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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, 1996
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. [ ]
As of February 5, 1997, shares held by non-affiliates of Corning Incorporated
had an aggregate market value of $7,259,415,883. As of February 5, 1997,
229,231,063 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 5, 1997 relating to the
annual meeting of stockholders on April 24, 1997.
Part IV. By-Laws of Corning Incorporated as amended to and effective as of April
25, 1996.
PART I
Item 1. Business
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General
Corning traces its origins to a glass business established 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.
On December 31, 1996, Corning completed a strategic repositioning of the company
by distributing all of the shares of Quest Diagnostics Incorporated (formerly
Corning Clinical Laboratories Inc.) and Covance Inc. (formerly Corning
Pharmaceutical Services Inc.) (the Distributions) to its shareholders on a pro
rata basis. As a result of this transaction, Corning believes it can better
focus its strategies and resources to take advantage of growth opportunities in
its core businesses. Corning's Consolidated Financial Statements, appearing on
pages 23 through 25, and Notes to Consolidated Financial Statements, appearing
on pages 26 through 49, report Quest Diagnostics and Covance, which formerly
comprised Corning's Health Care Services segment, as discontinued operations for
all periods presented.
Corning is a global corporation which operates in three broadly based business
segments: Communications, Specialty Materials, and Consumer Products.
The Communications segment includes the opto-electronics and information-display
businesses. The opto-electronics business produces optical fiber, optical cable,
hardware and equipment and optical components for the worldwide
telecommunications industry. The information-display business manufactures glass
panels and funnels, projection-video lens assemblies and liquid-crystal-display
glass for flat panel displays.
The Specialty Materials segment includes the environmental-products business,
which produces emission-control substrates and related technologies for all
major-vehicle-producing markets, and the science-products business, which
produces various plastic and glass laboratory products for the life-sciences
market. The other businesses which operate in this segment specialize in the
production of optical, lighting and other advanced material products.
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. The Consumer Products segment also includes Steuben
crystal.
Corning and its subsidiaries produce approximately 60,000 different products at
42 plants in ten countries.
Additional discussion 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 5 through 14, and Note 3 (Information by Industry
Segment) of the Notes to Consolidated Financial Statements appearing on pages 28
through 30.
Competition
Corning competes across all of its product lines with many large and varied
manufacturers, both domestic and foreign.
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.
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 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.
1
Corning strives to 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.
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, Corning
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, Impressions, Puma, Pyrex, Pyrex
Portables, Visions, Steuben and Vycor. Subsidiaries of Corning frequently use
their own trademarks, such as Revere Ware, 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 by continuing operations were approximately $22.8 million in 1996 and
are estimated to be $29.9 million in 1997.
Corning's 1996 operating results from continuing operations were charged with
approximately $27.1 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 1997. 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
47 and Five Years in Review - Historical Comparison appearing on pages 53 and
54.
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
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Corning operates a total of 42 manufacturing plants and processing facilities,
29 of which are located in the United States. 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.
During the last five years, Corning has invested $1.9 billion in property,
construction, expansion, and modernization for continuing operations. Of the
$597.8 million spent in 1996, $37.0 million was spent on facilities outside the
United States.
2
Manufacturing, sales and administrative, and research and development facilities
at consolidated locations have an aggregate floor space of approximately 18
million square feet. Distribution of this total area is:
================================================================================
(million square feet) Total Domestic Foreign
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Manufacturing 14.0 10.7 3.3
Sales and administrative 2.9 2.6 0.3
Research and development 0.9 0.8 0.1
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17.8 14.1 3.7
================================================================================
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 28 through 30. Information concerning lease
commitments is included in Note 16 (Commitments, Contingencies and Guarantees)
of the Notes to Consolidated Financial Statements appearing on page 46.
In the opinion of management, Corning's facilities are suitable and adequate for
production and distribution of the Company's products. At December 31, 1996
Corning did not own any significant amounts of surplus or idle property.
Item 3. Legal Proceedings
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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 $20 million for its estimated liability for
environmental cleanup and litigation at December 31, 1996.
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 the
approximately 19,000 breast-implant product liability lawsuits pending against
Dow Corning. In June 1995, Dow Corning and its shareholders (Corning and The Dow
Chemical Company) attempted to remove various state court implant lawsuits
against Dow Corning 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 Michigan Federal Court,
but denying the motion to the extent it requested the transfer of cases against
Dow Corning's shareholders to such 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. Subsequently
Dow Corning, Corning and Dow Chemical filed an appeal from Judge Hood's order in
the United States Court of Appeals for the Sixth Circuit. On April 9, 1996, the
Sixth Circuit ruled that the Michigan Federal Court had "related to"
jurisdiction over the cases against Dow Corning's shareholders and remanded the
cases to Judge Hood for further proceedings. On July 30, 1996, Judge Hood
refused to transfer cases against Corning and Dow Chemical to the Michigan
Federal Court. Dow Chemical and Corning (as well as other defendants) have
appealed Judge Hood's latest order to the Sixth Circuit. The Sixth Circuit
ordered an expedited appeal. Briefing of the appeal is complete and oral
argument is scheduled for April 24, 1997.
3
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 after
November 30, 1995. Those who do opt-out will have the right to pursue individual
lawsuits. The Global Settlement has been effectively terminated. Another, more
limited settlement involving other defendant manufacturers is being considered
by the plaintiffs.
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.
As of December 31, 1996, 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 withdrew their appeal. On August 13, 1996, that District Court
issued Order No. 34 directing parties to show cause why various cases should not
be remanded to state courts with other defendants, but any claims by plaintiffs
against Corning would be dismissed in view of the previous final summary
judgment order. Certain state court tort cases against Corning were also
consolidated in various states for the purposes of discovery and pretrial
matters. Corning has made several motions for summary judgment in state courts
and judges have dismissed Corning from over 6,500 tort cases filed in
California, Connecticut, Illinois, Indiana, Michigan, Mississippi, New Jersey,
New Mexico, New York, Pennsylvania, Tennessee, Louisiana and Dallas, Harris and
Travis Counties in Texas, some of which are on appeal. Corning's motions seeking
dismissal remain pending, and continue to be filed, 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. On October 21, 1996, Dow Chemical
filed cross claims against Corning in a Louisiana state wide class action
scheduled for trial against Dow Chemical beginning in March 1997. The Louisiana
trial judge dismissed Corning from such class action on February 21, 1997.
Quest Diagnostics: Government Investigations and Related Claims. On December 31,
1996, Corning completed the spin-off of its health care services businesses by
the distribution to its shareholders of the Common Stock of Quest Diagnostics
Incorporated ("Quest Diagnostics") and Covance Inc. ("Covance"). In connection
with these distributions, Quest Diagnostics assumed financial responsibility for
the liabilities related to the clinical laboratory business and Covance assumed
financial responsibility for the liabilities related to the contract research
business. Corning agreed to indemnify Quest Diagnostics against all monetary
penalties, fines or settlements for any governmental claims arising out of
alleged violations of applicable federal fraud and health care statutes and
relating to billing practices of Quest Diagnostics and its predecessors that
were pending at December 31, 1996. Corning also agreed to indemnify Quest
Diagnostics for 50% of the aggregate of all judgment or settlement payments made
by Quest Diagnostics that are in excess of $42.0 million in respect of claims by
private parties (i.e., nongovernmental parties such as private insurers) that
relate to indemnified or previously settled governmental claims and that allege
overbillings by Quest Diagnostics, or any existing subsidiaries of Quest
Diagnostics, for services provided prior to December 31, 1996; provided,
however, such indemnification is not to exceed $25.0 million in the aggregate
and that all amounts indemnified against by Corning for the benefit of Quest
Diagnostics is to be calculated on a net after-tax basis. Such indemnification
does not cover (i) any governmental claims that arise after December 31, 1996
pursuant to service of subpoena or other notice of such investigation after
December 31, 1996, (ii) any nongovernmental claims unrelated to the indemnified
governmental claims or investigations, (iii) any nongovernmental claims not
settled prior to December 31, 2001, (iv) any consequential or incidental damages
relating to the billing claims, including losses of revenues and profits as a
consequence of exclusion for participation in federal or state health care
programs or (v) the fees and expenses of litigation.
4
Item 4. Submission of Matters to a Vote of Security Holders
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None.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
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Matters
-------
This information is included in Quarterly Operating Results and Related Market
Data, Five Years in Review - Historical Comparison, and Investor Information,
appearing on pages 51 through 56.
Item 6. Selected Financial Data
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This information is included in Five Years in Review - Historical Comparison
appearing on pages 53 and 54.
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
---------------------
On December 31, 1996, Corning completed a strategic repositioning of the Company
by distributing all of the shares of Quest Diagnostics Incorporated (formerly
Corning Clinical Laboratories Inc.) and Covance Inc. (formerly Corning
Pharmaceutical Services Inc.) (the Distributions) to its shareholders on a pro
rata basis. Prior to the Distributions, Corning received a ruling from the
Internal Revenue Service that the Distributions are tax-free to Corning and its
shareholders. As a result of the Distributions, Quest Diagnostics, Inc. and
Covance Incorporated became independent, publicly traded companies.
As a result of this transaction, Corning believes it can better focus its
strategies and resources to take advantage of growth opportunities in its core
businesses. Corning's Consolidated Financial Statements and Notes to
Consolidated Financial Statements report Quest Diagnostics and Covance, which
formerly comprised Corning's Health Care Services segment, as discontinued
operations for all periods presented.
Results of Continuing Operations
Consolidated sales increased 12% from 1995 to $3.7 billion due primarily to
strong performance by the Communications segment. Consolidated sales in 1995
advanced 6% over 1994 levels to $3.3 billion reflecting growth in the
Communications segment offset by the sale of the European consumer products
business in November 1994.
Net income from continuing operations totaled $342.9, or $1.50 per share, in
1996 compared with a net loss of $71.5 million, or $0.32 per share, in 1995 and
net income of $222.3 million, or $1.04 per share, in 1994. The comparability of
Corning's earnings from continuing operations over the past three years has been
significantly impacted by Corning's decision to fully reserve its investment in
and discontinue recognition of equity earnings from Dow Corning Corporation and
a restructuring charge, both of which occurred in the second quarter of 1995.
Additional information on Dow Corning and the restructuring charge begins on
page 10.
Excluding the losses from Dow Corning and the restructuring charge, Corning's
net income and earnings per share from continuing operations increased 17% and
16%, respectively, in 1996. Earnings in 1996 reflected strong results in the
Communications and Specialty Materials segments, and improved performance by the
Consumer Products segment. Equity earnings in 1996, excluding Dow Corning,
increased 28% over 1995 due to continued solid performance by the international
optical-fiber equity companies and improvements at Samsung-Corning Company, Ltd.
Corning's net income and earnings per share from continuing operations,
excluding the restructuring charge and losses from Dow Corning, increased 30%
and 23%, respectively, in 1995 when compared with 1994. The increases were
principally due to strong performance in the Communications and Specialty
Materials segments but reflected weak results in the Consumer Products segment.
Equity earnings in 1995, excluding Dow Corning, were up 37% primarily due to
strong growth at the international optical-fiber equity companies.
5
Industry Segments
Corning's products and services are grouped into three industry segments:
Communications, Specialty Materials 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 three 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.
Communications
(In millions)
================================================================================
1996 1995 1994
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Consolidated sales $1,969.4 $1,711.7 $1,458.3
Income before taxes 528.5 434.9 (1) 345.8
================================================================================
(1) Includes $9.3 million of restructuring charges.
Consolidated Operations: Consolidated sales and earnings in the Communications
segment increased substantially in 1996 due to continued strength in the
opto-electronics businesses. The strong results in the opto-electronics
businesses were offset somewhat by weak performance in the information-display
businesses. Sales and earnings increased in 1995 due to strong performance by
the opto-electronics businesses and the conventional-video components and
projection-video businesses. Approximately one-third of the sales growth in 1995
was due to acquisitions in 1994.
Sales of Corning's optical-fiber and optical-cable businesses increased
significantly in 1996 and 1995 as a result of continued strong worldwide demand.
Domestic volume growth is being driven by regional, local and long-haul
telephone companies and cable television operators who are installing optical
fiber to increase network capacity, reduce operating costs and add new services.
International volume increased as China, Mexico, and other developing countries
are modernizing telecommunications infrastructures. In addition, sales to
developed countries increased due to privatization of government-owned networks
and telecommunications industry deregulation. Sales growth in 1996 reflects
continued price stability. Earnings in this business increased significantly in
both 1996 and 1995, primarily as a result of the increased sales in both 1996
and 1995 and a favorable mix of optical fiber and optical cable products in the
first half of 1996.
As a result of the strong worldwide demand for optical fiber, Corning continues
to produce at maximum manufacturing capacity. Corning increased capacity during
1996 through manufacturing process enhancements. To participate in the expected
growth in this market, Corning is investing approximately $250 million to
significantly expand its optical-fiber production facility in Wilmington, North
Carolina. Capacity increases from this expansion began in late 1996 and are
expected to be substantially on line by the end of 1997. In addition, to further
increase capacity Corning is planning to invest several hundred million dollars
to build a new optical-fiber production facility in Concord, North Carolina.
Construction of this facility is expected to begin in the middle of 1997 and
production is expected to begin in 1999.
Sales in Corning's hardware and equipment business increased in 1996 due to
volume gains driven by overall market growth. Earnings in 1996 increased
modestly as the volume gains were somewhat offset by plant consolidation costs.
Sales and earnings increased in 1995 due primarily to Siecor's acquisition of
certain assets relating to the hardware and equipment businesses of Northern
Telecom Limited in December 1994.
Sales and earnings of the optical-components products business increased
significantly due to strong growth in sales of several new products. Sales and
earnings of this developing business were not significant prior to 1996.
Sales volume in the conventional-video components business continued to reflect
a shift from smaller to larger sizes. During 1996, Corning completed the second
phase of a three phase, $200 million expansion of its State College,
Pennsylvania, television glass plant which will substantially improve Corning's
capability to make larger-size video components. Sales were down slightly in
1996, as the activity related to the capacity expansion and glass furnace
repairs limited the effective capacity during the year. Earnings in 1996
decreased significantly when compared to 1995, due to the furnace repairs and
the costs of expanding the State College facility. Sales and earnings increased
in 1995 over 1994 as a result of strong consumer demand for larger-screen
televisions, manufacturing efficiencies and favorable product mix.
6
Sales of the projection-video components business decreased slightly in 1996 as
a result of market softness. During 1996, Corning completed the second phase of
an approximate $60 million expansion of its projection-video components
manufacturing facility in Cincinnati, Ohio. The lower volume, coupled with
expansion-related manufacturing inefficiencies, resulted in significantly
decreased earnings in 1996. Sales of the projection-video components business
increased significantly in 1995 due primarily to increased consumer demand as a
result of improved projection television set quality and aggressive marketing by
the projection television set manufacturers, and increased capacity. Earnings
increased in 1995 primarily as a result of volume gains.
Sales in the advanced-display products business, which produces liquid-crystal
display glass for flat panel displays, increased in 1996, reflecting strong
volume growth offset partially by price declines. Sales increased significantly
in 1995 over 1994 due to volume gains resulting from strong market demand and
the addition of new melting capacity in Japan. The business incurred a loss in
both 1996 and 1995 as a result of heavy development spending on new products and
manufacturing inefficiencies related to new product introductions. Performance
improved during the second half of 1996 and the business was profitable in the
fourth quarter.
The 1995 restructuring charge in this segment resulted from management's
decision to exit the manufacturing facility for glass-ceramic memory-disks and
significantly reduce the amount of development spending on this project.
Equity companies:
(In millions)
================================================================================
1996 1995 1994
---- ---- ----
Net sales $1,120.4 $982.2 $788.9
Corning's share of net income 67.5 47.4 38.1
================================================================================
Sales and earnings of Corning's optical-fiber equity companies increased
significantly in 1996 compared to 1995 due to strong volume growth at the
businesses located in Europe and Australia. The optical-fiber equity companies,
which have been producing at maximum capacity, were able to increase volume in
1996 primarily as a result of manufacturing process enhancements. To meet
anticipated demand, the European optical-fiber equity companies are planning to
increase capacity through facility expansions during 1997. In December 1996,
Corning announced the formation of Biccor Pte. Ltd., a holding company to be
owned 40% by Corning and 60% by BICC Cables-Asia Pacific Pte. Ltd. Biccor will
hold investments in and manage optical fiber cable plants in Southeast Asia and
China.
Samsung-Corning Company, Ltd. is a South Korean-based manufacturer, which
primarily produces glass panels and funnels for entertainment television and
display monitors. Samsung-Corning's sales increased in 1996 and 1995 primarily
as a result of a significant global expansion program which began in 1994 and
included the acquisition and building of manufacturing and sales facilities in
Germany and Malaysia. Earnings increased in 1996 as volume gains were partially
offset by the impact of the start up of new capacity in both Germany and
Malaysia during the year. Earnings decreased slightly in 1995 compared to 1994
as a result of start-up and higher financing costs associated with the
significant global expansion program which began in 1994.
The increase in earnings at Samsung-Corning was somewhat offset by start-up
costs of new information-display equity companies. During 1995, Corning and
Samsung Group 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. Additionally, 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. In December
1996, Corning, Asahi Glass Company Ltd. of Japan and Samsung Group of South
Korea announced an agreement in principle to establish a manufacturing facility
in Mexico that will finish glass funnels and panels for color television tubes.
Outlook: Sales and earnings of the Communications segment are expected to
increase in 1997 driven by continued volume growth in the opto-electronics
businesses and improvement in the information-display businesses. Sales and
earnings of the information-display businesses are expected to improve in 1997
from improved market demand and from manufacturing efficiencies as the capacity
expansions which impacted earnings in 1996 have substantially been completed.
Earnings in the advanced-display products business are expected to improve, but
will continue to be impacted by development spending for new products and
pricing pressure.
7
Equity earnings from the optical-fiber equity companies are expected to
increase. Samsung-Corning's earnings are expected to be flat as market growth in
Asia slows. Overall segment equity earnings are projected to decrease in 1997 as
significant start-up costs at Samsung-Corning Precision Glass Company and
American Video Glass Company are expected to more than offset the anticipated
increases at the optical-fiber equity companies.
Specialty Materials
(In millions)
================================================================================
1996 1995 1994
---- ---- ----
Consolidated sales $996.4 $871.9 $846.0
Income before taxes 195.8 174.7 (1) 164.3
================================================================================
(1) Includes $6.6 million of restructuring charges.
Consolidated Operations: Consolidated sales of this segment increased in 1996
due primarily to the consolidation of Quanterra Incorporated, an
environmental-testing business, beginning in the first quarter of 1996.
Excluding the impact of the consolidation of Quanterra, sales increased 6% due
primarily to growth in the environmental-products, science-products, and
advanced-materials businesses. Segment earnings increased significantly,
reflecting strong performance in the environmental-products, science-products
and advanced-materials business, offset somewhat by losses at Quanterra.
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 advanced-materials businesses, offset somewhat by
weaker results in the science-products business.
Sales of the environmental-products business increased in both 1996 and 1995.
Sales in 1996 reflected significant volume gains in the automotive substrate
market driven by strong market demand particularly in Europe, while sales of
substrates in North America and in diesel applications increased slightly from
1995 levels. Sales of automotive substrates in Europe and diesel applications
increased in 1995, offsetting second half softness in the North American market.
Earnings increased substantially in both 1996 and 1995 as a result of the volume
gains and continued manufacturing efficiency gains in both the United States and
European operations.
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 of this transaction, Corning began consolidating
Quanterra's results beginning in the first quarter of 1996. Quanterra's 1996
sales reflect declining market demand and downward pricing pressure. Despite
cost reduction efforts, Quanterra incurred a loss in 1996 due to the volume
decrease and lower prices.
Sales of the science-products business increased in 1996 over 1995. Earnings in
1996 increased as a result of the improved sales volume and manufacturing
efficiencies and cost reductions. Sales 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 of the advanced-materials business increased significantly in
1996 and 1995 due to growth in fused-silica applications for the semiconductor
industry and in mirror-blank applications for the satellite industry. Earnings
in 1996 and 1995 also benefited from manufacturing efficiencies and cost
reductions. Due to increased demand for the products of the advanced materials
business, Corning is expanding its Canton, New York, facility. The expansion is
expected to be completed in 1997.
