting officer in 1994.
Prior to joining Corning, Ms. Asbeck was with Price Waterhouse LLP for 10
years, most recently as a senior audit manager.
Peter Booth (56)~Senior~Vice~President
~
Mr. Booth joined Corning in 1974 as international counsel and was elected a
vice president of Corning International Corporation in 1975. He became
corporate counsel in 1980. In 1983 he was appointed director of Corporate
Plans and elected vice president and secretary. He became executive vice
president of Corning Japan K.K. in 1986. In 1991, Mr. Booth was named senior
vice president responsible for Strategy and Development.
Robert L. Ecklin (57)~~Senior~Vice~President
~
Mr. Ecklin joined Corning in 1961 and served in a variety of U.S. and
international manufacturing and engineering managerial positions. For Corning
Engineering he served as its vice president in 1982 and was appointed its
president in 1983. In 1986 he became vice president of Business Development.
Mr. Ecklin was appointed general manager of the Industrial Products Division in
1989 and senior vice president in 1990.
Robert C. Forrest (60)~Senior~Vice~President~
Mr. Forrest joined Corning in 1960 and has subsequently held a variety of
manufacturing and engineering managerial positions. In 1986 he was appointed
vice president responsible for manufacturing and engineering for the
Telecommunications Products Division. He was appointed senior vice president
and general manager of the Telecommunications Products Division in 1990.
Sandra L. Helton (46)~Senior~Vice~President~and~Treasurer
~
Ms. Helton joined Corning in 1971 and served in various engineering and
financial positions. In 1986 she was appointed assistant treasurer. She was
elected a vice president and treasurer in 1991 and senior vice president in
1994.
A. John Peck, Jr. (56)~Secretary
~
Mr. Peck joined Corning in 1972. He has served as assistant counsel and as
associate counsel in the Legal Department. He was appointed assistant
secretary in 1981 and elected secretary in 1988.
William C. Ughetta (63)~Senior~Vice~President~and~General~Counsel
~
Mr. Ughetta joined Corning in 1968 as assistant secretary and assistant
counsel. He was elected secretary of the corporation in 1971 and vice
president in 1972. He was elected a senior vice president in 1983.
19
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
--------------------------------------------------
Information covering Management Remuneration and Transactions, appearing under
the captions "Report of the Compensation Committee of the Board of Directors on
Executive Compensation" and "Other Matters" in the Proxy Statement relating to
the annual meeting of stockholders to be held on April 25, 1996, is
incorporated by reference in this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
Information with respect to Security Ownership of Certain Beneficial Owners,
appearing under the caption "Security Ownership of Certain Beneficial Owners"
in the Proxy Statement relating to the annual meeting of stockholders to be
held on April 25, 1996, is incorporated by reference in this Annual Report on
Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
A description of transactions with management and others and certain business
relationships, appearing under the captions "Directors' Compensation and Other
Matters Relating to Directors" and "Other Matters" in the Proxy Statement
relating to the annual meeting of stockholders to be held on April 25, 1996, is
incorporated by reference in this Annual Report on Form 10-K.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
------------------------------------------------------------------------
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
1. Index to financial statements and financial statement schedules, filed
as part of this report:
Page
Report of Independent Accountants 24
Consolidated Statements of Income 25
Consolidated Balance Sheets 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28-49
Financial Statement Schedule:
II Valuation Accounts and Reserves 54
2. Supplementary Data:
Quarterly Operating Results and Related Market Data 50
Five Years in Review - Historical Comparison 51-52
Investor Information 53
3. Exhibits filed as part of this report: see (c) below.
(B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF FISCAL 1995:
A report on Form 8-K dated October 17, 1995, filed in connection with the
registrant's medium-term note facility, includes Corning's third quarter
earnings press release of October 17, 1995.
A report on Form 8-K dated December 7, 1995, announcing that, effective
January 1, 1996, Corning will prospectively adopt a calendar year
accounting calendar and will begin to consolidate results of all major
subsidiaries currently.
(C) EXHIBITS FILED AS PART OF THIS REPORT:
#3. (i) Articles of Incorporation of the Registrant:
Restated Certificate of Incorporation, dated July 12, 1989, and the
Certificate of Amendment, dated September 28, 1989, of the Restated
Certificate of Incorporation of the Registrant which appear as
Exhibit 3(a) to the 1989 Annual Report on Form 10-K are incorporated
herein by reference in this Annual Report on Form 10-K pursuant to an
exemption in accordance with Section 232.102(a) of Regulation S-T.
Certificate of Amendment, dated April 30, 1992, of the Restated
Certificate of Incorporation of the Registrant to the 1992 Annual
Report on Form 10-K is incorporated herein by reference in this
Annual Report on Form 10-K pursuant to an exemption in accordance
with Section 232.102(a) of Regulation S-T.
Certificate of Amendment, dated July 15, 1994, as amended by the
Certificate of Correction filed on July 26, 1994, of the Restated
Certificate of Incorporation of the Registrant which appears as
Exhibit 3 to the 1994 Annual Report on Form 10-K is incorporated
herein by references in this Annual Report.
21
Certificate of Amendment, dated October 24, 1994, as amended by the
Certificate of Correction filed on July 26, 1994, of the Restated
Certificate of Incorporation of the Registrant which appears as
Exhibit 3 to the 1994 Annual Report on Form 10-K is incorporated
herein by references in this Annual Report.
#4. Instruments defining the rights of security holders are
incorporated herein by reference in this Annual Report on Form 10-K
pursuant to an exemption in accordance with Section 232.102(a) of
Regulation S-T.
Rights Agreement dated July 2, 1986, and the Amendment to the Rights
Agreement dated October 4, 1989, that define the preferred share
purchase rights which trade with the Registrant's common stock, which
appear as Exhibit 1 to Form 8-K, dated July 14, 1986 and Exhibit 1 to
Form 8-K, dated October 4, 1989, respectively, are incorporated
herein by reference in this Annual Report on Form 10-K pursuant to an
exemption in accordance with Section 232.102(a) of Regulation S-T.
Indenture dated May 13, 1986, between Hazleton Corporation and
Nation's Bank of Virginia, N.A., successor trustee to Sovran Bank,
N.A., defining rights of holders of Hazleton Corporation 6 1/2%
convertible subordinated debentures due 2006 which appears as Exhibit
4 to the 1987 Annual Report on Form 10-K is incorporated herein by
reference in this Annual Report on Form 10-K pursuant to an exemption
in accordance with Section 232.102(a) of Regulation S-T.
#12. Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Dividends
#21. Subsidiaries of the Registrant at December 31, 1995
#23 Consent of Independent Accountants
#24 Powers of Attorney
#27 Financial Data Schedule
(D) DOW CORNING CORPORATION:
Page
Report of Independent Accountants 55
Consolidated Balance Sheets 57-58
Consolidated Statements of Operations and Retained Earnings 59
Consolidated Statements of Cash Flow 60
Notes to Consolidated Financial Statements 61-84
Financial statements of unconsolidated subsidiary companies and associated
companies accounted for under the equity method, other than Dow Corning
Corporation, have been omitted. Summary financial information on
Corning's equity-basis companies is presented in Note 4 (Investments) of
the Notes to Consolidated Financial Statements appearing on pages 33 and
34.
22
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Corning Incorporated
/s/ James R. Houghton
By Chief Executive Officer March 6, 1996
----------------------
(James R. Houghton)
/s/ Van C. Campbell
By Vice Chairman March 6, 1996
----------------------
(Van C. Campbell) and Chief Financial Officer
/s/ Katherine A. Asbeck
By Chief Accounting Officer March 6, 1996
----------------------
(Katherine A. Asbeck)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and on the date indicated.
Capacity Date
*
Chairman of the Board, March 6, 1996
--------------------------
(James R. Houghton) Chief Executive Officer
and Director
*
Director March 6, 1996
--------------------------
(Roger G. Ackerman)
*
Director March 6, 1996
--------------------------
(Robert Barker)
*
Director March 6, 1996
--------------------------
(John S. Brown)
*
Director March 6, 1996
--------------------------
(Mary L. Bundy)
*
Director March 6, 1996
--------------------------
(Van C. Campbell)
*
Director March 6, 1996
--------------------------
(David A. Duke)
23
*
Director March 6, 1996
--------------------------
(Lawrence S. Eagleburger)
*
Director March 6, 1996
--------------------------
(John H. Foster)
*
Director March 6, 1996
--------------------------
(Gordon Gund)
*
Director March 6, 1996
--------------------------
(John M. Hennessy)
*
Director March 6, 1996
--------------------------
(Vernon E. Jordan, Jr.)
*
Director March 6, 1996
--------------------------
(James W. Kinnear)
*
Director March 6, 1996
--------------------------
(James J. O'Connor)
*
Director March 6, 1996
--------------------------
(Catherine A. Rein)
*
Director March 6, 1996
--------------------------
(Henry Rosovsky)
*
Director March 6, 1996
--------------------------
(H. Onno Ruding)
*
Director March 6, 1996
--------------------------
(William D. Smithburg)
/s/ William C. Ughetta
*By
----------------------
(William C. Ughetta, Attorney-in-fact)
24
REPORT OF INDEPENDENT ACCOUNTANTS
~Price~Waterhouse~LLP
~
January 22, 1996
To the Board of Directors and Stockholders of Corning Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 20 present fairly, in all material
respects, the financial position of Corning Incorporated and its subsidiaries
at December 31, 1995, and January 1, 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
25
CONSOLIDATED STATEMENTS OF INCOME
Corning Incorporated and Subsidiary Companies
Years Ended December 31, 1995, January 1, 1995,
and January 2, 1994
(In millions, except per-share amounts) 1995 1994* 1993*
--- ----
- ---
REVENUES
Net sales $5,313.1 $4,770.5 $4,004.8
Royalty, interest and dividend income 33.0 28.7 29.9
------------------------------------------------------------------------------
- ------------
5,346.1 4,799.2 4,034.7
------------------------------------------------------------------------------
- ------------
DEDUCTIONS
Cost of sales 3,386.0 3,060.9 2,597.0
Selling, general and administrative expenses 1,093.5 871.7 774.0
Research and development expenses 179.7 176.9 173.1
Provision for restructuring and other special charges 67.0 82.3 207.0
Interest expense 117.8 110.4 88.2
Other, net 36.2 37.5 38.7
------------------------------------------------------------------------------
- -------------
Income before taxes on income 465.9 459.5 156.7
Taxes on income 154.7 170.1 35.3
------------------------------------------------------------------------------
- -------------
Income before minority interest and equity earnings 311.2 289.4 121.4
Minority interest in earnings of subsidiaries (66.8) (50.7) (16.6)
Dividends on convertible preferred securities of subsidiary (13.7) (6.1)
Equity in earnings (losses) of associated companies:
Other than Dow Corning Corporation 66.5 51.5 24.5
Dow Corning Corporation (348.0) (2.8) (144.5)
------------------------------------------------------------------------------
- --------------
NET INCOME (LOSS)
(per common share, ($0.23)/1995; $1.32/1994;
($0.09)/1993) $(50.8) $ 281.3 $ (15.2)
- -------------------------------------------------------------------------------
- ------------
WEIGHTED AVERAGE SHARES OUTSTANDING $ 226.6 $ 211.8 $ 192.0
------------------------------------------------------------------------------
- -------------
* Reclassified to conform to the 1995 presentation.
See Notes to Consolidated Financial Statements beginning on page 28.
26
CONSOLIDATED BALANCE SHEETS
Corning Incorporated and Subsidiary Companies
December 31, 1995, and January 1, 1995
(In millions, except share amounts) 1995 1994*
-------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 84.6 $ 72.0
Short-term investments, at cost, which
approximates market value 130.3 89.3
Accounts receivable, net of doubtful accounts
and allowances - $181.3/1995; $89.4/1994 932.4 947.1
Inventories 467.8 416.7
Deferred taxes on income and other current assets 219.2 201.2
-------------------------------------------------------------------------
Total current assets 1,834.3 1,726.3
-------------------------------------------------------------------------
INVESTMENTS
Associated companies, at equity 344.2 318.6
Dow Corning Corporation, at equity 341.8
Others, at cost 31.9 33.4
PLANT AND EQUIPMENT, AT COST, NET OF
ACCUMULATED DEPRECIATION 2,031.6 1,890.6
GOODWILL AND OTHER INTANGIBLE ASSETS,
NET OF ACCUMULATED AMORTIZATION -
$232.2/1995; $170.8/1994 1,416.1 1,408.0
OTHER ASSETS 329.0 304.0
-------------------------------------------------------------------------
TOTAL ASSETS $5,987.1 $6,022.7
-------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Loans payable $ 146.0 $ 67.6
Accounts payable 255.2 258.3
Other accrued liabilities 763.9 748.3
-------------------------------------------------------------------------
Total current liabilities 1,165.1 1,074.2
-------------------------------------------------------------------------
OTHER LIABILITIES 664.9 643.6
LOANS PAYABLE BEYOND ONE YEAR 1,393.0 1,405.6
MINORITY INTEREST IN SUBSIDIARY COMPANIES 272.5 247.0
CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY 364.7 364.4
CONVERTIBLE PREFERRED STOCK 23.9 24.9
COMMON STOCKHOLDERS' EQUITY
Common stock, including excess over par value
and other capital - Par value $0.50 per share;
Shares authorized: 500 million;
Shares issued: 1995-258.6 million;
1994-255.8 million 1,113.0 1,031.4
Retained earnings 1,496.5 1,714.5
Less cost of 28.8 million/1995 and
27.6 million/1994
shares of common stock in treasury (563.0) (523.7)
Cumulative translation adjustment 56.5 40.8
-------------------------------------------------------------------------
Total common stockholders' equity 2,103.0 2,263.0
-------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,987.1 $6,022.7
-------------------------------------------------------------------------
* Reclassified to conform to the 1995 presentation.
See Notes to Consolidated Financial Statements beginning on page 28.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
Corning Incorporated and Subsidiary Companies
Years Ended December 31, 1995, January 1, 1995,
and January 2, 1994
(In millions) 1995 1994* 1993*
------------------------------------------------------------------------------
- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (50.8) $ 281.3
$ (15.2)
Adjustments to reconcile income (loss) to net cash
provided by operations:
Depreciation and amortization 377.4 338.4 280.4
Equity in earnings of associated companies, other
than Dow Corning
Corporation, less than (in excess of) dividends received 7.8 (3.3) 22.6
Equity in losses of Dow Corning Corporation 348.0 2.8 144.5
Minority interest in earnings of subsidiaries
in excess of (less than) dividends paid 25.8 31.1 (0.4)
Losses (gains) on disposition of properties and investments 12.9 (11.6) 6.4
Provision for restructuring and other special charges,
net of cash paid 51.8 60.9 157.4
Deferred tax provision (benefit) (41.6) 17.4 (84.4)
Other (2.9) 6.5 16.1
Changes in operating assets and liabilities:
Accounts receivable 15.7 (217.6) 35.1
Inventories (47.5) (38.3) 5.5
Deferred taxes and other current assets 12.3 (4.2) (2.5)
Accounts payable and other current liabilities (10.3) (61.2) 24.1
------------------------------------------------------------------------------
- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 698.6 402.2 589.6
------------------------------------------------------------------------------
- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant and equipment (495.3) (386.9) (443.1)
Acquisitions of businesses, net (41.0) (387.1) (449.9)
Net proceeds from disposition of properties and investments 19.1 242.1 34.1
Net increase in long-term investments (28.1) (14.1) (18.1)
Other, net 2.1 (13.8) (27.2)
------------------------------------------------------------------------------
- --------
NET CASH USED IN INVESTING ACTIVITIES (543.2) (559.8) (904.2)
------------------------------------------------------------------------------
- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of loans 170.4 237.4 1,020.6
Repayments of loans (97.4) (609.0) (501.1)
Increase in minority interest due to capital contribution 66.5
Proceeds from issuance of convertible preferred securities
of subsidiary 364.4
Proceeds from issuance of common stock 24.3 247.7 14.2
Repurchases of common stock (33.1) (58.6)
Payment of dividends (167.2) (152.2) (136.2)
------------------------------------------------------------------------------
- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (103.0) 154.8 338.9
------------------------------------------------------------------------------
- ----------
Effect of exchange rates on cash 1.2 3.3 3.4
-------------------------------------------------------------------------------
- -------
Net change in cash and cash equivalents 53.6 0.5 27.7
Cash and cash equivalents at beginning of year 161.3 160.8 133.1
------------------------------------------------------------------------------
- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 214.9 $ 161.3
$ 160.8
------------------------------------------------------------------------------
- -----------
* Reclassified to conform to the 1995 presentation.
See Notes to Consolidated Financial Statements beginning on page 28.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per-share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Corning operates on a fiscal year ending on the Sunday nearest December 31.
The three most recent fiscal years ended on December 31, 1995, January 1, 1995,
and January 2, 1994 and included 52 weeks.
The consolidated financial statements include the accounts of all entities
controlled by Corning. All significant intercompany accounts and transactions
are eliminated. Major subsidiaries are consolidated at dates up to one month
earlier than the consolidated balance sheet dates.
Effective January 1, 1996, Corning will prospectively adopt a calendar year
accounting calendar and will begin to consolidate results of all major
subsidiaries currently.
The equity method of accounting is used for investments in associated companies
which are not controlled by Corning and in which Corning's interest is
generally between 20% and 50%.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FOREIGN CURRENCIES
Balance sheet accounts of foreign subsidiaries are translated at current
exchange rates and income statement accounts are translated at average exchange
rates for the year. Translation gains and losses are accumulated in a separate
component of common stockholders' equity. Foreign currency transaction gains
and losses affecting cash flows are included in current earnings.
Corning enters into foreign exchange contracts primarily as hedges against
identifiable foreign currency commitments. Gains and losses on contracts
identified as hedges are deferred and included in the measurement of the
related foreign currency transactions. Gains and losses on foreign currency
contracts which are not designated as hedges of foreign currency commitments
are included in current earnings.
Corning management does not believe that its foreign exchange exposure or its
hedging program are material to Corning's financial position or result of
operations.
CASH AND CASH EQUIVALENTS
Short-term investments, comprised of repurchase agreements and debt instruments
with original maturities of three months or less, are considered cash
equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Approximately 50% of
Corning's inventories at December 31, 1995, and January 1, 1995, are valued
using the last-in, first-out (LIFO) method. The first-in, first-out (FIFO)
method is used to value the remaining inventories which are principally at
consolidated subsidiaries.
PROPERTY AND DEPRECIATION
Land, buildings and equipment are recorded at cost. Depreciation is based on
estimated useful lives of properties, using straight-line and accelerated
methods.
29
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
GOODWILL AND OTHER INTANGIBLE ASSETS
Investment costs in excess of the fair value of net assets acquired are
amortized over appropriate periods not exceeding 40 years. Other intangible
assets are recorded at cost and amortized over periods not exceeding 15 years.
IMPAIRMENT ACCOUNTING
Corning adopted Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
(FAS 121) in 1995. Corning reviews the recoverability of its long-lived
assets, including goodwill and other intangible assets, when events or changes
in circumstances occur that indicate that the carrying value of the asset may
not be recoverable. The measurement of possible impairment is based on
Corning's ability to recover the asset from the expected future pre-tax cash
flows (undiscounted and without interest charges) of the related operations.
The measurement of impairment requires management to make estimates of expected
future cash flows related to long-lived assets. It is at least reasonably
possible that future events or circumstances could cause these estimates to
change. Corning's policy on impairment prior to the adoption of FAS 121 was
not materially different.
REVENUE RECOGNITION
Corning recognizes revenue primarily as products are shipped and as services
are rendered. In the Health Care Services segment, clinical laboratories
recognize revenue upon completion of the testing process while many of the
pharmaceutical-services businesses utilize the percentage-of-completion method
of accounting for long-term contracts. Billings for clinical-laboratory
services under third party payor programs, including Medicare and Medicaid, are
recorded as sales net of contractual allowances for differences between amounts
billed and the estimated receipts under such programs. Adjustments to the
estimated receipts, based on final settlement with the third party payors, are
recorded upon settlement.
TAXES ON INCOME
Corning uses the asset and liability approach to accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of differences between the carrying amounts of
assets and liabilities and their respective tax bases using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period when the change is enacted.
EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income less dividends on
Series B convertible preferred stock by the weighted average number of common
shares outstanding. Dividends on Series B convertible preferred stock amounted
to $2 million in 1995 and $2.1 million in 1994 and 1993. Weighted average
shares outstanding were 226.6 million in 1995; 211.8 million in 1994 and 192
million in 1993. The weighted average of common shares outstanding for
earnings per common share calculations does not include approximately 2.6
million, 2.9 million and 3.3 million shares held by the Corning Stock Ownership
Trust in 1995, 1994 and 1993, respectively. Common stock equivalents are not
included in the earnings per common share computation because they do not
result in material dilution.
2. BUSINESS COMBINATIONS AND DIVESTITURES
POOLINGS OF INTEREST
Corning acquired three clinical-laboratory testing companies in 1994. In the
second quarter 1994, Corning acquired the common stock of Maryland Medical
Laboratory Inc. in exchange for 4.5 million shares of Corning common stock. In
the third quarter 1994, Corning acquired Nichols Institute. Corning issued 7.5
million shares of Corning common stock and reserved 1.1 million shares for
future issuance upon the exercise of options issued in connection with the
Nichols transaction. Also in the third quarter 1994, Corning acquired the
common stock of Bioran Medical Laboratory in exchange for 6 million shares of
Corning common stock.
30
2. BUSINESS COMBINATIONS AND DIVESTITURES
(Continued)
In the second quarter 1993, Corning acquired DeYor Laboratories, a clinical-
testing company. Corning issued 840,000 shares of Corning common stock in
connection with this transaction. In the third quarter 1993, Corning acquired
all of the outstanding shares of common stock and options to purchase common
stock of Costar Corporation, a manufacturer of plastic science products.
Corning issued 5.5 million shares of Corning common stock and reserved 322,000
shares for future issuance upon the exercise of options issued in connection
with the Costar transaction.
These transactions were accounted for as poolings of interests. Corning's
consolidated financial statements for periods prior to the acquisitions have
not been restated since the combined impact of the acquisitions was not
material to Corning's historical financial position or results of operations.
