-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ANx4u18LNXvG2Z2GbMR9tqgfQxH1uW8aheWRE5e64ks/Y/FoUi7iQxLa+Ohl/72N dfzyhfTJKugYW5INB6zpRA== 0000075234-96-000035.txt : 19961224 0000075234-96-000035.hdr.sgml : 19961224 ACCESSION NUMBER: 0000075234-96-000035 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19961223 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: OWENS CORNING CENTRAL INDEX KEY: 0000075234 STANDARD INDUSTRIAL CLASSIFICATION: ABRASIVE ASBESTOS & MISC NONMETALLIC MINERAL PRODUCTS [3290] IRS NUMBER: 344323452 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-03660 FILM NUMBER: 96684930 BUSINESS ADDRESS: STREET 1: OWENS CORNING WORLD HEADQUARTERS STREET 2: ONE OWENS CORNING PARKWAY CITY: TOLEDO STATE: OH ZIP: 43659 BUSINESS PHONE: 4192488000 MAIL ADDRESS: STREET 1: OWENS CORNING WORLD HEADQUARTERS STREET 2: ONE OWENS CORNING PARKWAY CITY: TOLEDO STATE: OH ZIP: 43659 FORMER COMPANY: FORMER CONFORMED NAME: OWENS CORNING FIBERGLAS CORP DATE OF NAME CHANGE: 19920703 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K/A Amendment No. 3 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1995 Commission File No. 1-3660 Owens Corning Fiberglas Tower, Toledo, Ohio 43659 Area Code (419) 248-8000 A Delaware Corporation I.R.S. Employer Identification No. 34-4323452 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock - $.10 Par Value New York Stock Exchange Rights to Purchase Series A New York Stock Exchange Participating Preferred Stock, no par value, of the Registrant 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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes / X / No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At December 31, 1995, the aggregate market value of Registrant's $.10 par value common stock (Registrant's voting stock) held by non-affiliates was $2,289,208,060, assuming for purposes of this computation only that all directors and executive officers are considered affiliates. At December 31, 1995, there were outstanding 51,389,618 shares of Registrant's $.10 par value common stock. Parts of Registrant's definitive 1996 proxy statement filed or to be filed pursuant to Regulation 14A (the "1996 Proxy Statement") are incorporated by reference into Part III of this Form 10-K. Owens Corning's Form 10-K for the year ended December 31, 1995, filed on February 23, 1996 as amended by Forms 10-K/A filed on February 23, 1996 and March 5, 1996, is hereby further amended by amending Item 6 "Selected Financial Data", Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Item 14 "Exhibits, Financial Statement Schedules, and Reports on Form 8-K", to read as set forth below: -14- ITEM 6. SELECTED FINANCIAL DATA The following is a summary of certain financial information of the Company. 1995(a) 1994(b) 1993(c) 1992(d) 1991(e) (In millions of dollars, except per share data and where noted) Net sales $ 3,612 $3,351 $2,944 $2,878 $2,783 Cost of sales 2,670 2,536 2,266 2,234 2,186 Marketing, administrative and other expenses 454 429 350 350 1,171 Science and technology expenses 76 71 69 65 54 Restructure costs - 89 23 16 - Income (loss) from operations 412 226 236 213 (628) Cost of borrowed funds 87 94 89 110 131 Income (loss) before provision for income taxes 325 132 147 103 (759) Provision (credit) for income taxes 106 58 47 33 (238) Net income (loss) 231 159 131 73 (742) Net income (loss) per share Primary 4.64 3.61 3.00 1.70 (18.13) Fully diluted 4.40 3.35 2.81 1.67 (18.13) Dividends per share on common stock Declared - - - - - Paid - - - - - Weighted average number of shares outstanding (in thousands) Primary 49,711 44,209 43,593 43,013 40,924 Fully diluted 54,106 50,025 49,410 48,844 42,924 Net cash flow from operations 285 233 253 192 253 Capital spending 276 258 178 144 114 Total assets (f) 3,261 3,274 3,013 3,162 3,511 Long-term debt 794 1,037 898 1,018 1,148 Average number of employees (in thousands) 17 17 17 17 17
(a) During 1995, the Company recorded a one time $8 million tax credit as a result of a tax loss carryback. (b) During 1994, the Company recorded a $117 million charge ($85 million after-tax) for productivity initiatives and other actions. The Company also recorded a $10 million after-tax charge for the adoption of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" for its non-U.S. plans, a $28 million after-tax charge for the adoption of SFAS No. 112, "Employers' Accounting for Postemployment Benefits," and a $123 million after-tax credit for the change in accounting method for rebuilding furnaces. -15- (c) During 1993, the Company recorded a $23 million charge for the restructuring of its European operations, an $8 million charge ($5 million after-tax) for the writedown of its hydrocarbon ventures to their net realizable value, a $26 million credit for the adoption of SFAS No. 109, "Accounting for Income Taxes," and a $14 million credit for the revaluation of deferred taxes. (d) During 1992, the Company recorded a $16 million charge ($11 million after-tax) to reorganize the Company's Building Materials segment and to centralize the Company's accounting and information systems. The Company also recorded a net extraordinary gain of $1 million resulting from the utilization of tax loss carryforwards, partially offset by a loss on the early retirement of debt. (e) During 1991, the Company recorded a non-recurring $800 million charge for unasserted asbestos litigation claims and a $227 million after-tax charge, or $5.55 per share, for the adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" for its U.S. plans. (f) During 1993, the Company adopted the provisions of FIN 39 which require the Company to present separately in its balance sheet its estimated contingent liabilities and related insurance assets. 1992 and 1991 assets have been restated to conform with the 1995, 1994, and 1993 presentations. -16- ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (All per share information in Item 7 is on a fully diluted basis.) RESULTS OF OPERATIONS Net income for the year ended December 31, 1995 was $231 million, or $4.40 per share, compared to net income of $159 million, or $3.35 per share, and net income of $131 million, or $2.81 per share, for the years ended December 31, 1994 and 1993, respectively. The 1995 earnings growth reflects pricing gains and the benefits of acquisitions, as well as a one time gain of $8 million or $.15 per share which was the result of a tax loss carryback. Excluding the impact of the tax benefit, net income for the year ended December 31, 1995, was $223 million, or $4.25 per share. Please see Note 8 to the Consolidated Financial Statements. Net income of $159 million for the year ended December 31, 1994, included the following offsetting special items: an after-tax gain of $123 million, or $2.45 per share, reflecting a change to the capital method of accounting for the rebuilding of glass melting facilities; an after-tax charge of $85 million, or $1.69 per share, for productivity initiatives and other actions; a non-cash, after-tax charge of $10 million, or $.20 per share, to reflect adoption of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," for plans outside the United States; and a non-cash, after-tax charge of $28 million, or $.56 per share, to reflect adoption of SFAS No. 112, "Employers' Accounting for Postemployment Benefits." Please see Notes 6, 16 and 17 to the Consolidated Financial Statements. Excluding special items, net income for the year ended December 31, 1993 was $118 million, or $2.56 per share. The 1993 special items included a credit of $26 million, or $.53 per share, for the cumulative effect of adopting the accounting standard for income taxes (SFAS No. 109); a one time gain of $14 million, or $.29 per share, reflecting a tax benefit resulting from a revaluation of deferred taxes, offset in part by an increase in the Company's corporate tax liability, necessitated by the increase in the federal statutory tax rate; an after-tax charge of $5 million, or $.10 per share, for the write-down of the Company's hydrocarbon ventures to their net realizable value; and a charge of $23 million, or $.47 per share, for the restructuring of the Company's European operations. Please see Notes 8 and 16 to the Consolidated Financial Statements. Net sales were $3.612 billion for the year ended December 31, 1995, reflecting an 8% increase from the 1994 level of $3.351 billion. Net sales in 1993 were $2.944 billion. Most of the 1995 growth is attributable to pricing gains achieved worldwide, with incremental growth resulting from acquisitions, which occurred mid year 1994 and throughout 1995. Please see Note 5 to the Consolidated Financial Statements. Sales outside the U.S. represented 27% of the total sales for the year ended December 31, 1995 compared to 24% for the years 1994 and 1993. Gross margin for the year ended December 31, 1995 increased to 26%, compared to 24% and 23% in 1994 and 1993, respectively, reflecting primarily pricing gains worldwide. -17- In the Building Materials segment, sales increased 6% for the year ended December 31, 1995 compared to 1994. This growth reflects pricing gains, and incremental sales from the 1995 acquisitions partially offset by a decline in volume, particularly in the Canadian markets. Income from operations for Building Materials decreased 9% from 1994 levels, after excluding the 1994 charge for restructure and other initiatives, primarily due to the weak economic conditions in Canada and start up costs associated with the Company's new insulation plant in Guangzhou, China. Building Materials sales in Europe increased 45% over the 1994 level, primarily resulting from a full year of sales from the June 1994 acquisition of the United Kingdom based insulation and industrial supply businesses of Pilkington plc (the "U.K. Acquisition"), and the addition of a second production line at the Company's insulation plant in Vise, Belgium. Late in the third quarter of 1995, the Company began shipping product from its insulation manufacturing facility in Guangzhou, China and announced plans for the construction of its second insulation plant in China, to be built in Shanghai. Roofing margins improved in 1995, driven primarily by improved pricing, and volume growth, including the successful introduction of Prominence(R) roofing shingles. The window business achieved significant sales growth and productivity improvements during the year, but has not yet reached break-even. In the foam insulation and related product markets, the Company has expanded its position with the acquisition of Falcon Manufacturing of Michigan, Inc. The Company also completed four other acquisitions in 1995 which are expected to contribute to the Company's overall growth strategy. These acquisitions increased the Company's small furnace technology base, as well as expanded its position in fabricated systems for the original equipment manufacturing market and its product offering for the window market. The Company further expanded its Building Materials multi-product offering in 1995 with the introduction of two branded products, Transitions(T) vinyl siding and PinkWrap(T) housewrap. In 1995 Miraflex(T), the revolutionary new form of glass fiber developed by Owens Corning which combines two different glass compositions into one fiber, was successfully introduced to North American markets in its first commercial application, PinkPlus(R) insulation featuring Miraflex(T) fiber. The Miraflex(T) fibers are flexible, soft to the touch, virtually itch-free, resilient and form-filling, characteristics not normally associated with glass or inorganic fibers, which is driving the success of the new fiber. In the Composite Materials segment, sales increased 12% for the year ended December 31, 1995, or approximately 20% excluding the Company's previously consolidated polyester resins business, discussed below. The Composite Materials sales increase, driven by strong worldwide market demand, is attributable to volume and pricing gains, coupled with favorable currency impact from European markets. In the U.S., sales increased slightly, while in Europe, the Company's composites operations benefited from European economic improvement which resulted in increased demand, coupled with the positive effects of productivity initiatives. In 1995 the Company announced plans to expand global composites capacity by 135,000 metric tons by 1997, with a significant portion of the new capacity coming from the refiring of the second furnace at the Company's Jackson, Tennessee