-----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, QmKzGwRo8CeHb+7O/GL1vHMXLjltq74J2KlPTrxM8Gl2gmSbAz97yaaOq7Kb3u3c BErQYDoNsC9RxZr2K/N8Mw== 0000075234-97-000005.txt : 19970321 0000075234-97-000005.hdr.sgml : 19970321 ACCESSION NUMBER: 0000075234-97-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970320 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 SEC ACT: 1934 Act SEC FILE NUMBER: 001-03660 FILM NUMBER: 97559555 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 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1996 Commission File No. 1-3660 Owens Corning One Owens Corning Parkway 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. [ X ] At February 19, 1997, the aggregate market value of Registrant's $.10 par value common stock (Registrant's voting stock) held by non-affiliates was $2,297,658,153, assuming for purposes of this computation only that all directors and executive officers are considered affiliates. At February 19, 1997, there were outstanding 52,769,579 shares of Registrant's $.10 par value common stock. Parts of Registrant's definitive 1997 proxy statement filed or to be filed pursuant to Regulation 14A (the "1997 Proxy Statement") are incorporated by reference into Part III of this Form 10-K. -2- PART I ITEM 1. BUSINESS Owens Corning (formerly known as Owens-Corning Fiberglas Corporation), a global company incorporated in Delaware in 1938, serves consumers and industrial customers with high performance glass composites and building materials systems. These products are used in industries such as home improvement, new construction, transportation, marine, aerospace, energy, appliance, packaging and electronics. Many of these products are marketed under the trademark FIBERGLAS(R). Approximately eighty-two percent of Owens Corning's sales are related to home improvement, sales of composite materials and sales outside U.S. markets. Approximately eighteen percent of the Company's sales are related to new U.S. residential construction. Owens Corning's executive offices are at One Owens Corning Parkway, Toledo, Ohio 43659; telephone (419) 248-8000. Unless the context requires otherwise, the terms "Owens Corning" and "Company" in this report refer to Owens Corning and its subsidiaries. The Company operates in two industry segments - Building Materials and Composite Materials - divided into ten businesses. As a general rule, there is a commonality of process equipment and/or products within each industry segment. The Company also has affiliate companies in a number of countries. Affiliated companies' sales, earnings and assets are not included in either industry segment unless the Company owns more than 50% of the affiliate. Revenue, operating profit, and identifiable assets attributable to each of Owens Corning's industry and geographic segments, as well as information concerning the dependence of the Company's industry segments on foreign operations, for each of the years 1996, 1995, and 1994, are contained in Note 1 to Owens Corning's Consolidated Financial Statements, entitled "Segment Data", on pages 34 through 40 hereof. BUILDING MATERIALS Principal Products And Methods Of Distribution Building Materials operates primarily in North America and Europe. It also has a growing presence in Latin America and Asia Pacific. Building Materials sells a variety of building and home improvement products in three major categories: glass fiber and foam insulation, roofing materials, and other specialty products for the home, such as housewrap, vinyl windows and patio doors, and vinyl siding. The businesses responsible for these products and markets include: Insulation, Building Materials Sales and Distribution - North America, Building Materials - Europe and Africa, Roofing/Asphalt, Specialty and Foam Products, Western Fiberglass Group, Latin America, and Asia Pacific. -3- Principal Products And Methods Of Distribution (Continued) The Company's Building Materials Sales and Distribution - North America business is a major source of sales of building insulation products to lumber yards and home centers, and roofing shingles, housewrap, windows/patio doors, and vinyl siding to retailers and distributors. These products are used primarily in the home improvement and new residential construction markets. In 1996, eighteen percent of the Company's sales were related to new construction activities in the United States, while home improvement and remodeling accounted for forty-one percent. Other channels for the Company's building materials include sales of insulation products in North America to insulation contractors, metal building insulation laminators, mechanical insulation distributors and fabricators, manufactured housing producers, and appliance, office products and automotive manufacturers. Foam insulation and related products are sold to distributors and retailers who resell to residential builders, remodelers and do-it- yourself customers; commercial