Results of operations of the acquired companies have been included in the
consolidated financial statements from the date of acquisition.
PURCHASES
During 1995, Corning acquired National Packaging Systems, Inc., a supplier of
clinical-trial packaging and related services. Corning also acquired the
Franklin Health Group, which provides complex disease management services, and
a few small clinical-testing laboratories. The purchase price for these
businesses totaled $41 million in cash and approximately 500,000 shares of
Corning common stock. Goodwill of approximately $55 million resulted from
these transactions and is being amortized over periods of 20 to 40 years.
In the first quarter 1994, Corning and Siecor Corporation, a consolidated
subsidiary, acquired the assets relating to the optical-fiber and optical-cable
businesses of Northern Telecom Limited for $130 million. In the fourth quarter
1994, Siecor acquired certain assets relating to the optical-hardware and
equipment-components businesses of Northern Telecom Limited for $130 million.
Goodwill of approximately $200 million resulted from these transactions and is
being amortized over periods not exceeding 25 years.
In the first quarter 1994, Corning and Vitro S.A. completed a two-part
transaction which ended their cross-ownership in two consumer products
companies, Corning Vitro Corporation in the United States and Vitro Corning
S.A. de C.V. in Mexico. The net cost to Corning of the two transactions was
$131 million. Goodwill of approximately $70 million resulted from the
transaction and is being amortized over 40 years.
In the third quarter 1993, Corning acquired all of the outstanding shares of
common stock of Damon Corporation, a clinical-testing business, for $405 million
including acquisition expenses. In addition, $167 million of Damon's
indebtedness was refinanced. Revised purchase price allocations in 1994
resulted in goodwill of approximately $600 million which is being amortized over
40 years.
Also in the third quarter 1993, Siecor acquired the telecommunications-products
businesses of GTE Control Devices Incorporated for approximately $45 million.
Goodwill of approximately $30 million resulted from this transaction and is
being amortized over periods not exceeding 15 years.
In the fourth quarter 1993, Corning acquired the clinical-testing laboratories
of Unilab Corporation in Denver, Dallas and Phoenix in exchange for a majority
of the Unilab shares owned by Corning, the assumption of approximately $70
million of Unilab debt, and Corning's investment in J.S. Pathology PLC.
Goodwill of approximately $200 million resulted from this transaction and is
being amortized over 40 years. As a result of this transaction, Corning
retained a small equity investment in Unilab. Corning previously owned 43% of
Unilab.
These acquisitions were accounted for as purchases. Accordingly, the results
of operations of the acquired companies were included in the consolidated
financial statements from the date of acquisition.
DIVESTITURES
In the second quarter 1994, Corning sold the clinical-laboratory testing
operations of Damon in California to Physicians Clinical Laboratory, Inc. for
$51 million. Also in the second quarter 1994, Corning sold its Parkersburg,
West Virginia, glass-tubing products plant to Schott Corporation, a subsidiary
of the Schott Group, for $57 million. In the fourth quarter 1994, Corning sold
its European consumer products business to Newell Co. for $86 million.
31
2. BUSINESS COMBINATIONS AND DIVESTITURES
(Continued)
QUANTERRA TRANSACTIONS
In the third quarter 1994, Corning and International Technology Corporation
created a jointly owned company named Quanterra Incorporated to which Corning
transferred the net assets of its Enseco environmental-testing laboratory
business and International Technology transferred the assets of its IT
Analytical Services business. Corning and International Technology each owned
50% of the company. Corning is accounting for its investment in Quanterra
using the equity method of accounting for investments. Corning received $33
million as a result of this transaction and recognized a gain on the
transaction which, net of its share of a one-time integration charge taken by
the new company, is not material and has been included in equity earnings in
1994.
In January 1996, Corning and International Technology completed a transaction
whereby Corning will increase its ownership in Quanterra to 81% in exchange for
an investment of approximately $20 million. In addition, Corning granted
International Technology the right to put the remaining 19% interest in
Quanterra to Corning at fair market value in January 2003. As a result,
Corning will consolidate Quanterra's results beginning in 1996.
3. INFORMATION BY INDUSTRY SEGMENT
Corning is a diversified, global, technology-based corporation which operates
in four broadly-based business segments: Specialty Materials, Communications,
Health Care Services (formerly Laboratory Services), and Consumer Products.
The Specialty Materials segment includes the environmental-products business,
which produces emission-control substrates and related applications for both
the North American and European markets, and the science-products business,
which produces various plastic and glass laboratory products. The other
businesses which operate in this segment specialize in the production of
optical, lighting and other advanced material products.
The Communications segment includes the opto-electronics and information-
display businesses. The opto-electronics business produces optical fiber,
optical cable and optical hardware and components for the worldwide
telecommunications industry. The information-display business manufactures
glass pannels and funnels, projection video lens assemblies and liquid crystal
display glass for flat panel displays.
The Health Care Services segment primarily includes the clinical-laboratory
testing and pharmaceutical-services businesses. The clinical-laboratory
testing business provides blood testing and other esoteric testing services to
individual patients, physicians, hospitals and managed care organizations. In
1995, 1994 and 1993, approximately 23%, 28% and 25%, respectively, of the sales
of the clinical-laboratory testing business were generated by Medicare/Medicaid
clients. The pharmaceutical-services business assists global pharmaceutical
and biotechnology companies with new drug research and development.
The Consumer Products segment produces cookware, glassware and dinnerware that
is sold primarily in the North American retail market through mass-market and
other distribution channels. Other Consumer Products businesses include
Serengeti eyewear and Steuben crystal.
Many of Corning's administrative and staff functions are performed on a
centralized basis. Corning charges these expenses to operating segments based
on the extent to which each business uses a centralized function. Certain
staff functions and certain research and development expenses which benefit all
businesses or relate to future technologies are included in "Other, including
Corporate Investments and R&D."
As a result of Corning's decision to fully reserve its investment in Dow
Corning Corporation and discontinue recognition of the equity earnings from Dow
Corning during 1995, summary financial information for Dow Corning is not
included in the segment data. Information for Dow Corning is presented
separately in Note 4 of the Notes to Consolidated Financial Statements.
Certain equity companies that are not associated with Corning's operating
segments are classified in "Other, including Corporate Investments and R&D." In
addition, Quanterra, which was formed in mid-1994, was transferred from the
Health Care Services segment to the Specialty Materials segment in 1995.
Segment data for 1994 and 1993 have been reclassified to conform to the 1995
presentation.
Information about Corning's segment operations is summarized on the following
page.
32
3. INFORMATION BY INDUSTRY SEGMENT
(Continued)
Other,
including
Corporate
Specialty Commu- Health Care Consumer Investments
OPERATIONS:Materials nications Services Products and R&D Total
-------------------------------------------------------------------------
Revenues:
1995 $872.9 $1,711.7 $2,055.0 $673.5 $ 33.0 $5,346.1
1994 846.0 1,458.3 1,687.1 779.1 28.7 4,799.2
1993 758.7 1,192.0 1,319.5 734.6 29.9 4,034.7
-------------------------------------------------------------------------
Income (loss) before taxes:
1995 (1) $174.7 $ 434.9 $106.3 $ 10.1 $(260.1) $
465.9
1994 (2) 164.3 345.8 156.6 55.6 (262.8) 459.5
1993 (3) 73.6 243.3 125.3 (35.4) (250.1) 156.7
-------------------------------------------------------------------------
ASSETS:
-------------------------------------------------------------------------
Operating assets:
1995 $706.3 $1,484.1 $2,294.3 $578.6 $579.6 $5,642.9
1994 600.6 1,437.3 2,220.1 580.3 524.0 5,362.3
1993 716.7 959.4 1,808.5 526.3 634.3 4,645.2
-------------------------------------------------------------------------
Capital expenditures:
1995 $ 96.3 $ 180.7 $113.5 $ 44.8 $ 60.0 $ 495.3
1994 60.0 146.3 100.8 43.3 36.5 386.9
1993 80.0 154.7 78.5 30.9 99.0 443.1
-------------------------------------------------------------------------
Depreciation and amortization:
1995 $ 60.5 $ 121.4 $126.3 $ 32.1 $ 37.1 $ 377.4
1994 57.2 109.7 95.8 40.5 35.2 338.4
1993 56.7 78.9 70.8 41.7 32.3 280.4
-------------------------------------------------------------------------
EQUITY INVESTMENTS OTHER THAN DOW CORNING:
-------------------------------------------------------------------------
Investment in associated companies, at equity:
1995 $ 60.2 $ 195.8 $ 5.7 $ 9.6 $ 72.9 $ 344.2
1994 47.2 182.5 4.7 13.0 71.2 318.6
1993 8.0 172.4 1.8 14.0 64.3 260.5
-------------------------------------------------------------------------
Equity company sales:
1995 $290.8 $ 982.2 $ 12.6 $ 95.0 $223.3 $1,603.9
1994 196.0 788.9 9.3 99.2 210.7 1,304.1
1993 104.8 680.2 18.0 285.2 173.9 1,262.1
-------------------------------------------------------------------------
Equity company net income (loss):
1995 $ 5.6 $ 101.6 $ (1.2) $ 6.1 $ 20.8 $ 132.9
1994 (6.9) 88.4 (0.8) 11.5 17.3 109.5
1993 (1.3) 85.2 (1.3) (30.6) 15.5 67.5
-------------------------------------------------------------------------
Corning's share of net income (loss):
1995 $ 6.4 $ 47.4 $ (0.5) $ 1.2 $ 12.0 $ 66.5
1994 5.7 38.1 (0.4) 2.3 5.8 51.5
1993 (1.0) 35.4 (0.5) (15.7) 6.3 24.5
-------------------------------------------------------------------------
(1) The 1995 restructuring and other special charges totaling $67 million
were included in income before taxes of Specialty Materials ($6.6 million),
Communications ($9.3 million), Health Care Services ($40.5 million) and
Other, including Corporate Investments and R&D ($10.6 million).
(2) The 1994 restructuring and other special charges totaling $82.3 million
were included in income before taxes of Health Care Services.
(3) The 1993 restructuring and other special charges totaling $207 million
were included in income before taxes of Specialty Materials ($26.5 million),
Communications ($10.7 million), Health Care Services ($95 million), Consumer
Products ($46.5 million),and Other, including Corporate Investments and R&D
($28.3 million).
33
4. INVESTMENTS
INVESTMENTS OTHER THAN DOW CORNING CORPORATION
Samsung-Corning Company Ltd., a 50%-owned South Korean-based manufacturer of
glass panels and funnels for cathode-ray tubes, represented $143 million and
$135.4 million of Corning's investments accounted for by the equity method at
year end 1995 and 1994, respectively.
The financial position and results of operations of Samsung-Corning and
Corning's other equity companies are summarized as follows:
1995 1994 1993
---------------- ---------------- ----------------
Samsung- Total Samsung- Total Samsung- Total
Corning Equity Corning Equity Corning Equity
Co. Ltd. Companies Co. Ltd. Companies Co. Ltd. Companies
-------------------------------------------------------------------------
Net sales $ 713.4 $1,603.9 $ 601.6 $1,304.1 $ 523.2 $1,262.1
Gross profit 152.8 501.7 147.0 388.7 158.7 369.6
Net income 43.1 132.9 46.5 109.5 40.5 67.5
-------------------------------------------------------------------------
Corning's equity
in net
income (1) $ 19.6 $ 66.5 $ 22.1 $ 51.5 $ 24.3 $ 24.5
--------------------------------------------------------------------------
Current assets$290.5 $684.2 $ 258.9 $560.3 $ 167.0 $ 429.4
Non-current
assets 978.1 1,342.2 589.2 930.4 536.2 835.6
-------------------------------------------------------------------------
Current
liabilities $ 351.5 $547.3 $ 204.1 $398.1 $ 182.3 $ 328.8
Non-current
liabilities 618.2 815.0 374.1 507.2 274.7 387.0
-------------------------------------------------------------------------
(1) Equity in earnings shown above and in the Consolidated Statements of
Income are net of amounts recorded for income tax.
Dividends received from Samsung-Corning and Corning's other equity companies
totaled $74.3 million, $48.2 million and $47.1 million in 1995, 1994 and 1993,
respectively. At December 31, 1995, approximately $133.7 million of equity in
undistributed earnings of equity companies were included in Corning's retained
earnings.
34
4. INVESTMENTS
(Continued)
DOW CORNING CORPORATION
Corning is a 50% owner of Dow Corning Corporation, a manufacturer of silicones.
The other 50% of Dow Corning is owned by The Dow Chemical Company.
On May 15, 1995, Dow Corning voluntarily filed for protection under Chapter 11
of the United States Bankruptcy Code as a result of several negative
developments related to the breast-implant litigation. At that time, Corning
management believed it was impossible to predict if and when Dow Corning would
successfully emerge from Chapter 11 proceedings. As a result, Corning recorded
an after-tax charge of $365.5 million in the second quarter of 1995 to fully
reserve its investment in Dow Corning. Corning also discontinued recognition
of equity earnings from Dow Corning beginning in the second quarter of 1995.
The financial position and results of operations of Dow Corning are summarized
as follows:
1995 1994 1993
-------------------------------------------------------------------------
Net sales $2,492.9 $2,204.6 $2,043.7
Gross profit 828.5 734.3 639.8
Net loss (30.6) (6.8) (287.0)
-------------------------------------------------------------------------
Corning's equity in net loss (1) $(348.0) (2) $(2.8) $(144.5)
- -------------------------------------------------------------------------
Current assets $1,835.7 $1,635.8 $1,069.2
Non-current assets 3,122.7 2,457.4 2,193.1
-------------------------------------------------------------------------
Current liabilities $ 459.5 $1,325.0 $770.6
Non-current liabilities 347.9 1,974.1 1,740.5
Liabilities subject to compromise 3,504.1 (3)
-------------------------------------------------------------------------
(1) Equity in earnings shown above and in the Consolidated Statements of
Income are net of amounts recorded for income tax.
(2) Includes $17.5 million of equity earnings recognized in the first
quarter 1995 and a charge taken by Corning of $365.5 million in the second
quarter 1995 to fully reserve its investment in Dow Corning. Corning
discontinued recognition of equity earnings from Dow Corning beginning in the
second quarter of 1995.
(3) Dow Corning's financial statements for 1995 have been prepared in
conformity with the American Institute of Certified Public Accountants'
Statement of Position 90-7, "Financial Reporting by Entities in Reorganizaion
under the Bankruptcy Code," (SOP 90-7). SOP 90-7 requires a segregation of
liabilities subject to compromise by the Bankruptcy Court as of the filing
date (May 15, 1995) and identification of all transactions and events that
are directly associated with the reorganization.
In March 1994, Dow Corning, along with other plaintiffs and representatives of
breast-implant litigation defendants, signed a breast-implant litigation
settlement agreement (the "Global Settlement") under which industry
participants would contribute $4.2 billion over a period of more than thirty
years to establish several special-purpose funds. Corning was not a signatory
or contributor to the Global Settlement. The Global Settlement, if
implemented, would have provided for a claims-based, structured resolution of
claims arising out of silicone breast implants and defined periods during which
breast-implant plaintiffs could "opt-out" of the settlement and instead
continue their individual breast-implant litigation against manufacturers and
other defendants. On October 10, 1995, the United States District Court of the
Northern District of Alabama entered an order declaring that claimants
participating in the Global Settlement would have an additional right to opt-
out of that settlement after November 30th. Those who do opt-out will have the
right to pursue individual lawsuits. The Global Settlement has been
effectively terminated.
Dow Corning recorded an accounting charge of $415 million after tax in the
fourth quarter of 1993. As disclosed in Dow Corning's financial statements,
this charge included the net present value of Dow Corning's best estimate of
its potential liability for breast-implant litigation based on current
settlement negotiations, and also included provisions for legal, administrative
and research costs related to breast implants, for a total of approximately
$1.2 billion, less expected insurance recoveries of $600 million and taxes of
$225 million.
35
4. INVESTMENTS
(Continued)
Dow Corning also recorded an accounting charge of $151.8 million after tax in
the fourth quarter of 1994. As disclosed in Dow Corning's financial
statements, this charge included Dow Corning's best estimate of additional
costs to resolve breast-implant litigation and claims outside of the Global
Settlement, and also included provisions for legal, administrative and research
costs related to breast implants, for a total of $647 million, less expected
insurance recoveries of $406 million and taxes of $89.2 million.
Subsequent to Corning's decision to fully reserve its investment in Dow
Corning, Dow Corning recorded an accounting charge of $221.2 million after tax.
As disclosed in Dow Corning's financial statements, this charge reflects a
change in Dow Corning's accounting method for its liability in the Global
Settlement. Dow Corning's 1995 results have also been impacted by the
suspension of interest payments and reorganization costs resulting from the
Chapter 11 filing.
Dow Corning is expected to file a reorganization plan with the Federal
Bankruptcy Court in the first half of 1996; however, the plan is not expected
to be approved by the creditors and the Court for some time. As such, Corning
continues to believe that it is impossible to predict if and when Dow Corning
will successfully emerge from Chapter 11 proceedings.
5. EMPLOYEE RETIREMENT PLANS
PENSION BENEFITS
Corning has defined-benefit pension plans covering approximately half of its
domestic employees and certain employees in foreign countries. Corning's
funding policy has been to contribute annually an amount determined jointly by
the company and its consulting actuaries which provides for the current cost
and amortization of prior service cost over a 30-year period.
The funded status of Corning's pension plans as of year end is as follows:
1995 1994
------------------------------------------------------------------------
Vested benefits $1,064.3 $877.6
Non-vested benefits 90.7 73.5
------------------------------------------------------------------------
Accumulated benefit obligation $1,155.0 $951.1
------------------------------------------------------------------------
Current fair market value of plan assets $1,270.2 $1,061.6
Present value of projected benefit obligation 1,218.1 1,018.9
------------------------------------------------------------------------
Plan assets in excess of projected benefit
obligation 52.1 42.7
Unrecognized prior service cost 112.7 128.3
Unrecognized transition gain (11.5) (10.9)
Unrecognized net (gains) losses from changes in
actuarial assumptions 64.5 (55.3)
Other unrecognized net experience gains (133.2) (25.4)
------------------------------------------------------------------------
Recorded pension asset $ 84.6 $ 79.4
------------------------------------------------------------------------
The projected benefit obligations for under-funded plans included in the table
totaled $76.5 million in 1995 and $65.5 million in 1994, of which $14.8 million
and $13.5 million was recorded as a liability in 1995 and 1994, respectively.
Plan assets are comprised principally of publicly traded debt and equity
securities. Corning common stock represented 6.3% and 6.9% of plan assets at
year end 1995 and 1994, respectively.
36
5. EMPLOYEE RETIREMENT PLANS
(Continued)
The unrecognized prior service cost, unrecognized transition gain, net gains
and losses from changes in actuarial assumptions and net experience gains are
deferred and amortized to pension expense over the remaining service life of
plan participants, if they exceed certain limits.
For Corning's principal defined-benefit plan, the assumed discount rate and
rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation were 7.5% and 4.5%,
respectively, for 1995 and 8.75% and 5%, respectively, for 1994. The expected
long-term rate of return on plan assets was 9% for 1995 and 1994. Assumptions
of the company's other plans are not significantly different.
The components of pension expense for Corning's defined-benefit pension plans
are as follows:
1995 1994 1993
-------------------------------------------------------------------------
Present value of benefits earned during the year $19.5 $25.1 $19.8
Interest cost on projected benefit obligation 86.8 81.5 75.4
Actual return on plan assets (229.3) (8.6) (90.7)
Net amortization and deferral 136.3 (80.4) 12.1
-------------------------------------------------------------------------
Net pension expense for the year $13.3 $17.6 $16.6
-------------------------------------------------------------------------
Measurement of pension expense is based on assumptions used to value the
pension liability at the beginning of the year. Total consolidated pension
expense, including defined-contribution pension plans, was $67.1 million in
1995, $59.5 million in 1994 and $52.5 million in 1993.
POSTRETIREMENT HEALTH-CARE AND LIFE-INSURANCE BENEFITS
Corning and certain of its domestic subsidiaries have defined-benefit
postretirement plans that provide health-care and life-insurance benefits for
retirees and eligible dependents. Approximately half of Corning's employees
may become eligible for such benefits upon reaching retirement age. As a
result of cost-sharing changes made in 1993, Corning's principal retiree
medical plans require increased retiree contributions each year equal to the
excess of medical cost increases over general inflation rates.
Corning's consolidated postretirement benefit obligation is determined by
application of the terms of health-care and life-insurance plans, together with
relevant actuarial assumptions and health-care cost trend rates. The discount
rate used in determining the accumulated postretirement benefit obligation was
7.5% in 1995 and 8.75% in 1994. The health-care cost trend rate for Corning's
principal plan is assumed to be 9.5% in 1996 for covered individuals under age
65 decreasing gradually to 6% in 2010 and thereafter. For covered individuals
over 65, the rate is assumed to be 8.6% in 1996 decreasing gradually to 6% in
2010 and thereafter. Assumptions for Corning's other plans are not
significantly different. The effect of a 1% annual increase in the assumed
health-care cost trend rates would increase the accumulated postretirement
benefit obligation and the net periodic postretirement benefit expense by $45
million and $4.7 million, respectively.
Gains and losses from plan amendments or changes in actuarial assumptions are
deferred and amortized to postretirement benefit expense, if they exceed
certain limits, over the expected remaining service life of plan participants.
37
5. EMPLOYEE RETIREMENT PLANS
(Continued)
Corning's accrued postretirement liability as of year end was comprised of the
following:
1995 1994
------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $365.4 $321.2
Fully eligible active plan participants 44.9 63.0
Other active plan participants 132.8 125.6
------------------------------------------------------------------------
543.1 509.8
------------------------------------------------------------------------
Unrecognized gain from plan amendments 14.7 18.8
Other unrecognized net experience gains 29.1 39.1
------------------------------------------------------------------------
Total postretirement liability 586.9 567.7
Less current portion 23.7 23.7
------------------------------------------------------------------------
Accrued postretirement liability $563.2 $544.0
------------------------------------------------------------------------
Corning has not funded these obligations.