facility. The remaining expansion will be at other existing facilities in the U.S., Europe, Asia and Latin America. The Company in 1995 began a new large diameter glass reinforced plastic (GRP) pipe facility in China, pipe joint ventures in Spain and Argentina, as well as a composite materials service center in Colombia. Early in 1996 the Company announced the formation of a pipe joint venture in Colombia, increasing the Company's global presence. -18- During the third quarter of 1994, the Company entered into a joint venture with Alpha Corporation of Tennessee, whereby the two companies combined their existing resin businesses for fifty percent interests in Alpha/Owens-Corning, L.L.C., the largest manufacturer of polyester resins in North America. Please see Note 5 to the Consolidated Financial Statements. The Company's cost of borrowed funds for the year ended December 31, 1995 was $7 million lower than 1994, reflecting decreased borrowings resulting from the conversion of the Company's 8% convertible junior subordinated debentures into shares of common stock. Additionally, the proceeds from the issuance of $200 million of convertible preferred securities were partially used to pay off the Company's short-term credit facility, established during the second quarter of 1994 to finance the U.K. Acquisition. Please see Notes 2, 3 and 4 to the Consolidated Financial Statements. At December 31, 1995, certain of the Company's foreign subsidiaries have tax net operating loss carryforwards of approximately $27 million. The Company has $322 million in net deferred tax assets at December 31, 1995, all of which management expects will be realized through future income from operations. Please see Note 8 to the Consolidated Financial Statements. Early in the first quarter of 1996, the Company completed the sale of its share in a Japanese affiliate, Asahi Fiber Glass Co. Ltd., to its partner Asahi Glass Company for approximately $50 million and realized a pretax gain in excess of $25 million. Please see Note 12 to the Consolidated Financial Statements. LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS Cash flow from operations, excluding asbestos-related activities, was $342 million for 1995, compared to $361 million for 1994. The decline in cash flow from operations from 1994 to 1995 was due in part to funding of a Voluntary Employee's Beneficiary Association trust for tax planning purposes. Total receivables at December 31, 1995 were $15 million lower than the December 31, 1994 level due to the sale of $50 million in receivables early in 1995, resulting in a total of $100 million of receivables sold under the 1994 sales agreement. The receivables sold were largely offset by increased sales in 1995. Please see Notes 6 and 10 to the Consolidated Financial Statements. At December 31, 1995, the Company's net working capital was negative $9 million and its current ratio was .99, compared to negative $143 million and .87 at December 31, 1994, and negative $49 million and .94 at December 31, 1993, respectively. The increase in 1995 was due in part to decreased short-term borrowings as a result of the repayment of the financing used for the U.K. Acquisition. Excluding the impact of the short-term borrowings used to finance the U.K. Acquisition, the Company's net working capital was negative $33 million and its current ratio was .97 at December 31, 1994. During 1995, virtually all of the Company's $173 million issue of 8% convertible junior subordinated debentures were converted. Debentures not converted were redeemed for cash. The conversion resulted in the issuance of 5.8 million new shares of common stock. Also in 1995, Owens- Corning Capital, L.L.C., a Delaware limited liability company, of which all of the common limited company interests are indirectly owned by the Company, issued $200 million of 6.5% cumulative convertible preferred securities. The proceeds from the issuance were loaned to the Company and partially used to repay its short-term credit facility. Please see Notes 2 and 4 to the Consolidated Financial Statements. -19- The Company's total borrowings at December 31, 1995 were $893 million, $319 million lower than at year-end 1994, primarily due to the conversion of its 8% convertible junior subordinated debentures, and the repayment of debt through the issuance of the above mentioned preferred securities. As of December 31, 1995, the Company had unused lines of credit of $358 million available under long-term bank loan facilities and an additional $239 million under short-term facilities, compared to $293 million and $91 million, respectively, at year-end 1994. The increase in unused available lines of credit reflects increased availability, primarily in foreign credit facilities, a decrease in borrowings and a decrease in outstanding letters of credit supporting appeals from asbestos trials. Such letters of credit reduce credit availability under the Company's long- term U.S. loan facility. Capital spending for property, plant and equipment, excluding acquisitions, was $276 million during 1995. At the end of 1995, approved capital projects were $134 million. The Company expects that funding for these expenditures will be from the Company's operations and external sources as required. Gross payments for asbestos litigation claims during 1995, including $48 million in defense costs and $6 million for appeal bond and other costs, were $308 million. Proceeds from insurance were $251 million, $100 million of which was received as a prepayment of a third quarter 1995 settlement with a major insurer, which confirmed the Company's access to $330 million of insurance for payment of asbestos litigation claims. Excluding the impact of the $100 million prepayment by the carrier, cash flow from asbestos related activities was a net pretax cash outflow of $157 million, or $94 million after-tax. During 1995, the Company received approximately 55,900 new asbestos personal injury cases and closed approximately 21,900 cases. Over the next twelve months total payments for asbestos litigation claims, including defense costs, are expected to be approximately $250 million. Proceeds from insurance of $100 million are expected to be available to cover these costs, resulting in a net pretax cash outflow of $150 million, or $90 million after-tax. Please see Note 21 to the Consolidated Financial Statements. The Company expects funds generated from operations, together with funds available under long and short term bank loan facilities, to be sufficient to satisfy its debt service obligations under its existing indebtedness, as well as its contingent liabilities for uninsured asbestos personal injury claims. The Company has been deemed by the Environmental Protection Agency (EPA) to be a potentially responsible party (PRP) with respect to certain sites under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund). The Company has also been deemed a PRP under similar state or local laws, including two state Superfund sites where the Company is the primary generator. In other instances, other PRPs have brought suits or claims against the Company as a PRP for contribution under such federal, state or local laws. During 1995, the Company was designated as a PRP in such federal, state, local or private proceedings for nine additional sites. At December 31, 1995, a total of 42 such PRP designations remained unresolved by the Company, some of which designations the Company believes to be erroneous. The Company is also involved with environmental investigation or remediation at a number of other sites at which it has not been designated a PRP. The Company has established a $20 million reserve for its Superfund (and similar state, local and private action) contingent liabilities. In addition, based upon information presently available to the Company, and without regard to the application of insurance, the Company believes that, considered in the aggregate, the additional costs associated with such contingent liabilities, including any related litigation costs, will not have a materially adverse effect on the Company's financial position or results of operations. -20- The 1990 Clean Air Act Amendments (Act) provide that the EPA will issue regulations on a number of air pollutants over a period of years. Until these regulations are developed, the Company cannot determine the extent to which the Act will affect it. The Company anticipates that its sources to be regulated will include glass fiber manufacturing and asphalt processing activities. The EPA's announced schedule is to issue regulations covering glass fiber manufacturing by late 1997 and asphalt processing activities by late 2000, with implementation as to existing sources up to three years thereafter. Based on information now known to the Company, including the nature and limited number of regulated materials it emits, the Company does not expect the Act to have a materially adverse effect on the Company's results of operations, financial condition or long-term liquidity. -21- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT 1. See Index to Financial Statements on page 23 hereof 2. See Index to Financial Statement Schedules on page 69 hereof 3. See Exhibit Index beginning on page 71 hereof Management contracts and compensatory plans and arrangements required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K are denoted in the Exhibit Index by an asterisk ("*"). (b) REPORTS ON FORM 8-K No report on Form 8-K was filed during the fourth quarter of 1995. -22- Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OWENS CORNING By /s/ G. H. Hiner Date February 14, 1996 Glen H. Hiner, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ G. H. Hiner Date February 14, 1996 Glen H. Hiner, Chairman of the Board and Chief Executive Officer and Director /s/ David W. Devonshire Date February 14, 1996 David W. Devonshire, Senior Vice President and Chief Financial Officer /s/ Domenico Cecere Date February 14, 1996 Domenico Cecere, Vice President and President, Roofing/Asphalt, and Controller (Interim) /s/ Norman P. Blake Date February 20, 1996 Norman P. Blake, Jr., Director /s/ William Colville Date February 15, 1996 William W. Colville, Director /s/ Landon Hilliard Date February 15, 1996 Landon Hilliard, Director /s/ Trevor Holdsworth Date February 19, 1996 Trevor Holdsworth, Director /s/ Jon M. Huntsman, Jr. Date February 16, 1996 Jon M. Huntsman, Jr., Director Date W. Walker Lewis, Director /s/ David T. McGovern Date February 20, 1996 David T. McGovern, Director /s/ Furman C. Mosely Date February 19, 1996 Furman C. Mosely, Jr., Director /s/ W. Ann Reynolds Date February 15, 1996 W. Ann Reynolds, Director -23- INDEX TO FINANCIAL STATEMENTS Item Page Report of Independent Public Accountants 24 Summary of Significant Accounting Policies 25-26 Consolidated Statement of Income - for the years ended December 31, 1995, 1994 and 1993 27-28 Consolidated Balance Sheet - December 31, 1995 and 1994 29-30 Consolidated Statement of Stockholders' Equity - for the years ended December 31, 1995, 1994, and 1993 31 Consolidated Statement of Cash Flows - for the years ended December 31, 1995, 1994 and 1993 32-33 Notes to Consolidated Financial Statements Notes 1 through 22 34-68 -24- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Owens Corning: We have audited the accompanying consolidated balance sheet of OWENS CORNING (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Owens Corning and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Notes 6, 8 and 17 to the consolidated financial statements, effective January 1, 1994, the Company changed its methods of accounting for furnace rebuilds, postretirement benefits other than pensions for its non-U.S. plans, and postemployment benefits, and effective January 1, 1993, the Company changed its method of accounting for income taxes. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the Index to Financial Statement Schedules is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP January 20, 1996 Toledo, Ohio -25- OWENS CORNING AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of majority owned subsidiaries. Significant intercompany accounts and transactions are eliminated. Net Income per Share Primary net income per share is computed using the weighted average number of common shares outstanding and common equivalent shares during the period. Fully diluted net income per share reflects the dilutive effect of increased shares that would result from the conversion of debt and equity securities which are not treated as common stock equivalents. Unless otherwise indicated, all per share information included in the notes to the Owens Corning and subsidiaries' (the "Company") consolidated financial statements is presented on a fully diluted basis. Inventory Valuation Inventories are stated at cost, which is less than market value, and include material, labor, and manufacturing overhead. The majority of U.S. inventories are valued using the last-in, first-out (LIFO) method and the balance of inventories are generally valued using the first-in, first- out (FIFO) method. Intangible Assets Intangible assets consist primarily of goodwill, patents, and covenants not to compete and are carried at cost less accumulated amortization. Goodwill is amortized on a straight-line basis over a period of forty years. Other intangible assets are amortized over their estimated useful lives or actual contractual lives. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful lives of intangible assets may warrant revision or that the remaining balance of these intangible assets may not be recoverable. When factors indicate that intangible assets should be evaluated for possible impairment, the Company uses an estimate of the related business segment's undiscounted net income over the remaining life of the intangible asset in measuring whether the intangible asset is recoverable. Investments in Affiliates Investments in affiliates are accounted for using the equity method, under which the Company's share of earnings of these affiliates is reflected in income as earned and dividends are credited against the investment in affiliates when received. -26- OWENS CORNING AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Depreciation For assets placed in service prior to January 1, 1992, the Company's plant and equipment is depreciated primarily using the double-declining balance method for the first half of an asset's estimated useful life and the straight-line method is used thereafter. For assets placed in service after December 31, 1991, the Company's plant and equipment is depreciated using the straight-line method. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Rebuilding of Glass Melting Furnaces The Company's glass melting furnaces periodically require substantial rebuilding. As discussed in Note 17 to the consolidated financial statements, effective January 1, 1994, the Company adopted the capital method of accounting for the cost of rebuilding glass melting furnaces. Under this method, costs are capitalized when incurred and depreciated over the estimated useful lives of the rebuilt furnaces. Derivative Financial Instruments Gains and losses on hedges of existing assets or liabilities are included in the carrying amount of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. Gains and losses on hedges of net investments in foreign subsidiaries are included in stockholders' equity. Gains and losses related to qualifying hedges of firm commitments or anticipated transactions also are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. Gains and losses on forward currency exchange contracts that do not qualify as hedges are recognized as other income or expense. Reclassifications Certain reclassifications have been made to 1994 and 1993 to conform with the classifications used in 1995. -27- OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1995 1994 1993 (In millions of dollars, except share data) NET SALES $3,612 $3,351 $2,944 COST OF SALES 2,670 2,536 2,266 Gross margin 942 815 678 OPERATING EXPENSES Marketing and administrative expenses 444 391 327 Science and technology expenses (Note 9) 76 71 69 Restructure costs (Note 16) - 89 23 Other (Notes 2, 4, 10 and 16) 10 38 23 Total operating expenses 530 589 442 INCOME FROM OPERATIONS 412 226 236 Cost of borrowed funds (Notes 2 and 3) 87 94 89 INCOME BEFORE PROVISION FOR INCOME TAXES 325 132 147 Provision for income taxes (Note 8) 106 58 47 INCOME BEFORE EQUITY IN NET INCOME OF AFFILIATES 219 74 100 Equity in net income of affiliates (Notes 5 and 12) 12 - 5 INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 231 74 105 Cumulative effect of accounting changes (Notes 6, 8 and 17) - 85 26 NET INCOME $231 $159 $131
The accompanying summary of significant accounting policies and notes are an integral part of this statement. -28- OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued) 1995 1994 1993 (In millions of dollars, except share data) NET INCOME PER COMMON SHARE: Primary: Income before cumulative effect of accounting changes $ 4.64 $ 1.70 $ 2.40 Cumulative effect of accounting changes - 1.91 .60 Net income per share $ 4.64 $ 3.61 $ 3.00 Assuming full dilution: Income before cumulative effect of accounting changes $ 4.40 $ 1.66 $ 2.28 Cumulative effect of accounting changes - 1.69 .53 Net income per share $ 4.40 $ 3.35 $ 2.81 Weighted average number of common shares outstanding and common equivalent shares during the period (in millions) Primary 49.7 44.2 43.6 Assuming full dilution 54.1 50.0 49.4
The accompanying summary of significant accounting policies and notes are an integral part of this statement. -29- OWENS CORNING AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET - DECEMBER 31, 1995 AND 1994 ASSETS 1995 1994 (In millions of dollars) CURRENT Cash and cash equivalents $ 18 $ 59 Receivables, less allowances of $19 million in 1995 and $16 million in 1994 (Note 10) 314 329 Inventories (Note 11) 253 223 Insurance for asbestos litigation claims - current portion (Note 21) 100 125 Deferred income taxes (Note 8) 70 156 VEBA trust (Note 6) 51 - Income tax receivable 50 12 Investment in affiliate held for sale (Note 12) 36 - Other current assets 35 26 Total current 927 930 OTHER Insurance for asbestos litigation claims (Note 21) 330 556 Deferred income taxes (Note 8) 252 308 Goodwill, less accumulated amortization of $19 million in 1995 and $14 million in 1994 (Note 5) 249 151 Investments in affiliates (Notes 5 and 12) 50 74 Other noncurrent assets (Note 6) 147 122 Total other 1,028 1,211 PLANT AND EQUIPMENT, at cost Land 52 51 Buildings and leasehold improvements 581 553 Machinery and equipment 2,266 2,172 Construction in progress 168 125 3,067 2,901 Less: Accumulated depreciation (1,761) (1,768) Net plant and equipment 1,306 1,133 TOTAL ASSETS $3,261 $3,274
The accompanying summary of significant accounting policies and notes are an integral part of this statement. -30- OWENS CORNING AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET - DECEMBER 31, 1995 AND 1994 (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 (In millions of dollars) CURRENT Accounts payable and accrued liabilities (Note 13) $ 587 $ 598 Reserve for asbestos litigation claims - current portion (Note 21) 250 300 Short-term debt (Note 3) 64 155 Long-term debt - current portion (Note 2) 35 20 Total current 936 1,073 LONG-TERM DEBT (Note 2) 794 1,037 OTHER Reserve for asbestos litigation claims (Note 21) 887 1,145 Other employee benefits liability (Note 6) 367 390 Pension plan liability (Note 7) 75 77 Other 220 232 Total other 1,549 1,844 COMMITMENTS AND CONTINGENCIES (Notes 15, 20 and 21) COMPANY OBLIGATED CONVERTIBLE SECURITY OF SUBSIDIARY HOLDING SOLELY PARENT DEBENTURES (MIPS, Note 4) 194 - STOCKHOLDERS' EQUITY Preferred stock, no par value; authorized 8 million shares, none outstanding (Note 19) Common stock, par value $.10 per share; authorized 100 million shares; issued 1995--51.4 million and 1994--44.2 million shares (Notes 2, 5 and 18) 579 348 Deficit (781) (1,012) Foreign currency translation adjustments 9 (1) Other (Note 7) (19) (15) Total stockholders' equity (212) (680) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,261 $3,274
The accompanying summary of significant accounting policies and notes are an integral part of this statement. -31- OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1995 1994 1993 (In millions of dollars) COMMON STOCK Balance beginning of year $ 348 $ 315 $ 299 Issuance of stock for: Conversion of debt (Note 2) 173 - - Acquisitions (Note 5) 42 27 - Awards under stock compensation plans (Note 18) 16 6 16 Balance end of year 579 348 315 DEFICIT Balance beginning of year (1,012) (1,171) (1,302) Net income 231 159 131 Balance end of year (781) (1,012) (1,171) FOREIGN CURRENCY TRANSLATION ADJUSTMENTS Balance beginning of year (1) 5 4 Translation adjustments 10 (6) 1 Balance end of year 9 (1) 5 OTHER Balance beginning of year (15) (18) (9) Net increase (decrease) (4) 3 (9) Balance end of year (19) (15) (18) STOCKHOLDERS' EQUITY $ (212) $ (680) $ (869)
The accompanying summary of significant accounting policies and notes are an integral part of this statement. -32- OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1995 1994 1993 (In millions of dollars) NET CASH FLOW FROM OPERATIONS Net income $ 231 $ 159 $ 131 Reconciliation of net cash provided by operating activities: Noncash items: Cumulative effect of accounting changes (Notes 6, 8 and 17) - (85) (26) Provision for depreciation, amortization, and rebuilding furnaces (Note 17) 125 118 121 Provision for deferred income taxes (Note 8) 142 59 10 Other 5 9 10 (Increase) decrease in receivables (Note 10) 36 21 (22) (Increase) decrease in inventories (15) 17 4 Increase (decrease) in accounts payable and accrued liabilities (50) 53 114 Funding of VEBA trust (Note 6) (64) - - Proceeds from insurance for asbestos litigation claims 251 87 224 Payments for asbestos litigation claims (308) (215) (283) Other (68) 10 (30) Net cash flow from operations 285 233 253 NET CASH FLOW FROM INVESTING Additions to plant and equipment (276) (258) (178) Investment in subsidiaries, net of cash acquired (Note 5) (81) (120) - Other (4) 23 - Net cash flow from investing (361) (355) (178)
The accompanying summary of significant accounting policies and notes are an integral part of this statement. -33- OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued) 1995 1994 1993 (In millions of dollars) NET CASH FLOW FROM FINANCING (Notes 2, 3 and 4) Net additions (reductions) to long-term credit facilities $ 55 $ 10 $ (90) Other additions to long-term debt 9 145 - Other reductions to long-term debt (128) (51) (21) Net increase (decrease) in short-term debt (94) 69 26 Issuance of preferred stock of subsidiary, net of fees 194 - - Other - 5 11 Net cash flow from financing 36 178 (74) Effect of exchange rate changes on cash (1) - - Net increase (decrease) in cash and cash equivalents (41) 56 1 Cash and cash equivalents at beginning of year 59 3 2 Cash and cash equivalents at end of year $ 18 $ 59 $ 3
The accompanying summary of significant accounting policies and notes are an integral part of this statement. -34- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Segment Data The Company operates in two industry segments, Building Materials and Composite Materials, and reports its results in two ways: by industry segment and by geographic segment. See Note 5 for detail of 1995 and 1994 acquisitions and divestitures of businesses. The industry segments are defined as follows: Building Materials Production and sale of glass wool fibers formed into thermal and acoustical insulation and air ducts; extruded and expanded polystyrene insulation; roofing shingles and asphalt materials; underground storage tanks; windows; and the rebranded sale of patio doors; vinyl siding and housewrap. Composite Materials Production and sale of glass fiber yarns; rovings, mats and veils; strand and reinforcement products; fiber reinforced plastic pipe; and polyester and vinyl ester resins. The geographic segment reporting combines the two industry segments within the major regions: United States, Europe, and Canada and other. Intersegment sales are generally recorded at market or equivalent value. Income (loss) from operations by industry and geographic segment consists of net sales less related costs and expenses. In computing income (loss) from operations by segment, cost of borrowed funds and other general corporate income and expenses have been excluded. Certain corporate operating expenses directly traceable to industry and geographic segments have been allocated to those segments. During the first quarter of 1994, the Company recorded a $117 million pretax charge for productivity initiatives and other actions (Note 16). The impact of this charge was to reduce income from operations for Building Materials and Composite Materials by $70 million and $22 million, respectively, and to increase general corporate expense by $25 million. Geographically, income from operations for Building Materials in the United States and Canada and other was reduced by $50 million and $20 million, respectively. Income from operations for Composite Materials in the United States, Europe, and Canada and other was reduced by $6 million, $13 million, and $3 million, respectively. During the first quarter of 1993, the Company recorded a $23 million charge to reorganize its European operations, the full impact of which was reflected as a reduction to income from operations for the Composite Materials segment (Note 16). -35- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Segment Data (Continued) Identifiable assets by industry and geographic segment are those assets that are used in the Company's operations in each industry and geographic segment and do not include general corporate assets. General corporate assets consist primarily of cash and cash equivalents, VEBA trust, deferred taxes, asbestos insurance, and corporate property and equipment. NET SALES 1995 1994 1993 (In millions of dollars) Industry Segments Building Materials United States $2,033 $1,952 $1,699 Europe 264 182 97 Canada and other 107 139 150 Total Building Materials 2,404 2,273 1,946 Composite Materials United States 610 595 528 Europe 459 355 346 Canada and other 139 128 124 Total Composite Materials 1,208 1,078 998 Intersegment sales Building Materials - - - Composite Materials 96 99 85 Eliminations (96) (99) (85) Net sales $3,612 $3,351 $2,944 Geographic Segments United States $2,643 $2,547 $2,227 Europe 723 537 443 Canada and other 246 267 274 3,612 3,351 2,944 Intersegment sales United States 54 43 42 Europe 21 22 15 Canada and other 88 91 66 Eliminations (163) (156) (123) Net sales $3,612 $3,351 $2,944