and industrial markets through specialty distributors; and, in some cases, large contractors, particularly in the agricultural and cold storage markets. In Europe, the Company sells building insulation to large insulation wholesalers, builder merchants, contractors, distributors, and retailers. The Company sells mechanical insulation products to distributors, fabricators, and manufacturers in the heating, ventilation, power and process, appliance and fire protection industries. In Latin America, the Company produces and sells building and mechanical insulation through joint venture and licensee relationships. In Asia Pacific, the Company sells primarily mechanical insulation through joint venture businesses, including a majority owned insulation plant in China, and licensees. The Company has licensed others for the manufacture of foam products at locations in Europe, the Middle East and Asia. The Company sells foam products through traditional agents and distributors where licensing does not exist. The Company sells roofing shingles to distributors and retailers, who resell them to residential roofing and remodeling contractors, as well as to do-it-yourself customers. Approximately 80% of roofing shingles sold in North America are used for reroofing, with new residential construction accounting for the remainder. The Company sells industrial asphalt under the Trumbull(TM) brand name. There are three principal kinds of industrial asphalt: Built-Up Roofing Asphalt (BURA), used in commercial roofing systems to provide waterproofing and adhesion; saturants or coating asphalt, used to manufacture roofing mats, felts and shingles; and industrial specialty asphalt, used by manufacturers in a variety of products such as waterproofing systems, adhesives, coatings, and product extenders, as well as in various automotive applications. There are various channels of distribution for the Company's asphalt products. The Company's asphalt products are used internally in the manufacture of the Company's residential roofing products and are also sold to other shingle manufacturers. In addition, asphalt is sold to roofing contractors and distributors for BURA systems and to manufacturers in a variety of other industries, including automotive, chemical, rubber and construction. -4- Seasonality Sales in the Building Materials segment tend to follow seasonal home improvement, remodeling and renovation, and new construction industry patterns. Sales levels for the segment, therefore, are typically lower in the winter months. Major Customers No customer in the Building Materials segment accounts for more than three percent of the segment's sales. COMPOSITE MATERIALS Principal Products and Methods of Distribution Composite Materials operates in North America, Europe and Latin America, with affiliates and licensees around the world, including a growing presence in Asia Pacific. The businesses responsible for these products include: Composites, Latin America, Engineered Pipe & Fabrication Systems, and Asia Pacific. The Company is the world's leading producer of glass fiber materials used in composites. Composites are fabricated material systems made up of two or more components (e.g., plastic resin and glass fiber) used in various applications to replace traditional materials, such as aluminum, wood, and steel. The global composites industry has expanded to include more than 40,000 end-use applications. Worldwide, the composites industry has relatively few raw material component suppliers (glass fiber, resin and additives) delivering to thousands of industrial customers through various channels. Depending on the end-use application, these raw materials move through different manufacturing process chains, ultimately finding their way to consumers through myriad markets worldwide. The primary end use markets that the Company serves are construction, transportation, and electrical/electronics. Within the construction market, the major end-use application for glass fiber is asphaltic roofing shingles, where glass fiber is used to provide fire and mildew resistance in 95% of all shingles produced in North America. The Company sells glass fiber and/or mat directly to a small number of major shingle manufacturers (including the Company's own roofing business). Tubs, showers and other related internal building components used for both remodeling and new construction are also major applications of glass fiber materials in the construction market. These end-use products are some of the first successful material substitution conversions normally encountered in developing countries. Glass fiber for these markets is sold to direct accounts, and also to distributors around the world, who in turn service thousands of customers. The most significant use of glass fibers within the transportation market is the automotive industry, which continues to grow as the amount of composite materials used per vehicle increases. There