The components of net periodic postretirement benefit expense are as follows:
1995 1994 1993
------------------------------------------------------------------------
Present value of benefits earned during the year$9.9 $11.3 $ 7.4
Interest cost on the accumulated postretirement
benefit obligation 40.8 39.1 37.9
Net amortization (2.6) (2.3) (3.6)
------------------------------------------------------------------------
Postretirement benefit expense $48.1 $48.1 $41.7
------------------------------------------------------------------------
Measurement of postretirement benefit expense is based on assumptions used to
value the postretirement liability at the beginning of the year.
38
6. TAXES ON INCOME
1995 1994 1993
-------------------------------------------------------------------------
Income (loss) before taxes on income:
U.S. companies $376.2 $423.4 $169.8
Non-U.S. companies 89.7 36.1 (13.1)
---------------------------------------------------------------------------
Income before taxes on income $465.9 $459.5 $156.7
-------------------------------------------------------------------------
Taxes on income $154.7 $170.1 $35.3
-------------------------------------------------------------------------
Effective tax rate reconciliation:
Statutory U.S. tax rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 1.7 2.5 2.1
Non-deductible goodwill 2.4 2.1 1.9
Foreign and other tax credits (1.7) (1.8) (7.5)
Lower taxes on subsidiary earnings (5.9) (1.8) (5.6)
Adjustment of net deferred tax assets to reflect
tax rate changes (3.5)
Other 1.7 1.0 0.1
-------------------------------------------------------------------------
Effective tax rate 33.2% 37.0% 22.5%
---------------------------------------------------------------------------
Components of net tax expense:
Taxes on income $154.7 $170.1 $35.3
Taxes on equity in earnings 7.7 10.2 6.1
Tax benefits included in common stockholders' equity(11.5) (7.2) (8.1)
---------------------------------------------------------------------------
Net tax expense $150.9 $173.1 $33.3
-------------------------------------------------------------------------
Current and deferred tax expense (benefit):
Current:
U.S. $120.7 $107.2 $90.9
State and municipal 26.2 23.5 13.7
Foreign 45.6 21.8 17.2
Deferred:
U.S. (33.1) 26.2 (74.8)
State and municipal (8.7) (2.5) (6.2)
Foreign 0.2 (3.1) (1.7)
Adjustment of net deferred tax assets to
reflect tax rate changes (5.8)
--------------------------------------------------------------------------
Net tax expense $150.9 $173.1 $33.3
-------------------------------------------------------------------------
39
6. TAXES ON INCOME
(Continued)
The tax effects of temporary differences and carryforwards that gave rise to
significant portions of the deferred tax assets and liabilities as of year end
are comprised of the following:
1995 1994
-----------------------------------------------------------------------
Other postretirement benefits $237.2 $229.5
Restructuring reserves 34.9 51.7
Other employee benefits 52.5 52.2
Loss and tax credit carryforwards 48.2 56.9
Accounts receivable reserves 54.7 21.9
Other 72.8 57.7
-----------------------------------------------------------------------
Gross deferred tax assets 500.3 469.9
Deferred tax assets valuation allowance (38.1) (45.7)
-----------------------------------------------------------------------
Deferred tax assets 462.2 424.2
-----------------------------------------------------------------------
Fixed assets (126.0) (130.1)
Pensions (41.9) (37.4)
Other (10.1) (12.3)
-----------------------------------------------------------------------
Deferred tax liabilities (178.0) (179.8)
-----------------------------------------------------------------------
Net deferred tax assets $284.2 $244.4
-----------------------------------------------------------------------
The net change in the total valuation allowance for the years ended December
31, 1995, and January 1, 1995, was a decrease of $7.6 million and an increase
of $23.9 million, respectively.
Corning currently provides income taxes on the earnings of foreign subsidiaries
and associated companies to the extent they are currently taxable or expected
to be remitted. Taxes have not been provided on $359.6 million of accumulated
foreign unremitted earnings which are expected to remain invested indefinitely.
It is not practicable to estimate the amount of additional tax that might be
payable on the foreign earnings; however, if these earnings were remitted,
income taxes payable would be provided at a rate which is significantly lower
than the effective tax rate.
The company has, as required, provided for tax on undistributed earnings of its
domestic subsidiaries and affiliated companies beginning in 1993 even though
these earnings have been and will continue to be reinvested indefinitely. The
company estimates that $36.9 million of tax would be payable on pre-1993
undistributed earnings of its domestic subsidiaries and affiliated companies
should the unremitted earnings reverse and become taxable to the company. The
company expects these earnings to be reinvested indefinitely.
Total payments for taxes on income were $114.3 million, $136.7 million and
$143.6 million during 1995, 1994 and 1993, respectively. Deferred income tax
benefits totaling $160.5 million and $133.2 million were included in other
current assets at year end 1995 and 1994, respectively. At December 31, 1995,
Corning had tax benefits attributable to loss carryforwards and credits
aggregating $48.2 million that expire at various dates through 2010.
40
7. SUPPLEMENTAL INCOME STATEMENT DATA
1995 1994 1993
------------------------------------------------------------------------
Depreciation expense $298.0 $275.5 $241.3
------------------------------------------------------------------------
Amortization of goodwill and other
intangible assets $79.4 $62.9 $39.1
- ------------------------------------------------------------------------
Provision for doubtful accounts $150.5 $62.6 $48.9
------------------------------------------------------------------------
Interest expense incurred $128.2 $122.3 $102.4
Interest capitalized (10.4) (11.9) (14.2)
------------------------------------------------------------------------
Interest expense, net $117.8 $110.4 $88.2
------------------------------------------------------------------------
Interest paid $118.1 $105.4 $88.7
------------------------------------------------------------------------
In the first quarter 1993, Corning recognized a non-operating gain of $4.2
million ($2.6 million after tax) which has been included in "Other, net" on the
Consolidated Statements of Income.
8. PROVISIONS FOR RESTRUCTURING AND OTHER SPECIAL CHARGES
In the second quarter 1995, Corning recorded a restructuring charge of $67
million ($40.5 million after tax). Of this charge, $40.5 million related to
Corning's Health Care Services segment and included severance for workforce
reduction programs primarily in the clinical-laboratory testing business and the
costs of exiting a number of leased facilities. The remaining charge included
severance for additional workforce reductions, primarily in corporate staff
groups, a curtailment loss in Corning's primary pension plan attributable to
workforce reductions and the write-off of production equipment caused by the
decision to exit the manufacturing facility for glass-ceramic memory-disks.
In the third quarter 1994, Corning recorded a charge of $82.3 million ($55.4
million after tax) which included $50.7 million of integration costs, $21.6
million of transaction expenses and $10 million of other reserves primarily
related to the Nichols, Maryland Medical and Bioran acquisitions. The
integration costs included the costs of closing clinical laboratories in certain
markets where duplicate Corning and Nichols, Maryland Medical or Bioran
facilities existed at the time of the acquisitions.
In the third quarter 1993, Corning recorded a charge of $207 million ($120.5
million after tax and minority interest) which included $156 million of
restructuring charges and $51 million of other special charges. In the fourth
quarter of 1993, Corning also recognized a reduction in equity earnings of $9.5
million as a result of restructuring charges taken by Vitro Corning, formerly a
49%-owned affiliated company. The consolidated restructuring charges included
costs to integrate the Damon acquisition and costs of a planned company-wide
restructuring program to reduce assets and overhead costs. The other special
charges primarily included a charge of $36.5 million to reflect the settlement
and related legal expenses associated with the compromise agreement with the
Civil Division of the Department of Justice to settle claims brought on behalf
of the Inspector General, U.S. Department of Health and Human Services, and $8
million of investment banking, legal and accounting fees and other transaction
expenses related to the Costar acquisition.
The costs to integrate the Damon acquisition totaled $40.6 million and included
the costs of closing certain Corning clinical-laboratory testing facilities in
certain markets where duplicate Corning and Damon facilities existed at the
time of the transaction. The costs incurred in the company-wide restructuring
program totaled $115.4 million and included, among other items, severance and
facility exit and relocation costs, asset write-offs and costs associated with
contractual obligations to consolidate the North American packaging and
worldwide Pyroceram manufacturing operations in the Consumer Products segment.
41
8. PROVISIONS FOR RESTRUCTURING AND OTHER SPECIAL CHARGES
(Continued)
The following summarizes Corning's restructuring activity:
1993 and 1994 Amounts Balance at 1995 Amounts Balance at
Restructuring Utilized January 1,RestructuringUtilized December 31,
Provisions Through 1994 1995 Provision in 1995 1995
-----------------------------------------------------------------------------------------
Employee termination
costs $98.0 $ 45.5 $52.5 $46.5 $66.9 $32.1
Write-off of fixed assets 45.2 23.3 21.9 14.1 18.3 17.7
Costs of exiting leased facilities 20.0 9.6 10.4 6.4 7.59.3
Contractual obligations 16.1 5.4 10.7 2.3 8.4
Other 27.4 23.5 3.9 1.2 2.7
-----------------------------------------------------------------------------------------
Total $206.7 $107.3 $99.4 $67.0 $96.2 $70.2
-----------------------------------------------------------------------------------------
Current $88.3 $59.4
Non-current 11.1 10.8
----------------------------------------------------------------------------------------
Total $99.4 $70.2
----------------------------------------------------------------------------------------
Employee termination costs include severance benefits related to approximately
4,600 employees (1,000, 2,000 and 1,600 in 1995, 1994 and 1993, respectively),
of which approximately 3,400 have been terminated or notified of their
termination at December 31, 1995. Management expects that approximately 400
additional terminations and the remaining business or facility exits will occur
by the end of 1996. The decrease in the number of actual versus anticipated
employee terminations is primarily attributable to higher than expected
attrition and average termination costs. Certain severance and facility exit
costs have payment terms extending into 1997.
42
9. SUPPLEMENTAL BALANCE SHEET DATA
INVENTORIES 1995 1994
------------------------------------------------------------------------
Finished goods $208.8 $ 210.1
Work in process 135.7 115.7
Raw materials and accessories 88.2 66.1
Supplies and packing materials 87.7 83.7
------------------------------------------------------------------------
Total inventories valued at current cost 520.4 475.6
Reduction to LIFO valuation (52.6) (58.9)
------------------------------------------------------------------------
Inventories $467.8 $ 416.7
------------------------------------------------------------------------
PLANT AND EQUIPMENT
------------------------------------------------------------------------
Land $ 64.8 $ 60.7
Buildings 960.9 892.7
Equipment 2,922.2 2,664.9
------------------------------------------------------------------------
3,947.9 3,618.3
Accumulated depreciation (1,916.3) (1,727.7)
------------------------------------------------------------------------
Plant and equipment, net $2,031.6 $1,890.6
------------------------------------------------------------------------
OTHER ACCRUED LIABILITIES
------------------------------------------------------------------------
Taxes on income $108.8 $ 40.0
Restructuring reserves 63.2 102.4
Wages and employee benefits 319.4 295.3
Other liabilities 272.5 310.6
------------------------------------------------------------------------
Other accrued liabilities $763.9 $ 748.3
------------------------------------------------------------------------
Restructuring reserves include reserves related to acquisitions and
divestitures.
43
10. LOANS PAYABLE
1995 1994
------------------------------------------------------------------------
Loans Payable:
Current maturities of loans payable beyond
one year $141.3 $ 43.6
Other short-term borrowings, principally commercial
paper in 1994 at current interest rates 4.7 24.0
------------------------------------------------------------------------
$ 146.0 $ 67.6
------------------------------------------------------------------------
Loans Payable Beyond One Year:
Notes, 8.375%, due 1996 $ 75.0 $ 75.0
Notes, 7.78%, due 1998 16.3 22.0
Notes, 8.75%, due 1999 99.9 99.9
Series A senior notes, 7.99%, due 1999 48.0 60.0
Series B senior notes, 8.4%, due 2002 50.0 50.0
Debentures, 8.25%, due 2002 75.0 75.0
Debentures, 6%, due 2003 99.4 99.4
Debentures, 7% due 2007, net of unamortized
discount of $42.9 million 57.1 55.7
Notes, 6.73%, due 2008 40.0 40.0
Notes, 6.83%, due 2009 30.0 30.0
Debentures, 6.75%, due 2013 99.5 99.5
Debentures, 8.875%, due 2016 74.5 74.5
Debentures, 8.875%, due 2021 74.9 74.9
Debentures, 7.625%, putable in 2004, due 2024 99.7 99.7
Medium-term notes, average rate 7.8%, due
through 2025 270.0 145.0
Other, average rate 6.45%, due through 2031 325.0 348.6
------------------------------------------------------------------------
1,534.3 1,449.2
Less current maturities 141.3 43.6
------------------------------------------------------------------------
$1,393.0 $1,405.6
---------------------------------------------------------------------------
At December 31, 1995, and January 1, 1995, the weighted average interest rate
on short-term borrowings was 6%.
At December 31, 1995, loans payable beyond one year become payable:
1997 1998 1999 2000 2001-2031
------------------------------------------------
$66.6 $57.4 $150.8 $109.4 $1,008.8
Based on borrowing rates currently available to Corning for loans with similar
terms and maturities, the fair value of loans payable beyond one year was $1.6
billion at year end 1995.
Unused bank revolving-credit agreements in effect at December 31, 1995, provide
for Corning to borrow up to $788 million. The revolving-credit agreements
provide for borrowing of U.S. dollars and Eurocurrency at various rates.
Corning also has the ability to issue up to $375 million of medium- and long-
term debt through public offerings under existing shelf-registration statements
filed with the Securities and Exchange Commission.
44
11. CONVERTIBLE MONTHLY INCOME PREFERRED SECURITIES
In July 1994, Corning and Corning Delaware L.P., a special purpose limited
partnership in which Corning is the sole general partner, completed a public
offering of 7.5 million shares of Convertible Monthly Income Preferred
Securities (MIPS), guaranteed by Corning and convertible into Corning common
stock at the rate of 1.2821 shares of Corning common stock for each preferred
security (equivalent to a conversion price of $39 per share). Dividends on the
preferred securities are payable by Corning Delaware at the annual rate of 6%
of the liquidation preference of $50 per preferred security. The proceeds,
which totaled $364.4 million (net of $9.4 million of underwriting commissions
and expenses), were used to retire the remaining debt incurred in the 1993
acquisition of Damon.
After August 5, 1998, the preferred securities will be redeemable, at the
option of Corning Delaware, for $51.80 per preferred security reduced annually
by $0.30 to a minimum of $50 per preferred security. The preferred securities
are subject to mandatory redemption on July 21, 2024, at a redemption price of
$50 per preferred security.
Corning may cause Corning Delaware to delay the payment of dividends for up to
60 months. During such period, dividends on the MIPS will compound monthly and
Corning may not declare or pay dividends on its common stock. If Corning
Delaware fails to pay dividends on the MIPS for 15 consecutive months or upon
the occurrence of certain other events, the preferred securities may convert,
at the option of the holders, to Corning Series C convertible preferred stock,
par value $100 per share. The Series C convertible preferred stock will have
dividend, conversion, optional redemption and other terms substantially similar
to the terms of the MIPS, except that, among other things, the holders of
Series C preferred stock will have the right to elect two additional directors
of Corning whenever dividends are in arrears for 18 months and the Series C
preferred stock will not be subject to mandatory redemption.
Based on quoted market prices at December 31, 1995, the fair value of the
preferred securities approximated $375 million.
12. CONVERTIBLE PREFERRED STOCK
Corning has 10 million authorized shares of Series Preferred Stock, par value
$100 per share. Of the authorized shares, 600,000 shares have been designated
Series A Junior Participating Preferred Stock of which no shares have been
issued.
At year end 1995, 1994 and 1993, 239,400, 249,000 and 257,000 shares of Series
B Convertible Preferred Stock were outstanding, respectively. Each Series B
share is convertible into four shares of Corning common stock and has voting
rights equivalent to four common shares. Cumulative cash dividends are paid at
the rate of 8% per annum. The Series B shares were sold exclusively to the
trustee of Corning's existing employee investment plans, based upon directions
from plan participants. Participants may cause Corning to redeem the shares at
100% of par upon reaching age 55 or later, retirement, termination of
employment or in certain cases of financial hardship. The Series B shares are
redeemable by Corning at $108 per share reduced annually on October 1,
commencing in 1990, by $1 per share to a minimum of $100 per share.
45
13. COMMON STOCKHOLDERS' EQUITY
1995 1994 1993
------------------------------------------------------------------------
Common stock at par value:
Balance at beginning of year $127.9 $ 114.0 $110.0
Shares issued 1.4 13.9 4.0
------------------------------------------------------------------------
Balance at end of year $129.3 $ 127.9 $114.0
------------------------------------------------------------------------
Capital in excess of par value:
Balance at beginning of year $1,042.9 $ 673.5 $656.5
Shares issued 73.8 369.4 17.0
------------------------------------------------------------------------
Balance at end of year $1,116.7 $1,042.9 $673.5
------------------------------------------------------------------------
Unearned compensation:
Balance at beginning of year $(139.4) $(160.7) $(198.6)
Corning Stock Ownership Trust 4.6 4.6 44.2
Other, net 1.8 16.7 (6.3)
------------------------------------------------------------------------
Balance at end of year $(133.0) $(139.4) $(160.7)
---------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year $1,714.5 $1,581.9 $1,704.1
Net income (loss) (50.8) 281.3 (15.2)
Dividends declared ($0.72 per share
in 1995,$0.69 per share in 1994,
and $0.68 per share in 1993) (167.2) (152.2) (136.2)
Other, net 3.5 29.2
------------------------------------------------------------------------
Balance at end of year $1,496.5 $1,714.5 $1,581.9
---------------------------------------------------------------------------
Treasury stock:
Balance at beginning of year $(523.7) $(516.5) $(473.6)
Repurchases of shares, net (39.3) (7.2) (42.9)
------------------------------------------------------------------------
Balance at end of year $(563.0) $(523.7) $(516.5)
---------------------------------------------------------------------------
Cumulative translation adjustment:
Balance at beginning of year $ 40.8 $ (6.4) $ 5.4
Translation adjustment 15.7 47.2 (11.8)
------------------------------------------------------------------------
Balance at end of year $ 56.5 $ 40.8 $ (6.4)
------------------------------------------------------------------------
Common stockholders' equity $2,103.0 $2,263.0 $1,685.8
---------------------------------------------------------------------------
13. COMMON STOCKHOLDERS' EQUITY
(Continued)
In 1994, Corning issued 8 million shares of common stock in a single-block
transaction. The net proceeds from this offering totaled $233 million and were
used to finance the acquisition of the shares of capital stock of Corning Vitro
Corporation held by Vitro and the acquisition of Northern Telecom Limited's
optical-fiber and optical-cable businesses. Corning issued 18 million and 6.3
million shares of common stock for pooling-of-interests business combinations
in 1994 and 1993, respectively.
Corning has established the Corning Stock Ownership Trust (CSOT) to fund future
employee purchases of common stock through its contributions to Corning's
Investment and Employee Stock Purchase Plans. Corning sold 4 million treasury
shares to the CSOT. At December 31, 1995, 2.4 million shares remained in the
CSOT. Shares held by the CSOT are not considered outstanding for earnings per
common share calculations until released to the Plans.
Each share of Corning common stock trades with a preferred share purchase right
which entitles shareholders to purchase one-hundredth of a share of Series A
Junior Participating Preferred Stock upon the occurrence of certain events. In
addition, the rights entitle shareholders to purchase shares of common stock at
a 50% discount in the event a person or group acquires 20% or more of Corning's
outstanding common stock. The preferred share purchase rights expire July 15,
1996.
14. STOCK COMPENSATION PLANS
Stock compensation plans include the 1994 Employee Equity Participation
Program, which covers 9 million shares, and the 1991 Divisional Incentive Stock
Plan, which covers 400,000 shares. These and predecessor plans provide the
authorization for Corning's three common stock plans discussed below. No
future awards or grants may be made under the predecessor plans except for
currently outstanding rights. At December 31, 1995, 2.3 million shares were
available for sale or grant under these plans.
Proceeds from the sale of stock under these plans are added to capital stock
accounts. Compensation expense is recorded for awards of shares or share
rights over the period earned. These plans resulted in expense of $16 million
in 1995, $16.5 million in 1994 and $3.1 million in 1993.
These plans do not include stock options granted in substitution for stock
options assumed in connection with Corning's acquisition of certain companies.
Accordingly, these grants do not reduce shares available under the stock
compensation plans.
STOCK OPTION PLAN
Non-qualified and incentive stock options to purchase unissued shares at the
market price on the grant date generally become exercisable in installments
from one to two years from the grant date; non-qualified and incentive stock
options are generally exercisable for 10 years from the grant date.
In connection with the Nichols acquisition in 1994 and the Costar acquisition
in 1993, Corning issued options to purchase 1.1 million shares and 322,000
shares, respectively, of Corning common stock in substitution for stock options
assumed.
47
14. STOCK COMPENSATION PLANS
(Continued)
Transactions for the three years ended December 31, 1995, were:
Weighted
Number Average
of Shares Exercise
in Thousands Price
------------------------------------------------------------------------
Options outstanding January 3, 1993 6,354 $21.36
Options granted under Plan 1,244 $29.72
Options granted in Costar transaction 322 $ 9.11
Options exercised (656) $12.21
Options terminated (42) $14.43
------------------------------------------------------------------------
Options outstanding January 2, 1994 7,222 $23.13
Options granted under Plan 2,511 $31.03
Options granted in Nichols transaction 1,050 $14.33
Options exercised (824) $12.34
Options terminated (126) $26.23
------------------------------------------------------------------------
Options outstanding January 1, 1995 9,833 $25.07
Options granted under Plan 3,389 $31.34
Options exercised (1,052) $13.83
Options terminated (393) $24.40
------------------------------------------------------------------------
Options outstanding December 31, 1995 11,777 $27.90
------------------------------------------------------------------------
Options covering 5.2 million shares were exercisable at December 31, 1995.
In October 1995, the Financial Accounting Standards Board issued Statement No.