-36- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Segment Data (Continued) INCOME (LOSS) FROM OPERATIONS 1995 1994 1993 (In millions of dollars) Industry Segments Building Materials United States $195 $145 $153 Europe 29 26 16 Canada and other 13 18 6 Total Building Materials 237 189 175 Composite Materials United States 135 108 101 Europe 64 (8) (15) Canada and other 26 9 12 Total Composite Materials 225 109 98 General corporate expense (50) (72) (37) Income from operations 412 226 236 Cost of borrowed funds (87) (94) (89) Income before provision for income taxes $325 $132 $147 Geographic Segments United States $330 $253 $254 Europe 93 18 1 Canada and other 39 27 18 General corporate expense (50) (72) (37) Income from operations 412 226 236 Cost of borrowed funds (87) (94) (89) Income before provision for income taxes $325 $132 $147
-37- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Segment Data (Continued) IDENTIFIABLE ASSETS AT 1995 1994 1993 DECEMBER 31, (In millions of dollars) Industry Segments Building Materials United States $ 893 $ 718 $ 596 Europe 170 162 46 Canada and other 194 136 155 Total Building Materials 1,257 1,016 797 Composite Materials United States 361 326 302 Europe 388 335 256 Canada and other 145 160 157 Total Composite Materials 894 821 715 General corporate 1,024 1,363 1,438 3,175 3,200 2,950 Investments in affiliates accounted for under the equity method 86 74 63 Total assets $3,261 $3,274 $3,013 Geographic Segments United States $1,254 $1,044 $ 898 Europe 558 497 302 Canada and other 339 296 312 General corporate 1,024 1,363 1,438 3,175 3,200 2,950 Investments in affiliates accounted for under the equity method 86 74 63 Total assets $3,261 $3,274 $3,013
-38- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Segment Data (Continued) PROVISION FOR DEPRECIATION, 1995 1994 1993 AMORTIZATION, AND REBUILDING (In millions of dollars) FURNACES Industry Segments Building Materials United States $ 49 $ 48 $ 47 Europe 11 6 2 Canada and other 8 8 11 Total Building Materials 68 62 60 Composite Materials United States 22 22 24 Europe 18 17 16 Canada and other 7 8 10 Total Composite Materials 47 47 50 General corporate 10 9 11 Total provision for depreciation, amortization, and rebuilding furnaces $125 $118 $121 Geographic Segments United States $ 71 $ 70 $ 71 Europe 29 23 18 Canada and other 15 16 21 General corporate 10 9 11 Total provision for depreciation, amortization, and rebuilding furnaces $125 $118 $121
-39- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Segment Data (Continued) ADDITIONS TO PLANT AND EQUIPMENT 1995 1994 1993 (In millions of dollars) Industry Segments Building Materials United States $ 60 $ 85 $ 82 Europe 36 41 2 Canada and other 33 7 5 Total Building Materials 129 133 89 Composite Materials United States 37 41 31 Europe 39 35 32 Canada and other 18 26 7 Total Composite Materials 94 102 70 General corporate 53 23 19 Total additions $ 276 $ 258 $ 178 Geographic Segments United States $ 97 $ 126 $ 113 Europe 75 76 34 Canada and other 51 33 12 General corporate 53 23 19 Total additions $ 276 $ 258 $ 178
-40- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. Long-Term Debt 1995 1994 (In millions of dollars) Unsecured U.S. credit facility due in 1997, variable $ 55 $ 35 Unsecured European credit facilities due through 2002, variable 40 - Unsecured Canadian credit facility due in 1997, variable - 4 Guaranteed debentures due in 2001, 10% 150 150 Debentures due in 2002, 8.875% 150 150 Debentures due in 2012, 9.375% 150 149 Guaranteed debentures due in 1998, 9.8% 100 100 Eurobonds due through 2001, 9.814% (Note 20) 63 140 Bonds due in 2000, 7.25%, payable in Deutsche marks (Note 20) 50 50 Convertible junior subordinated debentures due in 2005, 8%, convertible at $29.75 per share - 173 Notes due through 2002, 6.06% to 8.50%, payable in foreign currencies 26 38 Other long-term debt due through 2012, at rates from 5.375% to 12.47% 45 68 829 1,057 Less: Current portion (35) (20) Total long-term debt $ 794 $1,037
The U.S. credit facility has a maximum commitment of $475 million at December 31, 1995, of which $176 million was used for standby letters of credit and $244 million was unused. The rate of interest is either the bank's base rate, or 13/16% over the certificate of deposit rate, or 11/16% over the London Interbank Offered Rate (LIBOR). The weighted average rate of interest paid on borrowings under this facility during 1995 was 6.9%, (8.5% at December 31, 1995). A commitment fee of 1/4 of 1% is charged on the unused portions of this facility. The Canadian credit facility is payable in Canadian dollars and has a maximum commitment of 135 million Canadian dollars ($99 million U.S. dollars), all of which was unused at December 31, 1995. The rate of interest is either 11/16% over the Canadian cost of funds rate, or 11/16% over LIBOR on U.S. deposits, or .7875% over the Canadian bankers' acceptance rate. A commitment fee of 1/4 of 1% is charged on the unused portions of this facility. -41- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. Long-Term Debt (Continued) The European credit facilities, payable in Belgian francs, have an aggregate commitment of 1.6 billion Belgian francs ($55 million U.S. dollars) of which 400 million Belgian francs ($15 million U.S. dollars) was unused at December 31, 1995. The rate of interest on the facilities ranges from 4.28% to 4.51% at December 31, 1995. The commitment fee on the unused portions of the facilities range from 3/20 to 1/4 of 1%. As is typical for bank credit facilities, the agreements relating to the facilities described above contain restrictive covenants, including requirements for the maintenance of working capital, interest coverage, and minimum coverage of fixed charges; and limitations on the early retirement of subordinated debt, additional borrowings, certain investments, payment of dividends, and purchase of Company stock. The agreements include a provision which would result in all of the unpaid principal and accrued interest of the facilities becoming due immediately upon a change of control in ownership of the Company. A material adverse change in the Company's business, assets, liabilities, financial condition or results of operations constitutes a default under the agreements. During 1995, the Company's $173 million issue of 8% convertible junior subordinated debentures were converted. The conversion resulted in the issuance of 5.8 million new shares of common stock. In conjunction with the conversion of the debentures, the Company paid fees of approximately $3 million which are reflected as other expenses on the Company's consolidated statement of income for the year ended December 31, 1995. In November 1994, Owens-Corning Finance (U.K.) PLC, a wholly- owned subsidiary of the Company, issued $140 million of Eurobonds. These bonds are convertible into fixed rate preference shares of Owens-Corning Finance (U.K.) PLC in November 2004 and may be redeemed at any time, at a premium, at the option of the Company. The bonds are guaranteed by the Company as to payments of principal and interest and rank similarly with all other senior unsecured debt of the Company. Subsequently, in a separate transaction, the Company sold a put option to the holder of the bonds allowing the option holder to require the Company to purchase a portion of the bonds. As a result of the holder's exercise of the put option, in May 1995, the Company repurchased a portion of the $140 million issue of Eurobonds for $77 million. -42- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. Long-Term Debt (Continued) The aggregate maturities and sinking fund requirements for all long-term debt issues for each of the five years following December 31, 1995 are: Credit Other Long- Year Facilities Term Debt (In millions of dollars) 1996 $ - $ 35 1997 63 19 1998 8 112 1999 8 12 2000 6 75
3. Short-Term Debt 1995 1994 (In millions of dollars) Balance outstanding at December 31 $ 64 $ 155 Weighted average short-term borrowings $ 184 $ 165 Weighted average interest rates on short-term debt outstanding at December 31 7.5% 6.6%
In May 1995 the Company repaid its unsecured, variable rate, short-term bank credit facility that was used to finance the 1994 U.K. acquisition (Note 5). This facility had a maximum commitment of $110 million at December 31, 1994, all of which was used. The rate of interest on borrowings under this facility was 1/2 of 1% over LIBOR, or 6.6875% at December 31, 1994. In December 1995 the Company entered into two revolving credit agreements. Each quarter during 1996, the Company may borrow up to a predetermined amount from $13 million to $16 million. The amount borrowed may be repaid in U.S. dollars at less than or equal to the original borrowing, based upon predetermined British pound or Belgian franc currency exchange rates. The agreements are in effect through 1996 and bear interest at market rates in effect at the time of each borrowing. The Company had unused short-term lines of credit totalling $239 million and $91 million at December 31, 1995 and 1994, respectively. -43- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. Convertible Monthly Income Preferred Securities (MIPS) In May 1995, Owens-Corning Capital, L.L.C. ("OC Capital"), a Delaware limited liability company, all of the common limited liability company interests in which are owned indirectly by the Company, completed a private offering of 4 million shares of Convertible Monthly Income Preferred Securities ("preferred securities"). The aggregate purchase price for the offering was $200 million. In conjunction with the offering, the Company incurred $6 million in issuance costs. The preferred securities are guaranteed in certain respects by the Company and are convertible, at the option of the holders, into Company common stock at the rate of 1.1416 shares of Company common stock for each preferred security (equivalent to a conversion price of $43.80 per common share). OC Capital cannot initiate any action relating to conversion until after June 1, 1998. Distributions on the preferred securities are cumulative and are payable at the annual rate of 6-1/2 percent of the liquidation preference of $50 per preferred security. Distributions of $8 million have been recorded as other expenses on the Company's consolidated statement of income for the year ended December 31, 1995. The Company issued $200 million of 6-1/2 percent Convertible Subordinated Debentures due 2025 to OC Capital, which represents the sole asset of OC Capital, in exchange for the proceeds of the offering. The Company used the proceeds to repay the $110 million short-term bank credit facility utilized for the 1994 U.K. acquisition (Note 5), with the balance used to reduce borrowings under the Company's revolving credit facilities. 