are hundreds of composites applications, including exterior and interior body panels, instrument panels, bumpers, lamp housings, headliners, packaging for electronics, valve covers, luggage racks, distributor caps, timing belts, mufflers and tanks for alternative fuel vehicles. These composite parts are either produced by original equipment manufacturers (OEMs), or are purchased by OEMs from first-tier suppliers. Glass fibers for these parts are -5- Principal Products and Methods of Distribution (Continued) sold mostly to first-tier and second-tier OEM suppliers. Non-automotive transportation applications include railcars, shipping containers, intermodal refrigerated containers, trailers and commercial ships. Within the electrical/electronics markets, glass fiber is used extensively in printed circuit boards made for the consumer electronics, transportation, and telecommunications industries. The Company sells glass fiber to a small number of large fabric weavers, who, in turn, supply the rest of the circuit board production value chain. Applications also include fiber optic and copper cable reinforcement, connectors, circuit breaker boxes, computer housings, electricians' safety ladders, and hundreds of various electro/mechanical components. The Company manufactures large diameter glass-reinforced plastic (GRP) pipe designed for use in underground pressure and gravity fluid handling systems. The pipe is a filament- wound structural composite made with glass fiber and polyester resins. The Company has pipe joint ventures in Thailand, Saudi Arabia, Germany, Spain, Botswana, Argentina, Egypt, Turkey and Colombia, and wholly-owned pipe plants in Norway and China. The Company, directly and with joint venture partners around the world, manufactures and sells GRP pipe directly to governments and private industry for major infrastructure projects primarily for the safe and efficient transport of water and waste. Major Customers No customer in the Composite Materials segment accounts for more than four percent of the segment's sales. GENERAL Raw Materials And Patents Owens Corning considers the sources and availability of raw materials, supplies, equipment and energy necessary for the conduct of its business in each industry segment to be adequate. The Company has numerous U.S. and foreign patents issued and applied for relating to its products and processes in each industry segment resulting from research and development efforts. The Company has issued royalty-bearing patent licenses to companies in several foreign countries. The licenses cover technology relating to both industry segments. Including registered trademarks for the Owens Corning logo, the Color Pink, and Fiberglas, the Company has approximately 125 trademarks registered in the United States and approximately 700 trademarks registered in other countries. The Company considers its patent and trademark positions to be adequate for the present conduct of its business in each of its industry segments. Working Capital Owens Corning's manufacturing operations in each of its industry segments are generally continuous in nature and it warehouses much of its production prior to sale since it operates primarily with short delivery cycles. -6- Research And Development During 1996, 1995 and 1994, the Company spent approximately $78 million, $69 million, and $64 million, respectively, for research and development activities. Customer sponsored research and development was not material in any of the last three years. Environmental Control Owens Corning's capital expenditures relating to compliance with environmental control requirements were approximately $17 million in 1996. The Company currently estimates that such capital expenditures will be approximately $20 million in 1997 and $22 million in 1998. The Company does not consider that it has experienced a material adverse effect upon its capital expenditures or competitive position as a result of environmental control legislation and regulations. Operating costs of environmental control equipment, however, were approximately $54 million in 1996. Owens Corning continues to invest in equipment and process modifications to remain in compliance with applicable environmental laws and regulations. The 1990 Clean Air Act Amendments (Act) provide that the United States Environmental Protection Agency (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 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 material adverse effect on the Company's results of operations, financial condition, or long-term liquidity. Number Of Employees Owens Corning averaged approximately 18,100 employees during 1996 and had approximately 18,900 employees at December 31, 1996. Competition Owens Corning's products compete with a broad range of products made from numerous basic, as well as high- performance, materials. The Company competes with a number of manufacturers in the United States of glass fibers in primary