123 "Accounting for Stock-Based Compensation" (FAS 123). This statement
defines a fair value-based method of accounting for employee stock options and
similar equity investments and encourages adoption of that method of accounting
for employee stock compensation plans. However, it also allows entities to
continue to measure compensation cost for employee stock compensation plans
using the intrinsic value-based method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25). Entities which
elect to continue accounting for stock compensation plans utilizing APB 25 are
required to disclose pro forma net income and earnings per share, as if the
fair value-based method of accounting under FAS 123 had been applied. Corning
intends to continue to account for stock compensation plans pursuant to APB 25
and, as such, will include the pro forma disclosures required by FAS 123 in the
1996 Consolidated Financial Statements.
EQUITY PURCHASE PLAN
Under the Equity Purchase Plan, shares were sold to certain employees at book
value and must be repurchased by the company at book value or converted to
equivalent unrestricted shares. At December 31, 1995, a total of 1.6 million
shares were outstanding under this plan. No shares will be sold under this
plan in the future.
48
INCENTIVE STOCK PLANS
The Incentive Stock Plan and the Divisional Incentive Stock Plan permit stock
grants, either determined by specific performance goals or issued directly, in
most instances subject to the possibility of forfeiture and without cash
consideration. The Divisional Incentive Stock Plan is not available to
officers of the company.
In 1995, 1994 and 1993, grants of 549,000, 576,000 and 681,000 shares,
respectively, were made under these plans. At December 31, 1995, there were no
outstanding incentive rights. A total of 4.9 million shares issued in prior
years remain subject to forfeiture at December 31, 1995.
15. EMPLOYEE STOCK OWNERSHIP PLAN
Corning has established the Employee Stock Ownership Plan (ESOP) within its
existing employee investment plans. At inception of the plan, Corning borrowed
$50 million and loaned the proceeds to the ESOP. The ESOP used the proceeds to
purchase 4 million treasury shares. Corning's receivable from the ESOP was
$16.3 million and $22 million at the end of 1995 and 1994, respectively, and is
classified as unearned compensation in common stockholders' equity.
Corning is obligated to make monthly contributions to the plan sufficient to
enable the ESOP to pay its loan, including interest. These contributions are
classified as expense at the time they are made.
Contributions to the ESOP were $6.4 million in 1995, $6.2 million in 1994 and
$5.9 million in 1993. Dividends on unallocated shares reduced contribution
requirements by $0.8 million in 1995, $1 million in 1994 and $1.3 million in
1993. Interest costs amounted to $1.6 million in 1995, $1.8 million in 1994
and $2.4 million in 1993. Shares held by the ESOP are included in weighted
average shares for earnings per share calculations.
16. COMMITMENTS, CONTINGENCIES AND GUARANTEES
Minimum rental commitments under leases outstanding at December 31, 1995 are:
1996 1997 1998 1999 2000 2001-2013
------------------------------------------------------------
$88.9 $69.2 $52.3 $38.4 $30.1 $119.5
Rental expense was $120 million in 1995, $108.6 million in 1994 and $90.2
million in 1993.
Corning's clinical-laboratory testing business has entered into several
settlement agreements with various governmental and private payors during
recent years. At present, government investigations of certain practices by
clinical laboratories acquired in recent years are ongoing. In addition,
certain payors are reviewing their reimbursement practices for laboratory
tests. The results of these investigations and reviews may result in
additional settlement payments or reductions in reimbursements for certain
tests. Corning believes it has recorded reserves that adequately provide for
the estimated exposure from these investigations; however, it is possible that
claims could arise that could be in excess of amounts reserved.
The ability of certain subsidiaries and associated companies to transfer funds
is limited by provisions of certain loan agreements and foreign government
regulations. At December 31, 1995, the amount of equity subject to such
restrictions for consolidated subsidiaries totaled $81.5 million. While this
amount is legally restricted, it does not result in operational difficulties
since Corning has generally permitted subsidiaries to retain a majority of
equity to support their growth programs. At December 31, 1995, loans of equity
affiliates guaranteed by Corning totaled $31.8 million.
49
17. INTERNATIONAL ACTIVITIES
Information by geographic area is presented below on a source basis, with
exports shown in their area of origin, and research and development expenses
shown in the area where the activity was performed. Other revenues, interest
expense and miscellaneous income and expense are included with other
unallocated amounts to allow a reconciliation to amounts reported in the
Consolidated Statements of Income. Transfers between areas are accounted for
at prices approximating prices to unaffiliated customers.
Eliminations
Latin America, and
United Asia-Pacific Unallocated
1995 States Europe and Canada Amounts Consolidated
- ------------------------------------------------------------------------------------------
Revenues $4,973.3 (1) $ 176.8 $163.0 $ 33.0 $5,346.1
Transfers between
areas 104.4 11.5 2.4 (118.3)
Total revenues 5,077.7 188.3 165.4 (85.3) 5,346.1
Income before tax 473.0 (2) 64.8 49.2 (121.1) 465.9
-----------------------------------------------------------------------------------------
Identifiable assets
at year end 5,129.9 422.4 380.1 54.7 5,987.1
Research and
development
expense 165.4 11.2 3.1 179.7
---------------------------------------------------------------------------------------
1994
----------------------------------------------------------------------------------------
Revenues $4,429.4 (1) $ 215.8 $125.3 $ 28.7 $4,799.2
Transfers between
areas 93.5 20.9 0.8 (115.2)
Total revenues 4,522.9 236.7 126.1 (86.5) 4,799.2
Income before tax 500.9 (3) 47.2 30.6 (119.2) 459.5
-----------------------------------------------------------------------------------------
Identifiable assets
at year end 4,960.8 339.2 319.1 403.6 6,022.7
Research and
development expense 162.9 10.3 3.7 176.9
-----------------------------------------------------------------------------------------
1993
----------------------------------------------------------------------------------------
Revenues $3,659.9 (1) $ 242.8 $102.1 $ 29.9 $4,034.7
Transfers between
areas 53.8 9.9 (63.7)
Total revenues 3,713.7 252.7 102.1 (33.8) 4,034.7
Income before tax (4) 224.0 6.2 23.6 (97.1) 156.7
Identifiable assets
at year end 4,319.8 393.7 298.9 219.3 5,231.7
Research and
development expense 157.1 10.9 5.1 173.1
---------------------------------------------------------------------------------------
(1) U.S. sales to unaffiliated customers in 1995, 1994 and 1993 include $654
million, $518.2 million and $424.8 million of export sales; $236 million,
$184 million and $162.7 million to Europe; and $418 million, $334.2 million
and $262.1 million to Latin America, Asia-Pacific and Canada.
(2) The 1995 restructuring and other special charges of $67 million were
included in income before tax of the United States.
(3) The 1994 restructuring and other special charges of $82.3 million were
included in income before tax of the United States.
(4) The 1993 restructuring and other special charges of $207 million were
included in income before tax of the United States ($193.9 million), Europe
($9.5 million) and Latin America, Asia-Pacific and Canada ($3.6 million).
50
QUARTERLY OPERATING RESULTS AND RELATED MARKET DATA
(unaudited)
(In millions, except First Second Third Fourth Total
per-share amounts) Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------------------
1995
-------------------------------------------------------------------------
Revenues $1,123.0 $1,306.5 $1,577.9 $1,338.7 $
5,346.1
Gross profit 402.5 481.3 580.3 463.0 1,927.1
Income before taxes 107.9 102.0 (1) 134.4 121.6 465.9
Equity in earnings (losses)
of associated companies:
Other than Dow Corning
Corporation 8.4 20.9 19.3 17.9 66.5
Dow Corning Corporation (2) 17.5 (365.5) (348.0)
Net income (loss) 79.4 (297.2) 83.5 83.5 (50.8)
---------------------------------------------------------------------------
Per Common Share:
Net income (loss) $0.35 $(1.32) $ 0.37 $0.37 $(0.23)
Dividend declared 0.18 0.18 0.18 0.18 0.72
Price range
High $36 1/2 $37 1/4 $33 7/8 $ 32
Low 29 3/8 31 5/8 26 1/4 25 1/2
-------------------------------------------------------------------------
1994
-------------------------------------------------------------------------
Revenues $956.6 $1,109.2 $1,452.7 $1,280.7 $
4,799.2
Gross profit 326.8 409.6 524.5 448.7 1,709.6
Income before taxes 79.0 140.8 92.4 (1)147.3 459.5
Equity in earnings (losses)
of associated companies:
Other than Dow Corning
Corporation 4.2 11.4 19.0 16.9 51.5
Dow Corning Corporation (2) 12.3 22.6 23.4 (61.1) (2.8)
Net income 58.0 111.4 76.9 35.0 281.3
-------------------------------------------------------------------------
Per Common Share:
Net income $0.28 $ 0.54 $ 0.36 $0.14 $ 1.32
Dividend declared 0.17 0.17 0.17 0.18 0.69
Price range
High $33 1/8 $34 1/8 $ 343/8 $35 1/8
Low 27 5/8 30 1/4 29 28 7/8
-------------------------------------------------------------------------
(1)Includes impact of restructuring and other special charges which are
described in Note 8 of the Notes to Consolidated Financial Statements.
(2)As described in Note 4 of the Notes to Consolidated Financial Statements,
Corning fully reserved its investment in and discontinued recognition of
equity earnings from Dow Corning Corporation in the second quarter of 1995.
Equity losses from Dow Corning in 1994 include a charge of $75.9 million in
the fourth quarter related to breast-implant litigation.
51
FIVE YEARS IN REVIEW - HISTORICAL COMPARISON
(Dollar amounts in millions, except per-share amounts)
1995 1994 1993 1992 1991
-------------------------------------------------------------------------
PER COMMON SHARE DATA
Income (loss) before extraordinary
credit and cumulative effect
of changes in accounting
methods $ (0.23) $ 1.32 $ (0.09) $ 1.40 $ 1.66
Tax benefit of loss
carryforwards 0.04 0.03
Cumulative effect of changes in
accounting methods (1) (1.52)
Net income (loss) $ (0.23) $ 1.32 $ (0.09) $ (0.08) $ 1.69
Dividends declared (2) $ 0.72 $ 0.69 $ 0.68 $ 0.62 $ 0.68
Weighted average shares
outstanding (millions) 226.6 211.8 192.0 188.6 186.5
OPERATIONS
Net sales $5,313.1 $4,770.5 $4,004.8 $3,708.7 $3,259.2
Research and development
expenses 179.7 176.9 173.1 151.1 130.7
Non-operating gains 8.1
Provision for restructuring
and
other special charges 67.0 82.3 207.0 63.3
Equity in earnings (losses) of
associated companies:
Other than Dow Corning
Corporation 66.5 51.5 24.5 31.9 37.3
Dow Corning Corporation (348.0) (2.8) (144.5) 11.9 74.4
Income (loss) before extraordinary
credit and cumulative effect
of changes in accounting
methods (50.8) 281.3 (15.2) 266.3 311.2
Tax benefit of loss
carryforwards 7.7 5.6
Cumulative effect of changes
in accounting methods (1) (286.6)
NET INCOME (LOSS) $(50.8) $ 281.3 $ (15.2) $ (12.6) $316.8
---------------------------------------------------------------------------
FINANCIAL POSITION
Assets
Working capital $669.2 $ 652.1 $ 451.4 $ 465.2 $521.0
Investments:
Other than Dow Corning
Corporation 376.1 352.0 304.7 478.2 377.8
Dow Corning Corporation 341.8 326.0 466.1 553.7
Plant and equipment, net 2,031.6 1,890.6 1,759.8 1,605.0 1,429.6
Goodwill and other
intangible assets, net 1,416.1 1,408.0 1,009.1 220.7 198.5
Total assets 5,987.1 6,022.7 5,231.7 4,286.3 3,852.6
Capitalization
Loans payable beyond one
year $1,393.0 $1,405.6 $1,585.6 $ 815.7 $700.0
Other liabilities and
deferred credits 664.9 643.6 668.6 574.6 282.4
Minority interest in
subsidiary companies 272.5 247.0 245.7 241.2 115.1
Convertible preferred
securities
of subsidiary 364.7 364.4
Convertible preferred stock 23.9 24.9 25.7 26.9 27.9
Common stockholders'
equity 2,103.0 2,263.0 1,685.8 1,803.8 2,018.8
Total capitalization $4,822.0 $4,948.5 $4,211.4 $3,462.2 $3,144.2
52
FIVE YEARS IN REVIEW - HISTORICAL COMPARISON
(Continued)
1995 1994 1993 1992 1991
-------------------------------------------------------------------------
SELECTED DATA AND RATIOS
Common dividends declared $165.2 $150.1 $134.1 $120.2 $128.2
Preferred dividends declared $ 2.0 $ 2.1 $ 2.1 $ 2.2 $ 2.4
Additions to plant and
equipment $495.3 $386.9 $443.1 $377.4 $313.0
Depreciation and
amortization $377.4 $338.4 $280.4 $248.2 $231.3
Number of employees 41,000 43,000 39,200 31,100 30,700
Number of common
stockholders 18,800 21,600 19,000 16,200 15,000
Return on average common
stockholders' equity 14.1% 16.3%
Per-share amounts have been adjusted for the 2-for-1 stock split effective
January 13, 1992.
(1) During 1992, Corning recorded an after-tax charge of $294.8 million
($1.56 per common share) in the first quarter and increased 1992 net
postretirement benefit expense of $21.3 million ($0.11 per common share) for
both consolidated and equity companies as a result of the adoption of FAS
106. In addition, Corning recognized an $8.2 million gain ($0.04 per common
share) from an equity company's adoption of FAS 109.
(2) Includes a special dividend of $0.15 per common share in the fourth
quarter 1991.
53
INVESTOR INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held on Thursday, April 25, 1996, in
Corning, New York. A formal notice of the meeting together with a proxy
statement will be mailed to shareholders on or about March 15, 1996. A full
report of the proceedings at the annual meeting will be available without
charge upon written request to Mr. A. John Peck Jr., secretary, Corning
Incorporated, HQ-E2-A14, Corning, New York 14831.
ADDITIONAL INFORMATION
A copy of Corning's 1995 Annual Report on Form 10-K filed with the Securities
and Exchange Commission is available upon written request to Mr. A. John Peck
Jr., secretary, Corning Incorporated, HQ-E2-A14, Corning, New York 14831.
HIGH PERFORMANCE WORKPLACE
Corning has prepared a report on its progress in moving toward the high
performance workplace. The report generally follows the checklist set forth at
the conclusion of the "Road to High Performance Workplaces: A Guide to Better
Jobs and Better Business Results - 1994" prepared by the Office of the American
Workplace, U.S. Department of Labor, and as such measures practices in the
following areas - Skills and Information; Participation, Organization and
Partnership; and Compensation, Security and Work Environment. Shareholders who
wish to receive a copy of this report should contact the Secretary at the above
address.
INVESTOR INFORMATION
Investment analysts who need additional information may contact Mr. Richard B.
Klein, senior vice president, External Reporting and Communications, HQ-E2-20-
T24, Corning, New York 14831; Telephone (607) 974-8313.
COMMON STOCK
Corning Incorporated common stock is listed on the New York Stock Exchange and
the Zurich Stock Exchange. In addition, it is traded on the Boston, Midwest,
Pacific and Philadelphia stock exchanges. Common stock options are traded on
the Chicago Board Options Exchange. The abbreviated ticker symbol for Corning
Incorporated is "GLW."
DIVIDEND REINVESTMENT
Corning's Dividend Reinvestment Plan allows shareholders to reinvest dividends
in Corning Incorporated common stock automatically, regularly and conveniently.
In addition, participating shareholders may supplement the amount invested with
voluntary cash investments. Plan participation is voluntary and shareholders
may join or withdraw at any time.
Full details of the plan are available by writing to the Secretary of the
company or to Harris Trust and Savings Bank at the address listed below. Be
certain to include a reference to Corning Incorporated.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
Harris Trust and Savings Bank
Shareholder Services Division
P.O. Box 755
Chicago, Illinois 60690-0755
Telephone: (800) 255-0461
For people with hearing impairments, Harris Bank has a Telecommunication Device
for the Deaf (TDD) telephone. The listing is Harris Bank, Hearing Impaired
Telephone, TDD (312) 461-5633 or TDD (312) 461-5637.
CHANGE OF ADDRESS
Report change of address to Harris Trust and Savings Bank at the above address.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
54
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
SCHEDULE II - VALUATION ACCOUNTS AND RESERVES
BALANCE AT NET DEDUCTIONS BALANCE AT
YEAR ENDED DECEMBER 31, 19951-1-95 ADDITIONS AND OTHER 12-31-95
---------------------------------------------------------------------------
Doubtful accounts and
allowances $ 89.4 $150.5 $58.6 $ 181.3
LIFO valuation $ 58.9 $ 1.5 $ 7.8 $ 52.6
Deferred tax assets
valuation allowance $ 45.7 $10.2 $17.8 $ 38.1
Accumulated amortization
of goodwill
and other intangible assets$170.8 $61.4 -- 232.2
Reserves for accrued costs
of business restructuring$149.0 $67.0 $105.7 $ 110.3 (A)
- ---------------------------------------------------------------------------
BALANCE AT NET DEDUCTIONS BALANCE AT
YEAR ENDED JANUARY 1, 1995 1-2-94 ADDITIONS AND OTHER 1-1-95
-------------------------------------------------------------------------
Doubtful accounts and
allowances $ 70.5 $62.6 $43.7 $ 89.4
LIFO valuation $ 99.4 $ 2.4 $42.9 $ 58.9
Deferred tax assets
valuation allowance $ 21.8 $24.9 $ 1.0 $ 45.7
Accumulated amortization
of goodwill
and other intangible
assets $106.8 $66.0 $ 2.0 $ 170.8
Reserves for accrued costs
of business
restructuring $232.5 $69.0 (B) $152.5 $ 149.0 (A)
- -------------------------------------------------------------------------
BALANCE AT NET DEDUCTIONS BALANCE AT
YEAR ENDED JANUARY 2, 1994 1-3-93 ADDITIONS AND OTHER 1-2-94
-------------------------------------------------------------------------
Doubtful accounts and
allowances $ 56.8 $48.9 $35.2 $ 70.5
LIFO valuation $ 105.9 $ 4.9 $11.4 $ 99.4
Deferred tax assets
valuation allowance -- $21.8 -- $ 21.8
Accumulated amortization
of goodwill
and other intangible
assets $94.7 $23.6 $11.5 $ 106.8
Reserves for accrued costs
of business
restructuring $63.3 $247.8 (C) $78.6 $ 232.5 (A)
- -------------------------------------------------------------------------
(A)Includes short-term reserves of $63.2 million, $102.4 million and $155
million in 1995, 1994 and 1993, respectively.
(B)Includes $18.3 million of reserves resulting from business acquisitions and
divestitures.
(C)Includes $77.3 million of reserves resulting from business acquisitions.
55
Suite 3900 Telephone 313 259 0500
200 Renaissance Center
Detroit, MI 48243
~Price~Waterhouse~LLP~
REPORT OF INDEPENDENT ACCOUNTANTS
January 19, 1996
To the Stockholders and
Board of Directors of
Dow Corning Corporation
In our opinion, the consolidated balance sheets and the related consolidated
statements of operations and retained earnings and of cash flows present fairly,
in all material respects, the financial position of Dow Corning Corporation and
its subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, on May 15, 1995, Dow Corning Corporation voluntarily
filed for protection under Chapter 11 of the United States Bankruptcy Code.
This action was taken primarily as a result of uncertainties related to breast
implant litigation and related insurance recovery as discussed in Note 3 to the
financial statements. The uncertainties inherent in the bankruptcy process
raise substantial doubt about the Company's ability to continue as a going
concern in its present form. Management's plans in regard to these matters are
also described in Notes 3 and 4. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Price Waterhouse LLP
56
DOW CORNING CORPORATION
AND SUBSIDIARY COMPANIES
-----------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
PAGE
----
Consolidated balance sheets at
December 31, 1995 and 1994 57-58
Consolidated statements of operations and retained earnings for the years
ended
December 31, 1995, 1994 and 1993 59
Consolidated statements of cash flows for the years ended December 31,
1995,
1994 and 1993 60
Notes to consolidated financial statements 61-84
57
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
--------------------------
(in millions of dollars)
ASSETS
------
December 31,
-----------------
1995 1994
----- -----
CURRENT ASSETS:
Cash and cash equivalents $387.3 $201.1
----- -----
Short-term investments 6.3 0.7
----- -----
Accounts and notes receivable -
Trade (less allowance for
doubtful accounts
of $13.6 in 1995 and
$10.2 in 1994) 425.8 380.4
Anticipated implant insurance
receivable 265.0 157.5
Other receivables 48.6 35.8
----- -----
739.4 573.7
----- -----
Inventories 329.0 308.4
----- -----
Other current assets -
Deferred income taxes 61.9 252.9
Implant deposit 275.0 275.0
Other 36.8 24.0
----- -----
373.7 551.9
----- -----
Total current assets 1,835.7 1,635.8
------ ------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 154.3 150.8
Buildings 492.0 467.0
Machinery and equipment 2,301.9 2,181.9
Construction-in-progress 189.9 135.2
----- -----
3,138.1 2,934.9
Less - Accumulated depreciation (1,930.5) (1,743.0)
------- -------
1,207.6 1,191.9
------ ------
OTHER ASSETS:
Anticipated implant insurance
receivable 1,126.0 943.6
Restricted insurance proceeds 108.3 -
Deferred income taxes 537.1 182.7
Other 143.7 139.2
----- -----
1,915.1 1,265.5
------ ------
$4,958.4 $4,093.2
======= =======
The Notes to Consolidated Financial Statements are an integral
part of these financial statements.
58
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
--------------------------
(in millions of dollars except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------
December 31,
-----------------
1995 1994
----- -----
CURRENT LIABILITIES:
Notes payable $ 14.7 $404.9
Current portion of long-term debt 8.7 41.9
Trade accounts payable 148.5 160.2
Accrued payrolls and employee benefits 71.0 61.8
Accrued taxes 60.2 60.9
Implant reserve - 475.4
Other current liabilities 156.4 119.9
----- -----
Total current liabilities 459.5 1,325.0
----- ------
LONG-TERM DEBT 110.8 335.1
----- -----
OTHER LONG-TERM LIABILITIES:
Implant reserve - 1,286.9
Other 110.3 352.1
----- -----
110.3 1,639.0
----- ------
LIABILITIES SUBJECT TO COMPROMISE:
Trade accounts payable 46.6 -
Accrued employee benefits 181.4 -
Accrued taxes 21.7 -
Implant reserve 2,471.5 -
Notes payable 375.0 -
Long-term debt 273.4 -
Other 134.5 -
----- ----
3,504.1 -
------ ----
CONTINGENT LIABILITIES (NOTE 3)
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES 126.8 117.9
----- -------
STOCKHOLDERS' EQUITY:
Common stock, $5 par value -
2,500,000 shares
authorized and outstanding 12.5 12.5
Retained earnings 566.9 597.5
Cumulative translation adjustment 67.5 66.2
----- -----
Stockholders' equity 646.9 676.2
----- -----
$4,958.4 $4,093.2
======= =======
The Notes to Consolidated Financial Statements are an integral
part of these financial statements.