5. Acquisitions and Divestitures of Businesses During 1995 and 1994, the Company made several acquisitions in the Building Materials segment in the United States and Europe, which were consummated through the exchange of various combinations of common stock and cash. The aggregate purchase price including possible subsequent contingent consideration was $126 million and $155 million for 1995 and 1994, respectively. The 1995 acquisitions exchanged 946,922 shares of the Company's common stock and $82 million in cash which includes $1 million to be paid in the first quarter of 1996 and the 1994 acquisitions exchanged 855,556 shares of the Company's common stock and $120 million in cash, net of cash acquired, for all of the assets and liabilities of the companies acquired. The incremental sales from the acquisitions, in the year of acquisition, were $41 million and $134 million for the years ended December 31, 1995 and 1994, respectively. The largest of these acquisitions was the 1994 second quarter acquisition of Pilkington Insulation Limited and Kitsons Insulation Products Limited (collectively, "the U.K. acquisition"), the United Kingdom based insulation manufacturing and industrial supply businesses of Pilkington PLC. Acquiring two glass fiber insulation manufacturing facilities, one rock wool manufacturing facility and 14 distribution centers, the Company now represents the United Kingdom's largest manufacturer of glass fiber and rock wool insulation is a major -44- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. Acquisitions and Divestitures of Businesses (Continued) supplier of thermal and acoustical insulation products to the United Kingdom construction industry. The purchase price of the U.K. acquisition was $110 million and was financed with borrowings from the Company's short-term bank credit facility (Note 3). All acquisitions were accounted for under the purchase method of accounting, whereby the assets acquired and liabilities assumed have been recorded at their fair values and the results of operations for the acquisitions have been included in the Company's consolidated financial statements subsequent to the acquisition dates. The purchase price allocations were based on preliminary estimates of fair market value and are subject to revision. The 1995 acquisitions included goodwill of $97 million and non-competition agreements of $3 million. The 1994 acquisitions included goodwill of $78 million and non- competition agreements of $6 million. The goodwill and non-competition agreements are being amortized on a straight-line basis over 40 years and 7 years, respectively. The pro forma effect of the acquisitions was not material to net income for the years ended December 31, 1995, 1994 or 1993. On September 30, 1994, the Company entered into a joint venture with Alpha Corporation of Tennessee, whereby the two companies combined their existing resin businesses to form Alpha/Owens-Corning, L.L.C., the largest manufacturer of polyester resins in North America. The Company contributed two manufacturing plants (Valparaiso, Indiana and Guelph, Ontario) and owns a 50 percent interest in the joint venture. This joint venture is being accounted for under the equity method. For the nine months ended September 30, 1994 and the year ended December 31, 1993, resin sales totaled $58 million and $63 million, respectively, and were included in the Composite Materials segment. Late in the fourth quarter of 1994, the Company completed the sale of its underground storage tank manufacturing business. Sales for this business totaled $41 million and $43 million in 1994 and 1993, respectively, and were included in the Building Materials segment. 6. Postemployment and Postretirement Benefits Other Than Pensions The Company and its subsidiaries maintain health care and life insurance benefit plans for certain retired employees and their dependents. The health care plans in the U.S. are unfunded and pay either 1) stated percentages of covered medically necessary expenses, after subtracting payments by Medicare or other providers and after stated deductibles have been met or, 2) fixed amounts of medical expense reimbursement. Employees become eligible to participate in the health care plans upon retirement under one of the Company's pension plans if they have accumulated 10 years of service after age 45. Some of the plans are -45- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. Postemployment and Postretirement Benefits Other Than Pensions (Continued) contributory, with some retiree contributions adjusted annually. The Company has reserved the right to change or eliminate these benefit plans subject to the terms of collective bargaining agreements during their term. Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" for its non-U.S. plans. Accordingly, the projected cost of postretirement benefits is charged to expense during the years in which eligible employees render service. The cumulative effect of the adoption of this standard was a charge of $10 million, or $.20 per share. (The Company adopted Statement No. 106 for its U.S. plans effective January 1, 1991.) During 1993, the Company approved changes in its postretirement health care plans for retirees and active employees. These changes, which reduced the accumulated benefit obligation by $120 million and 1993 expense by $18 million, resulted in an unrecognized net reduction in prior service cost which will be amortized through 1999. The following table reconciles the status of the accrued postretirement benefits cost liability at October 31, 1995 and 1994, as reflected on the balance sheet as of December 31, 1995 and 1994: 1995 1994 (In millions of dollars) Accumulated Postretirement Benefits Obligation: Retirees $ (194) $ (176) Fully eligible active plan participants (21) (24) Other active plan participants (54) (46) Funded status (269) (246) Unrecognized net gain (11) (39) Unrecognized net reduction in prior service cost (72) (88) Benefit payments subsequent to the valuation date (October 31) 3 3 Accrued postretirement benefits cost liability (includes current liabilities of $19 million in 1995 and 1994) $ (349) $ (370)
-46- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. Postemployment and Postretirement Benefits Other Than Pensions (Continued) For measurement purposes, a 10.5% annual rate of increase in the per capita cost of covered health care claims was assumed for 1996. The rate was assumed to decrease to 10% for 1997, then decrease gradually to 6.0% by 2005. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefits obligation as of October 31, 1995, by $14 million and the aggregate of the service and interest cost components of net postretirement benefits cost for the year then ended by $2 million. The discount rate used in determining the accumulated postretirement benefits obligation was 7.5% in 1995, 8.5% in 1994, and 7.5% in 1993. Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." This standard requires the Company to recognize the obligation to provide benefits to former or inactive employees after employment but before retirement under certain conditions. These benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits (including workers' compensation), job training and counseling, and continuation of benefits such as health care and life insurance coverage. The cumulative effect of the adoption of this standard, recorded in 1994, was an undiscounted charge of $28 million, or $.56 per share, net of related income taxes of $18 million. The following table reconciles the status of the accrued postemployment benefits cost liability at October 31, 1995 and 1994, as reflected on the balance sheet as of December 31, 1995 and 1994: 1995 1994 (In millions of dollars) Funded status $ (40) $ (45) Unrecognized net gain (2) - Benefit payments subsequent to the valuation date (October 31) 1 1 Accrued postemployment benefit cost liability (includes current liabilities of $4 million in 1995 and $5 million in 1994) $ (41) $ (44)
The net postemployment benefits expense was $2 million and $3 million for 1995 and 1994, the year of adoption, respectively. -47- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. Postemployment and Postretirement Benefits Other Than Pensions (Continued) The net postretirement benefits cost for 1995, 1994 and 1993 included the following components: 1995 1994 1993 (In millions of dollars) Service cost $ 7 $ 8 $ 7 Interest cost on accumulated post- retirement benefits obligation 19 19 23 Net amortization and deferral (24) (20) (13) Net postretirement benefits cost $ 2 $ 7 $ 17
In December 1995, the Company established and funded a Voluntary Employees' Beneficiary Association (VEBA) trust to cover certain employee welfare and postretirement benefits in the amount of $64 million, of which $13 million has been classified as long-term. 7. Pension Plans The Company has several defined benefit pension plans covering most employees. Under the plans, pension benefits are generally based on an employee's number of years of service. Company contributions to these pension plans are based on the calculations of independent actuaries using the projected unit credit method. Plan assets consist primarily of equity securities with the balance in fixed income investments or insurance contracts. The unrecognized cost of retroactive amendments and actuarial gains and losses are amortized over the average future service period of plan participants expected to receive benefits. In August of 1995, the Company amended the pension plan for U.S. salaried employees to change from a final average pay formula to a cash balance formula. The new plan provisions become effective on January 1, 1996. The change resulted in a reduction in the projected benefit obligation of $20 million. The change is expected to reduce pension expense in the future through the amortization of the reduction in the projected benefit obligation, reduced service cost and reduced interest cost on the projected benefit obligation. The reduction in pension expense for 1996 is expected to be $11 million. The impact on pension expense for 1995 was a reduction of $4 million. -48- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. Pension Plans (Continued) Pension expense for the Company's defined benefit pension plans includes the following: 1995 1994 1993 (In millions of dollars) Service cost $ 20 $ 22 $ 23 Interest cost on projected benefit obligation 64 58 62 Actual return on plan assets (114) (13) (124) Net amortization and deferral 30 (64) 50 Net pension expense $ - $ 3 $ 11
The funded status at October 31, 1995 and 1994 is as follows: 1995 1994 (In millions of dollars) Over Under Over Under Funded Funded Funded Funded Vested benefit obligation $ 359 $ 312 $ 310 $ 273 Accumulated benefit obligation $ 395 $ 355 $ 341 $ 343 Plan assets at fair value $ 500 $ 316 $ 466 $ 306 Projected benefit obligation 447 365 430 352 Plan assets in excess of (less than) projected benefit obligation 53 (49) 36 (46) Unrecognized loss 15 59 8 55 Unrecognized prior service cost (30) (31) (12) (24) Unrecognized transition amount (35) (11) (39) (13) Adjustment to minimum liability - (7) - (12) Net pension liability (includes current liabilities of $2 million in 1995 and $8 million in 1994 and noncurrent assets of $41 million in 1995 and $38 million in 1994) $ 3 $ (39) $ (7) $ (40)
-49- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. Pension Plans (Continued) The 1995, 1994 and 1993 primary actuarial assumptions used for pension plans were: 1995 1994 1993 Discount rate 7.5% 8.5% 7.5% Expected long-term rate of return on plan assets 9.0% 9.5% 10.0% Rate of compensation increase 5.1% 5.1% 4.1%
The Company also sponsors defined contribution plans available to substantially all U.S. employees. Company contributions for the plans are based on matching a percentage of employee savings up to a maximum savings level. The Company's contributions were $12 million in 1995, $10 million in 1994, and $9 million in 1993. 8. Income Taxes Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Statement No. 109 changed the criteria for measuring the provision for income taxes and recognizing deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of corresponding liabilities and assets using enacted tax rates in effect for the year in which the differences are expected to reverse. The cumulative effect of the adoption of this standard, recorded in 1993, was an increase to earnings of $26 million, or $.53 per share. -50- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. Income Taxes 1995 1994 1993 (In millions of dollars) Income (loss) before provision (credit) for income taxes: U.S. $ 226 $ 119 $ 163 Foreign 99 13 (16) Total $ 325 $ 132 $ 147 Provision (credit) for income taxes: Current U.S. $ (45) $ (2) $ 24 State and local (4) (7) 7 Foreign 13 5 6 Total current (36) (4) 37 Deferred U.S. 113 51 27 State and local 15 13 1 Foreign 14 (2) (4) Total deferred 142 62 24 Adjustment to deferred tax assets and liabilities for an increase in the U.S. federal statutory rate - - (14) Total provision for income taxes $ 106 $ 58 $ 47