forms, not all of which produce a broad line of glass fiber products. Approximately one-half of these producers compete with the Company's Building Materials industry segment in the sale of glass fibers in primary form. A similar number compete with the Company's Composite Materials industry segment. Companies in other countries, primarily Japan, export glass fiber products to the United States. The Company also competes outside the United States against a number of manufacturers of glass fibers in primary forms. Owens Corning also competes with many manufacturers, fabricators and distributors in the sale of products made from glass fibers. In addition, the Company competes with many other manufacturers in the sale of industrial asphalts and other products. Methods of competition include product performance, price, terms, service and warranty. -7- ITEM 2. PROPERTIES PLANTS Owens Corning's plants as of February 1, 1997 are listed below by industry segment and primary products, and are owned except as noted. The Company considers that these properties are in good condition and well maintained, and are suitable and adequate to carry on the Company's business. The capacity of each plant varies depending upon product mix. BUILDING MATERIALS SEGMENT Thermal And Acoustical Insulation Delmar, New York Palestine, Texas Eloy, Arizona Phenix City, Alabama (1) Fairburn, Georgia Salt Lake City, Utah Kansas City, Kansas Santa Clara, California Mount Vernon, Ohio Waxahachie, Texas Newark, Ohio Babelegi, South Africa Ravenhead, United Kingdom Candiac, Canada Scarborough, Canada Edmonton, Canada Shanghai, China (2) Guangzhou, China Springs, South Africa Pontyfelin, United Kingdom Vise, Belgium Queensferry, United Kingdom (1) Facility is leased. (2) Under construction. Roofing And Asphalt Processing (one of each at every location, except as noted) Atlanta, Georgia (1) Kearney, New Jersey Brookville, Indiana (1) Medina, Ohio Channelview, Texas (2) Memphis, Tennessee Compton, California Minneapolis, Minnesota Denver, Colorado Morehead City, North Detroit, Michigan (2) Carolina (2) (4) Houston, Texas Oklahoma City, Oklahoma (2) Irving, Texas Portland, Oregon (5) Jacksonville, Florida (3) Savannah, Georgia (1) Jessup, Maryland Summit, Illinois (3) (1) Roofing plant only. (2) Asphalt processing plant only. (3) Facility is partially leased. (4) Facility is leased. (5) Two asphalt processing plants, as well as one roofing plant. -8- Specialty and Foam Products Byron Center, Michigan Rockford, Illinois Hazleton, Pennsylvania St. Louis, Missouri* Martinsville, Virginia* Tallmadge, Ohio Barcelona, Spain Nanjing, China Hartlepool, United Kingdom Valleyfield, Canada *Facility is leased. Fabrication Centers Angola, Indiana Johnson City, Tennessee (1) Athens, Alabama Laredo, Texas (1) Atlanta, Georgia (1) Los Angeles, California (1) Cleveland, Tennessee (1) Memphis, Tennessee (1) Columbus, Ohio (1) Montgomery, Alabama (1) Coopersville, Michigan (1) Orlando, Florida (1) Dallas, Texas (1) Sacramento, California (1) Grand Rapids, Michigan (1) Shelbyville, Kentucky (1) (2) Hazelton, Pennsylvania (1) Springfield, Tennessee (1) Hebron, Ohio Tiffin, Ohio (1) Indianapolis, Indiana (1) Van Buren, Arkansas (1) Brantford, Canada (1) Facility is leased. (2) Two facilities. COMPOSITE MATERIALS SEGMENT Textiles And Reinforcements Aiken, South Carolina Huntingdon, Pennsylvania Amarillo, Texas Jackson, Tennessee* Anderson, South Carolina New Braunfels, Texas * Fort Smith, Arkansas Apeldoorn, The Netherlands Rio Claro, Brazil Battice, Belgium San Vincente deCastellet/ Birkeland, Norway Barcelona, Spain Guelph, Canada Springs, South Africa L'Ardoise, France Wrexham, United Kingdom Liversedge, United Kingdom *Facility is leased. Pipe Changchun, China Sandefjord, Norway* *Facility is leased. -9- OTHER PROPERTIES Effective in mid 1996, Owens Corning's general offices of approximately 400,000 square feet are located in the Owens Corning World Headquarters, Toledo, Ohio. The lease for this facility terminates May 31, 2015, with options to extend through May 31, 2030. Under separate leases, the Company has additional general office space of approximately 150,000 square feet, and warehouse space of approximately 100,000 square feet, located in other buildings in Toledo. The Company's research and development function is conducted at its Science and Technology Center, located on approximately 500 acres of land outside Granville, Ohio. It consists of twenty-three structures totaling approximately 635,000 square feet. The Company also has Application Development Centers in Battice, Belgium and Bangalore, India. ITEM 3. LEGAL PROCEEDINGS The paragraphs in Note 21 to the Company's Consolidated Financial Statements, entitled "Contingent Liabilities", on pages 66 through 70 hereof, are incorporated here by reference. Securities and Exchange Commission rules require the Company to describe certain governmental proceedings arising under federal, state