Sales of Corning's other Specialty Materials businesses, consisting of optical
and lighting products, decreased in 1996 due to a volume decline in the lighting
business as a result of exiting certain product lines and market softness.
Earnings decreased in 1996 due to the lower volume and higher development
spending by the optical-products business for new products. Sales increased in
1995 over 1994 due to moderate volume increases, while earnings increased due to
the volume gains coupled with manufacturing efficiencies and cost reduction
efforts.
8
Equity companies:
(In millions)
================================================================================
1996 1995 1994
---- ---- ----
Net sales $182.5 $290.8 $196.0
Corning's share of net income 8.8 6.4 5.7
================================================================================
Equity earnings in the Specialty Materials segment in 1996 primarily include
EuroKera, S.N.C., a French-based manufacturer of glass-ceramic cook-tops. Equity
earnings in 1995 and the second half of 1994 also include Quanterra, which
Corning began to consolidate in 1996.
Sales and earnings of EuroKera increased in both 1996 and 1995 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.
Outlook: The 1996 sales and earnings trends in this segment are expected to
continue in 1997. Sales growth is expected to continue in the
environmental-products, science-products and advanced-materials businesses.
Consolidated earnings are expected to increase with the anticipated sales growth
and from continued manufacturing efficiencies and cost reductions. Quanterra is
expected to break even in 1997 as a result of continued cost reductions.
Consumer Products
(In millions)
================================================================================
1996 1995 1994
---- ---- ----
Consolidated sales $685.8 $673.5 $779.1
Income before taxes 38.2 10.1 55.6
================================================================================
Consolidated Operations: Consolidated sales in the Consumer Products segment
increased slightly in 1996 as a result of volume gains in the mass-market
channels and in international markets despite continued difficult retail
houseware market conditions. Earnings in this segment increased significantly in
1996 due to the increased sales volume, cost reductions in the manufacturing and
administrative areas and the gain recognized on the sale of CALP S.p.A., an
equity company. The increase in international sales was principally due to
strength in Asia, but all geographic markets experienced improvements during
1996. The sales improvement was driven by strength in the Pyrex and Corelle
product lines, while sales of Corning Ware were flat and Revere Ware decreased.
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. The flat sales in 1995 reflected increased sales of
Corelle, Corning Ware and Pyrex brands due in part to the introduction of
several new products, but were offset by a decrease in sales of Revere Ware.
Earnings decreased substantially in 1995 compared to 1994 due to lower sales
volume, increased costs associated with several glass furnace repairs and the
incremental costs related to new product promotions and new factory outlet
stores.
In October 1996, Corning announced that it had reached an agreement to sell its
Serengeti eyewear business to Solar-Mates, Inc. for approximately $28 million.
Corning expects to record a modest gain upon completion of this transaction in
early 1997.
9
Equity companies:
(In millions)
================================================================================
1996 1995 1994
---- ---- ----
Net sales $27.5 $95.0 $99.2
Corning's share of net income 0.5 1.2 2.3
================================================================================
Equity earnings in the Consumer segment are principally from CALP S.p.A. which
Corning sold in March 1996 for approximately $30 million.
Outlook: Excluding the impact of the planned sale of Serengeti, consolidated
segment sales in 1997 are expected to be even with 1996 levels. The competitive
and difficult houseware market conditions experienced in recent years are
expected to continue. In response to these market conditions, Corning is
planning to reduce the number of stock-keeping units it provides. With this
planned action, certain products and product packaging primarily for the
specialty retail market will be eliminated, resulting in significantly reduced
manufacturing and administrative costs. Management expects these actions will
increase segment earnings.
Corporate Investments
Other than Dow Corning Corporation
(In millions)
================================================================================
1996 1995 1994
---- ---- ----
Net sales $262.9 $223.3 $210.7
Corning's share of net income 8.3 11.7 2.5
================================================================================
Corning's corporate investments include Pittsburgh Corning, Pittsburgh Corning
Europe, N.V. and several other small strategic investments that are not
integrated with Corning's operating segments.
Sales and earnings of Pittsburgh Corning and Pittsburgh Corning Europe decreased
in 1996 due to volume decreases in architectural glass block and grill brick
product lines in the U.S. Sales and earnings were up in 1995 resulting
principally from volume increases for architectural glass blocks in the U.S.
and strong European demand for FOAMGLAS(R) insulation.
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, or $1.62 per share, in the second quarter
of 1995 to fully reserve its investment in Dow Corning.
10
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, or $0.08 per share, in the first quarter 1995 and
a loss of $2.8 million, or $0.01 per share, in 1994. The 1994 results include a
significant charge 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 filed a reorganization plan with the Federal Bankruptcy Court in
December 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
In the second quarter 1995, Corning recorded a restructuring charge of $26.5
million ($16.1 million after tax), or $0.07 per share. The charge included
severance for 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. These actions
are substantially complete.
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 this restructuring plan.
Additional information on the restructuring charge is included in Note 8 of the
Notes to Consolidated Financial Statements.
Taxes
Corning's effective tax rate for continuing operations was 33.5% in 1996, 29% in
1995, and 33% in 1994. The lower 1995 rate was due to a higher percentage of
Corning's earnings from consolidated entities with lower effective tax rates and
the restructuring charge. Note 6 of the Notes to Consolidated Financial
Statements reconciles the effective tax rate to the statutory tax rate.
Results of Discontinued Operations
The loss from discontinued operations in 1996 totaled $167.3 million, or $0.74
per share, and includes a provision for loss on Distributions of $176.5 million,
or $0.78 per share offset by income from discontinued operations of $9.2
million, or $0.04 per share, recognized in the first quarter of 1996, prior to
Corning's decision to complete the Distributions. The $176.5 million provision
for loss on Distributions includes a $142 million after-tax charge to increase
reserves for government claims and an after-tax charge for transaction costs
offset by the results of operations of the distributed businesses from April 1,
1996 through December 31, 1996, the Distribution date.
Income from discontinued operations in 1995 totaled $20.7 million, or $0.09 per
share. The results in 1995 reflect a restructuring charge of $24.4 million after
tax which includes severance for workforce reduction programs primarily in the
clinical-laboratory testing business and the costs of exiting a number of leased
facilities. Income from discontinued operations in 1994 totaled $59 million, or
$0.28 per share, and included a restructuring charge of $55.4 million after tax
for integration costs and transaction expenses, primarily related to the
acquisitions of Nichols Institute, Maryland Medical Laboratory Inc. and Bioran
Medical Laboratory.
Results of discontinued operations include allocations of consolidated interest
expense totaling $51.7 million, $48.5 million and $44.8 million in 1996, 1995
and 1994, respectively. The allocations were based on the ratio of net assets of
discontinued operations to consolidated net assets.
11
Quest Diagnostics has entered into several settlement agreements with various
governmental and private payors during recent years. Government investigations
of certain practices by clinical laboratories acquired in recent years are
ongoing. In the second quarter 1996, the U.S. Department of Justice (DOJ)
notified Quest Diagnostics that it had taken issue with certain payments
received by Damon Corporation (Damon) from federally funded healthcare programs
prior to its acquisition by Quest Diagnostics. During the second and third
quarters 1996, Quest Diagnostics' management met with the government several
times to evaluate the substance of the government's allegations. As a result of
these discussions, in October 1996, Quest Diagnostics' management, on behalf of
its Damon subsidiary, reached a settlement agreement with the DOJ which caused
Quest Diagnostics to pay $119 million to the government.
As a result of this settlement agreement, Quest Diagnostics' management
reassessed the level of reserves recorded for other asserted and unasserted
claims related to the Damon and other related and similar government
investigations, including the investigation of billing practices by Nichols
Institute (Nichols) prior to its acquisition by Quest Diagnostics in 1994.
During 1996, Quest Diagnostics recorded charges totaling $142 million after tax
to increase its reserves to equal the Damon settlement and Quest Diagnostics
management's best estimate of potential amounts which could be required to
satisfy the remaining claims.
Corning has agreed to indemnify Quest Diagnostics on an after-tax basis, for the
settlement of claims against Nichols and certain other claims that were pending
at December 31, 1996. Coincident with the Distributions, Corning recorded a
payable to Quest Diagnostics of approximately $25 million which is equal to
management's best estimate of amounts which are probable of being paid by
Corning to Quest Diagnostics to satisfy the remaining indemnified claims on an
after-tax basis.
Although management believes that established reserves for indemnified claims
are sufficient, it is possible that additional information may become available
to Quest Diagnostics' management which may cause the final resolution of these
matters to exceed established reserves by an amount which could be material to
Corning's results of operations and cash flow in the period in which such claims
are settled. Management does not believe that these issues will have a material
adverse impact on Corning's overall financial condition.
Corning, Quest Diagnostics and Covance have entered into tax indemnification
agreements that prohibit Quest Diagnostics and Covance for a period of two years
after the Distributions from taking certain actions that might jeopardize the
favorable tax treatment of the Distributions and provide Corning with certain
rights of indemnification against Quest Diagnostics and Covance. The tax
indemnification agreements also require Quest Diagnostics and Covance to take
such actions as Corning may request to preserve the favorable tax treatment
provided for in the ruling obtained from the Internal Revenue Service in respect
of the Distributions.
Corning, Quest Diagnostics and Covance have also entered into a tax sharing
agreement which allocates among Corning, Quest Diagnostics and Covance
responsibility for federal, state and local taxes relating to taxable periods
before and after the Distributions and provides for computing and apportioning
tax liabilities and tax benefits for such periods among the parties. Quest
Diagnostics and Covance have paid or will pay Corning for all income taxes due
at December 31, 1996. Corning will indemnify Quest Diagnostics and Covance for
any adjustments to these liabilities resulting from future audits of Corning's
consolidated federal and certain other tax returns for periods prior to the
Distribution date.
Liquidity and Capital Resources
Corning's working capital increased from $454.4 million at the end of 1995 to
$611.2 million at the end of 1996. The ratio of current assets to current
liabilities was 1.8 at the end of 1996 compared to 1.6 at year-end 1995.
Corning's long-term debt as a percentage of total capital was 42 percent at the
end of 1996, compared to 33 percent at the end of 1995. The increase in these
ratios is primarily due to the impact of the Distributions on Corning's balance
sheet.
The increase in the percentage of long-term debt to total capital is due
primarily to the $1.1 billion reduction in stockholders' equity as a result of
the Distributions of Quest Diagnostics and Covance. During the fourth quarter of
1996, Quest Diagnostics and Covance borrowed approximately $650 million from
third-party lenders and repaid intercompany debt to Corning prior to the
Distributions. Corning used the proceeds from the repayment of intercompany debt
to repay approximately $375 million of short-term borrowings and $75 million of
long-term debt. Corning intends to use the remaining proceeds to invest for
future strategic uses.
12
The repayment of debt will cause a decrease in the total consolidated interest
expense in 1997. However, interest expense of continuing operations will
increase as the amount of interest allocated to discontinued operations in 1996
is greater than the expected reduction in interest expense due to the repayment
of debt.
Corning's working capital position is reinforced by available bank credit lines
totaling $815 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. Although Corning's leverage has increased
significantly as a result of the Distributions, Corning's management believes
the Company has sufficient financial flexibility and ready access to funds to
meet seasonal working capital requirements and for capital expenditures.
Management expects the Company to generate positive cash flow from operating
activities and take other actions that will reduce Corning's ratio of long-term
debt to total capital during 1997.
Cash Flows
Cash and short-term investments at the end of 1996 increased from 1995 by $35.6
million due to operating and financing activities which provided cash of $602.8
million and $80.0 million, respectively, offset by investing activities and
discontinued operations which used cash of $439.2 million and $188.3 million,
respectively. Cash and short-term investments at the end of 1995 increased from
1994 by $46.5 million as operating activities provided cash of $556.2 million
offset by investing activities, financing activities, and discontinued
operations which used cash of $397.6 million, $94.8 million and $18.5 million,
respectively.
Cash flows from operating activities in 1996 increased compared with 1995
primarily due to increased earnings of continuing operations before special
charges partially offset by an increase in cash used for working capital. Cash
flows from operating activities increased in 1995 from 1994 due to higher
earnings of continuing operations before special charges and a lower use of cash
for working capital.
Corning generated cash from investing activities in 1996 as the proceeds from
the repayment of intercompany debt by Quest Diagnostics and Covance prior to the
Distributions were greater than capital spending. Cash used in investing
activities in 1995 decreased from 1994 as a higher level of capital spending net
of proceeds from the disposition of properties and investments in 1995 was
offset by lower cash used for business acquisitions. Capital spending amounted
to $597.8 million, $381.8 million and $286.1 million in 1996, 1995 and 1994,
respectively. Corning anticipates capital spending will approximate $600 million
in 1997. The high level of capital spending in 1996 and expected in 1997 relates
primarily to capacity expansions in Corning's growth businesses.
Cash used in financing activities increased in 1996 primarily as a result of the
repayment of loans with the proceeds from the Distributions. Financing
activities in 1995 resulted in a net use of cash as dividends paid were in
excess of net borrowings. Financing activities in 1994 provided cash as the
proceeds from the issuance of common stock in February 1994 and the MIPS
offering in July 1994 were in excess of dividends paid and net repayment of
loans.
Cash used in discontinued operations increased in 1996 compared with 1995 due
primarily to the settlement of government claims and repayment of a capital
lease obligation during 1996. Cash used in discontinued operations totaled $18.5
million and $50.3 million in 1995 and 1994, respectively.
Corning repurchased $83.9 million and $33.1 million of its common stock in 1996
and 1995, respectively. Approximately $50 million of the 1996 amount and all of
the 1995 amount were repurchased 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. The remainder of the 1996 stock repurchases were from
employees to satisfy tax withholding requirements on shares issued under
employee benefit plans.
Dividends paid to common shareholders in 1996 totaled $165.3 million compared
with $165.2 million in 1995 and $150.1 million in 1994. The increase in
dividends paid in 1995 is a result of increase in both the dividend rate and
common shares outstanding. Corning plans to maintain the dividend rate paid to
common shareholders in 1997.
13
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 $20 million for its estimated liability for
environmental cleanup and litigation at December 31, 1996.
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.
14
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 24, 1997, is incorporated by reference in this
Annual Report on Form 10-K.
Executive Officers of the Registrant
Roger G. Ackerman (58) Chairman of the Board and Chief Executive 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 1975, a senior vice president in 1980, director
of the Manufacturing and Engineering Division in 1981, and president and chief
executive officer of MetPath Inc. (now Quest Diagnostics Incorporated) in 1983.
In 1985, he was elected group president and a director. In 1990 Mr. Ackerman was
elected president and in 1996 was elected to his present position.
Van C. Campbell (58) 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.
Norman E. Garrity (55) Sector President and Co-Chief Operating Officer
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 1987 and executive vice
president in 1990, responsible for the Specialty Materials Group and the
manufacturing and engineering function. In 1996 he was elected to his present
position.
John W. Loose (54) Sector President and Co-Chief Operating Officer
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 and subsequently
senior vice president, International. In April 1990 he was elected executive
vice president responsible for the Information Display Group. In 1993, Mr. Loose
became responsible for the consumer business and was elected president and chief
executive officer of Corning Consumer Products Company. In 1996 he was elected
to his present position.
James M. Ramich (51) 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.
Larry Aiello, Jr. (47) Senior Vice President, International
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
and effective February 1, 1997 senior vice president, International.
Katherine A. Asbeck (40) 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 a senior audit manager of Price
Waterhouse LLP.
Peter Booth (57) 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.
15
Peter F. Campanella (51) President and CEO of Corning Consumer Products Company
Mr. Campanella joined Corning in 1971 and subsequently served in a variety of
sales and marketing positions in the Consumer Products Division and Corning
International. He became director of sales and marketing in Science Products in
1989, vice president and general manager in 1990 and was named senior vice
president in 1994. He assumed responsibility for the Advanced Materials &
Process Technologies group in 1995 and was elected to his present position in
April 1996.
James R. Cooke (45) Vice President
Mr. Cooke joined Corning in 1980 and has served in various accounting, finance,
and strategic planning positions. In July 1994, he was appointed
Opto-Electronics division vice president and general manager, Components
Products Business and director of external development in June 1995. He was
named vice president business development and general manager of
Opto-Electronics Components Products Business in March 1996.
Charles W. Deneka (52) Senior Vice President
Mr. Deneka joined Corning in 1972 and subsequently held manufacturing,
engineering and development positions in several divisions. In 1990, he was
named vice president and director of Development responsible for new product
development activities. In January 1995, he was appointed senior vice president
and chief technical officer.
Robert L. Ecklin (58) 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.
James B. Flaws (48) Vice President and Controller
Mr. Flaws joined Corning in 1973 and has held a variety of positions within
Corning's Consumer Products group and in 1991 was appointed vice president and
chief financial officer. Mr. Flaws was elected assistant treasurer of Corning
Incorporated in 1993. He was elected to his present position as vice president
and controller effective as of February 1, 1997.
Sandra L. Helton (47) 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. (57) 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 (64) 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 and
general counsel in 1972. He was elected a senior vice president in 1983.
Wendell P. Weeks (37) Vice President
Mr. Weeks joined Corning in 1983 and has served in various accounting, business
development, and business manager positions. In 1992, he was named general
manager and director of external development, Opto-Electronics Components
Business, division vice president in July 1994, and deputy general manager in
June 1995. He was appointed vice president and general manager of the
Telecommunications Products Division in March 1996.
16
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 24, 1997, 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 24, 1997, 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 24, 1997, is
incorporated by reference in this Annual Report on Form 10-K.
17
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 22
Consolidated Statements of Income 23
Consolidated Balance Sheets 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26-49
Financial Statement Schedule:
II Valuation Accounts and Reserves 50
2. Supplementary Data:
Quarterly Operating Results and Related Market Data 51-52
Five Years in Review - Historical Comparison 53-54
Investor Information 55-56
3. Exhibits filed as part of this report: see (c) below.
(b) Reports on Form 8-K filed during the last quarter of fiscal 1996:
A report on Form 8-K dated October 15, 1996, filed in connection with
the registrant's medium-term note facility, includes Corning's third
quarter earnings press release of October 15, 1996.
A report on Form 8-K dated November 26, 1996, filed in connection with
the Distributions of Corning's health care services businesses.
(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 reference in this Annual Report
pursuant to an exemption in accordance with Section 232.102(a)
of Regulation S-T.
18
Certificate of Amendment, dated October 24, 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 reference in this Annual Report
pursuant to an exemption in accordance with Section 232.102(a)
of Regulation S-T.
Certificate of Amendment, dated June 24, 1996, of the Restated
Certificate of Incorporation of the Registrant which amends
the number of shares of Series A Preferred Stock designated.
#4. Rights Agreement dated June 5, 1996, that defines the
preferred share purchase rights which trade with the
Registrant's common stock, which appears as Exhibit 1 to
Form 8-K, dated July 10, 1996, 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, 1996
#23 Consent of Independent Accountants
#24 Powers of Attorney
#27 Financial Data Schedule
(d) Dow Corning Corporation:
Page
Report of Independent Accountants 57
Consolidated Balance Sheets 58-59
Consolidated Statements of Operations and Retained Earnings 60
Consolidated Statements of Cash Flow 61
Notes to Consolidated Financial Statements 62-86
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 31 and 32.