59
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
-----------------------------------------------------------
(in millions of dollars except share data)
Year ended December 31,
--------------------------
1995 1994 1993
------ ------ ------
NET SALES $2,492.9 $2,204.6 $2,043.7
------- ------- -------
OPERATING COSTS AND EXPENSES:
Manufacturing cost of sales 1,664.4 1,470.3 1,403.9
Marketing and administrative expenses 450.3 415.4 403.9
Implant costs 351.1 241.0 640.0
------ ------ ------
2,465.8 2,126.7 2,447.8
------ ------ ------
OPERATING INCOME (LOSS) 27.1 77.9 (404.1)
OTHER INCOME (EXPENSE):
Interest income 36.6 18.0 5.0
Currency gains (losses) and other, net (22.6) (11.0) 10.4
Interest expense (43.0) (70.3) (33.3)
------ ------ ------
INCOME (LOSS) BEFORE REORGANIZATION COSTS
AND INCOME TAXES (1.9) 14.6 (422.0)
Reorganization costs 21.0 - -
------ ---- ----
INCOME (LOSS) BEFORE INCOME TAXES (22.9) 14.6 (422.0)
Income tax provision (benefit) (9.6) 7.9 (150.9)
Minority interests' share in income 17.3 13.5 15.9
------ ------ ------
NET INCOME (LOSS) (1995 - $(12.24)
per share; 1994 - $(2.72) per share;
1993 - $(114.80) per share) (30.6) (6.8) (287.0)
Retained earnings at beginning of year 597.5 604.3 891.3
------ ------ ------
Retained earnings at end of year $566.9 $597.5 $604.3
====== ====== ======
The Notes to Consolidated Financial Statements are an integral
part of these financial statements.
60
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(in millions of dollars)
Year ended December 31,
-------------------------
1995 1994 1993
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(30.6) $(6.8) $(287.0)
Adjustments to reconcile net loss to
net cash provided by (used for)
operating activities -
Depreciation and amortization 214.0 189.7 197.1
Deferred income taxes (131.0) (96.8) (211.5)
Implant charges including
imputed interest 364.5 269.3 640.0
Other 41.7 27.2 18.5
Implant payments (107.3) (240.4) (91.2)
Implant insurance reimbursement 163.5 71.4 -
Restricted insurance proceeds deposit (107.5) - -
Implant deposit - (275.0) -
Changes in assets and liabilities -
Accounts and notes receivable (56.0) (29.2) (44.8)
Inventories (19.2) (11.4) 44.0
Accounts payable 33.1 5.5 18.3
Accrued taxes 17.1 22.4 (24.7)
Other 30.5 11.9 19.2
----- ----- -----
Cash provided by (used for)
operating activities 412.8 (62.2) 277.9
-------- ----- ----- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (204.2) (177.6) (182.3)
Proceeds from sale of assets - - 66.3
Other (6.9) (13.0) 9.6
-------- ------- -------
Cash used for investing
activities (211.1) (190.6) (106.4)
----- ---- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 58.2 92.3 58.8
Payments on long-term debt (57.8) (69.2) (49.9)
Payments on revolving credit agreement - - (100.0)
Proceeds from revolving credit
agreement - 225.0 150.0
Net change in other short-term borrowings(16.9) (57.2) 25.0
---- ------ ------
Cash provided by (used for)
financing activities (16.5) 190.9 83.9
----- ------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1.0 - (0.8)
----- ---- -----
CHANGES IN CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and
cash equivalents 186.2 (61.9) 254.6
Cash and cash equivalents at
beginning of year 201.1 263.0 8.4
----- ----- ------
Cash and cash equivalents at end
of year $387.3 $201.1 $263.0
==== ===== =====
The Notes to Consolidated Financial Statements are an integral
part of these financial statements.
61
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(in millions of dollars except where noted)
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
-------------------------------------------
Dow Corning Corporation (Dow Corning or the Company) was incorporated in 1943 by
Corning Glass Works (now Corning Incorporated) and The Dow Chemical Company (Dow
Chemical) for the purpose of developing and producing polymers and other
materials based on silicon chemistry. Most of the Company's products are based
on polymers known as silicones which have a silicon-oxygen-silicon backbone.
Through various chemical processes, the Company manufactures silicones that have
an extremely wide variety of characteristics, in forms ranging from fluids,
gels, greases and elastomeric materials to resins and other rigid materials.
Silicones combine the temperature and chemical resistance of glass and the
versatility of plastics and, regardless of form or application, generally
possess such qualities as electrical resistance, resistance to extreme
temperatures, resistance to deterioration from aging, water repellency,
lubricating characteristics, relative chemical and physiological inertness, and
resistance to ultraviolet radiation. The Company currently manufactures over
9,000 products and serves approximately 50,000 customers worldwide, with no
single customer accounting for more than three percent of the Company's sales in
1995. Principal United States production plants are located in Kentucky,
Michigan and North Carolina. Principal foreign manufacturing plants are located
in Belgium, Germany, Japan, and the United Kingdom. The Company also owns
research and development facilities in the United States, Belgium, Japan, and
the United Kingdom. Dow Corning's average employment for 1995 was 8,500
persons.
On May 15, 1995, Dow Corning Corporation (the "Debtor Company") voluntarily
filed for protection under Chapter 11 of the U.S. Bankruptcy Code (the
"Bankruptcy Code") with the U.S. Bankruptcy Court for the Eastern District of
Michigan, Northern Division, in Bay City, Michigan (the "Bankruptcy Court").
The Debtor Company consists of a majority of the Company's United States
operations and certain foreign branches. The Debtor Company's Chapter 11
proceeding (the "Chapter 11 Proceeding") does not include any subsidiaries of
the Debtor Company. See Note 4 below for further discussion of this matter.
The consolidated financial statements of the Company have been prepared on a
"going-concern" basis, which contemplates the realization of assets and the
liquidation of liabilities in the ordinary course of business. However, as a
result of the Chapter 11 Proceeding of the Debtor Company, such realization of
assets and liquidation of liabilities is subject to significant uncertainties
including the approval of a plan of reorganization by the Bankruptcy Court.
Also, the ability of the Company to continue as a going concern (including its
ability to meet post-petition obligations of the Debtor Company and to meet
obligations of the subsidiaries of the Debtor Company) is dependent primarily on
(a) the ability of the Company to maintain adequate cash on hand, the ability of
the Company to generate cash from operations, and the ability of the
subsidiaries of the Debtor Company to obtain necessary financing and (b) if
required, the availability of a debtor-in-possession credit facility.
Management believes that conditions (a) and (b) will be satisfied.
The Company's financial statements as of December 31, 1995 have been
presented in conformity with the American Institute of Certified Public
Accountants'StatementofPosition90-7("SOP90-7"),
Financial~Reporting~By~Entities~In~Reorganization~Under~the~Bankruptcy~Code~,
issued November 19, 1990. SOP 90-7 requires a segregation of liabilities
subject to compromise by the Bankruptcy Court as of the bankruptcy filing date
(May 15, 1995) and identification of all transactions and events that are
directly associated with the reorganization of the Debtor Company.
Prior year comparative balances have not been reclassified to conform with
current year balances stated under SOP 90-7. The most significant difference
between the current year and prior year presentations is the reclassification of
substantially all of the Debtor Company's outstanding debt and breast implant
settlement liabilities to the caption "Liabilities Subject to Compromise" in the
accompanying consolidated balance sheet.
The consolidated financial statements do not include any adjustments relating
to the recoverability of recorded asset amounts or the amounts of liabilities
that may result from the Chapter 11 Proceeding. Upon confirmation of a plan of
reorganization by the Bankruptcy Court and if there are no material unsatisfied
conditions precedent to the effectiveness of a confirmed plan of reorganization,
adjustments to the carrying values of the Company's assets and liabilities may
be required to reflect the terms of such plan.
62
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------
Principles of Consolidation
--------------------------
The accompanying consolidated financial statements include the accounts of
Dow Corning Corporation and all of its wholly-owned and majority-owned domestic
and foreign subsidiaries (the Company). The Company's interests in 20% to 50%
owned affiliates are carried on the equity basis and are included in other
assets. Intercompany transactions and balances have been eliminated in
consolidation.
Cash and Cash Equivalents
------------------------
Cash equivalents include all highly liquid investments purchased with an
original maturity of ninety days or less. The carrying amounts for cash
equivalents approximate their fair values.
Inventories
----------
Inventories are stated at the lower of cost or market. The cost of the
majority of inventories is determined using the last-in, first-out (LIFO) method
and the remainder is valued using the first-in, first-out (FIFO) method.
Property and Depreciation
------------------------
Property, plant and equipment are carried at cost and are depreciated
principally using accelerated methods over estimated useful lives ranging from
10 to 20 years for land improvements, 10 to 45 years for buildings and 3 to 20
years for machinery and equipment. Upon retirement or other disposal, the asset
cost and related accumulated depreciation are removed from the accounts and the
net amount, less any proceeds, is charged or credited to income.
Expenditures for maintenance and repairs are charged against income as
incurred. Expenditures which significantly increase asset value or extend
useful asset lives are capitalized.
The Company follows the policy of capitalizing interest as a component of the
cost of capital assets constructed for its own use. Interest capitalized was
$3.3 in 1995, $14.3 in 1994, and $12.0 in 1993.
Investments
----------
The Company accounts for investments in debt and equity securities in
conformity with Statement of Financial Accounting Standards No. 115 ("SFAS
115"),~Accounting~for~Certain~Investments~in~Debt~and~Equity~Securities~.
SFAS 115 requires the use of fair value accounting for trading or available-for-
sale securities, while retaining the use of the amortized cost method for
investments in debt securities that the Company has the positive intent and
ability to hold to maturity.
Intangibles
----------
Other assets include $34.8 and $36.2 of intangible assets at December 31,
1995 and 1994, respectively. Goodwill, representing the excess of cost over net
assets of businesses acquired, is being amortized on a straight-line basis over
10 years. Other identifiable intangible assets are amortized on a straight-line
basis over their estimated useful lives.
Deferred Investment Grants
-------------------------
Included in other long-term liabilities are deferred investment incentives
(grants) which the Company has received related to certain capital expansion
projects in Belgium and the United Kingdom. Such grants are deferred and
recognized in income over the service lives of the related assets. At December
31, 1995 and 1994, gross deferred investment incentives were $96.9 and $89.7
with related accumulated amortization of $79.7 and $72.8, respectively.
63
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------
Income Taxes
-----------
The Company accounts for income taxes in conformity with the provisions of
Statement of Financial Accounting Standards No. 109
("SFAS 109"),~Accounting~for~Income~Taxes~. SFAS 109 requires a company to
recognize deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in a company's financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse.
Research and Development Costs
-----------------------------
Research and development costs are charged to operations when incurred and
are included in manufacturing cost of sales. These costs totaled $194.5 in
1995, $174.0 in 1994 and $163.9 in 1993.
Currency Translation
-------------------
Assets and liabilities of certain foreign subsidiaries are translated into
U.S. dollars at end-of-period exchange rates; translation gains and losses,
hedging activity and related tax effects from these subsidiaries are reported as
a separate component of stockholders' equity. Assets and liabilities of other
foreign subsidiaries are remeasured into U.S. dollars using end-of-period and
historical exchange rates; remeasurement gains and losses, hedging activity and
related tax effects for these subsidiaries are recognized in the statement of
operations. Revenues and expenses for all foreign subsidiaries are translated
at average exchange rates during the period. Foreign currency transaction gains
and losses are included in current earnings.
Interest and Currency Rate Derivatives
-------------------------------------
The Company enters into a variety of interest rate and currency swaps,
interest rate caps and floors, options and forward exchange contracts in its
management of interest rate and foreign currency exposures. The differential to
be paid or received on interest rate swaps, including interest rate elements in
combined currency and interest rate swaps, interest rate caps and floors is
recognized over the life of the agreements as an adjustment to interest expense.
Gains and losses on terminated interest rate instruments that were entered into
for the purpose of changing the nature of underlying debt obligations are
deferred and amortized to income as an adjustment to interest expense. Currency
option premiums are amortized over the option period. Gains and losses on
purchased currency options that are designated and effective as hedges are
deferred and recognized in income in the same period as the hedged transaction.
Realized and unrealized gains and losses on currency swaps, including currency
elements in combined currency and interest rate swaps, and forward exchange
contracts are recognized currently in other income and expense, or, if such
contracts are designated and effective as net investment hedges, in
stockholders' equity.
Use of Estimates
---------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
----------------
Certain reclassifications of prior year amounts have been made to conform to
the presentation adopted in 1995.
64
NOTE 3 - CONTINGENCIES
---------------------
Breast Implant Litigation and Claims - Background
------------------------------------------------
Prior to January 6, 1992, the Company, directly and through its wholly-owned
subsidiary, Dow Corning Wright Corporation, was engaged in the manufacture and
sale of silicone gel breast implants and the raw material components of these
products. As part of a review process initiated in 1991 by the United States
Food and Drug Administration (FDA) of Premarket Approval Applications (PMAA) for
silicone gel breast implants, on January 6, 1992, the FDA asked breast implant
producers and medical practitioners to voluntarily halt the sale and use of
silicone gel breast implants pending further review of the safety and
effectiveness of such devices, and the Company complied with the FDA's request
and suspended shipments of implants. Subsequently, the Company announced that
it would not resume the production or sale of silicone gel breast implants and
that it would withdraw its PMAA for silicone gel breast implants from
consideration by the FDA.
Since late 1991, there has been considerable publicity associated with the
breast implant controversy, and the Company experienced a substantial increase
in the number of lawsuits against the Company relating to breast implants. As of
December 31, 1995, the Company has been named, often together with other
defendants, in approximately 19,000 pending breast implant products liability
lawsuits filed by or on behalf of individuals who claim to have or have had
silicone gel breast implants. Many of these cases involve multiple plaintiffs.
In addition, there were 46 breast implant products liability class action
lawsuits which had been filed against the Company as of December 31, 1995. The
typical alleged factual bases for these lawsuits include allegations that the
plaintiffs' breast implants caused specified ailments, including, among other
things, autoimmune disease, scleroderma, systemic disorders, joint swelling and
chronic fatigue. The Company is sometimes named as the manufacturer of silicone
gel breast implants, and other times the Company is named as the supplier of
silicone raw materials to other breast implant manufacturers. The Company
vigorously asserts, among other defenses, that there is no causal connection
between silicone breast implants and the ailments alleged by the plaintiffs in
these cases. Consolidation of a substantial number of breast implant lawsuits
for pretrial purposes has occurred in the U.S. District Court for the Northern
District of Alabama, (the "Court") and various state courts where a substantial
number of breast implant lawsuits were filed. The Debtor Company's filing for
protection under Chapter 11 of the Bankruptcy Code has resulted in a stay of
this litigation in the United States.
Breast Implant Litigation and Claims - Settlement Agreement
----------------------------------------------------------
On March 23, 1994, the Company, along with other defendants and
representatives of breast implant litigation plaintiffs, entered into a
settlement pursuant to a Breast Implant Litigation Settlement Agreement (as
amended by the Court, the "Settlement Agreement"). Under the Settlement
Agreement, certain industry participants (the "Funding Participants") agreed to
contribute up to approximately $4.2 billion, of which the Company agreed to
contribute up to approximately $2.02 billion, over a period of more than thirty
years. Although the Settlement Agreement covers claims of most breast
implant recipients brought in the courts of U.S. federal and state
jurisdictions, approximately 5,000 U.S. plaintiffs and approximately 2,000
potential foreign claimants elected not to settle their claims by way of the
Settlement Agreement and elected to pursue their individual breast implant
litigation against the Company. Under the terms of the Settlement Agreement, in
certain circumstances, the Company may decide to exercise the option to withdraw
from participation in the settlement. The final approval of the Settlement
Agreement by the U.S. District Court in Alabama on September 1, 1994 has been
appealed to the U.S. Court of Appeals for the Eleventh Circuit primarily by
certain providers of health care indemnity payments or services and by certain
foreign claimants.
On May 1, 1995, the U.S. District Court in Alabama issued a statement
indicating its conclusion that a study of a sample of current disease
compensation settlement fund claims indicated that the total amount of current
claims likely to be approved for payment would substantially exceed the $1.2
billion presently committed under the settlement to pay such claims and that,
accordingly, amounts payable under the current disease compensation settlement
fund would be less than the amounts specified in the Settlement Agreement. On
October 9, 1995, the U.S. District Court in Alabama issued an order indicating
its conclusions that (a) the total amount of claims that would qualify for
payment from the settlement fund would exceed the amount set aside for such
claims, (b) very large numbers of potential claimants participating in the
settlement would elect to opt out of the settlement, (c) the Funding
Participants would not be willing to make their respective contributions to a
settlement which would leave so many potential claims unresolved and the
defendants would, therefore, withdraw from the settlement, and (d) negotiations
relating to possible modifications of the Settlement Agreement were not
successful in eliminating the apparent need for reductions in benefits under the
Settlement Agreement. For the above reasons, the U.S. District Court in Alabama
ordered that all members of the class of potential claimants who did not
initially opt out of the settlement would have the ability to opt out during
another period of indefinite duration commencing December 1, 1995 as envisioned
by the Settlement Agreement. Based on the above conclusions, the U.S. District
Court in Alabama requested that the parties to the Settlement Agreement
negotiate possible modifications of the Settlement Agreement. The Company has
not actively participated in these negotiations and is not a party to any
possible modifications of the Settlement Agreement. The Company has not
withdrawn from, or been released from, the Settlement Agreement. The Company
anticipates that breast implant litigation and claims pending against it will be
resolved pursuant to the Debtor Company's plan of reorganization arising out of
the Debtor Company's Chapter 11 Proceeding (see Note 4 below).
65
NOTE 3 - CONTINGENCIES (Continued)
----------------------
Breast Implant Litigation and Claims - Insurance Matters
-------------------------------------------------------
The Company believes that a substantial portion of the indemnity, settlement
and defense costs related to breast implant lawsuits and claims will be covered
by the Company's products liability insurance. A substantial number of the
Company's insurers have reserved the right to deny coverage, in whole or in
part, due to differing theories regarding, among other things, when coverage may
attach and their respective obligations relative to other insurers. The Company
has a substantial amount of unexhausted claims-made insurance coverage with
respect to lawsuits and claims commencing in 1986 and thereafter. For lawsuits
and claims involving implant dates prior to 1986, substantial coverage exists
under a number of primary and excess occurrence policies having various limits.
Because defense costs and disposition of particular breast implant lawsuits and
claims may be covered, in whole or in part, both by the claims-made coverage
issued from and after 1986, and one or more of the occurrence policies issued
prior to 1986, determination of aggregate insurance coverage depends on, among
other things, how defense and indemnity costs are allocated among the various
policy periods. Also, a number of the breast implant lawsuits pending against
the Company request punitive damages and compensatory damages arising out of
alleged intentional torts. Depending on policy language, applicable law and
agreements with insurers, any such damages which may be awarded pursuant to such
lawsuits may or may not be covered, in whole or in part, by insurance.
Management continues to believe that it is probable that the Company will
recover from its insurers a substantial amount of breast implant related
payments which have been or may be made by the Company. In reaching this
belief, the Company has analyzed its insurance policies, considered its history
of coverage and insurance reimbursement for these types of claims, and consulted
with knowledgeable third parties with significant experience in insurance
coverage matters. This belief is further supported by the fact that the Company
received insurance recoveries of $71.4 in 1994 and $163.5 in 1995 and entered
into settlements with certain insurers for future reimbursement.
Discussions among the Company and its primary insurers have occurred and are
continuing with a view toward reaching an agreement as to the allocation of
costs of breast implant litigation among the various insurers issuing products
liability insurance policies to the Company relative to breast implants and
other products. A significant portion of the anticipated implant insurance
receivable recorded in the financial statements is currently subject to
litigation in Wayne County Michigan Circuit Court (see below). On June 30,
1993, the Company filed a complaint, which was subsequently amended, in the
Superior Court of California against 99 insurance companies which issued
occurrence based products liability insurance policies to the Company from 1962
through 1985 ("Insurers"). The complaint also names as defendants three state
insurance guaranty funds. This action (the "California Action") resulted from
an inability of some of the Insurers to reach an agreement with the Company on a
formula for the allocation among the Insurers of payments of defense and
indemnity expenses submitted by the Company related to breast implant products
liability lawsuits and claims ("Insurance Allocation Agreement"). The
California Action was filed to seek, among other things, a judicial enforcement
of the obligations of the Insurers under the relevant insurance policies. On
September 10, 1993, several of the Company's insurers filed a complaint against
the Company and other insurers for declaratory relief in Wayne County Michigan
Circuit Court (the "Michigan Action"). This complaint raised issues similar to
those described above for determination by the courts. On October 1, 1993, the
Superior Court of California dismissed the California Action on the grounds of
inconvenient forum. In light of this ruling, the Company has elected to
litigate the coverage issues on breast implant products liability lawsuits and
claims in the Michigan Action. A number of these insurers have been dismissed
from this litigation pursuant to settlements reached with the Company.
On March 11, 1994, the court in the Michigan Action ruled that certain of the
Company's primary insurers have a duty to defend the Company with respect to
breast implant products liability lawsuits. These insurers were also directed to
reimburse the Company for certain defense costs previously incurred. On
November 16, 1994, the court ruled in favor of the Company on allocation of
defense costs. On August 11, 1995, the court ruled in favor of the Company on
allocation of indemnity costs. In each instance, the court ruled that each
primary occurrence insurer is obligated to pay the defense costs for all cases
alleging a date of implant either before or during the insurers' policy period
and for all cases involving unknown implant dates.