or local environmental provisions unless the Company reasonably believes that the proceeding will result in monetary sanctions of less than $100,000. The following proceedings are reported in response to this requirement. Based on the information presently available to it, however, the Company believes that the costs which may be associated with these matters will not have a materially adverse effect on the Company's financial position or results of operations. As previously reported, during the first quarter of 1995 the Company signed a consent order with the Tennessee Department of Environment and Conservation, providing for a remedial investigation and feasibility study for two state Superfund sites at which the Company was the primary generator. Based upon the completed remedial investigation, the Tennessee Division of Superfund has recommended that the two sites be delisted as state Superfund sites. Formal delisting proceedings are in process. Also as previously reported, in August 1996 the Company voluntarily reported to the United States Environmental Protection Agency (EPA) that, due to a change in assumptions regarding the formation of a reportable pollutant, the Company had concluded that reporting deficiencies for such pollutant had occurred at three plants. The Company has since filed all required reports with the EPA. The Company is unable at this time to determine the amount of penalties, if any, that may be sought by the EPA but believes that the Company's immediate voluntary disclosure will be a favorable consideration in reducing any penalty that would otherwise be sought. -10- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Owens Corning has nothing to report under this Item. -11- Executive Officers of the Company (as of March 1, 1997) The term of office for elected officers is one year from the annual election of officers by the Board of Directors following the Annual Meeting of Stockholders on the third Thursday of April. All those listed have been employees of Owens Corning during the past five years except as indicated. Name and Age Position* Glen H. Hiner (62) Chairman of the Board and Chief Executive Officer since January 1992. Director since 1992. Alan D. Booth (54) Vice President and Process Executive, Customer Fulfillment Process since June 1996; formerly Vice President and President, Insulation - North America (1994), Vice President, Insulation Division, Construction Products Group (1993) and Vice President, Mechanical Products Division (1986). David T. Brown (48) Vice President and President, Building Materials Sales and Distribution-North America since January 1996; formerly Vice President and President, Roofing/Asphalt (1994), Vice President, Roofing/Asphalt Division (1993) and Vice President, Atlanta Regional Sales, Building Materials (1986). Christian L. Campbell (46) Senior Vice President, General Counsel and Secretary since January 1995; formerly Vice President, General Counsel and Secretary at Nalco Chemical (1990). Domenico Cecere (47) Vice President and President, Roofing/Asphalt since January 1996; formerly Vice President and Controller (1993), also Vice President, Finance and Administration, Europe at Honeywell, Inc. (1992). Charles H. Dana (57) Executive Vice President since January 1994; formerly Senior Vice President and President - Industrial Materials Group (1989). David W. Devonshire (51) Senior Vice President and Chief Financial Officer since July 1993; formerly Corporate Vice President, Finance at Honeywell, Inc. (1992). -12- Name and Age Position* Carl B. Hedlund (49) Vice President and President, Asia Pacific since December 1995; formerly Vice President and President, Retail/ Distribution (1994), Vice President, Retail and Distribution, Construction Products Group (1993), Vice President, Roofing Products Operating Division (1989). Robert C. Lonergan (53) Vice President, Science and Technology since January 1995; formerly President, Windows (1993), also President of Reb Plastics, Inc. (1984). Heinz-J. Otto (47) Vice President and President, Composites since October 1996; formerly Head of Region Europe and Executive Board Member, Landis & Gyr Corp. (1992). Bradford C. Oelman (59) Senior Vice President, Governmental Affairs since April 1996; formerly Vice President-Corporate Relations (1986). Steven J. Strobel (39) Vice President and Controller since September 1996; formerly Chief Financial Officer of Kraft Canada, Inc. (1994) and Vice President and Controller of Kraft USA Operations (1991). Gregory M. Thomson (49) Senior Vice President, Human Resources since October 1994; formerly Vice President, Human Resources, Public Service Electric & Gas (1988). Efthimios O. Vidalis (42) Vice President and President, Insulation since July 1996; formerly Vice President and President, Composites (1994) and Vice President, Reinforcements Division, Europe (1986). *Information in parentheses indicates year in which service in position began. -13- Part II ITEM 5. MARKET FOR OWENS CORNING'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal market on which Owens Corning's common stock is traded is the New York Stock Exchange. The high and low sales prices in dollars per share for Owens Corning's common stock as reported in the consolidated transaction reporting system for each quarter during 1996 and 1995 are set forth in the following tables. 1996 High Low 1995 High Low First Quarter 46 39-3/4 First Quarter 36-1/4 30-1/4 Second Quarter 43-1/8 37-5/8 Second Quarter 40 34-5/8 Third Quarter 43 36 Third Quarter 47-1/8 36-1/2 Fourth Quarter 43-1/2 36-1/4 Fourth Quarter 46-3/4 40-3/8