The reconciliation between the U.S. federal statutory rate and the Company's effective income tax rate is: 1995 1994 1993 U.S. federal statutory rate 35% 35% 35% Operating losses of foreign subsidiaries - 7 10 Utilization of research and development credits (3) - - Utilization of operating loss carryforwards - (7) (2) Utilization of tax loss carryback (2) - - Enacted federal tax rate change - - (10) State and local income taxes 2 3 3 Other 1 6 (4) Effective tax rate 33% 44% 32%
-51- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. Income Taxes (Continued) As of December 31, 1995, the Company has not provided for withholding or U.S. federal income taxes on approximately $196 million of accumulated undistributed earnings of its foreign subsidiaries as they are considered by management to be permanently reinvested. If these undistributed earnings were not considered to be permanently reinvested, approximately $25 million of deferred income taxes would have been provided. During 1995 and 1994, the Company utilized tax net operating loss carryforwards for certain of its foreign subsidiaries of approximately $2 million and $9 million, respectively. At December 31, 1995 and 1994, the Company had tax net operating loss carryforwards for certain of its foreign subsidiaries of approximately $27 million, certain of which expire through 1999. The cumulative temporary differences giving rise to the deferred tax assets and liabilities at December 31, 1995 and 1994 are as follows: 1995 1994 Deferred Deferred Deferred Tax Deferred Tax Tax Assets Liabilities Tax Assets Liabilities (In millions of dollars) Asbestos litigation claims $ 244 $ - $ 306 $ - Other employee benefits 160 - 171 - Depreciation - 116 - 138 Warranty and product liability reserves 27 - 29 - Operating loss carryforwards 27 - 27 - State and local taxes - 21 - 20 Other 60 39 122 6 Subtotal 518 176 655 164 Valuation allowances (20) - (27) - Total deferred $ 498 $ 176 $ 628 $ 164 Management fully expects to realize its net deferred tax assets through income from future operations.
9. Science and Technology Expenses Science and technology expenses include research and development costs of $69 million in 1995, $64 million in 1994, and $61 million in 1993. In addition to research and development costs, science and technology expenses include continuing commercial activities such as engineering and product modifications for special applications and testing. -52- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. Accounts Receivable Securitization In 1994 and 1995, the Company sold certain accounts receivable of its Building Materials operations to a 100% owned subsidiary, Owens-Corning Funding Corporation ("OC Funding"). In December 1994, OC Funding entered into a three-year agreement whereby it can sell, on a revolving basis, an undivided percentage ownership interest in a designated pool of accounts receivable up to a maximum of $100 million. At December 31, 1995 and 1994, $100 million and $50 million, respectively, have been sold under this agreement and the sale has been reflected as a reduction of accounts receivable in the Company's consolidated balance sheet. The discount of $6 million on the receivables sold has been recorded as other expenses on the Company's consolidated statement of income for the year ended December 31, 1995. The Company maintains an allowance for doubtful accounts based upon the expected collectibility of all consolidated trade accounts receivable, including receivables sold by OC Funding. 11. Inventories Inventories are summarized as follows: 1995 1994 (In millions of dollars) Finished goods $ 210 $ 192 Materials and supplies 127 118 FIFO inventory 337 310 Less: Reduction to LIFO basis (84) (87) $ 253 $ 223
Approximately $175 million of FIFO inventories were valued using the LIFO method at December 31, 1995 and 1994. During 1995, 1994, and 1993, certain inventories were reduced, resulting in the liquidation of LIFO inventory layers carried at lower costs in prior years as compared with the current cost of inventory. The effect of these inventory reductions was to reduce 1995, 1994, and 1993 cost of sales by $7 million, $3 million, and $1 million, respectively. -53- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. Investments in Affiliates At December 31, 1995 and 1994, the Company's affiliates, which generally are engaged in the manufacture of fibrous glass and related products for the insulation, construction, reinforcements, and textile markets, include: Percent Ownership 1995 1994 COMPOSITES: Alpha/Owens-Corning, L.L.C. (USA) 50% 50% Knytex Company, L.L.C. (USA) 50% 50% Vitro-Fibras, S.A. (Mexico) 40% 40% GLOBAL PIPE: Amiantit Fiberglass Industries, Ltd. (Saudi Arabia) 30% 30% Owens-Corning Eternit Rohre GmbH (Germany) 50% 50% Owens-Corning Pipe Botswana (Pty.), Ltd. (Botswana) 46% 49% Owens-Corning Tubs S.A. (Spain) 50% 50% Owens-Corning Canos, S.A. (Argentina) 50% - BUILDING MATERIALS - EUROPE: Arabian Fiberglass Insulation Company, Ltd. (Saudi Arabia) 49% 49% ASIA PACIFIC: Asahi Fiber Glass Company, Ltd. (Japan) 28% 28% LG Owens-Corning Corp. (Korea) 31% 30% Siam Fiberglass Co., Ltd. (Thailand) 20% 20%
-54- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. Investments in Affiliates (Continued) The following table provides summarized financial information on a combined 100% basis for the Company's affiliates accounted for under the equity method: 1995 1994 1993 (In millions of dollars) At December 31: Current assets $ 338 $ 328 $ 214 Noncurrent assets 472 513 387 Current liabilities 403 331 240 Noncurrent liabilities 253 250 147 For the year: Net sales 962 630 486 Gross margin 178 96 81 Net income 47 7 16
The Company's equity in undistributed net income of affiliates was $36 million at December 31, 1995. Subsequent to year end, the Company sold all of its interest in Asahi Fiber Glass Company, Ltd. for approximately $50 million, and realized a pretax gain in excess of $25 million. 13. Accounts Payable and Accrued Liabilities 1995 1994 (In millions of dollars) Accounts payable $ 309 $ 298 Payroll and vacation pay 87 117 Payroll, property, and miscellaneous taxes 39 30 Other employee benefits liability (Note 6) 23 24 Other 129 129 $ 587 $ 598
-55- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. Consolidated Statement of Cash Flows Cash payments, net of refunds, for income taxes and cost of borrowed funds are summarized as follows: 1995 1994 1993 (In millions of dollars) Income taxes $ (34) $ (4) $ 43 Cost of borrowed funds 94 97 95 The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. See Notes 2 and 5 for supplemental disclosure of Non-cash Investing and Financing Activities. 15. Leases The Company leases certain manufacturing equipment and office and warehouse facilities under operating leases, some of which include cost escalation clauses, expiring on various dates through 2015. Total rental expense charged to operations was $63 million in 1995, $54 million in 1994, and $42 million in 1993. At December 31, 1995, the minimum future rental commitments under noncancellable leases payable over the remaining lives of the leases are:
Minimum Future Period Rental Commitments (In millions of dollars) 1996 $ 52 1997 52 1998 40 1999 20 2000 18 2001 through 2015 134 $ 316
-56- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 16. Restructuring of Operations and Other Initiatives During the first quarter of 1994, the Company recorded a $117 million pretax charge for productivity initiatives and other actions aimed at reducing costs and enhancing the Company's speed, focus, and efficiency. This $117 million pretax charge is comprised of an $89 million charge associated with the restructuring of the Company's business segments, as well as a $28 million charge, primarily composed of final costs associated with the administration of the Company's former commercial roofing business. The components of the $89 million restructure include: $44 million for personnel reductions, $20 million for divestiture of non-strategic businesses and facilities, $22 million for business realignments, and $3 million for other actions. The $44 million cost for personnel reductions primarily represents severance costs associated with the elimination of nearly 400 positions worldwide. The primary employee groups affected include science and technology personnel, field sales personnel, corporate administrative personnel, and commercial roofing and resin business personnel. As of December 31, 1995, the Company has recorded approximately $82 million in costs against its 1994 restructure reserve, of which $67 million represents actual cash expenditures and $15 million represents the non-cash effects of asset write-offs and business realignments. The $67 million cash expenditure includes severance costs of $42 million, divestiture or realignment of businesses and facilities costs of $22 million, and $3 million for other actions. During the first quarter of 1993, the Company recorded a $23 million charge to reorganize its European operations. This charge included $17 million for personnel reductions and $6 million for the writedown of fixed assets. 17. Glass Melting Furnace Rebuilds Effective January 1, 1994, the Company adopted the capital method of accounting for the cost of rebuilding glass melting furnaces. Under this method, costs are capitalized when incurred and depreciated over the estimated useful lives of the rebuilt furnaces. Previously, the Company established a reserve for the future rebuilding costs of its glass melting furnaces through a charge to earnings between dates of rebuilds. The change to the capital method provides a more appropriate measure of the Company's capital investment and is consistent with industry practice. The cumulative effect of this change in accounting method was an increase to earnings of $123 million, or $2.45 per share, net of related income taxes of $54 million. The effect of this change in accounting method was to increase depreciation expense and eliminate furnace rebuild provision. The pro forma effect of this change was not material to net income for the year ended December 31, 1993. -57- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 18. Stock Compensation Plans The Company's Stock Performance Incentive Plan (SPIP) and the Owens-Corning 1995 Stock Plan, (collectively, the "Plans"), permit up to two percent and one percent, respectively, of common shares outstanding at the beginning of each calendar year to be awarded as stock options and restricted stock (with 25% of this amount as the maximum permitted number of restricted stock awards). The Company may carry forward, independently for each plan, unused shares from prior years and may increase the shares available for awards in any calendar year through an advance of up to 25% of the subsequent year's allocation (determined by using 25% of the current year's allocation). These shares are also subject to the 25% limit for restricted stock awards. During 1995, the total number of shares available under the Plans for stock awards was 1,565,004 shares, 1,006,950 of which were awarded as stock options and 232,224 as restricted stock, which includes an advance of 54,355 shares from the 1996 allocation for SPIP. 599,840 shares are also available to be awarded under a prior plan; however, the Company does not expect any awards to be made under that plan. Additionally, the Company has a plan to award stock options and deferred stock awards to nonemployee directors, of which 95,500 shares were available for this purpose as of December 31, 1995. In 1995, 10,000 options and 4,000 stock awards were granted, of which 2,000 were issued in conjunction with the plan for nonemployee directors. During 1994, the total number of shares available for stock awards for SPIP was 1,075,752 shares, 894,000 of which were awarded as stock options and 59,450 as restricted stock, which included an advance of 93,478 shares from the 1995 allocation. Additionally, in 1994, 8,500 options and 4,000 stock awards were granted, of which 2,000 were issued in conjunction with the plan for nonemployee directors. Stock Options Activity during 1995 and 1994 in shares under option: 1995 1994 Number Price Number Price of Range per of Range per Shares Share Shares Share Beginning of year 3,290,454 $17.86-47.00 2,560,826 $17.86-47.00 Options granted 1,016,950 31.50-45.00 902,500 28.50-34.88 Options exercised (300,663) 17.86-40.50 (137,059) 18.75-30.63 Options cancelled (63,631) 30.63-40.50 (35,813) 26.75-40.50 End of year 3,943,110 $17.86-47.00 3,290,454 $17.86-47.00 Exercisable 2,107,427 $17.86-47.00 1,619,119 $17.86-47.00