19
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/ Roger G. Ackerman Chairman of the Board and
By Chief Executive Officer March 12, 1997
--------------------------------
(Roger G. Ackerman)
/s/ Van C. Campbell
By Vice Chairman March 12, 1997
-------------------------------- and Chief Financial Officer
(Van C. Campbell)
/s/ Katherine A. Asbeck
By Chief Accounting Officer March 12, 1997
--------------------------------
(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 12, 1997
-------------------------------- Chief Executive Officer
(Roger G. Ackerman) and Director
*
Director March 12, 1997
--------------------------------
(Robert Barker)
*
Director March 12, 1997
--------------------------------
(John Seely Brown)
*
Director March 12, 1997
--------------------------------
(Mary L. Bundy)
*
Director March 12, 1997
--------------------------------
(Van C. Campbell)
*
Director March 12, 1997
--------------------------------
(Lawrence S. Eagleburger)
*
Director March 12, 1997
--------------------------------
(John H. Foster)
20
*
Director March 12, 1997
--------------------------------
(Norman E. Garrity)
*
Director March 12, 1997
--------------------------------
(Gordon Gund)
* Director March 12, 1997
--------------------------------
(John M. Hennessy)
* Director March 12, 1997
--------------------------------
(James R. Houghton)
*
Director March 12, 1997
--------------------------------
(James W. Kinnear)
*
Director March 12, 1997
--------------------------------
(John W. Loose)
*
Director March 12, 1997
--------------------------------
(James J. O'Connor)
*
Director March 12, 1997
--------------------------------
(Catherine A. Rein)
*
Director March 12, 1997
--------------------------------
(Henry Rosovsky)
*
Director March 12, 1997
--------------------------------
(H. Onno Ruding)
*
Director March 12, 1997
--------------------------------
(William D. Smithburg)
/s/ William C. Ughetta
*By--------------------------------
(William C. Ughetta,
Attorney-in-fact)
21
REPORT OF INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
January 27, 1997
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 18 present fairly, in all material
respects, the financial position of Corning Incorporated and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, 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
22
CONSOLIDATED STATEMENTS OF INCOME
Corning Incorporated and Subsidiary Companies
====================================================================================================================================
Years Ended December 31, 1996, December 31, 1995 and January 1, 1995
(In millions, except per-share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Net sales $ 3,651.6 $ 3,257.1 $ 3,083.4
Royalty, interest and dividend income 32.9 30.6 26.5
- ------------------------------------------------------------------------------------------------------------------------------------
3,684.5 3,287.7 3,109.9
- ------------------------------------------------------------------------------------------------------------------------------------
Deductions
Cost of sales 2,258.9 2,032.6 1,950.0
Selling, general and administrative expenses 639.8 556.2 535.8
Research and development expenses 191.3 175.7 176.6
Provision for restructuring 26.5
Interest expense 69.1 69.3 65.6
Other, net 38.1 21.3 38.1
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before taxes on income 487.3 406.1 343.8
Taxes on income from continuing operations 163.2 118.2 112.6
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before minority interest
and equity earnings 324.1 287.9 231.2
Minority interest in earnings of subsidiaries (52.6) (64.4) (48.6)
Dividends on convertible preferred securities of subsidiary (13.7) (13.7) (6.1)
Equity in earnings (losses) of associated companies:
Other than Dow Corning Corporation 85.1 66.7 48.6
Dow Corning Corporation (348.0) (2.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 342.9 (71.5) 222.3
Income (loss) from discontinued operations, net of income taxes (167.3) 20.7 59.0
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 175.6 $ (50.8) $ 281.3
====================================================================================================================================
Per Common Share:
Continuing operations $ 1.50 $ (0.32) $ 1.04
Discontinued operations (0.74) 0.09 0.28
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 0.76 $ (0.23) $ 1.32
====================================================================================================================================
Weighted Average Shares Outstanding 227.1 226.6 211.8
====================================================================================================================================
See Notes to Consolidated Financial Statements beginning on page 26.
23
CONSOLIDATED BALANCE SHEETS
Corning Incorporated and Subsidiary Companies
====================================================================================================================================
December 31, 1996 and December 31, 1995
(In millions, except share amounts) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 51.9 $ 72.4
Short-term investments, at cost, which approximates market value 171.3 115.2
Accounts receivable, net of doubtful accounts and
allowances - $22.0/1996; $24.3/1995 566.3 479.5
Inventories 498.5 426.5
Deferred taxes on income and other current assets 130.7 102.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 1,418.7 1,196.4
- ------------------------------------------------------------------------------------------------------------------------------------
Investments
Associated companies, at equity 313.8 341.0
Others, at cost 23.4 23.9
Plant and Equipment, at Cost, Net of Accumulated Depreciation 1,977.7 1,599.6
Goodwill and Other Intangible Assets,
Net of Accumulated Amortization - $86.8/1996; $68.3/1995 330.4 330.8
Other Assets 257.3 305.3
Net Assets of Discontinued Operations 1,664.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 4,321.3 $ 5,461.7
====================================================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Loans payable $ 53.9 $ 143.1
Accounts payable 268.9 202.6
Other accrued liabilities 484.7 396.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 807.5 742.0
- ------------------------------------------------------------------------------------------------------------------------------------
Other Liabilities 646.2 618.3
Loans Payable Beyond One Year 1,208.5 1,340.0
Minority Interest in Subsidiary Companies 310.7 269.8
Convertible Preferred Securities of Subsidiary 365.1 364.7
Convertible Preferred Stock 22.2 23.9
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: 261.0 million/1996; 258.6 million/1995 566.0 1,113.0
Retained earnings 1,024.0 1,496.5
Less cost of 32.3 million/1996 and 28.8 million/1995
shares of common stock in treasury (672.5) (563.0)
Cumulative translation adjustment 43.6 56.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total common stockholders' equity 961.1 2,103.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 4,321.3 $ 5,461.7
====================================================================================================================================
See Notes to Consolidated Financial Statements beginning on page 26.
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
Corning Incorporated and Subsidiary Companies
====================================================================================================================================
Years Ended December 31, 1996, December 31, 1995 and January 1, 1995
(In millions) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) $ 175.6 $ (50.8) $ 281.3
Adjustments to reconcile net income (loss) to net cash provided by operating
activities of continuing operations:
(Income) loss from discontinued operations 167.3 (20.7) (59.0)
Depreciation and amortization 288.1 251.6 242.7
Equity in earnings of associated companies, other than Dow Corning
Corporation, less than (in excess of) dividends received 2.9 7.8 (3.3)
Equity in losses of Dow Corning Corporation 348.0 2.8
Minority interest in earnings of subsidiaries
in excess of dividends paid 19.0 25.1 29.0
Losses (gains) on disposition of properties and investments 6.6 12.9 (12.0)
Provision for restructuring, net of cash spent 25.4
Deferred tax provision (benefit) 18.5 (5.0) 2.8
Other 21.0 8.1 26.7
Changes in operating assets and liabilities:
Accounts receivable (75.3) 9.7 (143.1)
Inventories (71.3) (45.3) (38.5)
Deferred taxes and other current assets (14.7) 5.5 11.4
Accounts payable and other current liabilities 65.1 (16.1) 14.9
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities of Continuing Operations 602.8 556.2 355.7
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Additions to plant and equipment (597.8) (381.8) (286.1)
Acquisitions of businesses, net (15.1) (3.1) (390.7)
Net proceeds from disposition of properties and investments 35.9 18.3 133.1
Proceeds from Distributions of subsidiaries 650.0
Net increase in long-term investments (12.7) (28.1) (14.1)
Other, net 19.7 (2.9) (11.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities of Continuing Operations 80.0 (397.6) (569.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of loans 415.4 167.9 236.6
Repayments of loans (205.5) (86.7) (509.0)
Repayments of loans with proceeds from Distribution of subsidiaries (450.0)
Increase in minority interest due to capital contributions 8.6 66.5
Proceeds from issuance of convertible preferred securities of subsidiary 364.4
Proceeds from issuance of common stock 43.4 24.3 247.7
Repurchases of common stock (83.9) (33.1)
Payment of dividends (167.2) (167.2) (152.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities of Continuing Operations (439.2) (94.8) 254.0
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash (2.2) 1.2 3.3
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of accounting calendar change on cash (17.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash used in discontinued operations (188.3) (18.5) (50.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 35.6 46.5 (6.7)
Cash and cash equivalents at beginning of year 187.6 141.1 147.8
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 223.2 $ 187.6 $ 141.1
====================================================================================================================================
See Notes to Consolidated Financial Statements beginning on page 26.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Corning Incorporated and Subsidiary Companies
(Dollars in millions, except share and per-share amounts)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Principles of Consolidation
On December 31, 1996 Corning completed a strategic repositioning of the Company
by distributing all of the shares of Quest Diagnostics Incorporated (formerly
Corning Clinical Laboratories Inc.) and Covance Inc. (formerly Corning
Pharmaceutical Services Inc.) (the Distributions) to its shareholders on a pro
rata basis. Corning's consolidated financial statements and notes to
consolidated financial statements report Quest Diagnostics and Covance, which
formerly comprised Corning's Health Care Services segment, as discontinued
operations. Prior period Consolidated Financial Statements and Notes to
Consolidated Financial Statements have been restated accordingly.
The consolidated financial statements include the accounts of all entities
controlled by Corning. All significant intercompany accounts and transactions
are eliminated.
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%.
Effective January 1, 1996, Corning made several changes to its accounting
calendar to make Corning's results more comparable with other companies and to
enable Corning to report results of certain subsidiaries on a more current
basis. As part of the changes, Corning adopted an annual reporting calendar.
Previously Corning operated on a fiscal year ending on the Sunday nearest
December 31.
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 results 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 1996, 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.
26
1. Summary of Significant Accounting Policies
(Continued)
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.
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.
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 $1.9 million in 1996, $2 million in 1995 and $2.1 million in 1994. Weighted
average shares outstanding were 227.1 million in 1996, 226.6 million in 1995 and
211.8 million in 1994. The weighted average of common shares outstanding for
earnings per common share calculations does not include approximately 2.3
million, 2.6 million and 2.9 million shares held by the Corning Stock Ownership
Trust in 1996, 1995 and 1994, 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
Purchases
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.
27
2. Business Combinations and Divestitures
(Continued)
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 March 1996, Corning sold its equity investment in CALP S.p.A. for
approximately $30 million. The gain recognized on this transaction was not
material. In October 1996, Corning announced that it had reached an agreement to
sell its Serengeti eyewear business to Solar-Mates, Inc. for approximately $28
million. Corning expects to record a modest gain upon completion of this
transaction in early 1997.
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.
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 accounted 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 increased its ownership in Quanterra from 50% 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 of this
transaction, Corning began consolidating Quanterra's results beginning in 1996.
3. Information by Industry Segment
Corning is a diversified, global, technology-based corporation which operates in
three broadly-based business segments: Communications, Specialty Materials, and
Consumer 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 equipment and optical components for the worldwide
telecommunications industry. The information-display business manufactures glass
panels and funnels, projection-video lens assemblies and liquid-crystal display
glass for flat panel displays.
The Specialty Materials segment includes the environmental-products business,
which produces emission-control substrates and related technologies for all
major-vehicle-producing 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 advanced
materials, optical and lighting products.
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. The Steuben crystal and Serengeti eyewear
businesses are also included in this segment.
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."
28
3. Information by Industry Segment
(Continued)
As a result of Corning's decision to fully reserve its investment in Dow Corning
Corporation and discontinue recognition of 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."
Information about the company's segment operations is summarized on the
following page.
29
3. Information by Industry Segment
(Continued)
====================================================================================================================================
Other,
including
Corporate
Commu- Specialty Consumer Investments
nications Materials Products and R&D Total
- ------------------------------------------------------------------------------------------------------------------------------------
Operations:
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
1996 $ 1,969.4 $ 996.4 $ 685.8 $ 32.9 $3,684.5
1995 1,711.7 871.9 673.5 30.6 3,287.7
1994 1,458.3 846.0 779.1 26.5 3,109.9
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before taxes:
1996 $ 528.5 $ 195.8 $ 38.2 $ (275.2) $ 487.3
1995 (1) 434.9 174.7 10.1 (213.6) 406.1
1994 345.8 164.3 55.6 (221.9) 343.8
====================================================================================================================================
Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Operating assets:
1996 $ 1,967.2 $ 740.9 $ 570.8 $ 728.6 $4,007.5
1995 1,484.1 706.3 578.6 2,351.7 5,120.7
1994 1,437.3 600.6 580.3 2,239.8 4,858.0
- ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures:
1996 $ 364.7 $ 67.8 $ 37.7 $ 127.6 $ 597.8
1995 180.7 96.3 44.8 60.0 381.8
1994 146.3 60.0 43.3 36.5 286.1
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization:
1996 $ 141.0 $ 65.0 $ 36.9 $ 45.2 $ 288.1
1995 121.4 60.5 32.1 37.6 251.6
1994 109.7 57.2 40.5 35.3 242.7
====================================================================================================================================
Equity Investments other than Dow Corning:
- ------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity:
1996 $ 216.1 $ 27.6 $ 70.1 $ 313.8
1995 195.8 60.2 $ 9.6 75.4 341.0
1994 182.5 47.2 13.0 73.7 316.4
- ------------------------------------------------------------------------------------------------------------------------------------
Equity company sales:
1996 $ 1,120.4 $ 182.5 $ 27.5 $ 262.9 $1,593.3
1995 982.2 290.8 95.0 223.3 1,591.3
1994 788.9 196.0 99.2 210.7 1,294.8
- ------------------------------------------------------------------------------------------------------------------------------------
Equity company net income (loss):
1996 $ 158.5 $ 23.8 $ 2.4 $ 23.6 $ 208.3
1995 101.6 5.6 6.1 20.8 134.1
1994 88.4 (6.9) 11.5 17.3 110.3
- ------------------------------------------------------------------------------------------------------------------------------------
Corning's share of net income (loss):
1996 $ 67.5 $ 8.8 $ 0.5 $ 8.3 $ 85.1
1995 47.4 6.4 1.2 11.7 66.7
1994 38.1 5.7 2.3 2.5 48.6
====================================================================================================================================
(1) The 1995 restructuring charge totaling $26.5 million was included in income
before taxes of Communications ($9.3 million), Specialty Materials ($6.6
million) and Other, including Corporate Investments and R&D ($10.6
million).
30
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 $150.3 million and
$143 million of Corning's investments accounted for by the equity method at year
end 1996 and 1995, respectively.
The financial position and results of operations of Samsung-Corning and
Corning's other equity companies are summarized as follows:
====================================================================================================================================
1996 1995 1994
---------------------------- ----------------------------- --------------------------------
Samsung- Total Samsung- Total Samsung- Total
Corning Equity Corning Equity Corning Equity
Co. Ltd. Companies Co. Ltd. Companies Co. Ltd. Companies
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 794.9 $ 1,593.3 $ 713.4 $ 1,591.3 $ 601.6 $ 1,294.8
Gross profit 192.8 554.7 152.8 491.6 147.0 388.7
Net income 54.6 208.3 43.1 134.1 46.5 110.3
- ------------------------------------------------------------------------------------------------------------------------------------
Corning's equity
in net income(1) $ 26.4 $ 85.1 $ 19.6 $ 66.7 $ 22.1 $ 48.6
- ------------------------------------------------------------------------------------------------------------------------------------
Current assets $ 328.1 $ 661.3 $ 290.5 $ 673.5 $ 258.9 $ 560.3
Non-current
assets 1,415.0 1,826.3 978.1 1,336.5 589.2 930.4
- ------------------------------------------------------------------------------------------------------------------------------------
Current liabilities $ 446.3 $ 647.6 $ 351.5 $ 543.9 $ 204.1 $ 398.1
Non-current
liabilities 979.1 1,132.8 618.2 805.7 374.1 539.2
====================================================================================================================================
(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 $88.2 million, $74.3 million and $48.2 million in 1996, 1995 and 1994,
respectively. At December 31, 1996, approximately $190.5 million of equity in
undistributed earnings of equity companies were included in Corning's retained
earnings.
31
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:
====================================================================================================================================
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 2,532.3 $ 2,492.9 $ 2,204.6
Gross profit 858.3 828.5 734.3
Net income (loss) 221.7 (30.6) (6.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Corning's equity in net income (loss) (1) $ (348.0) (2) $ (2.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Current assets $ 1,524.7 $ 1,835.7 $ 1,635.8
Non-current assets 3,589.4 3,122.7 2,457.4
- ------------------------------------------------------------------------------------------------------------------------------------
Current liabilities $ 480.5 $ 459.5 $ 1,325.0
Non-current liabilities 343.2 347.9 1,974.1
Liabilities subject to compromise (3) 3,452.1 3,504.1
====================================================================================================================================
(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 1996 and 1995 have been prepared in
conformity with the American Institute of Certified Public Accountants'
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization 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.
As disclosed in Dow Corning's financial statements, its 1995 and 1994 results
were impacted by charges related to breast-implant litigation matters. In the
fourth quarter 1994, Dow Corning recorded an accounting charge of $151.8 million
after tax. Subsequent to Corning's decision to fully reserve its investment in
Dow Corning in 1995, Dow Corning recorded an accounting charge of $221.2 million
after tax. Dow Corning's 1996 and 1995 results have also been impacted by the
suspension of interest payments and reorganization costs resulting from the
Chapter 11 filing.
Dow Corning filed a reorganization plan with the Federal Bankruptcy Court in
December 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.
32
5. Employee Retirement Plans
Pension Benefits
Corning has defined-benefit pension plans covering substantially all 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:
====================================================================================================================================
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Vested benefits $ 1,054.9 $ 1,012.4
Non-vested benefits 96.1 90.1
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $ 1,151.0 $ 1,102.5
====================================================================================================================================
Current fair market value of plan assets $ 1,344.3 $ 1,217.1
Present value of projected benefit obligation 1,226.5 1,163.0
- ------------------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 117.8 54.1
Unrecognized prior service cost 134.1 113.4
Unrecognized transition gain (10.7) (11.5)
Unrecognized net (gains) losses from changes in actuarial assumptions 71.6 66.4
Other unrecognized net experience gains (213.3) (130.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Recorded pension asset $ 99.5 $ 91.8
====================================================================================================================================
Plan assets are comprised principally of publicly traded debt and equity
securities. Corning common stock represented 7.7% and 6.3% of plan assets at
year end 1996 and 1995, respectively.
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, in both 1996 and 1995. The expected long-term rate of return on
plan assets was 9% for 1996 and 1995. Assumptions of the company's other plans
are not significantly different.
33
5. Employee Retirement Plans
(Continued)
The components of pension expense for Corning's defined-benefit pension plans
are as follows:
====================================================================================================================================
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Present value of benefits earned during the year $22.2 $17.2 $22.9
Interest cost on projected benefit obligation 85.1 84.7 79.1
Actual return on plan assets (180.5) (224.9) (6.7)
Net amortization and deferral 91.8 134.2 (80.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Net pension expense for the year $18.6 $11.2 $15.3
====================================================================================================================================
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 $47.3 million in 1996, and
$42.7 million in both 1995 and 1994.
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. Substantially all of Corning's employees may
become eligible for such benefits upon reaching retirement age. 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 both 1996 and 1995. The health-care cost trend rate for Corning's
principal plan is assumed to be 9% in 1996 for covered individuals under age 65
decreasing gradually to 5% in 2010 and thereafter. For covered individuals over
65, the rate is assumed to be 8% in 1996 decreasing gradually to 5% 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 $49.3 million and $4.5
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.
34
5. Employee Retirement Plans
(Continued)
Corning's accrued postretirement liability as of year end was comprised of the
following:
================================================================================
1996 1995
- -------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 357.6 $ 363.8
Fully eligible active plan participants 58.1 44.6
Other active plan participants 135.8 131.7
- --------------------------------------------------------------------------------
551.5 540.1
Unrecognized gain from plan amendments 11.7 12.5
Other unrecognized net experience gains 34.3 27.2
- --------------------------------------------------------------------------------
Total postretirement liability 597.5 579.8
Less current portion 30.9 23.5
- --------------------------------------------------------------------------------
Accrued postretirement liability $ 566.6 $ 556.3
================================================================================
Corning has not funded these obligations.
The components of net periodic postretirement benefit expense are as follows:
================================================================================
1996 1995 1994
- ------------------------------------------------------------------------------
Present value of benefits earned during the year $ 10.6 $ 9.7 $ 10.9
Interest cost on the accumulated postretirement
benefit obligation 38.5 40.6 38.8
Net amortization (1.4) (1.9) (1.5)
- --------------------------------------------------------------------------------
Postretirement benefit expense $ 47.7 $ 48.4 $ 48.2
================================================================================
Measurement of postretirement benefit expense is based on assumptions used to
value the postretirement liability at the beginning of the year.