A trial on the merits of the claims in this litigation has commenced during
the fourth quarter of 1995. Notwithstanding this litigation, the Company is
continuing its negotiations with the Insurers.
66
NOTE 3 - CONTINGENCIES (Continued)
----------------------
Breast Implant Litigation and Claims - Financial Provisions
----------------------------------------------------------
The Company has taken steps in the past to reflect the anticipated financial
consequences to the Company of the breast implant situation. During 1991 and
1992, the Company recorded $25.0 and $69.0, respectively, of pretax costs
related to breast implant matters. In 1993, the Company recorded a pretax
charge of $640.0. This charge included the Company's best estimate, at the
time, of its potential liability for breast implant litigation based on
settlement negotiations, and also included provisions for legal, administrative,
and research costs related to breast implants, for a total of $1.24 billion,
less anticipated insurance recoveries of $600.0. The Company originally
recorded the liability attributable to the Settlement Agreement and the related
insurance receivable on a present value basis. On January 20, 1995, the Company
announced a pretax charge of $241.0 ($151.8 after tax) for the fourth quarter of
1994. This charge reflected the Company's best estimate, at the time, of
additional costs to resolve breast implant litigation and claims outside of the
Settlement Agreement, and included additional provisions for legal,
administrative, and research costs related to breast implants. This pretax
charge of $241.0 consisted of a $647.0 liability less anticipated insurance
recoveries of $406.0. These amounts were recorded on an undiscounted basis.
On May 4, 1995, the Company announced that it was actively considering an
action to seek protection under the reorganization provisions of Chapter 11 of
the U.S. Bankruptcy Code in order to maintain normal business operations while
seeking to resolve breast implant litigation and other liabilities through the
Chapter 11 reorganization process. On May 15, 1995, the Debtor Company
voluntarily filed for protection under Chapter 11 of the Bankruptcy Code (see
Note 4 below). As a result of the uncertainty associated with the Debtor
Company's filing for protection under Chapter 11 of the Bankruptcy Code,
management could no longer make the assessment that the amount and timing of the
settlement payments were reliably determinable as required by relevant
accounting rules. Therefore, on July 17, 1995, the Company announced a pretax
charge for the second quarter of 1995 of $351.1 ($221.2 after tax) to abandon
the present value treatment of the liability attributable to the Settlement
Agreement and the related insurance receivable.
The implant reserves reflected in the accompanying Consolidated Balance
Sheets are principally attributable to the Company's best estimate, at the time,
of its liability associated with the Settlement Agreement and the Company's best
estimate, at the time, of its liability to resolve breast implant litigation and
claims outside of the Settlement Agreement. Based on information currently
available and due to the uncertainty associated with the Debtor Company's filing
for protection under Chapter 11 of the Bankruptcy Code, management cannot
currently estimate the ultimate cost of resolving breast implant litigation and
claims. Notwithstanding the inherent uncertainties associated with estimating
the ultimate cost of resolving breast implant litigation and claims, management
believes it has accrued amounts required under generally accepted accounting
principles. The Company has not revised its implant reserves since the Debtor
Company's filing for protection under Chapter 11 of the Bankruptcy Code except
for the second quarter charge referred to above. The Company anticipates that
the ultimate cost to resolve breast implant litigation and claims will be
estimated for purposes of determining the feasibility of any plan of
reorganization during the Debtor Company's Chapter 11 Proceeding (see Note 4
below). As additional facts and circumstances develop, it is at least
reasonably possible that the estimate may be revised or provisions may be
necessary in the near term to reflect any additional costs of resolving breast
implant litigation and claims. Future revisions or provisions, if required,
could have a material effect on the Company's financial position or results of
operations in the period or periods in which such revisions or provisions are
recorded.
The anticipated implant insurance receivable recorded in the accompanying
Consolidated Balance Sheets is the result of the provisions described above; a
substantial portion of this anticipated implant insurance receivable relates to
insurers who provided coverage on an occurrence basis. The principal
uncertainties which exist with respect to the ultimate realization of this asset
include the ultimate cost of resolving breast implant litigation and claims, the
ultimate results of ongoing litigation against and settlement negotiations with
insurers, and the extent to which insurers may become insolvent in the future.
The Company took these factors into account when estimating the amount of
insurance recovery to record in the financial statements. Specifically, the
Company selected an allocation theory which is consistent with recent
developments in the ongoing insurance litigation. Additionally, an allowance
for insolvent insurers has been provided. As additional facts and circumstances
develop, it is at least reasonably possible that the estimate may be revised in
the near term. Future revisions or provisions, if required, could have a
material effect on the Company's financial position or results of operations in
the period or periods in which such revisions or provisions are recorded.
Notwithstanding the above, the Company believes that it is probable that the
anticipated implant insurance receivable recorded in the accompanying
Consolidated Balance Sheet at December 31, 1995 will ultimately be realized.
67
NOTE 3 - CONTINGENCIES (Continued)
----------------------
Securities Laws Class Action Lawsuits
------------------------------------
As of December 31, 1995, the Company and certain of its former and present
directors and officers were named, as defendants with others, in two securities
laws class action lawsuits filed by purchasers of stock of Corning Incorporated
(Corning) and The Dow Chemical Company (Dow Chemical). These cases were
originally filed as several separate cases in the Federal District Court for the
Southern District of New York in the first quarter of 1992; these cases were
consolidated in the second quarter of 1992 so that there is one case involving
claims on behalf of purchasers of stock of Corning and one case involving claims
on behalf of purchasers of stock of Dow Chemical. The plaintiffs in these cases
allege, among other things, misrepresentations and omissions of material facts
and breach of duty with respect to purchasers of stock of Corning and Dow
Chemical relative to the breast implant issue. The relief sought in these cases
is monetary damages in unspecified amounts. Motions to dismiss both cases have
been filed by all defendants. The Debtor Company's filing for protection under
Chapter 11 of the Bankruptcy Code has resulted in a stay of this litigation with
respect to the Debtor Company.
Shareholder Derivative Lawsuits
------------------------------
As of December 31, 1995, the Company and/or certain of its former and present
directors and officers were named in three shareholder derivative lawsuits filed
by shareholders of Corning and Dow Chemical. The plaintiffs in these cases
allege various breaches of fiduciary duties claimed to be owed by the defendants
relative to the breast implant issue. The relief sought by the shareholders
filing these suits on behalf of Dow Chemical and Corning is monetary damages in
unspecified amounts. Motions to dismiss these cases have been filed by all
defendants. The Debtor Company's filing for protection under Chapter 11 of the
Bankruptcy Code has resulted in a stay of this litigation with respect to the
Debtor Company.
Environmental Matters
--------------------
The Company has been advised by the United States Environmental Protection
Agency (EPA) or by similar state regulatory agencies that the Company, together
with others, is a Potentially Responsible Party (PRP) with respect to a portion
of the cleanup costs and other related matters involving a number of abandoned
hazardous waste disposal facilities. Management believes that there are 13
sites at which the Company may have some liability, although management
currently expects to settle the Company's liability for a majority of these
sites for de minimis amounts. Based upon preliminary estimates by the EPA or the
PRP groups formed with respect to these sites, the aggregate liabilities for all
PRPs at these sites at which management currently believes the Company may have
more than the de minimis liability is $99.0. Management cannot currently
estimate the aggregate liability for all PRPs at those sites at which management
expects the Company has a de minimis liability.
The Company records accruals for environmental matters when it is probable
that a liability has been incurred and the Company's costs can be reasonably
estimated. The amount accrued for environmental matters at December 31, 1995
was $15.7, although possible costs could range up to $28.0. While there are a
number of uncertainties with respect to the Company's estimate of its ultimate
liability for cleanup costs at these sites, it is the opinion of the Company
that the possibility that costs in excess of those accrued or disclosed will
have a material adverse impact on the Company's consolidated financial position
or results of operations is remote. This opinion is based upon the number of
identified PRPs at each site, the number of such PRPs that are believed by
management to be financially capable of paying their share of the ultimate
liability, and the portion of waste sent to the sites for which management
believes the Company might be held responsible based on available records.
However, due to uncertainties inherent in the estimation process, it is at least
reasonably possible that the amount accrued for environmental matters could be
further revised in the near term.
68
NOTE 3 - CONTINGENCIES (Continued)
----------------------
Other Litigation
---------------
Due to the nature of its business as a supplier of specialty materials to a
variety of industries, the Company, at any particular time, is a defendant in a
number of products liability lawsuits for injury allegedly related to the
Company's products, and, in certain instances, products manufactured by others.
Many of these lawsuits seek damages in substantial amounts. For example, the
Company has been named in products liability lawsuits pertaining to materials
previously used in connection with temporomandibular joint implant applications
and raw materials supplied by the Company to manufacturers of the NORPLANT(R)
Implant contraceptive device (NORPLANT(R) is a registered trademark of the
Population Council for Subdermal Levonorgestrel Implants). The Company has
followed a practice of aggressively defending all products liability claims
asserted against it. Although the Company intends to continue this practice,
currently pending proceedings and any future claims are subject to the
uncertainties attendant to litigation and the ultimate outcome of any such
proceedings or claims cannot be predicted with certainty. The prosecution of
lawsuits and claims against the Debtor Company has been stayed in the U.S. as a
result of the Debtor Company's filing for protection under Chapter 11 of the
Bankruptcy Code. The Company believes that these products liability claims will
not have a material adverse effect on the Company's consolidated results of
operations or financial condition. However, the Company anticipates that the
ultimate cost to resolve these claims will be estimated during the Debtor
Company's Chapter 11 Proceeding.
NOTE 4 - PROCEEDING UNDER CHAPTER 11
-----------------------------------
On May 15, 1995, Dow Corning Corporation (the "Debtor Company") voluntarily
filed for protection under Chapter 11 of the U.S. Bankruptcy Code (the
"Bankruptcy Code") with the U.S. Bankruptcy Court for the Eastern District of
Michigan, Northern Division, in Bay City, Michigan (the "Bankruptcy Court").
The Debtor Company consists of a majority of the Company's United States
operations and certain foreign branches. The Debtor Company's Chapter 11
proceeding (the "Chapter 11 Proceeding") does not include any subsidiaries of
the Debtor Company. This action was taken because (a) the Debtor Company was
not satisfied with the rate of progress toward resolving breast implant
litigation outside of the Settlement Agreement, (b) the Debtor Company was not
satisfied with the rate of progress toward achieving commitments from certain of
the Company's insurers relative to insurance recovery and (c) the Debtor Company
was concerned by the uncertainty associated with the Court's conclusions
relative to the Settlement Agreement (see Note 3 above for a further discussion
of these matters).
The Debtor Company is operating as a debtor-in-possession under the
supervision of the Bankruptcy Court. As a debtor-in-possession, the Debtor
Company is authorized to operate its business but may not engage in transactions
outside the ordinary course of its business without the approval of the
Bankruptcy Court.
Subject to certain exceptions under the Bankruptcy Code, the Debtor Company's
Chapter 11 filing automatically stayed the continuation of any judicial or
administrative proceedings against the Debtor Company. The Debtor Company has
filed notices to remove certain claims and causes of action asserted by
plaintiffs from state courts to federal courts. The Debtor Company has also
filed a motion seeking to transfer certain claims and causes of action asserted
by plaintiffs from these federal courts to the federal district court having
jurisdiction over the Debtor Company's bankruptcy case (the U.S. District Court
for the Eastern District of Michigan, the "U.S. District Court in Michigan").
On September 13, 1995, the U.S. District Court in Michigan granted the Debtor
Company's motion to transfer certain claims and causes of action asserted by
plaintiffs to the U.S. District Court in Michigan. This court also ruled that
if trials ultimately proceed, they should be conducted in either the U.S.
District Court in Michigan or the U.S. district court for the district in which
the claim arose. The purpose of this motion was to lay a foundation for the
eventual consolidation of these claims for purposes of a threshold "common
issues" trial on the core issue, among others, of whether silicone gel breast
implants cause the diseases claimed by those who assert such claims. The U.S.
District Court in Michigan also suggested that a "common issues" trial could
proceed, if needed, in connection with the Bankruptcy Court's estimation of
products liability claims against the Debtor Company during the Debtor Company's
Chapter 11 Proceeding.
Any creditor actions to obtain possession of property from the Debtor Company
are also stayed by the Chapter 11 Proceeding. As a result, the creditors of the
Debtor Company are precluded from collecting pre-petition debts without the
approval of the Bankruptcy Court. Certain pre-petition liabilities have been
paid after obtaining the approval of the Bankruptcy Court, including certain
wages and benefits of employees and obligations to certain foreign vendors.
The U.S. Trustee has appointed a Committee of Unsecured Creditors and a
Committee of Tort Claimants (together, the "Creditor Committees") in the Chapter
11 Proceeding. In accordance with the provisions of the Bankruptcy Code, these
parties represent the diversity of interests of the entire constituency that
each committee is appointed to serve and have the right to be heard with respect
to transactions outside the ordinary course of business and other matters
arising in the Chapter 11 Proceeding.
69
NOTE 4 - PROCEEDING UNDER CHAPTER 11 (Continued)
------------------------------------
The Bankruptcy Court so far has denied the Debtor Company's request to
establish a deadline (a bar date) for creditors to file claims against the
Debtor Company. Upon the establishment of a bar date in the future, creditors
who are required to file claims but fail to meet the deadline would be barred
from voting upon or receiving distributions under any plan of reorganization.
On June 24, 1995 and June 30, 1995, notices were mailed to the creditors of the
Debtor Company advising them of the Chapter 11 Proceeding and advising them of
the first meeting of creditors, which was held on July 14, 1995.
The Debtor Company had the exclusive right to file a plan of reorganization
for 120 days after its Chapter 11 filing (the "Exclusivity Period") and 60
additional days to obtain necessary acceptances of such plan. Such periods may
be extended at the discretion of the Bankruptcy Court, but only on a showing of
cause. The Debtor Company requested an extension, and, on September 7, 1995,
the Bankruptcy Court extended the Exclusivity Period to March 11, 1996. If the
Debtor Company fails to submit a plan of reorganization and achieve acceptance
thereof within the Exclusivity Period, as extended, or any additional extensions
thereof, any creditor has the right to file a plan of reorganization with the
Bankruptcy Court and solicit acceptances thereof.
Confirmation of a plan of reorganization requires, among other things,
acceptance of the plan by the affirmative vote (in excess of 50% of the number
and in excess of 66 2/3% of the dollar amount of the claims) of the creditors
who vote in each class of creditors whose claims are impaired by the plan of
reorganization. Alternatively, absent the requisite approvals, the Bankruptcy
Court may approve the Debtor Company's plan of reorganization under the
"cramdown" provisions of the Bankruptcy Code, assuming certain tests are met.
The condensed financial statements of the Debtor Company are presented as
follows:
NOTE 4 - PROCEEDING UNDER CHAPTER 11 (Continued)
------------------------------------
DOW CORNING CORPORATION
-----------------------
DEBTOR COMPANY CONDENSED BALANCE SHEET
-------------------------------------
(in millions of dollars)
ASSETS
------
December 31,
1995
-------
CURRENT ASSETS:
Cash and cash equivalents $ 223.0
------
Short-term investments 3.0
------
Accounts and notes receivable -
Trade (less allowance for doubtful accounts
of $2.0 in 1995) 115.0
Receivable from subsidiaries 381.7
Anticipated implant insurance receivable 265.0
Other receivables 27.4
------
789.1
------
Inventories 136.6
------
Other current assets -
Deferred income taxes 64.8
Implant deposit 275.0
Other 25.1
-----
364.9
------
Total current assets 1,516.6
------
INVESTMENTS:
Equity in unconsolidated subsidiaries 676.6
------
PROPERTY, PLANT AND EQUIPMENT: 1,601.9
Less - Accumulated depreciation (1,046.1)
-------
555.8
------
OTHER ASSETS:
Anticipated implant insurance receivable 1,126.0
Restricted insurance proceeds 108.3
Deferred income taxes 460.8
Receivable from subsidiaries 31.3
Other 34.1
-----
1,760.5
------
$4,509.5
=======
71
NOTE 4 - PROCEEDING UNDER CHAPTER 11 (Continued)
------------------------------------
DOW CORNING CORPORATION
-----------------------
DEBTOR COMPANY CONDENSED BALANCE SHEET
-------------------------------------
(in millions of dollars except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------
December 31,
1995
-------
CURRENT LIABILITIES:
Trade accounts payable $ 52.3
Payable to subsidiaries 16.9
Accrued payrolls and employee benefits 29.7
Other current liabilities 48.1
-----
Total current liabilities 147.0
------
OTHER LONG-TERM LIABILITIES:
Other 62.0
------
LIABILITIES SUBJECT TO COMPROMISE:
Trade accounts payable 46.6
Payable to subsidiaries 149.5
Accrued employee benefits 181.4
Accrued taxes 21.7
Implant reserve 2,471.5
Notes payable 375.0
Long-term debt 273.4
Other 134.5
------
3,653.6
------
STOCKHOLDERS' EQUITY:
Common stock, $5 par value - 2,500,000 shares
authorized and outstanding 12.5
Retained earnings 566.9
Cumulative translation adjustment 67.5
------
Stockholders' equity 646.9
------
$4,509.5
=======
72
NOTE 4 - PROCEEDING UNDER CHAPTER 11 (Continued)
------------------------------------
DOW CORNING CORPORATION
-----------------------
DEBTOR COMPANY CONDENSED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
----------------------------------------------------------------------
(in millions of dollars)
Year ended
December 31, 1995
----------------
NET SALES (includes $646.7 of sales
to subsidiaries) $1,583.4
OPERATING COSTS AND EXPENSES:
Manufacturing cost of sales 1,127.9
Marketing and administrative expenses 226.1
Implant costs 351.1
------
1,705.1
------
OPERATING LOSS (121.7)
OTHER INCOME (EXPENSE):
Interest income 27.0
Currency gains (losses) and other, net 9.2
Interest expense (31.6)
------
LOSS BEFORE REORGANIZATION COSTS AND INCOME TAXES (117.1)
Reorganization costs 21.0
------
LOSS BEFORE INCOME TAXES (138.1)
Income tax benefit (62.3)
------
NET LOSS (75.8)
Earnings of unconsolidated subsidiaries
and related eliminations 45.2
Retained earnings at beginning of year 597.5
------
Retained earnings at end of year $ 566.9
======
73
NOTE 4 - PROCEEDING UNDER CHAPTER 11 (Continued)
------------------------------------
DOW CORNING CORPORATION
-----------------------
DEBTOR COMPANY CONDENSED STATEMENTS OF CASH FLOWS
-------------------------------------------------
(in millions of dollars)
Year ended
December 31, 1995
----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(75.8)
Adjustments to reconcile net loss to net
cash provided by operating activities -
Depreciation and amortization 110.7
Deferred income taxes (122.3)
Implant charges including
imputed interest 364.5
Other 26.0
Implant payments (107.3)
Implant insurance reimbursement 163.5
Restricted insurance proceeds deposit (107.5)
Changes in assets and liabilities -
Accounts and notes receivable (154.9)
Inventories (11.3)
Accounts payable 114.9
Accrued taxes (5.1)
Other 6.9
-----
Cash provided by operating activities 202.3
-----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (70.1)
Other 7.5
-------
Cash used for investing activities (62.6)
------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (5.7)
Net change in other short-term borrowings (15.0)
-----
Cash used for financing activities (20.7)
------
CHANGES IN CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents 119.0
Cash and cash equivalents at beginning of year 104.0
-----
Cash and cash equivalents at end of year $223.0
=====
74
NOTE 4 - PROCEEDING UNDER CHAPTER 11 (Continued)
------------------------------------
The financial statements of the Debtor Company reflect transactions of the
Debtor Company and transactions between the Debtor Company and all subsidiaries
of the Debtor Company. The Debtor Company Condensed Statement of Operations and
Retained Earnings includes $646.7 of sales to subsidiaries in the caption "NET
SALES." These sales are conducted at prices substantially comparable to those
which would prevail in open-market transactions between unrelated parties.
While operating in the Chapter 11 Proceeding, the Debtor Company is generally
prohibited from paying interest on unsecured pre-petition debts of the Debtor
Company. During such time as the Debtor Company is operating in the Chapter 11
Proceeding, it will only report interest expense to the extent that such
interest will be paid during the Chapter 11 Proceeding at the direction or with
the approval of the Bankruptcy Court. The amount of interest that has not been
accrued as a result of the Chapter 11 Proceeding amounted to $30.9 ($19.6 after
tax) for the period May 15, 1995 through December 31, 1995. In accordance with
the provisions of Statement of Financial Accounting Standards No. 34,
~Capitalization~of~Interest~Cost,~$6.6 ($4.2 after tax) of this amount would
have been capitalized as part of the historical cost of acquiring certain
assets.
The Debtor Company has incurred and will continue to incur significant costs
associated with the reorganization. The aggregate amount of these expenses,
which are being expensed as incurred, may have a material adverse impact on the
Company's results of operations in future periods. These costs are recorded
under the caption "Reorganization costs" in the accompanying Statements of
Operations and Retained Earnings.
The accompanying Debtor Company Condensed Statement of Operations and
Retained Earnings reflects interest income of $27.0 for the year ended December
31, 1995. The Company cannot reasonably estimate the amount of interest income
that the Debtor Company has earned as a result of the Chapter 11 Proceeding.
As a result of its filing for protection under Chapter 11 of the Bankruptcy
Code, the Debtor Company is in default on its debt agreements. All outstanding
debt of the Debtor Company as of May 15, 1995 has been presented under the
caption "Liabilities Subject to Compromise" in the accompanying Balance Sheets.
NOTE 5 - SALE OF ASSETS
-----------------------
On July 1, 1993, the Company sold the metal orthopedic device assets for
approximately $66.3 in cash. The Company's investment in such assets was
approximately $70.0, most of which represented current assets. The sale of the
metal orthopedic device business did not have a material effect on the Company's
consolidated net sales, financial position or results of operations.