-58- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 18. Stock Compensation Plans (Continued) Option prices represent the market price at date of grant. Shares issued under options are recorded in the common stock accounts at the option price. Options granted vest ratably through 1998 for the SPIP plan and, as determined by the compensation committee, for the Owens-Corning 1995 Stock Plan. Deferred Stock Awards At December 31, 1995, the Company had 15,711 shares of deferred stock outstanding, all of which were vested. During 1995, 2,000 shares of deferred stock were granted, and 2,629 shares were issued. Compensation expense is measured based on the market price of the stock at date of grant and is recognized on a straight-line basis over the vesting period. Restricted Stock Awards At December 31, 1995, the Company had 448,973 shares of restricted stock outstanding. Stock restrictions lapse, subject to alternate vesting plans for approved early retirement and involuntary termination, over various periods ending in 2005. 19. Share Purchase Rights Each outstanding share of the Company's common stock includes a preferred share purchase right. Each right entitles the holder to buy from the Company one one- hundredth of a share of Series A Participating Preferred Stock of the Company at a price of $50. The Board of Directors has designated 750,000 shares of the Company's authorized preferred stock as Series A Participating Preferred Stock. There are currently no preferred shares outstanding. Rights become exercisable and detach from the common stock ten days after a person or group acquires, or announces a tender offer for, 20% or more of the Company's outstanding shares of common stock. The rights expire on December 30, 1996, unless redeemed earlier by the Company. The rights are redeemable by the Company at one cent each at any time prior to ten days following public announcement or notice to the Company that an acquiring person or group has purchased 20% or more of the Company's outstanding common stock. If the Company is acquired in a merger or other business combination at any time after the rights become exercisable, each right would entitle its holder to buy shares of the acquiring or surviving company having a market value of twice the exercise price of the right. -59- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 20. Derivative Financial Instruments and Fair Value of Financial Instruments The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to help meet financing needs and to reduce exposure to fluctuating foreign currency exchange rates and interest rates. The Company is exposed to credit loss in the event of nonperformance by the other parties to the financial instruments described below. However, the Company does not anticipate nonperformance by the other parties. The Company does not engage in trading activities with these financial instruments and does not generally require collateral or other security to support these financial instruments. The notional amounts of derivatives summarized in the foreign exchange risk and interest rate risk management section below do not represent the amounts exchanged by the parties and, thus, are not a measure of the exposure of the Company through its use of derivatives. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivatives, which relate to interest rates, exchange rates, securities prices, or financial or other indexes. Foreign Exchange Risk and Interest Rate Risk Management The Company enters into various types of derivative financial instruments to manage its foreign exchange risk and interest rate risk, as indicated in the following table. Notional Amount Notional Amount December 31, 1995 December 31, 1994 (In millions of dollars) Forward currency exchange contracts $ 234 $ 194 Options purchased 25 22 Currency swaps 190 190 Interest rate swaps 150 150
The Company enters into forward currency exchange contracts to manage its exposure against foreign currency fluctuations on certain assets and liabilities denominated in foreign currencies. As of December 31, 1995, the Company has 21 forward currency exchange contracts maturing in 1996 which exchange 2.7 billion Belgian francs, 19 million U.S. dollars, 11 million British pounds, 117 million French francs, 17 billion Italian lira, and various other currencies. As of December 31, 1994, the Company had 29 forward currency exchange contracts which matured in 1995 and exchanged 4.4 billion Belgian francs, 23 million U.S. dollars, 38 million British pounds, 22 million Deutsche marks, 19 billion Italian lira, and various other currencies. Gains and losses on these foreign currency hedges are included in the carrying amount of the related assets and liabilities. At December 31, 1995 and 1994, deferred gains and losses on these foreign currency hedges are not material to the consolidated financial statements. -60- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 20. Derivative Financial Instruments and Fair Value of Financial Instruments (Continued) The Company enters into forward currency exchange contracts to hedge its equity investments in certain foreign subsidiaries and to manage its exposure against fluctuations in foreign currency rates. As of December 31, 1995, the Company has two forward currency exchange contracts maturing in 1996 which exchange 1 billion Belgian francs against approximately 34 million U.S. dollars to hedge its equity investments in certain of its European subsidiaries. As of December 31, 1994, the Company had two forward currency exchange contracts which matured in 1995 and exchanged 1 billion Belgian francs against approximately 32 million U.S. dollars to hedge its equity investments in certain of its European subsidiaries. At December 31, 1995 and 1994, losses of $4 million and $3 million on hedges of net investments in foreign subsidiaries are included in stockholders' equity, respectively. The Company has entered into forward currency exchange contracts to reduce its exposure to currency fluctuations on the proceeds of the sale of its investment in Asahi Fiber Glass Company, Ltd. (Note 12). As of December 31, 1995, these contracts exchange 5 billion Japanese yen for 50 million U.S. dollars. At December 31, 1995, gains of $3 million are included as deferred revenue. The Company entered into forward currency exchange contracts to reduce its exposure to currency fluctuations on the anticipated 1995 earnings of certain European subsidiaries. The nine forward currency exchange contracts which matured in 1995, exchanged 412 million Belgian francs and 8 million British pounds against approximately 25 million U.S. dollars. Gains and losses on these foreign currency hedges were included in income in the period in which the exchange rates changed. Gains on these forward currency exchange contracts were not material to the consolidated financial statements. The Company enters into option contracts to hedge anticipated transactions with certain of its foreign subsidiaries. As of December 31, 1995, the Company has eight currency option contracts maturing in 1996 which hedge the 1996 royalty payments of the Company's European subsidiaries. As of December 31, 1995, the currency option contracts exchanged 526 million Belgian francs and 6 million British pounds against approximately 25 million U.S. dollars. As of December 31, 1994, the Company had six currency option contracts which exchanged 496 million Belgian francs and 4 million British pounds against approximately 22 million U.S. dollars. Gains on the Company's hedges of these anticipated transactions are included as deferred revenue. At December 31, 1995 and 1994, deferred gains on option contracts are not material to the consolidated financial statements. As of December 31, 1994, the Company entered into two currency swap transactions to manage its exposure against foreign currency fluctuations on the principal amount of its guaranteed .814% Eurobonds (Note 2). At December 31, 1994, gains on these currency swaps were not material to the consolidated financial statements. During May 1995 the Company terminated these swaps. The termination of these swaps exchanged 140 million U.S. dollars for approximately 89 million British pounds, resulting in a gain of approximately 10 million U.S dollars. At that time, the Company entered into two cross-currency interest rate swaps from U.S. dollars into British pounds to hedge the interest and principal payments of the remaining Eurobonds through 2002. These agreements also convert part of the fixed rate interest into variable rate interest. The gain on the exercised swaps is being amortized over the -61- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 20. Derivative Financial Instruments and Fair Value of Financial Instruments (Continued) life of the original hedge. At December 31, 1995, $7 million of unamortized gain on the four cross-currency interest rate swaps is included in other liabilities. The Company has a cross-currency interest rate conversion agreement from Deutsche marks into U.S. dollars to hedge the interest and principal payments of its 7.25% Deutsche mark bonds, due in 2000. The agreement establishes a fixed interest rate of 11.1%. The Company enters into interest rate swaps to manage its interest rate risk. The Company has entered into four interest rate swap agreements to reduce the interest rates on its fixed rate borrowings. These agreements effectively convert an aggregate principal amount of $150 million of fixed rate long-term debt into variable rate borrowings with interest rates ranging from 5.875% to 8.025% in 1995 and 5.81% to 7.96% in 1994. The agreements mature in 1998. The differential interest to be paid or received is accrued as interest rates change and is recognized over the life of the agreements. Other Financial Instruments with Off-Balance-Sheet Risk As of December 31, 1995 and 1994, the Company is contingently liable for guarantees of indebtedness owed by certain unconsolidated affiliates of $71 million and $27 million, respectively. The Company is of the opinion that its unconsolidated affiliates will be able to perform under their respective payment obligations in connection with such guaranteed indebtedness and that no payments will be required and no losses will be incurred by the Company under such guarantees. Concentrations of Credit Risk As of December 31, 1995 and 1994, the Company has no significant group concentrations of credit risk. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each category of financial instruments. Cash and short-term financial instruments The carrying amount approximates fair value due to the short maturity of these instruments. -62- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 20. Derivative Financial Instruments and Fair Value of Financial Instruments (Continued) Long-term notes receivable The fair value has been estimated using the expected future cash flows discounted at market interest rates. Long-term debt The fair value of the Company's long-term debt has been estimated based on quoted market prices for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities. Foreign currency swaps and interest rate swaps The fair values of foreign currency swaps and interest rate swaps have been estimated by traded market values or by obtaining quotes from brokers. Forward currency exchange contracts, option contracts, and financial guarantees The fair values of forward currency exchange contracts, option contracts, and financial guarantees are based on fees currently charged for similar agreements or on the estimated cost to terminate these agreements or otherwise settle the obligations with the counter parties at the reporting date. The estimated fair values of the Company's financial instruments as of December 31, 1995 and 1994, which have fair values different than their carrying amounts, are as follows: 1995 1994 Carrying Fair Carrying Fair Amount Value Amount Value (In millions of dollars) Assets Long-term notes receivable $ 24 $ 22 $ 20 $ 18 Liabilities Long-term debt 794 875 1,037 1,076 Off-Balance-Sheet Financial Instruments - Unrealized gains Foreign currency swaps - 39 - 26 Interest rate swaps - 14 - 4