35
6. Taxes on Income
====================================================================================================================================
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before taxes on income:
U.S. companies $ 400.7 $ 327.5 $313.0
Non-U.S. companies 86.6 78.6 30.8
- ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes on income $ 487.3 $ 406.1 $343.8
- ------------------------------------------------------------------------------------------------------------------------------------
Taxes on income from continuing operations $ 163.2 $ 118.2 $112.6
====================================================================================================================================
Effective tax rate reconciliation:
Statutory U.S. tax rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 1.4 1.1 1.9
Foreign and other tax credits (0.5) (2.0) (2.4)
Lower taxes on subsidiary earnings (2.4) (6.3) (2.1)
Other 1.3 0.4
- ------------------------------------------------------------------------------------------------------------------------------------
Effective tax rate 33.5% 29.1% 32.8%
====================================================================================================================================
Components of net tax expense:
Taxes on income from continuing operations $ 163.2 $ 118.2 $112.6
Taxes on equity in earnings 15.1 11.9 3.5
Tax benefits included in common stockholders' equity (17.0) (11.5) (22.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Net tax expense before discontinued operations 161.3 118.6 93.6
Income tax expense from discontinued operations 7.8 32.3 79.5
- ------------------------------------------------------------------------------------------------------------------------------------
Net tax expense $ 169.1 $ 150.9 $173.1
====================================================================================================================================
Current and deferred tax expense (benefit) before discontinued operations:
Current:
U.S. $ 68.2 $ 62.8 $ 53.3
State and municipal 15.3 16.5 9.4
Foreign 53.4 44.8 21.6
Deferred:
U.S. 16.2 (0.6) 14.0
State and municipal 4.0 (3.1) (0.2)
Foreign 4.2 (1.8) (4.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Net tax expense before discontinued operations $ 161.3 $ 118.6 $ 93.6
====================================================================================================================================
36
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:
================================================================================
1996 1995
- --------------------------------------------------------------------------------
Postretirement medical and life benefits $ 239.7 $ 233.5
Other employee benefits 37.8 44.3
Other accrued liabilities 20.9 23.2
Loss and tax credit carryforwards 25.2 24.9
Other 32.9 29.8
- --------------------------------------------------------------------------------
Gross deferred tax assets 356.5 355.7
Deferred tax assets valuation allowance (13.6) (18.3)
- --------------------------------------------------------------------------------
Deferred tax assets 342.9 337.4
- --------------------------------------------------------------------------------
Fixed assets (109.9) (106.6)
Pensions (41.7) (39.5)
Other (8.3) (3.1)
- --------------------------------------------------------------------------------
Deferred tax liabilities (159.9) (149.2)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 183.0 $ 188.2
================================================================================
The net change in the total valuation allowance for the years ended December 31,
1996, and 1995, was a decrease of $4.7 million and a decrease of $7.6 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 $333.7 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 $32.1 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 $123.5 million, $103.8 million and
$111.5 million during 1996, 1995 and 1994, respectively. Deferred income tax
benefits totaling $69 million and $61.1 million were included in other current
assets at year end 1996 and 1995, respectively. At December 31, 1996, Corning
had tax benefits attributable to loss carryforwards and credits aggregating
$25.2 million that expire at various dates through 2011.
37
7. Supplemental Income Statement Data
=============================================================================================================================
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Depreciation expense $ 269.2 $ 222.4 $ 218.2
Amortization of goodwill and other intangible assets 18.9 29.2 24.5
- -----------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense $ 288.1 $ 251.6 $ 242.7
- -----------------------------------------------------------------------------------------------------------------------------
Rental expense $ 60.5 $ 58.0 $ 52.6
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense incurred $ 86.7 $ 79.7 $ 77.5
Interest capitalized (17.6) (10.4) (11.9)
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense, net $ 69.1 $ 69.3 $ 65.6
- -----------------------------------------------------------------------------------------------------------------------------
Interest paid $ 114.2 $ 112.3 $ 99.9
=============================================================================================================================
Consolidated interest expense allocated to discontinued operations totaled $51.7
million, $48.5 million and $44.8 million in 1996, 1995 and 1994, respectively.
The allocations were based on the ratio of net assets of discontinued operations
to consolidated net assets.
8. Provision for Restructuring
In the second quarter 1995, Corning recorded a restructuring charge of $26.5
million ($16.1 million after tax). The charge included $18.5 million of
severance for workforce reductions, primarily in corporate staff groups, a
curtailment loss in Corning's primary pension plan attributable to workforce
reductions and $8.0 million for the write-off of production equipment caused by
the decision to exit the manufacturing facility for glass-ceramic memory-disks.
Of the $18.5 million provided for employee termination costs, Corning utilized
$9.3 million and $5.3 million in 1995 and 1996, respectively. The reserve
provided for the write-off of fixed assets was substantially utilized in 1996.
The restructuring reserve balance remaining at December 31, 1996 totaled $5.1
million.
Employee termination costs included severance benefits related to approximately
200 employees that have been terminated or notified of their termination at
December 31, 1996. Corning anticipates that spending under this restructuring
program will be completed in 1997.
38
9. Supplemental Balance Sheet Data
================================================================================
1996 1995
- --------------------------------------------------------------------------------
Inventories
- --------------------------------------------------------------------------------
Finished goods $ 223.0 $ 201.4
Work in process 156.7 135.7
Raw materials and accessories 104.5 84.4
Supplies and packing materials 64.5 57.6
- --------------------------------------------------------------------------------
Total inventories valued at current cost 548.7 479.1
Reduction to LIFO valuation (50.2) (52.6)
- --------------------------------------------------------------------------------
Inventories $ 498.5 $ 426.5
================================================================================
================================================================================
Plant and Equipment
- --------------------------------------------------------------------------------
Land $ 54.2 $ 42.3
Buildings 810.4 674.1
Equipment 2,906.3 2,437.9
- -------------------------------------------------------------------------------
3,770.9 3,154.3
Accumulated depreciation (1,793.2) (1,554.7)
- --------------------------------------------------------------------------------
Plant and equipment, net $ 1,977.7 $1,599.6
================================================================================
================================================================================
Other Accrued Liabilities
- --------------------------------------------------------------------------------
Taxes on income $ 98.9 $ 55.3
Wages and employee benefits 191.7 189.5
Other liabilities 194.1 151.5
- -------------------------------------------------------------------------------
Other accrued liabilities $ 484.7 $ 396.3
================================================================================
39
10. Loans Payable
====================================================================================================================================
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Loans Payable:
Current maturities of loans payable beyond one year $ 51.9 $ 138.3
Other short-term borrowings 2.0 4.8
- ------------------------------------------------------------------------------------------------------------------------------------
$ 53.9 $ 143.1
====================================================================================================================================
Loans Payable Beyond One Year:
Notes, 8.375%, due 1996 $ 75.0
Notes, 7.78%, due 1998 $ 13.3 16.3
Notes, 8.75%, due 1999 99.9 99.9
Series A senior notes, 7.99%, due 1999 36.0 48.0
Series B senior notes, 8.4%, due 2002 42.9 50.0
Debentures, 8.25%, due 2002 75.0 75.0
Debentures, 6%, due 2003 99.5 99.4
Debentures, 7% due 2007, net of unamortized discount of $41.2 million 58.8 57.1
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 265.0 270.0
Other, average rate 5.3%, due through 2009 151.4 269.0
- ------------------------------------------------------------------------------------------------------------------------------------
1,260.4 1,478.3
Less current maturities 51.9 138.3
- ------------------------------------------------------------------------------------------------------------------------------------
$ 1,208.5 $ 1,340.0
====================================================================================================================================
At December 31, 1996, and 1995, the weighted average interest rate on short-term
borrowings was 6%.
At December 31, 1996, loans payable beyond one year become payable:
================================================================================
1998 1999 2000 2001 2002-2025
- --------------------------------------------------------------------------------
$57.0 $146.9 $33.5 $45.6 $925.5
================================================================================
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 $1.3
billion at year end 1996.
Unused bank revolving-credit agreements in effect at December 31, 1996, provide
for Corning to borrow up to $815 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.
40
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). The MIPS are 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). In
January 1997, the conversion rate of the MIPS was adjusted from 1.2821 to 1.5340
(equivalent to a conversion price of $32.59 per share) to recognize the effect
of the Distributions of Quest Diagnostics and Covance. 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.
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, 1996, the fair value of the
preferred securities approximated $475 million.
12. Convertible Preferred Stock
Corning has 10 million authorized shares of Series Preferred Stock, par value
$100 per share. Of the authorized shares, 2,400,000 shares have been designated
Series A Junior Participating Preferred Stock of which no shares have been
issued.
At year end 1996, 1995 and 1994, 222,000, 239,400 and 249,000 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. In January 1997, the conversion rate of the
convertible preferred stock was adjusted from 4 to 4.79 to recognize the effect
of the Distributions of Quest Diagnostics and Covance. 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.
41
13. Common Stockholders' Equity
====================================================================================================================================
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock at par value:
Balance at beginning of year $ 129.3 $ 127.9 $ 114.0
Shares issued 1.2 1.4 13.9
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 130.5 $ 129.3 $ 127.9
====================================================================================================================================
Capital in excess of par value:
Balance at beginning of year $ 1,116.7 $ 1,042.9 $ 673.5
Shares issued 99.1 73.8 369.4
Distributions of subsidiaries (653.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 562.3 $ 1,116.7 $ 1,042.9
====================================================================================================================================
Unearned compensation:
Balance at beginning of year $ (133.0) $ (139.4) $ (160.7)
Corning Stock Ownership Trust (19.7) 4.6 4.6
Distributions of subsidiaries 4.5
Other, net 21.4 1.8 16.7
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (126.8) $ (133.0) $ (139.4)
====================================================================================================================================
Retained earnings:
Balance at beginning of year $ 1,496.5 $ 1,714.5 $ 1,581.9
Net income (loss) 175.6 (50.8) 281.3
Dividends declared ($0.72 per share in both
1996 and 1995, and $0.69 per share in 1994) (167.2) (167.2) (152.2)
Distributions of subsidiaries (473.2)
Change in accounting calendar (7.7)
Other, net 3.5
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,024.0 $ 1,496.5 $ 1,714.5
====================================================================================================================================
Treasury stock:
Balance at beginning of year $ (563.0) $ (523.7) $ (516.5)
Repurchases of shares (86.3) (34.8)
Termination of Equity Purchase Plan (14.5)
Other, net (8.7) (4.5) (7.2)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (672.5) $ (563.0) $ (523.7)
====================================================================================================================================
Cumulative translation adjustment:
Balance at beginning of year $ 56.5 $ 40.8 $ (6.4)
Translation adjustment (11.5) 15.7 47.2
Distributions of subsidiaries (1.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 43.6 $ 56.5 $ 40.8
====================================================================================================================================
Common stockholders' equity $ 961.1 $ 2,103.0 $ 2,263.0
====================================================================================================================================
42
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 shares of
common stock for pooling-of-interests business combinations in 1994. The
businesses acquired in the 1994 pooling-of-interest business combinations are
included in discontinued operations.
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, 1996, 2.5 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. Corning and the trustee
of the CSOT reached an agreement whereby the trustee waived its right to receive
the Distribution of Quest Diagnostics and Covance and in lieu thereof received
400,000 additional shares of Corning common stock.
As part of Corning's changes to its accounting calendar, effective January 1,
1996, certain consolidated subsidiaries that previously reported on fiscal year
ending November 30 adopted a calendar year end. The December 1995 net loss of
these subsidiaries totaled $7.7 million and was recorded in retained earnings in
the first quarter of 1996.
Corning repurchased approximately 2.2 million and 1.2 million shares of its
common stock in 1996 and 1995, respectively. Approximately 1.3 million shares of
the 1996 amount and all of the 1995 amount were repurchased 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. The remainder of
the 1996 stock repurchases were from employees to satisfy tax withholding
requirements on shares issued under employee benefit plans.
In June 1996, the Board of Directors approved the renewal of the Preferred Share
Purchase Right Plan 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 percent discount in the event a person or group acquires
20 percent or more of Corning's outstanding common stock. The preferred share
purchase rights became effective July 15, 1996 and expire July 15, 2006.
14. Stock Compensation Plans
At December 31, 1996, Corning's 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 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, 1996, 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. 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.
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 Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25).
Corning applies APB 25 accounting for its stock-based compensation plans.
Compensation expense is recorded for awards of shares or share rights over the
period earned. These plans resulted in compensation expense of $27.6 million in
1996, $12.0 million in 1995 and $16.4 million in 1994.
If the provisions of FAS 123 had been applied, the pro forma effect on Corning's
earnings and earnings per share in 1996 and 1995 would have been immaterial. As
a result of several factors, the pro forma effect in 1996 and 1995 may not be
representative of the effect to be expected in future years.
43
14. Stock Compensation Plans
(Continued)
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 except for the December 1995 grant which
becomes exercisable in installments from four to five years from the grant date;
the maximum term of non-qualified and incentive stock options is generally 10
years from the grant date.
Transactions for the three years ended December 31, 1996, were:
================================================================================
Weighted
Number Average
of Shares Exercise
in Thousands Price
- --------------------------------------------------------------------------------
Options outstanding January 2, 1994 7,222 $23.13
Options granted under Plan 2,511 $31.03
Options granted in acquisitions 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 January 1, 1996 11,777 $27.90
Options granted under Plan 763 $34.54
Options exercised (1,147) $13.52
Options terminated (1,022) $31.40
Adjustment due to Distributions 905
- --------------------------------------------------------------------------------
Options outstanding December 31, 1996 11,276 $24.26
================================================================================
The number and exercise price of all options outstanding were adjusted for the
Distributions of Quest Diagnostics and Covance. This adjustment increased the
number of options outstanding by approximately 905,000 and decreased the
exercise price of the options by approximately 18%.
For purposes of FAS 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995, respectively:
risk-free interest rate of 6.6% and 5.7%; dividend yield of 2.3%; expected
volatility of 24.5%; and expected life of 7 years.
The number of options exercisable and the corresponding weighted-average
exercise price was 6.5 million and $23.11 in 1996 and 5.2 million and $23.93 in
1995. The weighted-average fair value of options granted was $10.77 in 1996 and
$9.12 in 1995.
44
14. Stock Compensation Plans
(Continued)
The following table summarizes information about stock options outstanding at
December 31, 1996:
====================================================================================================================================
Options Outstanding Options Exercisable
---------------------------------------------------------------- -------------------------------------------
Weighted Average Number
Number Outstanding at Remaining Weighted Exercisable at Weighted
Range of December 31, 1996 Contractual Life Average December 31, 1996 Average
Exercise Prices in Thousands in Years Exercise Price in Thousands Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
$ 3 to 22 2,639 2.7 $13.80 2,639 $13.80
$22 to 28 5,538 8.3 $25.47 1,344 $25.51
$28 to 33 3,099 6.3 $31.01 2,544 $31.50
- ------------------------------------------------------------------------------------------------------------------------------------
11,276 6.4 $24.26 6,527 $23.11
====================================================================================================================================
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 1996, 1995 and 1994, grants of 340,000, 549,000 and 576,000 shares,
respectively, were made under these plans. In connection with the Distributions,
approximately 280,000 additional shares were issued to employees in lieu of
receiving the Distributions and approximately 180,000 shares were forfeited by
employees of the Distributed companies. At December 31, 1996, there were no
outstanding incentive rights. The weighted-average grant date fair value of
grants was $32.61 and $30.52 in 1996, and 1995, respectively. A total of 1.7
million shares issued in prior years remain subject to forfeiture at December
31, 1996.
Employee Stock Purchase Plan
In addition to the Stock Option Plan and Incentive Stock Plans, Corning has an
Employee Stock Purchase Plan (ESPP). Under the ESPP, substantially all employees
can elect to have up to 10% of their annual wages withheld to purchase Corning
common stock. The purchase price of the stock is 85% of the lower of the
beginning-of-quarter or end-of-quarter market price. The Corning Stock Ownership
Trust is utilized to fund employee purchases of common stock under the ESPP.
Equity Purchase Plan
Under the Equity Purchase Plan (EPP), 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. Effective September 30, 1996, the Board of
Directors voted to terminate the EPP. As a result of the EPP termination,
approximately 1.4 million restricted shares outstanding under the EPP were
repurchased by Corning for approximately $3.4 million and 312,000 unrestricted
common shares during the fourth quarter of 1996.
45
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 $9.6
million and $16.3 million at the end of 1996 and 1995, 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 $6.7 million in 1996, $6.4 million in 1995 and
$6.2 million in 1994. Dividends on unallocated shares reduced contribution
requirements by $0.5 million in 1996, $0.8 million in 1995 and $1 million in
1994. Interest costs amounted to $1.2 million in 1996, $1.6 million in 1995 and
$1.8 million in 1994. Shares held by the ESOP are included in weighted average
shares for earnings per share calculations. The trustee of the ESOP will sell
the shares of Quest Diagnostics and Covance that it received from the
distribution. The proceeds from the sale of these shares will be used to
purchase shares of Corning common stock.
16. Commitments, Contingencies and Guarantees
Minimum rental commitments under leases outstanding at December 31, 1996 are:
================================================================================
1997 1998 1999 2000 2001 2002-2013
- --------------------------------------------------------------------------------
$56.8 $41.2 $30.5 $21.9 $16.8 $93.7
================================================================================
At December 31, 1996, future minimum lease payments to be received under a
noncancelable sublease to Quest Diagnostics totaled $79 million. Quest
Diagnostics, in turn, has a noncancelable sublease covering approximately $53
million of the minimum lease payments due to Corning. Corning has agreed to
indemnify Quest Diagnostics should Quest Diagnostics' subleasee default on the
minimum lease payments. Additionally, Corning continues to guarantee certain
obligations of Quest Diagnostics totaling $18.7 million.
Corning has agreed to indemnify Quest Diagnostics, on an after-tax basis, for
the settlement of certain governmental claims pending at December 31, 1996. In
addition, Corning, Quest Diagnostics and Covance have entered into tax
indemnification and tax sharing agreements. Additional information on these
indemnification agreements is presented in Note 18 of the Notes to Consolidated
Financial Statements.
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, 1996, the amount of equity subject to such
restrictions for consolidated subsidiaries totaled $76.6 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, 1996, loans of equity
affiliates guaranteed by Corning totaled $21.3 million.
At December 31, 1996, Corning had foreign currency contracts designated as
hedges to purchase $42 million U.S. dollars. These contracts are held by Corning
and its subsidiaries and will mature at varying dates in 1997.
46
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
States Europe and Canada Amounts Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
1996
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $ 3,050.3(1) $ 229.2 $ 372.1 $ 32.9 $ 3,684.5
Transfers between areas 182.5 18.4 4.0 (204.9)
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues 3,232.8 247.6 376.1 (172.0) 3,684.5
Income before tax 407.4 68.9 23.7 (12.7) 487.3
- -----------------------------------------------------------------------------------------------------------------------------
Identifiable assets
at year end 3,663.6 315.1 342.6 4,321.3
Research and development
expense 173.7 13.4 4.2 191.3
=============================================================================================================================
1995
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $ 2,923.3(1) $ 176.8 $ 157.0 $ 30.6 $ 3,287.7
Transfers between areas 104.4 11.5 2.4 (118.3)
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues 3,027.7 188.3 159.4 (87.7) 3,287.7
Income before tax 363.6(2) 53.6 48.9 (60.0) 406.1
- -----------------------------------------------------------------------------------------------------------------------------
Identifiable assets
at year end 3,139.2 322.0 330.2 5.6 3,797.0
Research and development
expense 161.4 11.2 3.1 175.7
=============================================================================================================================
1994
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $ 2,743.6(1) $ 215.8 $ 124.0 $ 26.5 $ 3,109.9
Transfers between areas 93.5 20.9 0.8 (115.2)
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues 2,837.1 236.7 124.8 (88.7) 3,109.9
Income before tax 349.1 42.6 29.3 (77.2) 343.8
- -----------------------------------------------------------------------------------------------------------------------------
Identifiable assets
at year end 3,226.2 330.9 348.2 1.2 3,906.5
Research and development
expense 162.6 10.3 3.7 176.6
=============================================================================================================================
(1) U.S. sales to unaffiliated customers in 1996, 1995 and 1994 include $647
million, $497 million and $411 million of export sales; $213 million, $130
million and $113 million to Europe; and $434 million, $367 million and $298
million to Latin America, Asia-Pacific and Canada.
(2) The 1995 restructuring charge of $26.5 million was included in income
before tax of the United States.
47
18. Discontinued Operations
On December 31, 1996, Corning completed a strategic repositioning of the Company
by distributing all of the shares of Quest Diagnostics Incorporated (formerly
Corning Clinical Laboratories Inc.) and Covance Inc. (formerly Corning
Pharmaceutical Services Inc.) (the Distributions) to its shareholders on a pro
rata basis. Prior to the Distributions, Corning received a ruling from the
Internal Revenue Service that the Distributions are tax-free to Corning and its
shareholders. As a result of the Distributions Quest Diagnostics and Covance
became independent, publicly traded companies.