NOTE 6 - FOREIGN CURRENCY
-------------------------
Following is an analysis of the changes in the cumulative translation
adjustment:
1995 1994 1993
--- --- ---
Balance, beginning of year $66.2 $31.6 $28.3
Translation adjustments and
gains (losses) from certain
hedges and intercompany
balances (4.2) 31.3 (0.2)
Income tax effect of current
year activity 5.5 3.3 3.5
---- ---- -----
Balance, end of year $67.5 $66.2 $31.6
==== ==== ====
Net foreign currency gains (losses) currently recognized in income amounted
to $(4.5) in 1995, $(4.8) in 1994, and $(8.1) in 1993.
75
NOTE 7 - RECEIVABLES SOLD
-------------------------
Prior to the Debtor Company's filing for protection under Chapter 11 of the
Bankruptcy Code, the Debtor Company sold on an ongoing basis substantially all
of its U.S. trade receivables, with limited recourse, to Bay Asset Funding
Corporation ("BAFC"), a wholly owned but separate corporate entity of the Debtor
Company. BAFC had agreements in place with third parties whereby it could sell
on an ongoing basis fractional ownership interests in such trade receivables,
with limited recourse, for a purchase price of up to $65.0. The agreements
contemplated that (a) the trade receivables sold to BAFC by the Debtor Company
are solely the assets of BAFC, (b) the creditors of BAFC are separate from the
creditors of the Company, and (c) in the event of a liquidation of BAFC, such
creditors would be entitled to satisfy their claims from BAFC's assets prior to
any distribution to the Company.
As of December 31, 1995, the Company had no amounts outstanding under these
agreements. Net of related reserves, the amount of receivables sold under these
agreements which remained uncollected at December 31, 1994 was $32.0. The sale
of such receivables under these agreements resulted in net proceeds of
approximately $28.3 in 1995 and $62.6 in 1994. The sale of such receivables
under previous agreements resulted in net proceeds of $74.7 in 1993.
NOTE 8 - RESTRICTED ASSETS
--------------------------
In connection with the Settlement Agreement (as further described in Note 3
above), the Company has entered into an agreement whereby $275.0 is restricted
to use for future breast implant settlement payments. Accordingly, this amount
is included in the caption "Implant deposit" in the accompanying consolidated
balance sheet. This amount is also subject to the provisions of a related
escrow agreement. Among other things, this escrow agreement appoints an
independent escrow agent and defines permitted investments. These permitted
investments include cash equivalents, repurchase agreements, corporate or
municipal bonds or similar instruments having a rating no lower than investment
grade, equity securities of any companies having a public debt rating of no
lower than investment grade, or mutual funds that invest principally in the
types of investments described above. The aggregate fair value of these
investments approximates carrying value at December 31, 1995.
In addition, $107.5 of proceeds from settlements with insurers and $0.8 of
related investment income is restricted as to its use pursuant to an order of
the Bankruptcy Court. Accordingly, $108.3 is included in the caption
"Restricted insurance proceeds" in the accompanying consolidated balance sheet.
At December 31, 1995, this amount is invested in cash equivalents. These
proceeds relate to settlements of policies which name the Company and The Dow
Chemical Company as co-insureds. The Company and/or The Dow Chemical Company
will have access to these proceeds for the purpose of, among other things,
reimbursement of specified indemnity and expense payments under conditions
prescribed by (and subject to approval of) the Bankruptcy Court.
A substantial portion of the "Implant insurance receivable" recorded in the
accompanying consolidated balance sheets relates to policies which name the
Company and The Dow Chemical Company as co-insureds. The Company anticipates
that future settlements of policies which name the Company as a co-insured will
be subject to approval of the Bankruptcy Court and restricted in a manner
similar to that described above. Notwithstanding the above, the Company
believes that it is probable that it will have access to such restricted funds
sufficient to ultimately realize the implant insurance receivable recorded in
the accompanying consolidated balance sheet.
NOTE 9 - INVENTORIES
--------------------
Following is a summary of inventories by costing method at December 31:
1995 1994
--- ---
Raw material, work-in-process
and finished goods:
Valued at LIFO $212.7 $204.7
Valued at FIFO 116.3 103.7
---- ----
$329.0 $308.4
===== =====
Under the dollar value LIFO method used by the Company, it is impracticable
to separate inventory values by classifications. Inventories valued using LIFO
at December 31, 1995 and 1994 are stated at approximately $67.5 and $69.5,
respectively, less than they would have been if valued at replacement cost.
76
NOTE 10 - INVESTMENTS
---------------------
Excluding investments accounted for on the equity basis, the carrying amount
for investments at December 31, 1995 and 1994 was $40.0 and $27.6, respectively.
These investments consist principally of investments in debt and equity
securities and have been classified as "available for sale" in accordance with
Statement of Financial Accounting Standards No.
115,~Accounting~for~Certain~Investments~in~Debt~and~Equity~Securities~. The
aggregate fair value of these investments approximates carrying value, and there
were no material realized or unrealized gains or losses at December 31, 1995 or
1994. Fair values are determined based on quoted market prices or, if quoted
market prices are not available, on market prices of comparable instruments.
Investments are included in the captions "Short-term investments" and "Other
assets" in the accompanying consolidated balance sheets.
NOTE 11 - NOTES PAYABLE AND CREDIT FACILITIES
--------------------------------------------
Notes payable at December 31 consisted of the following:
1995 1994
--- ---
CURRENT LIABILITIES:
Revolving Credit Agreement $ - $375.0
Other bank borrowings 14.7 29.9
---- ----
$14.7 $404.9
==== =====
LIABILITIES SUBJECT TO COMPROMISE:
Revolving Credit Agreement $375.0 $ -
===== ===
During 1993, the Debtor Company entered into a Revolving Credit Agreement
with 16 domestic and foreign banks which provided for borrowings on a revolving
credit basis until November 1997 of up to $400.0. Under the provisions of the
Revolving Credit Agreement, the Debtor Company is subject to certain debt
restrictions and provisions. As a result of its filing for protection under
Chapter 11 of the Bankruptcy Code on May 15, 1995 (see Note 4 above), the Debtor
Company is in default on its debt agreements, including the Revolving Credit
Agreement. At May 15, 1995, the interest rate on amounts outstanding under the
Revolving Credit Agreement was 7.13%. While operating in the Chapter 11
Proceeding, the Debtor Company is prohibited from paying interest on unsecured
pre-petition debts including the debt incurred under the Revolving Credit
Agreement. The Company is unable to estimate the fair value of the debt
incurred under the Revolving Credit Agreement due to the uncertainty associated
with the Debtor Company's filing for protection under Chapter 11 of the
Bankruptcy Code.
Amounts outstanding under short-term lines of credit are liabilities of the
subsidiaries of the Debtor Company and are described as "Other bank borrowings"
in the table above. The carrying amounts of these short-term borrowings
approximate their fair value.
77
NOTE 12 - LONG-TERM DEBT
-----------------------
Long-term debt at December 31 consisted of the following:
1995 1994
--- ---
LONG-TERM DEBT:
9.375% Debentures due 2008 $ - $75.0
8.15% Debentures due 2029 - 50.0
8.125%-9.5% Medium-term Notes
due 1995-2001,
8.82% average rate at
December 31, 1994 - 36.5
5.77% Term Loans, maturing
serially 1995-1999 - 26.6
Variable-rate Notes due 1995-1998,
5.9%-6.984% at December 31, 1994 - 123.3
Variable-rate Note, maturing
serially 1997-1999,
7.193% at December 31, 1995 20.0 20.0
Variable-rate Revolving Credit
Agreement expiring 1999,
7.218% at December 31, 1995 50.0 -
Variable-rate Notes due 1998-2003,
5.5%-7.938% at December 31, 1995 25.1 -
5.55% Japanese Yen Notes due 1996-1998 - 29.7
Other obligations due 1996-1999 24.4 15.9
---- ----
119.5 377.0
Less - Payments due within one year 8.7 41.9
---- ----
$110.8 $335.1
===== =====
LIABILITIES SUBJECT TO COMPROMISE:
9.375% Debentures due 2008 $75.0 $ -
8.15% Debentures due 2029 50.0 -
8.125%-9.5% Medium-term Notes
due 1995-2001,
8.71% average rate at
December 31, 1995 34.5 -
Variable-rate Notes due 1995-1998,
6.688%-7.234% at December 31, 1995 84.8 -
5.55% Japanese Yen Notes due 1998 29.1 -
---- ---
$273.4 $ -
===== ===
Due to the Debtor Company's filing for protection under Chapter 11 of the
Bankruptcy Code (see Note 4 above), long-term debt of the Debtor Company was
reclassified in 1995 to the caption "LIABILITIES SUBJECT TO COMPROMISE" in the
table above and in the accompanying Consolidated Balance Sheets. At December
31, 1995, the amount shown under the caption "LONG-TERM DEBT" in the table above
represents long-term debt of the subsidiaries of the Debtor Company.
At December 31, 1995, the fair value of the long-term debt of the
subsidiaries of the Debtor Company approximated the book value of $119.5. The
Company is unable to estimate the fair value of the long-term debt of the Debtor
Company at December 31, 1995 due to the uncertainty associated with the Debtor
Company's filing for protection under Chapter 11 of the Bankruptcy Code. At
December 31, 1994, the fair value of the long-term debt of the Company
approximated the book value of $377.0. The fair value was based largely on
interest rates offered on U.S. Treasury obligations with comparable maturities
using discounted cash flow analysis. These rates were not adjusted to reflect
the premium that the Company might pay over U.S. Treasury rates.
As a result of its filing for protection under Chapter 11 of the Bankruptcy
Code, the Debtor Company is in default on its debt agreements.
The provisions of the 9.375% and 8.15% debentures state that the debentures
are not redeemable by the Company prior to their maturity; however, the
provisions of the 8.15% debentures state that the holder may elect to have all
or a portion of their debentures repaid on October 15, 1996 at 100% of the
principal amount.
78
NOTE 12 - LONG-TERM DEBT (Continued)
------------------------
Annual aggregate maturities of the long-term debt of the subsidiaries of the
Debtor Company are: $8.7 in 1996, $1.6 in 1997, $28.7 in 1998, $65.4 in 1999,
$0.3 in 2000, and $14.8 thereafter.
While operating in the Chapter 11 Proceeding, the Debtor Company is
prohibited from paying interest on unsecured pre-petition debts of the Debtor
Company. Cash paid during the year for interest, net of amounts capitalized,
was $34.5 in 1995, $40.7 in 1994, and $31.8 in 1993.
NOTE 13 - INTEREST AND CURRENCY RATE DERIVATIVES
-----------------------------------------------
The Company utilizes a variety of financial instruments, several with off-
balance sheet risks, in its management of current and future interest rate and
foreign currency exposures. These financial instruments include interest rate
swaps, interest rate caps and floors, interest rate options, currency swaps, and
forward exchange contracts.
These instruments involve, to varying degrees, elements of credit and market
risk in excess of the amount recognized in the consolidated balance sheet.
Methods used by the Company to monitor and control credit risk include limiting
counterparties to only major banks and substantial financial institutions and
monitoring the credit-worthiness of these counterparties on an ongoing basis.
In the event of default by a counterparty, the risk in these transactions is
limited to the cost of replacing the instrument at current market rates. The
contract or notional amounts of these instruments are used to measure the volume
of these agreements and do not represent exposure to credit loss. Methods used
by the Company to monitor and control market risk include entering into
offsetting positions that essentially counterbalance with each other and
continued monitoring of market conditions. Although the Company may be exposed
to losses in the event of nonperformance by counterparties and interest and
currency rate movements, it does not anticipate significant losses due to these
financial arrangements.
The Company enters into interest rate swaps to exchange fixed and variable
interest payment obligations without an exchange of the underlying principal
amounts in order to manage interest rate exposures. The Company also enters
into interest rate caps and floors, and interest rate options in order to
transfer, modify, or reduce interest rate risk. These instruments are used to
hedge specific elements of the Company's debt portfolio. Hedge accounting is
used to recognize the differential to be paid or received as an adjustment to
interest expense over the life of the agreements. There were no interest rate
swaps, interest rate caps or floors, or interest rate options outstanding at
December 31, 1995. Interest rate swaps, interest rate caps and floors, and
interest rate options outstanding at December 31, 1994 are shown in the
following table.
December 31, 1994
------------------------------
Weighted
Fair BookNotional Average
Value Value Amount Maturity
---- ---- ----- -------
Interest rate swaps where
the Company pays
fixed rates $1.8 $(1.4)$190.0 5.6 years
Interest rate swaps where the
Company pays
variable rates (2.5) 0.2 115.0 2.5 years
Interest rate caps (0.2) 0.9 55.0 1.4 years
Interest rate floors (0.3) - 40.0 1.9 years
Interest rate options (1.6) - 80.0 4.4 years
All interest rate swaps, interest rate caps and floors, and interest rate
options were terminated on May 15, 1995 when the Debtor Company filed for
protection under Chapter 11 of the Bankruptcy Code (see Note 4 above). The
termination of these financial instruments did not have a material impact on the
Company's financial condition or results of operations. There were no deferred
gains or losses related to interest rate swaps, interest rate caps and floors,
or interest rate options as of December 31, 1995.
The fair value of interest rate swaps, interest rate caps and floors, and
interest rate options is estimated by obtaining quoted market prices of
comparable instruments, adjusted through interpolation where necessary for
maturity differences. The fair values shown above represent the amount the
Company would receive (or pay, if denoted by brackets) to terminate the
agreements at the reporting date.
79
NOTE 13 - INTEREST AND CURRENCY RATE DERIVATIVES (Continued)
------------------------------------------------
The Company enters into currency swaps, currency options, and forward
exchange contracts primarily to hedge working capital not denominated in
functional currencies. Gains and losses on these contracts are recognized
concurrent with the gains and losses from the associated exposures. Currency
swaps and forward exchange contracts are shown in the following table.
December 31, 1995 December 31, 1994
-------------------- --------------------
Weighted Weighted
Book Notional Average Book Notional Average
Value Amount Maturity Value Amount Maturity
---- ----- ------- ---- - ----
- -------
Currency swaps $ - $ - - $(34.3)
$100.02.0 years
Forward exchange
contracts:
-to buy British Pounds 0.3 20.6 * (1.1)
95.1 *
-to sell British Pounds(0.1) 10.8 * 2.8
129.4 *
-to buy ECU - 9.4 * (0.3)
15.4 *
-to sell ECU (0.5) 68.0 * (0.1)
23.3 *
-to buy German Marks - 8.0 * (0.4)
18.1 *
-to sell German Marks - 1.3 * 0.6
33.8 *
-to buy Japanese Yen (0.1) 2.5 * (2.8)
62.7 *
-to sell Japanese Yen 0.5 17.2 * 0.2
10.1 *
-to buy other currencies0.2 17.6 * (0.2)
22.6 *
-to sell other currencies (0.9) 90.0 *
0.452.3 *
*Weighted average maturity is less than one year.
The fair value of currency swaps is estimated by obtaining quoted market
prices of comparable instruments, adjusted through interpolation where necessary
for maturity differences. The fair value of forward exchange contracts is
estimated by obtaining quotes from brokers. The book values of these
instruments approximate fair values.
NOTE 14 - POST EMPLOYMENT BENEFITS
---------------------------------
The Company maintains defined benefit employee retirement plans covering most
domestic and certain foreign employees. The Company also has various defined
contribution and savings plans covering certain employees. Plan benefits for
defined benefit employee retirement plans are based primarily on years of
service and compensation. The Company's funding policy is consistent with
national laws and regulations. Plan assets include marketable equity
securities, insurance contracts, corporate and government debt securities, real
estate and cash.
The components of pension expense for the Company's domestic and foreign
plans are set forth below.
1995 1994 1993
--- --- ---
Defined benefit plans:
Service cost
(benefits earned during
the period) $19.5 $20.9 $16.1
Interest cost on projected
benefit obligations 48.1 43.9 38.0
Actual return on plan assets (110.7) 0.2 (73.4)
Net amortization 3.6 4.7 1.6
Difference between actual
and expected
return on plan assets 68.3 (40.2) 35.0
---- ---- ----
28.8 29.5 17.3
---- ---- ------
Defined contribution and
savings plans 13.4 12.0 10.1
---- ---- ------
$42.2 $41.5 $27.4
==== ==== ====
80
NOTE 14 - POST EMPLOYMENT BENEFITS (Continued)
----------------------------------
The following table presents reconciliations of defined benefit plans' funded
status with amounts recognized in the Company's consolidated balance sheets as
part of other assets and other long-term liabilities. Plans with assets
exceeding the accumulated benefit obligation (ABO) are segregated by column from
plans with ABO exceeding assets. Assets exceed ABO for all domestic plans.
1995 1994
-------------- --------------
Assets ABO Assets ABO
exceed exceeds exceed exceeds
ABO assets ABO assets
--- ----- --- -----
Actuarial present value
of benefit obligations:
Vested $459.5 $42.3 $387.7 $35.5
Nonvested 48.3 6.2 41.9 4.4
---- ---- ---- ----
Accumulated benefit
obligation 507.8 48.5 429.6 39.9
Provision for future
salary increases 119.3 15.0 92.1 12.6
Projected benefit
obligation 627.1 63.5 521.7 52.5
Plan assets at fair value 575.9 8.3 480.3 7.2
---- ---- ---- ----
Plan assets in excess of (less than)
projected benefit
obligation (51.2) (55.2) (41.4) (45.3)
Unrecognized net loss (gain)22.1 8.6 25.1 5.7
Unrecognized (negative)
prior service costs 38.1 (4.8) 40.9 (7.8)
Unrecognized net transition
obligation 6.4 1.8 5.7 1.7
Prepaid (accrued)
pension cost $15.4 $(49.6) $30.3 $(45.7)
==== ===== ==== ======
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation for defined benefit plans was 7.5% in
1995 and 8.1% in 1994. The weighted average rate of increase in future
compensation levels was determined using an age specific salary scale and was
5.5% in 1995 and 5.5% in 1994. The weighted average expected long-term rate of
return on plan assets was 8.5% in 1995 and 8.5% in 1994.
In addition to providing pension benefits, the Company, primarily in the
United States, provides certain health care and life insurance benefits for most
retired employees. The cost of providing these benefits to retirees outside the
United States is not significant. Net periodic postretirement benefit cost
includes the following components:
1995 1994 1993
--- --- ---
Service cost $ 3.5 $ 3.4 $ 6.0
Interest cost 10.4 9.3 10.3
Amortization of negative
prior service cost (14.1) (13.2) (14.3)
---- ---- -----
$(0.2) $(0.5) $ 2.0
81
NOTE 14 - POST EMPLOYMENT BENEFITS (Continued)
----------------------------------
The following table presents the accrued postretirement benefit cost
recognized in the Company's consolidated balance sheets as part of liabilities
subject to compromise.
December 31, December 31,
1995 1994
------- -------
Accumulated postretirement benefit obligation:
Retirees $70.3 $66.3
Fully eligible, active plan
participants 41.9 36.2
Other active plan participants 32.8 25.5
---- ----
145.0 128.0
Unrecognized negative prior
service cost 53.8 67.9
Unrecognized net loss (17.4) (9.9)
---- -----
Accrued postretirement
benefit cost $181.4 $186.0
==== =====
In December 1992, the Company amended its retiree health care benefit plan to
require that, beginning in 1994, employees have a certain number of years of
service to be eligible for any retiree health care benefit. The retiree health
care plan provides for certain cost-sharing changes which limit the Company's
share of retiree health care costs. The Company continues to fund benefit costs
on a pay-as-you-go basis with the retiree paying a portion of the costs.
The health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9.65% in 1995 and was assumed to decrease
gradually to 5.75% in 2005 and remain at that level thereafter. For retirees
under age 65, plan features limit the health care cost trend rate assumption to
a maximum of 8% for years 1994 and later. The health care cost trend rate
assumption has a significant effect on the amounts reported. Increasing the
assumed health care cost trend rate by one percentage point in each year would
increase the accumulated postretirement benefit obligation by 4.8% and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1995 by 6.4%.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.50% at December 31, 1995 and 8.25% at December 31, 1994.
NOTE 15 - RELATED PARTY TRANSACTIONS
------------------------------------
The Company purchased raw materials and services totaling $49.7 in 1995,
$46.8 in 1994 and $39.4 in 1993 from The Dow Chemical Company and its
affiliates. The Company believes that the costs of such purchases were
competitive with alternative sources of supply. Other transactions between the
Company and related parties were not material.
NOTE 16 - INCOME TAXES
---------------------
The components of income (loss) before income taxes are as follows:
1995 1994 1993
--- --- ---
U.S. companies $(126.4) $(47.2) $(516.7)
Non-U.S. companies 103.5 61.8 94.7
---- ---- ----
$(22.9) $ 14.6 $(422.0)
===== ==== ======
82
NOTE 16 - INCOME TAXES (Continued)
----------------------
The components of the income tax provision (benefit) are as follows:
1995 1994 1993
--- --- ---
Current
U.S. $ 38.5 $ 62.6 $ 14.3
Non-U.S. 52.6 47.5 37.9
---- ---- ----
91.1 110.1 52.2
---- ---- ----
Deferred
U.S. (101.8) (96.0) (205.4)
Non-U.S. 1.1 ( 6.2) 2.3
---- ----- ----
(100.7) (102.2) (203.1)
------ ------ -----
$ (9.6) $ 7.9 $(150.9)
===== ==== ======
The tax effects of the principal temporary differences giving rise to
deferred tax assets and liabilities were as follows:
December 31,December 31,
1995 1994
------- -------
Implant costs $403.4 $288.0
Accrued expenses 70.3 97.2
Postretirement health care
and life insurance 67.9 61.7
Basis in inventories 31.2 24.9
Tax credit and net operating
loss carryforwards 4.9 2.5
Other 41.2 26.4
------ --------
618.9 500.7
Valuation allowance - (1.0)
--- ----
618.9 499.7
---- ----
Property, plant and equipment (54.8) (66.3)
---- ----
Net deferred tax asset $564.1 $433.4
===== =====
Management believes that it is more likely than not that the net deferred tax
asset will be realized. This belief is based on criteria established in
Statement of Financial Accounting Standards No.
109,~Accounting~for~Income~Taxes~.
At December 31, 1995, income and remittance taxes have not been recorded on
$239.2 of undistributed earnings of foreign subsidiaries, either because any
taxes on dividends would be offset substantially by foreign tax credits or
because the Company intends to indefinitely reinvest those earnings. Cash paid
during the year for income taxes, net of refunds received, was $107.4 in 1995,
$62.4 in 1994 and $72.5 in 1993.