-63- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 20. Derivative Financial Instruments and Fair Value of Financial Instruments (Continued) As of December 31, 1995 and 1994, the Company is contingently liable for guarantees of indebtedness owed by certain unconsolidated affiliates. There is no market for these guarantees and they were issued without explicit cost. Therefore, it is not practicable to establish their fair value. As of December 31, 1995 and 1994, the Company has also entered into certain forward currency exchange and option contracts, the fair values of which are not material to the consolidated financial statements. 21. Contingent Liabilities ASBESTOS LIABILITIES The Company is a co-defendant with other former manufacturers, distributors and installers of products containing asbestos and with miners and suppliers of asbestos fibers (collectively, the Producers) in personal injury and property damage litigation. The personal injury claimants generally allege injuries to their health caused by inhalation of asbestos fibers from the Company's products. Most of the claimants seek punitive damages as well as compensatory damages. The property damage claims generally allege property damage to school, public and commercial buildings resulting from the presence of products containing asbestos. Virtually all of the asbestos-related lawsuits against the Company arise out of its manufacture, distribution, sale or installation of an asbestos-containing calcium silicate, high temperature insulation product, the manufacture of which was discontinued in 1972. Status As of December 31, 1995, approximately 144,200 asbestos personal injury claims were pending against the Company, 55,900 of which were received in 1995. The Company received approximately 29,100 such claims in 1994, and 32,400 in 1993. Through December 31, 1995, the Company had resolved (by settlement or otherwise) approximately 160,600 asbestos personal injury claims. During 1993, 1994, and 1995, the Company resolved approximately 60,000 such claims and incurred total indemnity payments of $641 million (an average of about $10,700 per case). The Company's indemnity payments have varied considerably over time and from case to case, and are affected by a multitude of factors. These include the type and severity of the disease sustained by the claimant (i.e., mesothelioma, lung cancer, other types of cancer, asbestosis or pleural changes); the occupation of the claimant; the extent of the claimant's exposure to asbestos-containing products manufactured, sold or installed by the Company; the extent of the claimant's exposure to asbestos-containing products manufactured, sold or installed by other Producers; the number and financial resources of other Producer defendants; the jurisdiction of suit; the -64- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 21. Contingent Liabilities (Continued) presence or absence of other possible causes of the claimant's illness; the availability or not of legal defenses such as the statute of limitations or state of the art; whether the claim was resolved on an individual basis or as part of a group settlement; and whether the claim proceeded to an adverse verdict or judgment. Insurance As of December 31, 1995, the Company had approximately $430 million in unexhausted insurance coverage (net of deductibles and self-insured retentions and excluding coverage issued by insolvent carriers) under its liability insurance policies applicable to asbestos personal injury claims. This insurance, which is substantially confirmed, includes both products hazard coverage and primary level non- products coverage. Portions of this coverage are not available until 1997 and beyond under agreements with the carriers confirming such coverage. All of the Company's liability insurance policies cover indemnity payments and defense fees and expenses subject to applicable policy limits. In addition to its confirmed non-products insurance, the Company has a significant amount of potential non-products coverage with excess level carriers. The Company cautions, however, that this coverage is unconfirmed and that the amount and timing of additional recovery from these policies, if any, will depend on subsequent negotiations or proceedings. Reserve The Company's estimated total liabilities in respect of indemnity and defense costs associated with pending and unasserted asbestos personal injury claims that may be received through the year 1999 (the "Liabilities"), and its estimated insurance recoveries in respect of such claims (the "Insurance"), are reported separately as follows: -65- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 21. Contingent Liabilities (Continued) Asbestos Litigation Claims December 31, December 31, 1995 1994 (In millions of dollars) Reserve for asbestos litigation claims Current $ 250 $ 300 Other 887 1,145 Total Reserve 1,137 1,445 Insurance for asbestos litigation claims Current 100 125 Other 330 556 Total Insurance 430 681 Net Asbestos Liability $ 707 $ 764
Case filing rates have continued at historically high levels with the receipt of approximately 55,900 new claims during 1995, following the receipt of approximately 29,100 claims in 1994 and approximately 32,400 claims in 1993. Many of these new claims appear to be the product of mass screening programs and not to involve significant asbestos-related impairment. The large number of recent filings and the uncertain value of these claims have added to the uncertainties involved in estimating the Company's asbestos liabilities. Certain of the Company's principal co-defendants, the 20 members of the Center for Claims Resolution, have entered into a proposed "global" settlement which would require future claimants to satisfy certain medical criteria indicative of significant asbestos-related impairment as a pre-condition to their eligibility for settlement payments. The Company is using similar criteria in the implementation of its own settlement and litigation strategy and is also seeking to require more careful proof than in the past that claimants had significant exposure to the Company's asbestos- containing product or operations. The Company believes that this strategy will reduce the overall cost of asbestos personal injury claims in the long run by channeling indemnity payments to claimants who can establish significant asbestos-related impairment and exposure to the Company's asbestos-containing product or operations and by substantially reducing indemnity payments to individuals who are unimpaired or who did not have significant such exposure. The Company's strategy has resulted in an increased level of trial activity and an increase in the number and amount of compensatory and punitive damage verdicts and judgments against the Company. This strategy may have the effect of increasing average per-case indemnity costs for claims resolved with payment, while also increasing the number of claims dismissed without payment. -66- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 21. Contingent Liabilities (Continued) The Company cautions that such factors as the number of future asbestos personal injury claims received by it, the rate of receipt of such claims, and the indemnity and defense costs associated with asbestos personal injury claims, as well as the prospects for confirming additional, applicable insurance coverage beyond the $430 million referenced above, are influenced by numerous variables that are difficult to predict, and that estimates, such as the Company's, which attempt to take account of such variables, are subject to considerable uncertainty. Depending upon the outcome of the various uncertainties described above, particularly as they relate to unimpaired claims, it may be necessary at some point in the future for the Company to make additional provision for the uninsured costs of asbestos personal injury claims received through the year 1999 (although no such amounts are reasonably estimable at this time). The Company remains confident that its estimate of Liabilities and Insurance will be sufficient to provide for the costs of all such claims that involve malignancies or significant asbestos-related functional impairment. The Company has reviewed and will continue to review the adequacy of its estimate of Liabilities and Insurance on a periodic basis and make such adjustments as may be appropriate. The Company cannot estimate and is not providing for the cost of unasserted claims which may be received by the Company after the year 1999 because management is unable to predict the number of claims to be received after 1999, the severity of disease which may be involved and other factors which would affect the cost of such claims. Cash Expenditures The Company's anticipated cash expenditures for uninsured asbestos-related costs of claims received through 1999 are expected to approximate $707 million, the Company's Liabilities, net of Insurance, before tax benefits. Cash payments will vary annually depending upon a number of factors, including the pace of the Company's resolution of claims and the timing of payment of its Insurance. Management Opinion Although any opinion is necessarily judgmental and must be based on information now known to the Company, in the opinion of management, while any additional uninsured and unreserved costs which may arise out of pending personal injury and property damage asbestos claims and additional similar asbestos claims filed in the future may be substantial over time, management believes that any such additional costs will not impair the ability of the Company to meet its obligations, to reinvest in its businesses or to take advantage of attractive opportunities for growth. -67- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 21. Contingent Liabilities (Continued) NON-ASBESTOS LIABILITIES Various other lawsuits and claims arising in the normal course of business are pending against the Company, some of which allege substantial damages. Management believes that the outcome of these lawsuits and claims will not have a materially adverse effect on the Company's financial position or results of operations. 22. Quarterly Financial Information (Unaudited) Quarter First Second Third Fourth (In millions of dollars, except share data) 1995 Net sales $ 844 $ 877 $ 927 $ 964 Cost of sales 630 639 684 717 Gross margin $ 214 $ 238 $ 243 $ 247 Net income $ 33 $ 63 $ 70 $ 66 Net income per share: Primary net income per share $ .71 $ 1.25 $ 1.35 $ 1.27 Fully diluted net income per share $ .68 $ 1.20 $ 1.28 $ 1.21
-68- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 22. Quarterly Financial Information (Unaudited) (Continued) Quarter First Second Third Fourth (In millions of dollars, except share data) 1994 Net sales $ 677 $ 852 $ 936 $ 886 Cost of sales 523 644 705 664 Gross margin $ 154 $ 208 $ 231 $ 222 Income (loss) before cumulative effect of accounting changes $ (67) $ 45 $ 53 $ 43 Cumulative effect of accounting changes (Notes 6 and 17) 85 - - - Net income $ 18 $ 45 $ 53 $ 43 Net income per share: Primary Income (loss) before cumulative effect of accounting changes $(1.52) $ 1.03 $ 1.19 $ .98 Cumulative effect of accounting changes 1.93 - - - Net income per share $ .41 $ 1.03 $ 1.19 $ .98 Fully diluted Income (loss) before cumulative effect of accounting changes $(1.30) $ .95 $ 1.09 $ .91 Cumulative effect of accounting changes 1.70 - - - Net income per share $ .40 $ .95 $ 1.09 $ .91
Net income per share and primary and fully diluted weighted average shares are computed independently for each of the quarters presented. Therefore, the sum of the quarterly net income per share may not equal the per share total for the year. -69- INDEX TO FINANCIAL STATEMENT SCHEDULES Number Description Page II Valuation and Qualifying Accounts and Reserves - for the years ended December 31, 1995, 1994, and 1993 70 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OWENS CORNING Registrant Date: December 20, 1996 By: /s/ David W. Devonshire Senior Vice President and Chief Financial Officer (as duly authorized officer) -----END PRIVACY-ENHANCED MESSAGE-----