As a result of the Distributions, Corning's stockholders' equity was reduced by
$1.1 billion, which represented Corning's investment in equity and intercompany
debt of Quest Diagnostics and Covance on the date of the Distributions. Prior to
the Distributions, Quest Diagnostics and Covance borrowed $650 million from
third-party lenders and repaid intercompany debt to Corning. Corning used the
proceeds from the repayment of intercompany debt to repay approximately $375
million of short-term borrowings and $75 million of long-term debt. Corning
intends to use the remaining proceeds to invest for future strategic uses.
Summarized results of Corning's discontinued operations are as follows:
======================================================================================
1996 1995 1994
- --------------------------------------------------------------------------------------
Sales $ 515.0 $ 2,055.0 $ 1,687.1
Income (loss) before income taxes $ 20.5 $ 57.2 $ 116.5
Income tax provision 11.3 36.5 57.5
- ---------------------------------------------------------------------------------------
Income from operations, net of income taxes
Provision for loss on Distributions, 9.2 20.7 59.0
including income tax benefit of $3.5 million (176.5)
- ---------------------------------------------------------------------------------------
Discontinued operations, net of income taxes $ (167.3) $ 20.7 $ 59.0
=======================================================================================
The 1996 sales of $515 million and income from operations of $9.2 million of the
discontinued businesses only includes results through March 31, 1996. Results of
the discontinued business include allocations of consolidated interest expense
totaling $51.7 million, $48.5 million and $44.8 million in 1996, 1995 and 1994,
respectively. The allocations were based on the ratio of net assets of
discontinued operations to consolidated net assets.
The $176.5 million provision for loss on Distributions includes a second quarter
after-tax charge of $56.8 million, a third quarter after-tax charge of $115
million and a fourth quarter after-tax charge of $4.7 million. The second
quarter charge includes a $37 million after-tax charge to increase reserves for
government claims and an after-tax charge for the estimated costs related to the
Distributions offset by the estimated results of operations of the businesses to
be Distributed from April 1, 1996 through December 31, 1996, the Distribution
date. The third quarter charge related primarily to a $105 million after-tax
charge taken by Quest Diagnostics to increase reserves related to certain
government investigations of billing practices of certain clinical laboratories
acquired by Quest Diagnostics in 1993 and 1994. The fourth quarter charge of
$4.7 million represents the final accounting for estimates recorded in the
second quarter of 1996.
Quest Diagnostics 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 the second quarter 1996, the U.S. Department of Justice
(DOJ) notified Quest Diagnostics that it had taken issue with certain payments
received by Damon Corporation (Damon) from federally funded healthcare programs
prior to its acquisition by Quest Diagnostics. As a result, in the second
quarter 1996, Quest Diagnostics increased its reserves by $46 million ($37
million after tax) to equal management's estimate, at that time, of the low end
of the range of potential amounts which could be required to satisfy claims
related to the Damon and other related and similar investigations.
48
18. Discontinued Operations
(Continued)
During the third quarter, Quest Diagnostics management met with the government
several times to evaluate the substance of the government's allegations. As a
result of these discussions in October 1996, Quest Diagnostics' management, on
behalf of its Damon subsidiary, reached a settlement agreement with the DOJ
which caused Quest Diagnostics to pay $119 million to the government. This
settlement concludes all federal and Medicaid claims relating to the billing by
Damon of certain blood tests to Medicare and Medicaid patients and other matters
relating to Damon being investigated by the DOJ. As a result of this settlement
agreement, Quest Diagnostics management reassessed the level of reserves
recorded for other asserted and unasserted claims related to the Damon and other
similar government investigations, including the investigation of billing
practices by Nichols Institute (Nichols) prior to its acquisition by Quest
Diagnostics in 1994. Quest Diagnostics recorded a charge totaling $142 million
($105 million after tax) in the third quarter 1996 to establish additional
reserves equal to the Damon settlement agreement and Quest Diagnostics
management's best estimate of potential amounts which could be required to
satisfy the remaining claims.
Corning has agreed to indemnify Quest Diagnostics on an after-tax basis, for the
settlement of claims against Nichols and certain other claims that were pending
at December 31, 1996. Coincident with the Distributions, Corning recorded a
payable to Quest Diagnostics of approximately $25 million which is equal to
management's best estimate of amounts which are probable of being paid by
Corning to Quest Diagnostics to satisfy the remaining indemnified claims on an
after-tax basis.
Although management believes that established reserves for indemnified claims
are sufficient, it is possible that additional information may become available
to Quest Diagnostics' management which may cause the final resolution of these
matters to exceed established reserves by an amount which could be material to
Corning's results of operations and cash flow in the period in which such claims
are settled. Corning does not believe that these issues will have a material
adverse impact on Corning's overall financial condition.
Corning, Quest Diagnostics and Covance have entered into tax indemnification
agreements that prohibit Quest Diagnostics and Covance for a period of two years
after the Distributions from taking certain actions that might jeopardize the
favorable tax treatment of the Distributions and provide Corning with certain
rights of indemnification against Quest Diagnostics and Covance. The tax
indemnification agreements also require Quest Diagnostics and Covance to take
such actions as Corning may request to preserve the favorable tax treatment
provided for in any rulings obtained from the Internal Revenue Service in
respect of the Distributions.
Corning, Quest Diagnostics and Covance have also entered into a tax sharing
agreement which allocates among Corning, Quest Diagnostics and Covance
responsibility for federal, state and local taxes relating to taxable periods
before and after the Distributions and provides for computing and apportioning
tax liabilities and tax benefits for such periods among the parties. Quest
Diagnostics and Covance have paid or will pay Corning for all income taxes due
at December 31, 1996. Corning will indemnify Quest Diagnostics and Covance for
any adjustments to these liabilities resulting from future audits of Corning's
consolidated federal and certain other tax returns for periods prior to the
Distribution date.
Income from discontinued operations in 1995 reflects a restructuring charge of
$40.5 million ($24.4 million after tax) which included severance for workforce
reduction programs and the costs of exiting a number of leased facilities.
Income from discontinued operations in 1994 reflects a restructuring charge of
$82.3 million ($55.4 million after tax) for integration costs, transaction
expenses, and other reserves, primarily related to 1994 acquisitions. 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 by issuing 7.5
million shares of Corning common stock and reserving 1.1 million shares for
future issuance upon the exercise of options issued in connection with the
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. These transactions were accounted for as poolings of interests.
49
Corning Incorporated and Subsidiary Companies
Schedule II - Valuation Accounts and Reserves
==========================================================================================================
Balance at Net Deductions Balance at
Year Ended December 31, 1996 12-31-95 Additions and Other 12-31-96
- ----------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 24.3 $ 20.0 $ 22.3 $22.0
LIFO valuation $ 52.6 $ 5.5 $ 7.9 $50.2
Deferred tax assets valuation allowance $ 18.3 $ 3.7 $ 8.4 $13.6
Accumulated amortization of goodwill
and other intangible assets $ 68.3 $ 18.5 $86.8
==========================================================================================================
===========================================================================================================
Balance at Net Deductions Balance at
Year Ended December 31, 1995 1-1-95 Additions and Other 12-31-95
- -----------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 18.3 $ 20.5 $ 14.5 $24.3
LIFO valuation $ 58.9 $ 1.5 $ 7.8 $52.6
Deferred tax assets valuation allowance $ 25.9 $ 10.2 $ 17.8 $18.3
Accumulated amortization of goodwill
and other intangible assets $ 54.2 $ 14.1 $68.3
===========================================================================================================
============================================================================================================
Balance at Net Deductions Balance at
Year Ended January 1, 1995 1-2-94 Additions and Other 1-1-95
- ------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 15.3 $ 9.5 $ 6.5 $18.3
LIFO valuation $ 99.4 $ 2.4 $ 42.9 $58.9
Deferred tax assets valuation allowance $ 21.8 $ 5.1 $ 1.0 $25.9
Accumulated amortization of goodwill
and other intangible assets $ 27.6 $ 28.6 $ 2.0 $54.2
============================================================================================================
50
QUARTERLY OPERATING RESULTS AND RELATED MARKET DATA
(unaudited)
(In millions, except per-share amounts) Corning Incorporated and Subsidiary Companies
===================================================================================================================================
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------------------------------
1996
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 845.6 $ 920.7 $ 919.2 $ 999.0 $ 3,684.5
Gross profit 320.6 345.0 359.0 368.1 1,392.7
Income from continuing operations before
income taxes 100.1 136.3 131.1 119.8 487.3
Equity in earnings of associated companies
other than Dow Corning Corporation 11.6 22.5 24.4 26.6 85.1
Income from continuing operations $ 62.6 $ 93.8 $ 95.2 $ 91.3 $ 342.9
Income (loss) from discontinued operations,
net of income taxes (1) 9.2 (56.8) (115.0) (4.7) (167.3)
Net income (loss) $ 71.8 $ 37.0 $ (19.8) $ 86.6 $ 175.6
- -----------------------------------------------------------------------------------------------------------------------------------
Per Common Share:
Continuing operations $ 0.27 $ 0.41 $ 0.42 $ 0.40 $ 1.50
Discontinued operations (1) 0.04 (0.25) (0.51) (0.02) (0.74)
Net income (loss) $ 0.31 $ 0.16 $ (0.09) $ 0.38 $ 0.76
Dividend declared $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.72
Price range
High $ 36 $ 39 5/8 $ 39 1/4 $ 46 1/4
Low 29 33 3/4 35 1/2 37 3/8
===================================================================================================================================
1995 (4)
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 638.6 $ 773.0 $ 1,053.9 $ 822.2 $ 3,287.7
Gross profit 239.8 290.0 400.6 294.1 1,224.5
Income from continuing operations before
income taxes 69.9 88.3 (2) 153.9 94.0 406.1
Equity in earnings (losses) of associated companies:
Other than Dow Corning Corporation 8.4 21.0 19.5 17.8 66.7
Dow Corning Corporation (3) 17.5 (365.5) (348.0)
Income (loss) from continuing operations $ 58.8 $ (301.7) $ 101.1 $ 70.3 $ (71.5)
Income (loss) from discontinued operations,
net of income taxes (1) 20.6 4.5 (17.6) 13.2 20.7
Net income (loss) $ 79.4 $ (297.2) $ 83.5 $ 83.5 $ (50.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Per Common Share:
Continuing operations $ 0.26 $ (1.34) $ 0.45 $ 0.31 $ (0.32)
Discontinued operations (1) 0.09 0.02 (0.08) 0.06 0.09
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
===================================================================================================================================
51
QUARTERLY OPERATING RESULTS AND RELATED MARKET DATA
(Continued)
(1) Discontinued operations are described in Note 18 of the Notes to
Consolidated Financial Statements.
(2) Includes impact of a restructuring charge described in Note 8 of the Notes
to Consolidated Financial Statements.
(3) 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.
(4) Effective January 1, 1996, Corning made several changes to its accounting
calendar to make Corning's results more comparable with other companies and
to enable Corning to report results of certain subsidiaries on a more
current basis. First, Corning adopted an annual reporting calendar.
Previously Corning operated on a fiscal year ending on the Sunday nearest
December 31. As a result, Corning's 1996 quarters included results for
three calendar months. Prior to 1996 Corning's quarters included results
for 12 weeks (16 weeks in the third quarter). Second, Corning's 1996
quarters included three months of operations for all significant
subsidiaries and affiliates. Previously, certain subsidiaries reported two
months of results in the first quarter and four months of results in the
third quarter. Third, certain consolidated subsidiaries that previously
reported on a fiscal year ending November 30, adopted a calendar year end.
This change did not affect the comparability of Corning's annual results.
However, a shift in results between the quarters, primarily an increase in
the first quarter and a decrease in the third quarter reported results,
occurred. Corning did not restate its quarterly historical financial
statements for the calendar change because financial information as of
calendar quarter ends was not readily available.
To provide a basis against which to evaluate 1996 results, pro forma
estimates of 1995 results as if the calendar change had occurred at the
beginning of 1995 were prepared and are included on the following table.
The pro forma estimates were prepared by prorating 1995 results for twelve
or sixteen week periods into calendar month quarters and by shifting
monthly results of subsidiaries and affiliates between quarters to reflect
the new accounting calendar.
1995 Pro Forma Quarterly Operating Results (unaudited)
(in millions, except per-share amounts)
==============================================================================================================================
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------------------------------------------------------------------------------------------------------------------------------
Revenues $ 774.2 $ 810.1 $ 841.2 $ 862.2 $ 3,287.7
Gross Profit 281.7 303.0 324.9 314.9 1,224.5
Income from continuing operations before income taxes 88.5 90.7 124.6 102.3 406.1
Equity in earnings (losses) of associated companies:
Other than Dow Corning Corporation 14.4 20.6 17.0 14.7 66.7
Dow Corning Corporation 17.5 (365.5) (348.0)
Income (loss) from continuing operations $ 74.0 $ (301.3) $ 84.3 $ 71.5 $ (71.5)
Income (loss) from discontinued operations,
net of income taxes 26.4 3.1 (21.3) 12.5 20.7
Net income (loss) $ 100.4 $ (298.2) $ 63.0 $ 84.0 $ (50.8)
------------------------------------------------------------------------------------------------------------------------------
Per Common Share:
Continuing operations $ 0.33 $ (1.34) $ 0.38 $ 0.31 $ (0.32)
Discontinued operations 0.11 0.02 (0.10) 0.06 0.09
Net income (loss) $ 0.44 $ (1.32) $ 0.28 $ 0.37 $ (0.23)
==============================================================================================================================
52
FIVE YEARS IN REVIEW - HISTORICAL COMPARISON
(In millions, except per-share amounts) Corning Incorporated and Subsidiary Companies
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
Per Common Share Data
Income (loss) from continuing
operations before cumulative effect of
changes in accounting methods $ 1.50 $ (0.32) $ 1.04 $ (0.30) $ 0.87
Cumulative effect of changes in
accounting methods (1) (1.51)
Income (loss) from continuing operations $ 1.50 $ (0.32) $ 1.04 $ (0.30) (0.64)
Income (loss) from discontinued operations,
net of income taxes (0.74) 0.09 0.28 0.21 0.56
Net income (loss) $ 0.76 $ (0.23) $ 1.32 $ (0.09) (0.08)
Dividends declared $ 0.72 $ 0.72 $ 0.69 $ 0.68 0.62
Weighted average shares outstanding (millions) 227.1 226.6 211.8 192.0 188.6
- -----------------------------------------------------------------------------------------------------------------------------------
Operations
Net sales $ 3,651.6 $ 3,257.1 $ 3,083.4 $ 2,685.3 $ 2,558.9
Research and development expenses 191.3 175.7 176.6 172.7 150.9
Provision for restructuring and
other special charges 26.5 112.0 63.3
Equity in earnings (losses) of associated companies:
Other than Dow Corning Corporation 85.1 66.7 48.6 25.0 40.4
Dow Corning Corporation (348.0) (2.8) (144.5) 11.9
Income (loss) from continuing
operations before cumulative effect of
changes in accounting methods $ 342.9 $ (71.5) $ 222.3 $ (55.1) $ 167.4
Cumulative effect of changes in
accounting methods (1) (284.7)
Income (loss) from continuing operations $ 342.9 $ (71.5) $ 222.3 $ (55.1) $ (117.3)
Income (loss) from discontinued operations,
net of income taxes (167.3) 20.7 59.0 39.9 104.7
Net Income (Loss) $ 175.6 $ (50.8) $ 281.3 $ (15.2) $ (12.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Financial Position
Assets
Working capital $ 611.2 $ 454.4 $ 448.2 $ 278.2 $ 328.1
Investments:
Other than Dow Corning Corporation 337.2 364.9 340.2 281.8 343.5
Dow Corning Corporation 341.8 326.0 466.1
Plant and equipment, net 1,977.7 1,599.6 1,482.9 1,452.1 1,304.1
Goodwill and other intangible assets, net 330.4 330.8 330.5 105.6 78.6
Net assets of discontinued operations 1,664.7 1,609.7 1,389.8 724.8
Total assets 4,321.3 5,461.7 5,516.2 4,797.9 4,013.3
- ---------------------------------------------------------------------------------------------------------------------------------
Capitalization
Loans payable beyond one year $ 1,208.5 $ 1,340.0 $ 1,345.0 $ 1,550.1 $ 781.8
Other liabilities 646.2 618.3 594.1 602.7 551.9
Minority interest in
subsidiary companies 310.7 269.8 244.5 239.9 238.3
Convertible preferred securities
of subsidiary 365.1 364.7 364.4
Convertible preferred stock 22.2 23.9 24.9 25.7 26.9
Common stockholders' equity 961.1 2,103.0 2,263.0 1,685.8 1,803.8
Total capitalization $ 3,513.8 $ 4,719.7 $ 4,835.9 $ 4,104.2 $ 3,402.7
- -----------------------------------------------------------------------------------------------------------------------------------
53
FIVE YEARS IN REVIEW - HISTORICAL COMPARISON
(Continued)
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
Selected Data
Common dividends declared $ 165.3 $ 165.2 $ 150.1 $ 134.1 $ 120.2
Preferred dividends declared $ 1.9 $ 2.0 $ 2.1 $ 2.1 $ 2.2
Additions to plant and equipment $ 597.8 $ 381.8 $ 286.1 $ 364.6 $ 305.6
Depreciation and amortization $ 288.1 $ 251.6 $ 242.7 $ 209.5 $ 189.0
Number of employees (2) 20,000 18,200 22,400 21,800 17,800
Number of common stockholders 18,000 18,800 21,600 19,000 16,200
- -----------------------------------------------------------------------------------------------------------------------------------
(1) During 1992, Corning recorded an after-tax charge of $292.9 million ($1.55
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) Amounts do not include employees of discontinued operations.
54
INVESTOR INFORMATION
Annual Meeting
The annual meeting of shareholders will be held on Thursday, April 24, 1997, 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, 1997. 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,
MP-HQ-E2-10, Corning, New York 14831.
Additional Information
A copy of Corning's 1996 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, MP-HQ-E2-10, Corning, New York 14831. The
Annual Report on Form 10-K can also be accessed electronically through the
Corning home page on the internet at http://www.corning.com.
Investor Information
Investment analysts who need additional information may contact Mr. Richard B.
Klein, senior vice president, External Reporting and Communications or Ms.
Katherine M. Dietz, assistant director of Investor Relations, Corning
Incorporated, MP-HQ-E2-20, Corning, New York 14831; Telephone (607) 974-9000.
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."
Convertible Monthly Income Preferred Securities
Corning Incorporated convertible monthly income preferred securities (MIPS) is
listed on the New York Stock Exchange. The abbreviated ticker symbol for the
Corning MIPS is "GLW pfM".
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
55
INVESTOR INFORMATION
(Continued)
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995
The statements in this Annual Report which are not historical facts or
information are forward-looking statements. These forward-looking statements
involve risks and uncertainties that could cause the outcome to be materially
different. Forward-looking statements include, but are not limited to, global
economic conditions, product demand and industry capacity, competitive products
and pricing, manufacturing efficiencies, cost reductions, availability and costs
of critical materials, new product development and commercialization,
manufacturing capacity, facility expansions and new plant start-up costs, the
effect of regulatory and legal developments, capital resource and cash flow
activities, capital spending, equity company activities, interest costs,
divestiture activity, the rate of technology change, ability to enforce patents
and other risks detailed in Corning's Securities and Exchange Commission
filings.