The income tax provision (benefit) at the effective rate differs from the
income tax provision (benefit) at the U.S. federal statutory tax rate in effect
during those years for the following reasons:
Year ended December 31,
---------------------------------
1995 1994 1993
--- --- ---
Income tax provision (benefit)
at statutory rate $(8.0) $ 5.1 $(147.7)
Foreign taxes, net 8.6 10.6 0.4
Foreign sales corporation (5.8) (3.7) (2.1)
State income taxes (6.2) (12.6) 1.7
Other, net 1.8 8.5 (3.2)
---- ---- ----
Income tax provision (benefit)
at effective rate $(9.6) $ 7.9 $(150.9)
==== ==== ======
83
NOTE 17 - COMMON STOCK
----------------------
The outstanding shares of the Company's common stock are held in equal
portions by Corning Incorporated and Dow Holdings Inc., a wholly-owned
subsidiary of The Dow Chemical Company. There were no changes in outstanding
shares during 1995, 1994 or 1993. Per share data is based upon 2,500,000 shares
outstanding for all periods.
NOTE 18 - COMMITMENTS AND GUARANTEES
------------------------------------
The Company leases certain real and personal property under agreements which
generally require the Company to pay for maintenance, insurance and taxes.
Rental expense was $47.9 in 1995, $45.5 in 1994 and $46.2 in 1993. The minimum
future rental payments required under noncancelable operating leases at December
31, 1995, in the aggregate are $125.4, including the following amounts due in
each of the next five years: 1996 - $32.9, 1997 - $25.1, 1998 - $18.7, 1999 -
$16.0 and 2000 - $11.8.
The Company has no material guarantees as of December 31, 1995.
NOTE 19 - INDUSTRY SEGMENT AND FOREIGN OPERATIONS
-------------------------------------------------
The Company's operations are classified as a single industry segment.
Financial data by geographic area are presented below:
1995 1994 1993
--- --- ---
Net sales to customers:
United States $1,005.4 $888.3 $830.6
Europe 642.4 554.5 490.9
Asia 725.9 652.0 619.9
Other 119.2 109.8 102.3
----- ----- -----
Net sales $2,492.9 $2,204.6 $2,043.7
======= ======= =======
Interarea sales:
United States $381.4 $317.6 $219.6
Europe 48.7 46.9 54.7
Asia 10.6 9.5 9.2
Other 0.5 0.3 0.3
----- ----- -----
Interarea sales $441.2 $374.3 $283.8
===== ===== =====
Operating profit:
United States $410.3 $338.8 $192.3
Europe 51.2 36.0 59.2
Asia 35.7 53.8 68.7
Other and eliminations 13.2 14.2 7.1
----- ----- -----
510.4 442.8 327.3
General corporate expenses (534.9) (401.7) (703.6)
Unallocated income
(expense), net 1.6 (26.5) (45.7)
----- ----- ---------
Income (loss) before income
taxes $(22.9) $ 14.6 $(422.0)
===== ===== =====
Identifiable assets:
United States $1,040.1 $1,083.0 $1,071.2
Europe 568.6 486.4 423.6
Asia 609.9 593.8 498.1
Other and eliminations 43.0 38.9 37.3
----- ----- -----
2,261.6 2,202.1 2,030.2
Corporate assets 2,696.8 1,891.1 1,232.1
------ ------ ------
Total assets $4,958.4 $4,093.2 $3,262.3
======= ======= =======
19
NOTE 19 - INDUSTRY SEGMENT AND FOREIGN OPERATIONS (Continued)
-------------------------------------------------
Interarea sales are made on the basis of arm's length pricing. Operating
profit is total sales less certain operating expenses. General corporate
expenses, equity in earnings of associated companies, interest income and
expense, certain currency gains (losses), minority interests' share in income,
and income taxes have not been reflected in computing operating profit.
General corporate expenses include implant costs, certain research and
development costs, and corporate administrative personnel and facilities costs
not specifically identified with a geographic area. Identifiable assets are
those operating assets identified with the operations in each geographic area.
Corporate assets are principally cash and cash equivalents, short-term
investments, anticipated implant insurance receivables, intangible assets,
investments accounted for on the equity basis, and corporate facilities.
ITEM 14(C) EXHIBIT #12
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
DIVIDENDS:
(Dollars in millions, except ratios)
Fiscal Year Ended
Dec. 31, Jan. 1, Jan. 2, Jan.
3, Dec. 29,
1995* 1995 1994
1993 1991
Income before taxes on income $465.9 $459.5 $156.7 $336.6 $327.4
Adjustments:
Share of earnings (losses)
before taxes of
50% owned companies 95.2 89.0 (137.0) 103.2 165.4
Loss before taxes of greater than
50% owned
unconsolidated subsidiary (3.1) (4.0) (3.1) (2.1) (2.2)
Distributed income of less than
50% owned companies
and share of loss if debt is guaranteed 2.1 4.5 (4.3) 6.6
Amortization of capitalized interest 9.6 13.3 13.0 11.8 10.2
Fixed charges net of capitalized
interest 171.6 212.0 155.8 130.3 126.4
Earnings before taxes and fixed charges
as adjusted $739.2 $771.9 $189.9 $575.5 $633.8
Fixed charges:
Interest incurred $128.2 $122.3 $ 94.0 $ 68.9 $ 60.4
Share of interest incurred of
50% owned companies
and interest on guaranteed debt
of less than 50%
owned companies 10.2 60.8 40.9 42.0 47.5
Interest incurred by greater than
50% owned
unconsolidated subsidiary 0.7 0.8 0.8 0.9 0.9
Portion of rent expense which
represents interest factor 40.1 36.2 29.9 27.6 23.0
Share of portion of rent expense
which represents interest
factor for 50% owned companies 2.7 9.4 9.1 9.2 9.0
Portion of rent expense which
represents interest factor for
greater than 50% owned
unconsolidated subsidiary 0.1 0.1 0.1 0.1
Amortization of debt costs 0.9 2.0 1.8 1.5 0.4
Total fixed charges 182.8 231.6 176.6 150.2 141.3
Capitalized interest (11.2) (19.6) (20.8) (19.9) (14.9)
Total fixed charges net of
capitalized interest $171.6 $212.0 $155.8 $130.3 $126.4
Preferred dividends:
Preferred dividend requirements $15.7 $ 8.2 $ 2.1 $ 2.2 $ 2.4
Ratio of pre-tax income to
income before minority
interest and equity earnings 1.5 1.6 1.3 1.4 1.5
Pre-tax preferred dividend requirement 23.5 13.1 2.7 3.1 3.6
Total fixed charges 182.8 231.6 176.6 150.2 141.3
Fixed charges and pre-tax preferred
dividend requirement $206.3 $244.7 $179.3 $153.3 $144.9
Ratio of earnings to combined
fixed charges
and preferred dividends 3.6x 3.2x 1.1x 3.8x 4.4x
*Beginning in the second quarter of 1995, the Computation of Earnings to
Combined Fixed Charges and Preferred Dividends excludes Dow Corning
Corporation as a result of the Registrant's decision to fully reserve its
investment in and discontinue recognition of equity earning from Dow Corning.
ITEM 14(C) EXHIBIT #21
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 1995 ARE LISTED BELOW:
Percentage of
Corp. voting securities
No. Name owned by (Corp. No.)
------------------------------------------------------------------------------
1. Corning Incorporated (New York)
2. Corning Brasil Industria E Comercio Ltda. (Brazil) 100.00 (1)
3. Corning Incorporated Foreign Sales
Corporation (Virgin Islands) 83.34 (1)
8.33 (20)
8.33 (48)
4. Corning International Corporation (Delaware) 100.00 (1)
5. Corning France, S.A. (France) 99.82 (4)
6. Corning GmbH (Germany) 100.00 (4)
7. Corning (H.K.) Ltd. (Hong Kong) 100.00 (4)
8. Wislan S.A. (Uruguay) 100.00 (4)
9. Corning Japan K.K. (Japan) 78.74 (4)
10. Corning Limited (United Kingdom) 100.00 (4)
11. Acecrest Ltd. (United Kingdom) 100.00 (10)
12. Villabrook Ltd. (United Kingdom) 100.00 (10)
13. Corning Mexicana, S.A. de C.V. (Mexico) 100.00 (4)
14. Teddington Company Ltd. (Bermuda) 100.00 (4)
15. Corning International K.K. (Japan) 100.00 (1)
16. Nutrisearch Biosystems Limited (United Kingdom) 100.00 (1)
17. Corning Asahi Corporation (Delaware) 51.00 (1)
18. Components Incorporated (Delaware) 100.00 (1)
19. Corning Asahi Video Products Company (New York) 51.00 (1)
20. Corning Consumer Products Company (Delaware) 100.00 (1)
21. Corning Australia Pty. Limited (Australia) 100.00 (20)
22. Corning Brasil-Vidros Especiais Ltda. (Brazil) 100.00 (20)
23. Corning Canada Inc. (Canada) 100.00 (20)
24. Corning (Singapore) Pte. Ltd. (Singapore) 100.00 (20)
25. Iwaki Corning (M) SDN BHD (Malaysia) 80.00 (24)
26. Revere Ware Corporation (Delaware) 100.00 (20)
27. Corning Costar Corporation (Delaware) 100.00 (1)
28. Costar Europe Ltd. (Delaware) 100.00 (27)
29. Costar GmbH (Germany) 100.00 (27)
30. Costar International Sales Corporation (Virgin Islands) 100.00 (27)
31. Costar Italia, s.r.l. (Italy) 100.00 (27)
32. Costar/Nuclepore Canada, Inc. (Canada) 100.00 (27)
33. Costar UK Ltd. (United Kingdom) 100.00 (27)
34. Dominique Dutscher, S.A. (France) 99.80 (27)
35. Corning Delaware, L.P. (Delaware) 100.00 (1)
36. Corning Enterprises Inc. (New York) 100.00 (1)
37. Corning Europe Inc. (Delaware) 100.00 (1)
38. OCWC Corporation (Delaware) 100.00 (1)
39. SAMCO Scientific, Inc. (Delaware) 100.00 (1)
40. Siecor Corporation (Delaware) 50.00 (1)
41. Cable Services, Inc. (Delaware) 100.00 (40)
42. Siecor Mexico S.A. de C.V. (Mexico) 99.99 (40)
.01 (44)
43. Siecor Dominican Republic, Inc. (Delaware) 100.00 (40)
44. Siecor International Corporation (North Carolina) 100.00 (40)
ITEM 14(C) EXHIBIT #21 (CONTINUED)
SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 1995 ARE LISTED BELOW:
Percentage of
Corp. voting securities
No. Name owned by (Corp. No.)
- -------------------------------------------------------------------------------
45. Siecor International Corporation (Virgin Islands) 100.00 (40)
46. Siecor Puerto Rico, Inc. (Delaware) 100.00 (40)
47. Siecor S.A. de C.V. (Mexico) 99.99 (40)
.01 (44)
48. U.S. Precision Lens, Inc. (Ohio) 100.00 (1)
49. MRL Nucor, Inc. (Delaware) 100.00 (1)
50. Corning Health Group (New Jersey) 100.00 (1)
51. Corning Life Sciences Inc. (Delaware) 100.00 (1)
52. Corning Clinical Laboratories Inc. (Delaware) 100.00 (51)
53. Corning Clinical Laboratories, Inc. (Michigan) 100.00 (52)
54. MetPath Services Corp. (Michigan) 100.00 (53)
55. MetPath TPA, Inc. (Michigan) 100.00 (53)
56. Corning Clinical Laboratories of
Pennsylvania, Inc. (Delaware) 100.00 (52)
57. DeYor CPF/MetPath Inc. (Ohio) 100.00 (56)
58. Southgate Medical Services, Inc. (Ohio) 100.00 (56)
59. Associated Clinical Laboratories L.P. (Pennsylvania) 65.00 (56)
60. DPD Holdings, Inc. (Delaware) 100.00 (52)
61. D.L. Acquiring Corporation (Colorado) 100.00 (60)
62. MetWest Inc. (Delaware) 100.00 (60)
63. CLMP Inc. (Delaware) 100.00 (52)
64. Damon Investment Holdings, Inc. (Delaware) 100.00 (52)
65. Corning Pharmaceutical Services Inc. (Delaware) 100.00 (52)
66. CORNING Besselaar, Inc. (New Jersey) 100.00 (65)
67. CORNING Besselaar Clinical Research Units, Inc. (Florida)100.00 (66)
68. CORNING PACT, Inc. (Pennsylvania) 100.00 (66)
69. G.H.B.A. (Dublin) Limited (Ireland) 100.00 (66)
70. CORNING Besselaar Limited (Switzerland) 100.00 (65)
71. CORNING Besselaar A.G. (Switzerland) 100.00 (65)
72. G.H. Besselaar Associates GmbH (Germany) 100.00 (65)
73. CORNING Besselaar Pty. Ltd. (Australia) 100.00 (65)
74. CORNING Besselaar S.A. (Belgium) 100.00 (65)
75. CORNING Besselaar SARL (France) 100.00 (74)
76. Hazleton Corporation (Washington) 100.00 (65)
77. CORNING Hazleton, Inc. (Delaware) 100.00 (76)
78. Hazleton Laboratories Canada, Ltd. (Canada) 100.00 (77)
79. HRP, Inc. (Pennsylvania) 100.00 (76)
80. CORNING SciCor, Inc. (Delaware) 100.00 (65)
81. CORNING SciCor Limited Partnership (Indiana) 99.00 (80)
1.00 (65)
82. CORNING SciCor S.A. (Switzerland) 100.00 (80)
83. Corning Pharmaceutical Services Ltd. (United Kingdom) 100.00 (65)
84. CORNING Besselaar Ltd. (United Kingdom) 100.00 (83)
85. CORNING Besselaar CRU Ltd. (United Kingdom) 100.00 (84)
86. CORNING Hazleton Ltd. (United Kingdom) 100.00 (83)
87. Hazpen Trustees Ltd. (United Kingdom) 100.00 (86)
88. CORNING Microtest Research Ltd. (United Kingdom) 100.00 (86)
89. CORNING National Packaging, Inc. (Pennsylvania) 100.00 (65)
90. CORNING Bio Inc. (Delaware) 76.00 (51)
91. MetPath New England Inc. (Massachusetts) 100.00 (52)
92. Corning Clinical Laboratories, Inc. (Massachusetts) 100.00 (52)
93. Trans United Casualty and Indemnity Insurance Company (Cayman Islands)
100.00 (52)
ITEM 14(C) EXHIBIT #21 (CONTINUED)
SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 1995 ARE LISTED BELOW:
Percentage of
Corp. voting securities
No. Name owned by (Corp. No.)
- ------------------------------------------------------------------------------
94. Corning Clinical Laboratories Inc. (Maryland) 100.00 (51)
95. Diagnostic Reference Services Inc. (Maryland) 100.00 (94)
96. Pathology Building Partnership (Maryland) 50.00 (94)
50.00 (95)
97. Pharmaceutical Laboratory Services, Inc. (Maryland) 100.00 (51)
98. Corning Nichols Institute (California) 100.00 (51)
99. Nichols Institute Diagnostics (California) 100.00 (51)
100. Nichols Institute Sales Corporation (Virgin Islands) 100.00 (99)
101. Nichols Institute Diagnostics Limited (United Kingdom) 100.00 (51)
102. Nichols Institute Diagnostics Trading S.A. (Switzerland) 100.00 (51)
103. Nichols Institute Diagnostika GmbH (Germany) 100.00 (51)
104. Nichols Institute International Holding B.V. (Netherlands)100.00 (51)
105. Nichols Institute Diagnostics B.V. (Netherlands) 100.00 (104)
106. Nomad-Massachusetts, Inc. (Massachusetts) 100.00 (52)
107. Analisis S.A. (Mexico) 100.00 (106)
108. Laboratorios Clinicos de Mexico, S.A. de C.V. (Mexico) 100.00 (106)
109. Laboratorios de Analisis Biomedicos, S.A. (Mexico) 100.00 (106)
110. Laboratorios de Frontera Polanco, S.A. de C.V. (Mexico) 100.00 (106)
111. CORNING Hazleton GmbH (Germany) 100.00 (76)
Companies accounted for under the equity method:
112. CALP S.p.A. (Italy) 23.10 (4)
113. EuroKera S.N.C. (France) 50.00 (5)
114. Keraglass (France) 50.00 (5)
115. Morgane S.A. (France) 40.00 (5)
116. Samcor Glass Limited (India) 30.00 (5)
10.00 (15)
5.00 (132)
117. Sicover, S.A. (France) 50.00 (5)
118. Siecor GmbH (Germany) 50.00 (6)
119. Siecor GmbH & Co. KG (Germany) 50.00 (6)
120. International Hau-Mei Glass Engineering Co., Ltd.
(Peoples Republic of China) 50.00 (4)
121. Optical Waveguides Australia Pty. Ltd. (Australia) 50.00 (4)
122. Pittsburgh Corning Europe N.V. (Belgium) 50.00 (4)
123. Deutsche Pittsburgh Corning GmbH (Germany) 100.00 (122)
124. Pittsburgh Corning France SARL (France) 100.00 (122)
125. Pittsburgh Corning GmbH (Austria) 100.00 (122)
126. Pittsburgh Corning Nederland B.V. (Netherlands) 100.00 (122)
127. Pittsburgh Corning Scandinavia AB (Sweden) 100.00 (122)
128. Pittsburgh Corning (Schweiz) A.G. (Switzerland) 100.00 (122)
129. Pittsburgh Corning (U.K.) Ltd. (United Kingdom) 99.00 (122)
130. Shanghai Corning Engineering Corporation Ltd.
(Peoples Republic of China) 50.00 (4)
131. Optical Fibres (United Kingdom) 50.00 (10)
132. Samsung-Corning Co., Ltd. (Korea) 50.00 (4)
133. Samsung Corning Company (Malaysia) SDN BHD 70.00 (132)
134. Samsung Corning (Deutschland) GmbH (Germany) 100.00 (132)
135. Samsung Ferrite Tianjin Co. (Peoples Republic of China) 100.00 (132)
136. N-Cor, Ltd. (Japan) 50.00 (15)
137. ACOR Programs, Inc. (Delaware) 42.00 (1)
138. CeraMem Separations, Inc. (Delaware) 19.00 (1)
ITEM 14(C) EXHIBIT #21 (CONTINUED)
SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 1995 ARE LISTED BELOW:
Percentage of
Corp. voting securities
No. Name owned by (Corp. No.)
- -------------------------------------------------------------------------------
139. Cormetech, Inc. (Delaware) 50.00 (1)
140. American Video Glass Company (Delaware) 50.00 (17)
141. Watkins Glen International, Inc. (New York) 50.00 (36)
142. Corporate Venture Partners (Delaware) 26.58 (1)
143. Samsung Corning Precision Glass Co., Ltd. (Korea) 50.00 (1)
144. Corsam Glasstec R&D Center (Delaware) 50.00 (1)
50.00 (132)
145. Doan Associates (Michigan) 20.00 (1)
146. Dow Corning Corporation (Michigan) 50.00 (1)
147. Eurokera North America, Inc. (Delaware) 50.00 (1)
148. Fairfield Venture Partners II, L.P. (Connecticut) 58.69 (1)
149. Fiber Sensys, Inc. (Oregon) 46.97 (1)
150. Molecular Simulations, Inc. (Delaware) 55.00 (1)
151. Biosym Technologies, Inc. (California) 100.00 (150)
152. Biosym Technologies GmbH (Germany) 100.00 (151)
153. Biosym Technologies Ltd. (United Kingdom) 100.00 (151)
154. Biosym Technologies SARL (France) 100.00 (151)
155. MDL Information Systems, Inc. (California) 5.80 (1)
156. Pittsburgh Corning Corporation (Pennsylvania) 50.00 (1)
157. U.S. Conec, Ltd. (Delaware) 50.00 (40)
158. Steuben Partners, L.P. (Connecticut) 21.88 (1)
159. Surgical Eye Enterprises L.P. (Pennsylvania) 50.00 (56)
160. Surgical Eye Institute L.P. (Pennsylvania) 50.00 (159)
161. Clinical Pathology Institute (Pennsylvania) 33.33 (56)
162. Nevillewood L.P. (Pennsylvania) 29.08 (56)
163. Pharmakon Research & Development (Pennsylvania) 25.00 (56)
164. Hazleton Clinical Research Institute Inc. (Delaware) 50.00 (163)
165. Bio-Imaging Technologies, Inc. (New Jersey) 37.30 (65)
166. Quanterra Incorporated (Delaware) 50.00 (52)
167. Home Access Health Corp. (Delaware) 35.00 (52)
168. Servicios de Laboratorio, S.A. de C.V. (Mexico) 100.00 (108)
As explained on page 21, financial statements of companies accounted for under
the equity method, except Dow Corning Corporation, are omitted. Summary
financial information on Corning's equity basis companies is included in Note
4, appearing on pages 33 through 35, in this Annual Report on Form 10-K.
ITEM 14(C) EXHIBIT #23
CONSENT OF INDEPENDENT ACCOUNTANTS
~Price~Waterhouse~LLP
~
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-8 (Nos. 2-77248, 33-
12605, 33-25162, 33-30575, 33-30815, 33-47133, 33-53272, 33-62682, 33-50201, 33-
55345, 33-57742, 33-34602, 33-58193, 33-63887, 33-18329 and 33-3036) and Form S-
3 (Nos. 33-12951, 33-28917, 33-49903, 33-53821, 33-56887 and 333-441) of
Corning Incorporated of our report dated January 22, 1996, appearing on page 24
of this Form 10-K and our report relating to the Dow Corning Corporation
financial statements dated January 19, 1996, appearing on page 55 of this Form
10-K.
/s/ Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
March 6, 1996
The following exhibits are included only in copies of the 1995 Annual Report on
Form 10-K filed with Securities and Exchange Commission.
Exhibit #24 Powers of Attorney
Exhibit #27 Financial Data Schedule
Copies of these exhibits may be obtained by writing to Mr. A. John Peck, Jr.,
secretary, Corning Incorporated, HQ-E2-A14, Corning, New York 14831.