56
Suite 3900 Telephone 313 259 0500
200 Renaissance Center
Detroit, MI 48243
Price Waterhouse LLP
Report of Independent Accountants
January 21, 1997
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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, 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
57
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(in millions of dollars)
ASSETS
------
December 31,
------------------------------
1996 1995
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 344.4 $ 387.3
-------- --------
Marketable securities 184.1 6.3
-------- --------
Accounts and notes receivable -
Trade (less allowance for doubtful accounts of
$11.7 in 1996 and of $13.6 in 1995) 421.7 425.8
Anticipated implant insurance receivable 23.8 265.0
Other receivables 68.1 48.6
-------- --------
513.6 739.4
-------- --------
Inventories 298.3 329.0
-------- --------
Other current assets -
Deferred income taxes 153.7 61.9
Implant deposit - 275.0
Other 30.6 36.8
-------- --------
184.3 373.7
-------- --------
Total current assets 1,524.7 1,835.7
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 148.1 154.3
Buildings 514.3 492.0
Machinery and equipment 2,289.1 2,301.9
Construction-in-progress 346.2 189.9
-------- --------
3,297.7 3,138.1
Less - Accumulated depreciation (1,992.4) (1,930.5)
-------- --------
1,305.3 1,207.6
-------- --------
OTHER ASSETS:
Marketable securities 50.7 33.7
Anticipated implant insurance receivable 999.0 1,126.0
Restricted insurance proceeds 480.9 108.3
Implant deposit 275.0 -
Deferred income taxes 383.0 537.1
Other 95.5 110.0
-------- --------
2,284.1 1,915.1
-------- --------
$5,114.1 $4,958.4
======== ========
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,
---------------------------
1996 1995
---- ----
CURRENT LIABILITIES:
Notes payable $ 5.0 $ 14.7
Current portion of long-term debt 1.3 8.7
Trade accounts payable 174.3 148.5
Accrued payrolls and employee benefits 68.9 71.0
Accrued taxes 94.4 60.2
Other current liabilities 136.6 156.4
-------- --------
Total current liabilities 480.5 459.5
-------- --------
LONG-TERM DEBT 103.3 110.8
-------- --------
OTHER LONG-TERM LIABILITIES 111.5 110.3
-------- --------
LIABILITIES SUBJECT TO COMPROMISE:
Trade accounts payable 66.0 46.6
Accrued employee benefits 176.3 181.4
Accrued taxes 3.6 21.7
Implant reserve 2,424.4 2,471.5
Notes payable 375.0 375.0
Long-term debt 270.4 273.4
Other 136.4 134.5
-------- --------
3,452.1 3,504.1
-------- --------
CONTINGENT LIABILITIES (NOTE 3)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 128.4 126.8
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $5 par value - 2,500,000 shares
authorized and outstanding 12.5 12.5
Retained earnings 788.6 566.9
Cumulative translation adjustment 37.2 67.5
-------- --------
Stockholders' equity 838.3 646.9
-------- --------
$5,114.1 $4,958.4
======== ========
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,
--------------------------------------
1996 1995 1994
---- ---- ----
NET SALES $2,532.3 $2,492.9 $2,204.6
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Manufacturing cost of sales 1,674.0 1,664.4 1,470.3
Marketing and administrative expenses 462.3 450.3 415.4
Implant costs - 351.1 241.0
-------- -------- -------
2,136.3 2,465.8 2,126.7
-------- -------- -------
OPERATING INCOME 396.0 27.1 77.9
OTHER INCOME (EXPENSE):
Interest income 54.1 36.6 18.0
Interest expense (7.8) (43.0) (70.3)
Other, net 16.1 (22.6) (11.0)
-------- -------- -------
INCOME (LOSS) BEFORE REORGANIZATION COSTS AND INCOME TAXES 458.4 (1.9) 14.6
Reorganization costs 49.4 21.0 -
-------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES 409.0 (22.9) 14.6
Income tax provision (benefit) 168.9 (9.6) 7.9
Minority interests' share in income 18.4 17.3 13.5
-------- -------- --------
NET INCOME (LOSS) (1996 - $88.68 per share;
1995 - $(12.24) per share; 1994 - $(2.72) per share) 221.7 (30.6) (6.8)
Retained earnings at beginning of year 566.9 597.5 604.3
-------- -------- --------
Retained earnings at end of year $ 788.6 $ 566.9 $ 597.5
======== ======== ========
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,
------------------------------
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 221.7 $ (30.6) $ (6.8)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities -
Depreciation and amortization 188.9 214.0 189.7
Deferred income taxes 32.8 (131.0) (96.8)
Implant charges including imputed interest - 364.5 269.3
Reorganization costs 49.4 21.0 -
Other 24.3 41.7 27.2
Implant payments (25.3) (107.3) (240.4)
Implant insurance reimbursement 368.2 163.5 71.4
Restricted insurance proceeds (368.2) (107.5) -
Implant deposit - - (275.0)
Changes in assets and liabilities -
Accounts and notes receivable (32.0) (56.0) (29.2)
Inventories 16.6 (19.2) (11.4)
Accounts payable 29.2 33.1 5.5
Accrued taxes 8.0 17.1 22.4
Other 31.0 30.5 11.9
------- ------- -------
Cash provided by (used for) operating activities 544.6 433.8 (62.2)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (312.6) (204.2) (177.6)
Proceeds from sales of marketable securities 26.8 2.8 1.5
Purchases of marketable securities (224.9) (12.4) (2.4)
Other (2.4) 2.7 (12.1)
------- ------- -------
Cash used for investing activities (513.1) (211.1) (190.6)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 47.3 58.2 92.3
Payments on long-term debt (57.0) (57.8) (69.2)
Proceeds from revolving credit agreement - - 225.0
Net change in other short-term borrowings (8.9) (16.9) (57.2)
------- ------- -------
Cash provided by (used for) financing activities (18.6) (16.5) 190.9
------- ------- -------
CASH FLOWS USED FOR REORGANIZATION COSTS (49.4) (21.0) -
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (6.4) 1.0 -
------- ------- -------
CHANGES IN CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash equivalents (42.9) 186.2 (61.9)
Cash and cash equivalents at beginning of year 387.3 201.1 263.0
------- ------- -------
Cash and cash equivalents at end of year $ 344.4 $ 387.3 $ 201.1
======= ======= =======
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 was incorporated in 1943 by Corning Glass Works
(now "Corning Incorporated") and Dow Chemical for the purpose of developing and
producing polymers and other materials based on silicon chemistry. Dow Corning
Corporation operates in various countries around the world through numerous
wholly-owned or majority-owned subsidiary corporations. 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
9,600 products and serves approximately 50,000 customers worldwide, with no
single customer accounting for more than three percent of the Company's sales in
1996. 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, Germany and
the United Kingdom. Dow Corning's average employment for 1996 was 8,700 persons.
On May 15, 1995, Dow Corning Corporation, excluding its subsidiaries,
(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, 1996 have been
presented in conformity with the American Institute of Certified Public
Accountants' Statement of Position 90-7 ("SOP 90-7"), "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.
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'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 and $14.3 in 1994. However, in conformity with the provisions of
SOP 90-7, the Company has discontinued accruing interest expense related to
unsecured pre-petition debts of the Debtor Company. As a result, the Company has
also discontinued the capitalization of interest as a component of the cost of
capital assets for its own use, since any amounts that would be capitalized
after the application of SOP 90-7 would be considered immaterial.
The Company has adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable assets and certain
identifiable intangibles to be disposed of. The adoption of the new standard did
not have a material impact on the Company's financial statement for the year
ended December 31, 1996.
Restricted and Unrestricted 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. Investments in debt and equity securities are included in the
captions "Marketable securities," "Restricted insurance proceeds" and "Implant
deposit" in the accompanying consolidated balance sheets.
63
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangibles
Other assets include $36.2 and $34.8 of intangible assets at December 31,
1996 and 1995, respectively. Goodwill, representing the excess of cost over net
assets of businesses acquired is included in the above amounts, and 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, 1996 and 1995, gross deferred investment incentives were $90.3 and
$96.9 with related accumulated amortization of $80.3 and $79.7, respectively.
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 $203.5 in
1996, $194.5 in 1995 and $174.0 in 1994.
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 for these subsidiaries are reported as
a separate component of stockholders' equity. Revenues and expenses for these
foreign subsidiaries are translated at average exchange rates during the period.
For other foreign subsidiaries, monetary assets and liabilities are remeasured
into U.S. dollars using end-of-period exchange rates; remeasurement gains and
losses, hedging activity and related tax effects for these subsidiaries are
recognized in the statement of operations. Historical exchange rates are used
for non-monetary assets and related elements of expense. All other revenues and
expenses are remeasured at average exchange rates during the period. Foreign
currency transaction gains and losses are included in current earnings.
Currency Rate Derivatives
The Company enters into a variety of forward exchange contracts and, from
time to time, currency options in its management of foreign currency exposures.
Realized and unrealized gains and losses on 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.
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.
64
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, the
reported amounts of revenues and expenses during the reporting period and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to the presentation adopted in 1996.
NOTE 3 - CONTINGENCIES
Breast Implant Litigation and Claims - Background
Prior to 1992, the Company was engaged in the manufacture and sale of
silicone gel breast implants and the raw material components of these products.
On January 6, 1992, the United States Food and Drug Administration ("FDA") asked
breast implant producers to voluntarily halt the sale of silicone gel breast
implants pending the FDA's further review of the safety and effectiveness of
such devices, and the Company complied with the FDA's request. Subsequently, the
Company announced that it would not resume the production or sale of breast
implants.
Since late 1991, the Company experienced a substantial increase in the
number of lawsuits against the Company relating to breast implants. As of
December 31, 1996, 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
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, 1996; however, only three of
these class actions have been certified. Since the commencement of the Company's
Chapter 11 Proceeding, the Company has been dismissed from a number of breast
implant lawsuits in which the Company was named as a supplier of silicone raw
material to other breast implant manufacturers. The Company anticipates that
other breast implant manufacturers which purchased silicone raw materials from
the Company, and other defendants in breast implant litigation, may file claims
for indemnity and contribution against the Company in the Company's Chapter 11
Proceeding.
The typical alleged factual bases for these lawsuits primarily include
allegations that the plaintiffs' breast implants (a) caused specific, recognized
autoimmune diseases including scleroderma, systemic lupus erythematosus, and
multiple sclerosis, (b) caused a vague combination of symptoms, including
chronic fatigue and joint pain, alleged to be a new disease not generally
recognized in the medical community and variously described by terms such as
"human adjuvant disease," "siliconosis," "atypical connective tissue disease,"
and "atypical neurological disease," and/or (c) have or may have ruptured. The
Company has sometimes been named as the manufacturer of 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. A substantial number
of breast implant lawsuits were consolidated for pretrial purposes 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.
Further information related to the jurisdictional status of these cases is
described in Note 4 below. 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. However, claims prosecuted against the Debtor Company in
non-U.S. jurisdictions and against subsidiaries of the Debtor Company are not
stayed by the Chapter 11 Proceeding. In addition to the 19,000 individual breast
implant lawsuits referred to above, approximately 6,000 individual claims have
been filed in non-U.S. jurisdictions; however, only approximately 100 of these
claims filed in non-U.S. jurisdictions have been served and are in a position to
proceed under the legal systems of their relevant jurisdictions. Approximately
5,700 non-U.S. plaintiffs have filed claims in the United States (included in
the 19,000 lawsuits referenced above); however, these approximately 5,700 claims
are stayed by the Debtor Company's Chapter 11 Proceeding. In addition to the
approximately 46 class action lawsuits referred to above, five class actions are
pending in non-U.S. jurisdictions. Two of these non-U.S. class actions have not
been served and none of the non-U.S. class actions are stayed by the Chapter 11
Proceeding.
65
NOTE 3 - CONTINGENCIES (Continued)
Breast Implant Litigation and Claims - Settlement Agreement
In 1994, the Company, along with other defendants and representatives of
breast implant litigation plaintiffs, entered into a settlement agreement under
the supervision of the Court (the "Settlement Agreement"). Under the Settlement
Agreement, certain industry participants originally 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 was designed to cover claims of most breast implant
recipients brought in the courts of U.S. federal and state jurisdictions,
approximately 7,000 U. S. and non-U.S. potential 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. In 1995, the Court
concluded the total amount of claims likely to be approved for payment would
result in substantially lower payments to claimants than anticipated under the
Settlement Agreement, and the Court requested the parties negotiate possible
modifications to the Settlement Agreement. The Company has not actively
participated in these negotiations and is not a party to the resulting
modification of the Settlement Agreement. The Company has neither exercised its
option to withdraw from, nor has it been officially excluded from the option of
participating in modification of, the Settlement Agreement. The Company
anticipates 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 for further
discussion).
Breast Implant Litigation and Claims - Insurance Matters
The Company has a substantial amount of unexhausted claims-made,
occurrence and occurrence-noticed products liability insurance coverage with
respect to breast implant lawsuits and claims commencing in 1986 and thereafter.
For breast implant lawsuits and claims involving implant dates prior to 1986,
substantial coverage exists under a number of primary and excess occurrence and
occurrence-noticed policies having various limits. For breast implant lawsuits
and claims filed after 1985 in cases with implant dates prior to 1986, potential
coverage exists under all of the above referenced policies. Because defense
costs and disposition of particular breast implant lawsuits and claims may be
covered, in whole or in part, both by the coverage issued from and after 1986,
and one or more of the policies issued prior to 1986, the ultimate 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.
A substantial number of the Company's insurers 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. Since June, 1993, the Company has been involved in litigation
against certain insurance companies which issued occurrence based products
liability insurance policies to the Company from 1962 through 1985 ("Occurrence
Insurers"). This litigation resulted from an inability of the Occurrence
Insurers to reach an agreement with the Company on a formula for the allocation
among the Occurrence Insurers of payments of defense and indemnity expenses
submitted by the Company related to breast implant products liability lawsuits
and claims. The Company sought a judicial enforcement of the obligations of the
Occurrence Insurers under the relevant insurance policies. Following certain
initial procedural steps, this litigation has been conducted in the Wayne County
Michigan Circuit Court (the "Michigan Court"). A number of the Occurrence
Insurers have been dismissed from this litigation pursuant to settlements
reached with the Company.
66
NOTE 3 - CONTINGENCIES (Continued)
In 1994, the Michigan Court (i) ruled that certain of the Company's
primary Occurrence Insurers have a duty to defend the Company with respect to
breast implant products liability lawsuits, (ii) directed these insurers to
reimburse the Company for certain defense costs previously incurred and (iii)
ruled in favor of the Company on allocation of defense costs. In 1995, the
Michigan Court ruled in favor of the Company on allocation of indemnity costs,
ordering 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 periods and for all cases involving unknown implant dates; once
implant dates become known, the appropriate insurer becomes responsible for
relevant claims. Also in 1995, the Michigan Court ruled that relevant insurance
contracts afford coverage for punitive damages except where specific policy
provisions expressly exclude coverage for such damages. A trial on the merits of
the claims in this litigation commenced in late 1995. In February, 1996, a
Michigan Court jury found the remaining Occurrence Insurers liable for coverage
including costs of defense and settlement of the Company's breast implant
lawsuits and claims in the United States and in foreign countries. The Michigan
Court also ruled that the Company is entitled to recover substantially all
defense, settlement and judgment costs previously incurred. In July, 1996, the
Michigan Court issued an omnibus final order and judgment and other rulings
relative to the Michigan Action. In December, 1996, the Michigan Court denied
certain post trial motions filed by certain of the Occurrence Insurers and ruled
that the omnibus final order and judgment and related rulings are effective.
Also in December, 1996, certain of the Occurrence Insurers appealed the results
of this litigation to the Michigan Court of Appeals. The Company is uncertain as
to when these appeals will be resolved. In the interim, the Company is
continuing settlement negotiations with the Occurrence Insurers as well as other
insurers that are not involved in the litigation.
Based on the results of this litigation, management continues to believe
it is probable 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 addition to the results of this litigation, this belief is further
supported by the fact that the Company received insurance recoveries of $603.1
from September 1, 1994 through December 31, 1996 (see Note 6 for further
discussion) and entered into settlements with certain insurers for future
reimbursement.
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. As
previously reported, prior to 1995 the Company recorded aggregate pre-tax
charges of $1,981.0 and related insurance receivables of $1,006.0 to cover (i)
the Company's best estimate, at the time, of its potential liability under the
Settlement Agreement, (ii) the Company's best estimate, at the time, of
additional costs to resolve breast implant litigation outside of the Settlement
Agreement and (iii) legal, administrative, and research costs related to breast
implants. The portion of the pre-1995 charges related to the Settlement
Agreement and related to the anticipated implant insurance receivable were
recorded on a present value basis. Subsequently, in 1995, the Company recorded a
pre-tax charge of $351.1 to abandon this present value treatment. The 1995
charge was taken because of the uncertainty associated with the Debtor Company's
filing for protection under Chapter 11 of the Bankruptcy Code. As a result of
filing for Chapter 11 protection, management could no longer make the assessment
that the amount and timing of the settlement payments were reliably determinable
as required by accounting rules relevant to present value discounting of future
liabilities. 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 1995 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 in the near
term to reflect any material developments relating to the resolution of the
breast implant litigation and claims. Future revisions, 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 are recorded.
67
NOTE 3 - CONTINGENCIES (Continued)
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 realization of this asset include
the ultimate cost of resolving breast implant litigation and claims, the results
of 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. As additional facts
and circumstances develop, it is at least reasonably possible that the estimate
may be revised in the near term to reflect any material developments relating to
insurance matters. Future revisions, 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 are recorded. Notwithstanding the above, the
Company believes it is probable that the anticipated implant insurance
receivable recorded in the accompanying consolidated balance sheet at December
31, 1996 will ultimately be realized.
Securities Laws Class Action Lawsuits
As of December 31, 1996, 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 and 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 there is one case involving claims on behalf of purchasers of
stock of Corning Incorporated 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 Incorporated 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, 1996, 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 Incorporated 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 Corning Incorporated
and Dow Chemical 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.
Tax Matters
On January 20, 1997, the Company received a Statutory Notice of
Deficiency (the "Notice") from the United States Internal Revenue Service (the
"IRS"). The Notice asserts tax deficiencies totaling approximately $105.3. The
alleged deficiencies in the Notice relate to the Company's consolidated federal
income tax returns for the 1992, 1993 and 1994 calendar years. The Company
believes that the deficiencies asserted by the IRS are excessive. The Company
intends to vigorously contest the IRS's claims and to file certain refund claims
in connection with its protest. The Company anticipates that this matter will be
resolved either in the Company's Chapter 11 Proceeding or through procedures
provided by the Internal Revenue Code, and that such resolution will not have a
material adverse effect on the Company's consolidated results of operation or
financial condition.
68
NOTE 3 - CONTINGENCIES (Continued)
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 currently
believes that there are 12 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 a de minimis liability is $56.0. 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, 1996 was $15.4. In addition, receivables of $10.6 for probable third-party
recoveries have been recorded related to these environmental matters. As
additional facts and circumstances develop, it is at least reasonably possible
that either the accrued liability or the recorded receivable relative to
environmental matters may be revised in the near term. 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 is remote that costs in excess of those accrued will have a
material adverse impact on the Company's consolidated financial position or
results of operations. 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.
As a result of financial provisions recorded with respect to breast
implant liability, the Debtor Company has been unable to meet certain federal
and state environmental statutory financial ratio tests. Consequently, in order
for the Debtor Company to continue to operate hazardous waste storage facilities
at certain plant sites, the states involved have required the Debtor Company to
establish and fund trusts to provide for aggregate estimated closure,
post-closure, corrective action and potential liability costs of $23.0. Interest
on the funds held in trust will be available to the Debtor Company under certain
circumstances, and the amount required to be held in trust may vary annually. At
such time as the Debtor Company satisfies the above referenced financial ratio
tests or the Debtor Company no longer needs or closes the permitted facilities,
the funds then remaining in these trusts will revert to the Debtor Company. The
establishment and funding of these trusts is subject to the continuing
jurisdiction of the Bankruptcy Court.
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 believes
that these claims are covered in whole or in part by substantial insurance or
certain indemnity arrangements. This belief is supported by the fact that the
indemnitors under these arrangements have been honoring their indemnity
commitments. The Company has followed a practice of aggressively defending all
products liability claims asserted against it, and 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. However, claims prosecuted against the
Debtor Company in non-U.S. jurisdictions and against subsidiaries of the Debtor
Company are not stayed by the Chapter 11 Proceeding. The Company is currently
unable to estimate its potential
69
NOTE 3 - CONTINGENCIES (Continued)
liability for these claims; however, 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. The Company
anticipates that the cost to resolve a substantial portion of these claims will
ultimately be estimated during the Debtor Company's Chapter 11 Proceeding.
NOTE 4 - PROCEEDING UNDER CHAPTER 11
On May 15, 1995, the Debtor Company voluntarily filed for protection
under Chapter 11 of the Bankruptcy Code. 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 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 conclusions of the U.S. District Court for the
Northern District of Alabama relative to the Settlement Agreement (see Note 3
above for further discussion).
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.
In June, 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. Under the Bankruptcy
Code, any creditor actions to obtain possession of property from the Debtor
Company are 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, including
wages and benefits of employees and obligations to certain foreign vendors, have
been paid after obtaining the approval of the Bankruptcy Court. In addition, on
November 25, 1996, the Bankruptcy Court granted the Debtor Company's motion to
allow for the offset of certain receivables and payables between the Debtor
Company and its subsidiaries existing as of May 15, 1995.
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 filed notices to remove certain claims and causes of action asserted by
plaintiffs from state courts to federal courts. The Debtor Company also filed
transfer motions seeking to transfer certain claims and causes of action
asserted by plaintiffs from various 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 transfer motion to transfer certain claims and causes of action
asserted by plaintiffs to the U.S. District Court in Michigan. This court also
indicated 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. In the interim, the U.S. District Court for the
Northern District of Alabama was assigned jurisdiction over these cases for
pretrial purposes. The purpose of these transfer motions 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.
70
NOTE 4 - PROCEEDING UNDER CHAPTER 11 (Continued)
The U.S. Trustee initially appointed a "Committee of Unsecured Creditors"
and a "Committee of Tort Claimants" and on July 22, 1996 appointed an "Official
Physicians' Committee" (collectively, the "Creditor Committees") in the Chapter
11 Proceeding. In accordance with the provisions of the Bankruptcy Code, the
Creditor Committees have been appointed to 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. On March 21,
1996, the Bankruptcy Court issued an order removing those members of the
Committee of Tort Claimants who do not have tort claims against the Company on
the basis that its members are not creditors of the Debtor Company. This order
was appealed to the U.S. District Court in Michigan by the Committee of Tort
Claimants and the U.S. Trustee. Subsequently, the U.S. District Court in
Michigan stayed the effective date of the portion of the Bankruptcy Court's
order related to the composition of the Committee of Tort Claimants pending
resolution of this appeal.
Under applicable provisions of the Bankruptcy Code, a debtor in Chapter
11 has certain periods of exclusivity during which it has the exclusive right to
file and seek acceptances of its reorganization plan. After the expiration of
such periods, as may be extended from time to time, any creditor has the right
to file a plan of reorganization with the Bankruptcy Court.
The Debtor Company had the exclusive right to file a plan of
reorganization for 120 days after its Chapter 11 filing (the "Plan Exclusivity
Period"). On September 7, 1995, the Bankruptcy Court extended the Plan
Exclusivity Period to March 11, 1996. On March 7, 1996, the Bankruptcy Court
suspended further activity with respect to certain matters, including the
expiration of the Plan Exclusivity Period, for a period of 90 days. On May 16,
1996, the Bankruptcy Court extended the Plan Exclusivity Period until the
expiration of 21 days after the Bankruptcy Court enters orders related to (a)
the procedure for the estimation of products liability and other claims against
the Debtor Company, (b) the Debtor Company's request for the appointment of a
panel of scientific experts to assist the Bankruptcy Court in the products
liability claims estimation process, (c) the Debtor Company's request to
establish a bar date for creditors to file claims against the Debtor Company and
(d) the establishment by the Bankruptcy Court of a claims notice procedure. That
order additionally extended the Debtor Company's exclusive statutory 60-day
period for soliciting acceptances of its plan of reorganization (the
"Solicitation Exclusivity Period") for an indefinite period, subject to further
order of the Bankruptcy Court.
On June 28, 1996, the Bankruptcy Court established bar dates, deadlines
for creditors to file claims against the Debtor Company, of January 15, 1997 for
all claims against the Debtor Company arising out of the United States and its
territories, and of February 15, 1997 for all claims against the Debtor Company
arising out of non-U.S. jurisdictions. Creditors who are required to file claims
but fail to meet the bar dates generally will be prohibited from voting upon or
receiving distributions under any plan of reorganization. Also on June 28, 1996,
the Bankruptcy Court approved a claims notice procedure. Because the Debtor
Company is uncertain as to when the orders regarding the procedure for the
estimation of claims against the Debtor Company and the potential appointment of
a panel of scientific experts will be issued, the Debtor Company is currently
not certain when the Plan Exclusivity Period and the Solicitation Exclusivity
Period will end.
On December 2, 1996, the Debtor Company filed its plan of reorganization
("Plan of Reorganization" or "Plan") and related disclosure statement
("Disclosure Statement") with the Bankruptcy Court. Under the Plan the Debtor
Company would commit up to $3.0 billion to satisfy claims of the Debtor
Company's creditors. Specifically, the Plan would provide approximately $1.0
billion to satisfy commercial claims which would be paid in full, including
accrued interest. In addition, the Plan would provide up to $2.0 billion to
resolve products liability claims if certain conditions are met. Of this amount,
$600.0 million would be allocated to a settlement trust ("Settlement Trust") and
up to $1.4 billion would be allocated subject to certain contingencies to a
litigation trust ("Litigation Trust"). Critical to the treatment of claims
related to such implants under the Plan is a common issue causation trial
("Causation Trial") which could include a court appointed, independent panel of
doctors and scientific experts to assess all of the available scientific studies
relative to silicone implants to determine if any causal connection exists
between the Debtor Company's silicone implants and the various ailments claimed
by the products liability claimants (See Note 3 for further discussion).
71
NOTE 4 - PROCEEDING UNDER CHAPTER 11 (Continued)
Notwithstanding the above, the Company has not revised its implant
reserves as a result of the Debtor Company's filing of its Plan of
Reorganization. The implant reserve as of December 31, 1996 was approximately
$2.4 billion as recorded in the accompanying consolidated balance sheets. The
implant reserve has not been revised due to the inherent uncertainty associated
with estimating the ultimate costs of resolving breast implant litigation and
claims. The Company anticipates the ultimate cost to resolve breast implant
litigation and claims will be determined as a part of the Debtor Company's
Chapter 11 Proceeding.
The Settlement Trust would provide to products liability claimants five
settlement options which would be available over a multi-year period to resolve
their claims without litigation. The settling claimants may receive benefits
under one or more of these five options. These options are (a) an expedited
payment option under which a claimant could receive specified payments if they
can demonstrate physical injury arising from a Debtor Company product, (b) an
explant option under which a claimant could receive an explant certificate
redeemable to pay expenses associated with removing medical devices manufactured
by the Debtor Company, (c) a scheduled review option under which claimants would
receive certain cash payments at levels to be established by the Causation Trial
if they meet certain claim criteria to be established by the Causation Trial,
(d) an individual evaluation option under which claimants who do not settle
their claims through options (a) through (c) above could elect to receive an
individual evaluation of their claim which may include an independent medical
examination and may require a higher level of proof and (e) a mediation option
under which claimants who do not select options (a) through (d) above could
agree to non-binding mediation as an alternative to proceeding with litigation.
The Litigation Trust would provide to products liability claimants who
choose not to settle their claims using the procedures in the Settlement Trust a
fund to be available for the payment of any verdicts (or awards in binding
arbitration) which such claimants might experience against the Litigation Trust
as a result of litigation related to the Debtor Company's products. The ultimate
amount to be placed in this fund is largely dependent on the outcome of the
Causation Trial. Amounts remaining, if any, in the Litigation Trust after the
expiration of a certain period of time would revert to the Debtor Company.
On January 10, 1997, the Committee of Unsecured Creditors and the
Committee of Tort Claimants jointly filed a motion with the Bankruptcy Court
requesting the termination of the Plan Exclusivity Period and the Solicitation
Exclusivity Period so that those creditor committees could file a competing plan
of reorganization. The Bankruptcy Court has not yet ruled on this motion.
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 having claims that are impaired by the plan
of reorganization. The Company is prohibited from soliciting acceptances of its
Plan from creditors until after the Bankruptcy Court approves the adequacy of
the Disclosure Statement. Thereafter the Debtor Company will have a period of
time to obtain necessary acceptances from its creditors for the Plan. In the
interim, the Debtor Company is conducting discussions with the Creditor
Committees regarding its Plan of Reorganization and Disclosure Statement. Absent
the requisite approvals referenced above, the Bankruptcy Court may approve the
Debtor Company's Plan of Reorganization, or a competing 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:
72
NOTE 4 - PROCEEDINGS UNDER CHAPTER 11 (Continued)
DOW CORNING CORPORATION
-----------------------
DEBTOR COMPANY CONDENSED BALANCE SHEET
--------------------------------------
(in millions of dollars)
ASSETS
------
December 31,
1996
----
CURRENT ASSETS:
Cash and cash equivalents $ 126.1
--------
Marketable securities 174.9
--------
Accounts and notes receivable -
Trade (less allowance for doubtful accounts
of $2.7) 113.9
Receivable from subsidiaries 386.0
Anticipated implant insurance receivable 23.8
Other receivables 23.0
--------
546.7
--------
Inventories 127.3
--------
Other current assets -
Deferred income taxes 92.0
Other 38.4
--------
130.4
--------
Total current assets 1,105.4
--------
INVESTMENTS:
Equity in unconsolidated subsidiaries 652.5
--------
PROPERTY, PLANT AND EQUIPMENT: 1,641.4
Less - Accumulated depreciation (1,091.1)
--------
550.3
--------
OTHER ASSETS:
Marketable securities 19.2
Anticipated implant insurance receivable 999.0
Restricted insurance proceeds 480.9
Implant deposit 275.0
Deferred income taxes 366.7
Receivable from subsidiaries 197.5
Other 35.8
--------
2,374.1
--------
$4,682.3
========
73
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,
1996
----
CURRENT LIABILITIES:
Trade accounts payable $ 68.0
Payable to subsidiaries 78.4
Accrued payrolls and employee benefits 32.4
Other current liabilities 85.6
--------
Total current liabilities 264.4
--------
OTHER LONG-TERM LIABILITIES 38.0
--------
LIABILITIES SUBJECT TO COMPROMISE:
Trade accounts payable 66.0
Payable to subsidiaries 89.5
Accrued employee benefits 176.3
Accrued taxes 3.6
Implant reserve 2,424.4
Notes payable 375.0
Long-term debt 270.4
Other 136.4
--------
3,541.6
--------
STOCKHOLDERS' EQUITY:
Common stock, $5 par value - 2,500,000 shares
authorized and outstanding 12.5
Retained earnings 788.6
Cumulative translation adjustment 37.2
--------
Stockholders' equity 838.3
--------
$4,682.3
========
74
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, 1996
------------------
NET SALES (includes $682.3 of sales to subsidiaries) $1,670.0
OPERATING COSTS AND EXPENSES:
Manufacturing cost of sales 1,184.5
Marketing and administrative expenses 233.1
--------
1,417.6
--------
OPERATING INCOME 252.4
OTHER INCOME:
Interest income 42.7
Other, net 26.6
--------
INCOME BEFORE REORGANIZATION COSTS AND INCOME TAXES 321.7
Reorganization costs 49.4
--------
INCOME BEFORE INCOME TAXES 272.3
Income tax provision 114.6
--------
NET INCOME 157.7
Earnings of unconsolidated subsidiaries and related eliminations 64.0
Retained earnings at beginning of year 566.9
--------
Retained earnings at end of year $ 788.6
========
75
NOTE 4 - PROCEEDING UNDER CHAPTER 11 (Continued)
DOW CORNING CORPORATION
------------------------
DEBTOR COMPANY CONDENSED STATEMENT OF CASH FLOWS
------------------------------------------------
(in millions of dollars)
Year ended
December 31, 1996
-----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $157.7
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 96.2
Deferred income taxes 35.1
Reorganization costs 49.4
Other (1.9)
Implant payments (25.3)
Implant insurance reimbursement 368.2
Restricted insurance proceeds deposit (368.2)
Changes in assets and liabilities -
Accounts and notes receivable 1.3
Inventories 9.3
Accounts payable 13.0
Accrued taxes 4.9
Receivables from subsidiaries (166.2)
Other 1.9
------
Cash provided by operating activities 175.4
------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (92.2)
Proceeds from sale of marketable securities 16.8
Purchases of marketable securities (205.2)
Dividends from subsidiaries 62.2
Other (6.1)
------
Cash used for investing activities (224.5)
------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in other short-term borrowings 1.6
------
Cash provided by financing activities 1.6
------
CASH FLOWS USED FOR REORGANIZATION COSTS (49.4)
------
CHANGES IN CASH AND CASH EQUIVALENTS:
Net decrease in cash and cash equivalents (96.9)
Cash and cash equivalents at beginning of year 223.0
------
Cash and cash equivalents at end of year $126.1
======
76
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 $682.3 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. Accordingly, the Debtor Company has ceased recording interest
expense in conformity with the provisions of SOP 90-7. The amount of interest
that has not been accrued as a result of the Chapter 11 Proceeding amounted to
$49.2 ($31.0 after tax) for the year ended December 31, 1996 and $30.9 ($19.6
after tax) for the period of May 15, 1995 through December 31, 1995. In
accordance with the provisions of Statement of Financial Accounting Standard No.
34, "Capitalization of Interest Cost," $14.1 ($8.9 after tax) would have been
capitalized as part of the historical cost of acquiring certain assets for the
year ended December 31, 1996 and $6.6 ($4.2 after tax) for the period of May 15,
1995 through December 31, 1995.
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 $42.7 for the year ended December
31, 1996. The amount of interest income that the Debtor Company has earned as a
result of the Chapter 11 Proceeding is immaterial.
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 sheet.
NOTE 5 - FOREIGN CURRENCY
Following is an analysis of the changes in the cumulative translation
adjustment:
1996 1995 1994
---- ---- ----
Balance, beginning of year $67.5 $66.2 $31.6
Translation adjustments, including gains (losses) from
certain hedges and intercompany balances (29.2) (4.2) 31.3
Income tax effect of current year activity (1.1) 5.5 3.3
------ ------- -------
Balance, end of year $37.2 $67.5 $66.2
===== ===== =====
Net foreign currency losses currently recognized in income amounted to
$(3.9) in 1996, $(4.5) in 1995, and $(4.8) in 1994.
77
NOTE 6 - 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 which, among other things, appointed an independent escrow agent. The
escrowed funds are invested in investment categories approved by the Bankruptcy
Court. At December 31, 1996 and 1995, the marketable securities included in the
caption "Implant deposit" in the accompanying balance sheet primarily consisted
of certificates of deposit, commercial paper, fixed rate federal agency notes
and floating rate federal agency notes. These marketable securities have a
maturity of less than one year. The aggregate fair value of these investments
approximates carrying value at December 31, 1996 and 1995.
In addition, $472.6 of cash proceeds from settlements with insurers
(received since the commencement of the Chapter 11 Proceeding) and $8.3 (after
tax) of related investment income is restricted as to its use pursuant to orders
of the Bankruptcy Court. Accordingly, $480.9 is included in the caption
"Restricted insurance proceeds" in the accompanying consolidated balance sheet.
A majority of these proceeds relate to settlements of policies which name the
Company and Dow Chemical as co-insureds. The Company and/or Dow Chemical will
have rights to petition the Bankruptcy Court for distribution of these proceeds
primarily for the purpose of payment or reimbursement of specified indemnity and
expense payments under conditions prescribed by the Bankruptcy Court.
A majority of the "Anticipated implant insurance receivable" recorded in
the accompanying consolidated balance sheets relates to policies which name the
Company and Dow Chemical 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 "Restricted insurance proceeds" and "Anticipated implant
insurance receivable" recorded in the accompanying consolidated balance sheet
(See Note 3 for further discussion).
At December 31, 1996 and 1995, the aggregate fair value of the marketable
securities included in the caption "Restricted insurance proceeds" approximates
carrying value. These amounts are summarized in the accompanying balance sheet
as follows (at cost):
December 31, December 31,
1996 1995
------------- ------------
Money Market Funds $ 22.6 $108.3
Demand Notes, Commercial Paper and
Certificates of Deposit
Maturity in a year or less 28.3 -
State and Municipal Securities
Maturity in a year or less 365.7 -
Maturity between 1 and 5 years 55.1 -
Corporate Obligations
Maturity in a year or less 9.2 -
------ ------
$480.9 $108.3
====== ======
78
NOTE 7 - INVENTORIES
Following is a summary of inventories by costing method at December 31:
1996 1995
---- ----
Raw material, work-in-process and finished goods:
Valued at LIFO $205.6 $212.7
Valued at FIFO 92.7 116.3
------ ------
$298.3 $329.0
====== ======
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, 1996 and 1995 are stated at approximately
$55.8 and $67.5, respectively, less than they would have been if valued at
replacement cost.
NOTE 8 - UNRESTRICTED INVESTMENTS
Excluding investments accounted for on the equity basis, the carrying
amount for unrestricted investments at December 31, 1996 and 1995 was $235.0 and
$40.0, respectively. These unrestricted investments consist principally of
obligations backed by the U. S. Government or one of its agencies and corporate
issue preferred equities; and have been classified as "available for sale" in
conformity with SFAS 115. The aggregate fair value of these unrestricted
investments approximates carrying value, and there were no material realized
gain or losses for the years ended December 31, 1996 and 1995, nor unrealized
gains or losses at December 31, 1996 or 1995. Fair values are determined based
on quoted market prices or, if quoted market prices are not available, on market
prices of comparable instruments. Unrestricted investments are included in the
captions "Marketable securities" in the current and noncurrent section of the
accompanying consolidated balance sheets.
NOTE 9 - NOTES PAYABLE AND CREDIT FACILITIES
Notes payable at December 31, consisted of the following:
1996 1995
---- ----
CURRENT LIABILITIES:
Other bank borrowings $ 5.0 $ 14.7
====== ======
LIABILITIES SUBJECT TO COMPROMISE:
Revolving Credit Agreement $375.0 $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.
79
NOTE 9 - NOTES PAYABLE AND CREDIT FACILITIES (Continued)
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.
NOTE 10 - LONG-TERM DEBT
Long-term debt at December 31, consisted of the following:
1996 1995
---- ----
LONG-TERM DEBT:
Variable-rate Note, maturing serially 1997-1999,
6.238% at December 31, 1996 $ 20.0 $ 20.0
Variable-rate Revolving Credit Agreement expiring 1999,
7.03% at February 29, 1996 - 50.0
Variable-rate Notes due 1998-2003,
3.98%-5.90% at December 31, 1996 22.6 25.1
Variable rate long-term line of credit expiring 2000,
6.35% at December 31, 1996 36.0 -
Other obligations and capital leases 26.0 24.4
------ ------
104.6 119.5
Less - Payments due within one year 1.3 8.7
------ ------
$103.3 $110.8
====== ======
LIABILITIES SUBJECT TO COMPROMISE:
9.375% Debentures due 2008 $75.0 $ 75.0
8.15% Debentures due 2029 50.0 50.0
8.125%-9.5% Medium-term Notes due 1995-2001,
8.71% average rate at December 31, 1996 34.5 34.5
Variable-rate Notes due 1995-1998,
6.688%-7.234% at December 31, 1996 84.8 84.8
5.55% Japanese Yen Notes due 1998 26.1 29.1
------ ------
$270.4 $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,
1996, 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, 1996, the fair value of the long-term debt of the
subsidiaries of the Debtor Company approximated the book value of $104.6. The
Company is unable to estimate the fair value of the long-term debt of the Debtor
Company at December 31, 1996 due to the uncertainty associated with the Debtor
Company's filing for protection under Chapter 11 of the Bankruptcy Code.
80
NOTE 10 - LONG-TERM DEBT (Continued)
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.
Annual aggregate maturities of the long-term debt of the subsidiaries of
the Debtor Company are: $1.3 in 1997, $27.2 in 1998, $21.2 in 1999, $37.6 in
2000 and $17.3 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
$7.8 in 1996, $34.5 in 1995 and $40.7 in 1994.
NOTE 11 - CURRENCY RATE DERIVATIVES
The Company enters into forward exchange contracts primarily to hedge
monetary assets and liabilities not denominated in functional currencies. Gains
and losses on these contracts are recognized concurrent with the gains and
losses from the associated exposures. Forward exchange contracts are shown in
the following table.
December 31, 1996 December 31, 1995
---------------------------------- -----------------------------------
Weighted Weighted
Book Notional Average Book Notional Average
Value Amount Maturity Value Amount Maturity
----- -------- -------- ----- -------- ---------
Forward exchange contracts:
-to buy British Pounds $ 0.4 $ 13.1 * $ 0.3 $20.6 *
-to sell British Pounds (1.3) 53.0 * (0.1) 10.8 *
-to buy ECU - - - - - 9.4 *
-to sell ECU 2.9 159.6 * (0.5) 68.0 *
-to buy German Marks (0.1) 8.3 * - 8.0 *
-to sell German Marks - 2.6 * - 1.3 *
-to buy Japanese Yen (0.3) 11.9 * (0.1) 2.5 *
-to sell Japanese Yen 0.5 13.1 * 0.5 17.2 *
-to buy other currencies (0.1) 21.2 * 0.2 17.6 *
-to sell other currencies (0.1) 113.0 * (0.9) 90.0 *
*Weighted average maturity is less than one year.
The fair value of forward exchange contracts is estimated by obtaining
quotes from brokers. The book values of these instruments approximate fair
values.
81
NOTE 12 - 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.
1996 1995 1994
---- ---- ----
Defined benefit plans:
Service cost (benefits earned during the period) $ 24.3 $ 19.5 $ 20.9
Interest cost on projected benefit obligations 51.3 48.1 43.9
Actual return on plan assets (56.4) (110.7) 0.2
Net amortization 4.0 3.6 4.7
Difference between actual and expected
return on plan assets 11.3 68.3 (40.2)
------ ------ ------
34.5 28.8 29.5
------ ------ ------
Defined contribution and savings plans 13.7 13.4 12.0
------ ------ ------
$ 48.2 $ 42.2 $ 41.5
====== ====== ======
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.
December 31,
---------------------
1996 1995
------------------------ ------------------------
Assets ABO Assets ABO
exceed exceeds exceed exceeds
ABO assets ABO assets
------ ------- ------ -------
Actuarial present value
of benefit obligations:
Vested $482.7 $ 42.6 $459.5 $ 42.3
Nonvested 48.1 5.3 48.3 6.2
------ ------ ------ ------
Accumulated benefit obligation 530.8 47.9 507.8 48.5
Provision for future salary increases 115.9 13.2 119.3 15.0
------ ------ ------ ------
Projected benefit obligation 646.7 61.1 627.1 63.5
Plan assets at fair value 640.4 6.7 575.9 8.3
------ ------ ------ ------
Plan assets less than
projected benefit obligation (6.3) (54.4) (51.2) (55.2)
Unrecognized net loss (gain) (26.7) 7.4 22.1 8.6
Unrecognized (negative) prior service costs 35.6 (4.0) 38.1 (4.8)
Unrecognized net transition obligation 5.7 1.3 6.4 1.8
Additional minimum liability (6.5) (0.3) - -
------ ------ ------ ------
Prepaid (accrued) pension cost $ 1.8 $(50.0) $ 15.4 $(49.6)
====== ====== ====== ======
82
NOTE 12 - POST EMPLOYMENT BENEFITS (Continued)
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation for defined benefit plans was
7.9% in 1996 and 7.5% in 1995. The weighted average rate of increase in future
compensation levels was determined using an age specific salary scale and was
5.5% in 1996 and 5.5% in 1995. The weighted average expected long-term rate of
return on plan assets was 8.5% in 1996 and 1995.
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:
1996 1995 1994
---- ---- ----
Service cost $3.6 $3.5 $ 3.4
Interest cost 10.1 10.4 9.3
Amortization of negative
prior service cost (14.1) (14.1) (13.2)
------ ----- -----
$(0.4) $(0.2) $(0.5)
====== ===== =====
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,
1996 1995
------------ ------------
Accumulated postretirement benefit obligation:
Retirees $ 73.2 $ 70.3
Fully eligible, active plan participants 36.4 41.9
Other active plan participants 28.2 32.8
------ ------
137.8 145.0
Unrecognized negative prior service cost 39.7 53.8
Unrecognized net loss (1.2) (17.4)
------ ------
Accrued postretirement benefit cost $176.3 $181.4
====== ======
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. This
amendment resulted in the Company recording an unrecognized negative prior
service cost, which is being amortized in the accompanying consolidated
statement of operations. 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 9.06% in 1996 and was assumed to decrease
gradually to 5.0% in 2004 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 8.0% 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 5.5% and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1996 by 4.9%.
The discount rate used in determining the accumulated postretirement
benefit obligation was 8.00% at December 31, 1996 and 7.50% at December 31,
1995.
83
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company purchased raw materials and services totaling $51.1 in 1996,
$49.7 in 1995 and $46.8 in 1994 from Dow Chemical and its affiliates. The
Company believes the costs of such purchases were competitive with alternative
sources of supply. Other transactions between the Company and related parties
were not material.
NOTE 14 - INCOME TAXES
The components of income (loss) before income taxes are as follows:
1996 1995 1994
------ ------ ------
U.S. companies $387.9 $(126.4) $(47.2)
Non-U.S. companies 21.1 103.5 61.8
------ ------- ------
$409.0 $ (22.9) $ 14.6
====== ======= ======
The components of the income tax provision (benefit) are as follows:
1996 1995 1994
------ ------ -----
Current
U.S. $ 96.7 $ 38.5 $ 62.6
Non-U.S. 35.0 52.6 47.5
------ ------- -------
131.7 91.1 110.1
------ ------- -------
Deferred
U.S. 35.5 (101.8) (96.0)
Non-U.S. 1.7 1.1 (6.2)
------ ------- -------
37.2 (100.7) (102.2)
------ ------- -------
$168.9 $ (9.6) $ 7.9
====== ======= =======
The tax effects of the principal temporary differences giving rise to
deferred tax assets and liabilities were as follows:
December 31, December 31,
1996 1995
------------ -------------
Implant costs $392.7 $403.4
Accruals deductible for tax purposes when paid 62.1 70.3
Postemployment benefits 62.4 67.9
Basis in inventories 25.7 31.2
Tax credit and net operating loss carryforwards 9.0 4.9
Other 52.5 41.2
------ ------
604.4 618.9
Valuation allowance (3.3) -
------ ------
601.1 618.9
------ ------
Long term debt (28.1) -
Property, plant and equipment (40.6) (54.8)
------ ------
(68.7) (54.8)
------ ------
Net deferred tax asset $532.4 $564.1
====== ======
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."
84
NOTE 14 - INCOME TAXES (Continued)
At December 31, 1996 income and remittance taxes have not been recorded
on $229.6 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 $142.0 in 1996,
$107.4 in 1995 and $62.4 in 1994.
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,
-------------------------------------------
1996 1995 1994
---- ---- ----
Income tax provision (benefit)
at statutory rate $143.1 $(8.0) $ 5.1
Foreign taxes, net 14.0 8.6 10.6
Foreign sales corporation (8.6) (5.8) (3.7)
State income taxes 5.6 (6.2) (12.6)
Accrued expenses 14.6 - -
Other, net 0.2 1.8 8.5
------ ----- -----
Income tax provision (benefit)
at effective rate $168.9 $(9.6) $ 7.9
====== ===== =====
NOTE 15 - 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 Dow Chemical. There were no changes in outstanding shares during
1996, 1995 or 1994. Per share data is based upon 2,500,000 shares outstanding
for all periods.
NOTE 16 - 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 $46.3 in 1996, $47.9 in 1995 and $45.5 in 1994. The minimum
future rental payments required under noncancelable operating leases at December
31, 1996, in the aggregate are $140.3 including the following amounts due in
each of the next five years: 1997 - $43.6, 1998 - $34.0, 1999 - $28.3, 2000 -
$9.7 and 2001 - $7.4.
The Company has not issued any guarantees of a material nature as of
December 31, 1996.
85
NOTE 17 - INDUSTRY SEGMENT AND FOREIGN OPERATIONS
The Company's operations are classified as a single industry segment.
Financial data by geographic area are presented below:
1996 1995 1994
------ ------ -----
Net sales to customers:
United States $1,094.3 $1,005.4 $ 888.3
Europe 610.1 642.4 554.5
Asia 697.0 725.9 652.0
Other 130.9 119.2 109.8
-------- -------- --------
Net sales $2,532.3 $2,492.9 $2,204.6
======== ======== ========
Interarea sales:
United States $ 379.0 $ 381.4 $ 317.6
Europe 53.7 48.7 46.9
Asia 9.4 10.6 9.5
Other 3.1 0.5 0.3
-------- -------- --------
Interarea sales $ 445.2 $ 441.2 $ 374.3
======== ======== ========
Operating profit:
United States $ 455.5 $ 410.3 $ 338.8
Europe 54.5 51.2 36.0
Asia 12.3 35.7 53.8
Other and eliminations 16.8 13.2 14.2
-------- -------- --------
539.1 510.4 442.8
General corporate expenses (203.6) (534.9) (401.7)
Unallocated income (expense), net 73.5 1.6 (26.5)
-------- -------- --------
Income (loss) before income taxes $ 409.0 $ (22.9) $ 14.6
======== ======== ========
Identifiable assets:
United States $1,202.8 $1,040.1 $1,083.0
Europe 627.3 568.6 486.4
Asia 539.0 609.9 593.8
Other and eliminations 73.0 43.0 38.9
-------- -------- --------
2,442.1 2,261.6 2,202.1
Corporate assets 2,672.0 2,696.8 1,891.1
-------- -------- --------
Total assets $5,114.1 $4,958.4 $4,093.2
======== ======== ========
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, marketable
securities, anticipated implant insurance receivables, intangible assets,
investments accounted for on the equity basis and corporate facilities.
86
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, Dec. 31, Jan. 1, Jan. 2, Jan. 3,
1996 1995 1995 1994 1993
-------- -------- -------- ------- -------
Income from continuing operations before taxes on income $ 487.3 $ 406.1 $ 343.8 $ 74.3 $ 156.2
Adjustments:
Share of earnings (losses) before taxes of 50% owned companies 130.3 95.2 89.0 (137.0) 103.2
Earnings (losses) before taxes of greater than 50% owned
unconsolidated subsidiary 0.7 (3.1) (4.0) (3.1) (2.1)
Distributed income of less than 50% owned companies
and share of loss if debt is guaranteed 2.1 4.5 (4.3)
Amortization of capitalized interest 11.8 9.6 13.3 13.0 11.8
Fixed charges net of capitalized interest 127.0 102.3 148.5 110.1 103.5
------- ------- ------- ------- -------
Earnings before taxes and fixed charges as adjusted $ 757.1 $ 610.1 $ 592.7 $ 61.8 $ 368.3
======= ======= ======= ======= =======
Fixed charges:
Interest incurred $ 86.7 $ 79.7 $ 77.5 $ 63.3 $ 53.1
Share of interest incurred of 50% owned companies and interest
on guaranteed debt of less than 50% owned companies 38.7 10.2 60.8 40.9 42.0
Interest incurred by greater than 50% owned unconsolidated
subsidiary 0.7 0.8 0.8 0.9
Portion of rent expense which represents interest factor 20.1 19.3 17.5 13.4 15.8
Share of portion of rent expense which represents interest
factor for 50% owned companies 1.4 2.7 9.4 9.1 9.2
Portion of rent expense which represents interest factor for
greater than 50% owned unconsolidated subsidiary 0.1 0.1 0.1
Amortization of debt costs 3.4 0.9 2.0 1.8 1.5
------- ------- ------- ------- -------
Total fixed charges 150.3 113.5 168.1 129.4 122.6
Capitalized interest (23.3) (11.2) (19.6) (19.3) (19.1)
------- ------- ------- ------- -------
Total fixed charges net of capitalized interest $ 127.0 $ 102.3 $ 148.5 $ 110.1 $ 103.5
======= ======= ======= ======= =======
Preferred dividends:
Preferred dividend requirements $ 15.7 $ 15.7 $ 8.2 $ 2.1 $ 2.2
Ratio of pre-tax income to income before minority interest
and equity earnings 1.5 1.4 1.5 0.9 1.2
------- ------- ------- ------- -------
Pre-tax preferred dividend requirement 23.6 22.0 12.3 1.9 2.6
Total fixed charges 150.3 113.5 168.1 129.4 122.6
------- ------- ------- ------- -------
Fixed charges and pre-tax preferred dividend requirement $ 173.9 $ 135.5 $ 180.4 $ 131.3 $ 125.2
======= ======= ======= ======= =======
Ratio of earnings to combined fixed charges and preferred
dividends 4.3x 4.5x 3.3x - 2.9x
======= ======= ======= ======= =======
Earnings did not cover combined fixed charges and preferred dividends by $69.5
in the fiscal year ended January 2, 1994.
87
Item 14(c) Exhibit #21
Corning Incorporated and Subsidiary Companies
Subsidiaries of the Registrant as of December 31, 1996 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 (21)
8.33 (48)
4. Corning International Corporation (Delaware) 100.00 (1)
5. Corning S.A. (France) 99.82 (4)
6. Corning Glass Taiwan Co., Ltd. (Taiwan) 100.00 (4)
7. Corning GmbH (Germany) 100.00 (4)
8. Corning (H.K.) Ltd. (Hong Kong) 100.00 (4)
9. Wislan S.A. (Uruguay) 100.00 (4)
10. Corning Japan K.K. (Japan) 78.74 (4)
11. Corning Limited (United Kingdom) 100.00 (4)
12. Acecrest Ltd. (United Kingdom) 100.00 (11)
13. Villabrook Ltd. (United Kingdom) 100.00 (11)
14. Corning Mexicana, S.A. de C.V. (Mexico) 100.00 (4)
15. Teddington Company Ltd. (Bermuda) 100.00 (4)
16. Corning International K.K. (Japan) 100.00 (1)
17. Nutrisearch Biosystems Limited (United Kingdom) 100.00 (1)
18. Corning Asahi Corporation (Delaware) 51.00 (1)
19. Components Incorporated (Delaware) 100.00 (1)
20. Corning Asahi Video Products Company (New York) 51.00 (1)
21. Corning Consumer Products Company (Delaware) 100.00 (1)
22. Corning Australia Pty. Limited (Australia) 100.00 (21)
23. Corning Brasil-Vidros Especiais Ltda. (Brazil) 100.00 (21)
24. Corning Canada Inc. (Canada) 100.00 (21)
25. Corning (Singapore) Pte. Ltd. (Singapore) 100.00 (21)
26. Iwaki Corning (M) SDN BHD (Malaysia) 80.00 (25)
27. Revere Ware Corporation (Delaware) 100.00 (21)
28. Corning Costar Corporation (Delaware) 100.00 (1)
29. Costar Europe Ltd. (Delaware) 100.00 (28)
30. Costar GmbH (Germany) 100.00 (28)
31. Costar International Sales Corporation (Virgin Islands) 100.00 (28)
32. Costar Italia, s.r.l. (Italy) 100.00 (28)
33. Costar/Nuclepore Canada, Inc. (Canada) 100.00 (28)
34. Costar UK Ltd. (United Kingdom) 100.00 (28)
35. Dominique Dutscher, S.A. (France) 99.80 (28)
36. Corning Delaware, L.P. (Delaware) 100.00 (1)
37. Corning Europe Inc. (Delaware) 100.00 (1)
38. Corning Franklin Health, Inc. (New Jersey) 100.00 (1)
39. OCWC Corporation (Delaware) 100.00 (1)
40. Corning Samco Corporation (Delaware) 100.00 (1)
41. Siecor Corporation (Delaware) 50.00 (1)
42. Cable Services, Inc. (Delaware) 100.00 (41)
43. Siecor Mexico S.A. de C.V. (Mexico) 99.99 (41)
.01 (45)
44. Siecor Dominican Republic, Inc. (Delaware) 100.00 (41)
45. Siecor International Corporation (North Carolina) 100.00 (41)
88
Item 14(c) Exhibit #21 (continued)
Subsidiaries of the Registrant as of December 31, 1996 are listed below:
Percentage of
Corp. voting securities
No. Name owned by (Corp. No.)
- -----------------------------------------------------------------------------------------------------------------------------------
46. Siecor International Corporation (Virgin Islands) 100.00 (41)
47. Siecor Puerto Rico, Inc. (Delaware) 100.00 (41)
48. U.S. Precision Lens, Inc. (Ohio) 100.00 (1)
49. Corning Korea Company Ltd. (Korea) 100.00 (4)
50. Quanterra Incorporated (Delaware) 81.00 (1)
Companies accounted for under the equity method:
51. EuroKera S.N.C. (France) 50.00 (5)
52. Keraglass S.N.C. (France) 50.00 (5)
53. Samcor Glass Limited (India) 30.00 (5)
10.00 (4)
5.00 (69)
54. Sicover, S.A. (France) 50.00 (5)
55. Siecor GmbH (Germany) 50.00 (7)
56. Siecor GmbH & Co. KG (Germany) 50.00 (7)
57. International Hau-Mei Glass Engineering Co., Ltd. (Peoples Republic of China) 50.00 (4)
58. Optical Waveguides Australia Pty. Ltd. (Australia) 50.00 (4)
59. Pittsburgh Corning Europe N.V. (Belgium) 50.00 (4)
60. Deutsche Pittsburgh Corning GmbH (Germany) 100.00 (59)
61. Pittsburgh Corning France SARL (France) 100.00 (59)
62. Pittsburgh Corning GmbH (Austria) 100.00 (59)
63. Pittsburgh Corning Nederland B.V. (Netherlands) 100.00 (59)
64. Pittsburgh Corning Scandinavia AB (Sweden) 100.00 (59)
65. Pittsburgh Corning (Schweiz) A.G. (Switzerland) 100.00 (59)
66. Pittsburgh Corning (U.K.) Ltd. (United Kingdom) 99.00 (59)
67. Shanghai Corning Engineering Corporation Ltd. (Peoples Republic of China) 50.00 (4)
68. Optical Fibres (United Kingdom) 50.00 (11)
69. Samsung Corning Co. Ltd. (Korea) 50.00 (4)
70. Samsung Corning Company (Malaysia) SDN BHD 70.00 (69)
71. Samsung Corning (Deutschland) GmbH (Germany) 100.00 (69)
72. Tianjin Samsung Corning Co. Ltd. (Peoples Republic of China) 100.00 (69)
73. N-Cor, Ltd. (Japan) 50.00 (16)
74. ACOR Programs, Inc. (Delaware) 56.00 (1)
75. CeraMem Separations, Inc. (Delaware) 23.00 (1)
76. Cormetech, Inc. (Delaware) 50.00 (1)
77. American Video Glass Company (Delaware) 50.00 (18)
78. Watkins Glen International, Inc. (New York) 50.00 (1)
79. Corporate Venture Partners (Delaware) 26.58 (1)
80. Samsung Corning Precision Glass Co., Ltd. (Korea) 50.00 (1)
81. Corsam Glasstec R&D Center (Delaware) 50.00 (1)
50.00 (69)
82. Doan Associates (Michigan) 20.00 (1)
83. Dow Corning Corporation (Michigan) 50.00 (1)
84. Eurokera North America, Inc. (Delaware) 50.00 (1)
85. Fiber Sensys, Inc. (Oregon) 46.97 (1)
86. Molecular Simulations, Inc. (Delaware) 50.00 (1)
87. Biosym Technologies, Inc. (California) 100.00 (86)
89
Item 14(c) Exhibit #21 (continued)
Subsidiaries of the Registrant as of December 31, 1996 are listed below:
Percentage of
Corp. voting securities
No. Name owned by (Corp. No.)
- -----------------------------------------------------------------------------------------------------------------------------------
88. Biosym Technologies GmbH (Germany) 100.00 (87)
89. Biosym Technologies Ltd. (United Kingdom) 100.00 (87)
90. Biosym Technologies SARL (France) 100.00 (87)
91. MDL Information Systems, Inc. (California) 5.80 (1)
92. Pittsburgh Corning Corporation (Pennsylvania) 50.00 (1)
93. U.S. Conec, Ltd. (Delaware) 50.00 (41)
94. Iwaki Glass Co., Ltd. (Japan) 3.00 (4)
As explained on page 19, 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
(Investments), appearing on pages 31 and 32, in this Annual Report on Form 10-K.
90
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. 33-40956, 33-44295, 33-49903, 33-53821, 33-56887 and 333-441) of
Corning Incorporated of our report dated January 27, 1997, appearing on page 22
of this Form 10-K and our report relating to the Dow Corning Corporation
financial statements dated January 21, 1997, appearing on page 57 of this Form
10-K.
/s/ Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
March 12, 1997
91
The following exhibits are included only in copies of the 1996 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, MP-HQ-E2-10, Corning, New York 14831.
92