The number of stockholders of record of the Company's common stock on February 19, 1997 was 6,813. In June 1996, the Board of Directors of the Company approved an annual dividend policy of $.25 per share of common stock and declared a dividend of $.0625 per share of common stock to stockholders of record on September 30, 1996, paid on October 15, 1996. The Company had not previously declared any dividends since 1986. In December 1996, the Board of Directors of the Company declared a dividend of $.0625 per share of common stock to stockholders of record on December 31, 1996, paid on January 15, 1997. In connection with certain of its current bank credit facilities, the Company has agreed to restrictions affecting the payment of cash dividends. As of January 1, 1997, these restrictions limited funds available for the payment of cash dividends by the Company to approximately $93 million. On August 30, 1996, the Company issued 472,250 shares of its common stock, par value $.10 per share, to Celfort Construction Materials Inc. (the "Seller") in connection with acquisition of substantially all the assets of the extruded polystyrene insulation products business of Seller. Such shares were issued without registration under the Securities Act of 1933 in reliance upon Regulation D promulgated under the Securities Act or the exemption provided by Section 4(2) of the Securities Act. -14- ITEM 6. SELECTED FINANCIAL DATA The following is a summary of certain financial information of the Company. 1996(a) 1995(b) 1994(c) 1993(d) 1992(e) (In millions of dollars, except per share data and where noted) Net sales $ 3,832 $ 3,612 $ 3,351 $ 2,944 $ 2,878 Cost of sales 2,834 2,670 2,536 2,266 2,234 Marketing, administrative and other expenses 1,380 452 429 350 350 Science and technology expenses 84 78 71 69 65 Restructure costs 38 - 89 23 16 Income (loss) from operations (504) 412 226 236 213 Cost of borrowed funds 77 87 94 89 110 Income (loss) before provision for income taxes (581) 325 132 147 103 Provision (credit) for income taxes (288) 106 58 47 33 Net income (loss) (284) 231 159 131 73 Net income (loss) per share Primary (5.50) 4.64 3.61 3.00 1.70 Fully diluted (5.50) 4.40 3.35 2.81 1.67 Dividends per share on common stock Declared .1250 - - - - Paid .0625 - - - - Weighted average number of shares outstanding (in thousands) Primary 51,722 49,711 44,209 43,593 43,013 Fully diluted 51,722 54,106 50,025 49,410 48,844 Net cash flow from operations 335 285 233 253 192 Capital spending 325 276 258 178 144 Total assets (f) 3,913 3,261 3,274 3,013 3,162 Long-term debt 818 794 1,037 898 1,018 Average number of employees (in thousands) 19 17 17 17 17
(a) During 1996, the Company recorded a net pre-tax charge of $875 million ($542 million after-tax) for asbestos litigation claims that may be received after 1999 and probable additional insurance recovery; special charges totaling $42 million ($27 million after-tax) including valuation adjustments associated with prior divestitures, major product line productivity initiatives and a contribution to the Owens-Corning Foundation; a pre-tax charge of $43 million ($26 million after-tax) for restructuring and other actions; $27 million reduction of tax reserves due to favorable legislation; and a pre-tax gain of $37 million ($27 million after-tax) from the sale of the Company's ownership interest in its former Japanese affiliate, Asahi Fiber Glass Co. Ltd. (b) During 1995, the Company recorded a one time $8 million tax credit as a result of a tax loss carryback. -15- ITEM 6. SELECTED FINANCIAL DATA (Continued) (c) 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. (d) 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. (e) 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. (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 assets have been restated to conform with those provisions. -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. All references to results from ongoing operations exclude the impact of special items reported for the relevant period.) RESULTS OF OPERATIONS Net sales were $3.832 billion for the year ended December 31, 1996, reflecting a 6% increase from the 1995 level of $3.612 billion. Net sales in 1994 were $3.351 billion. Most of the 1996 growth is attributable to volume increases in the Building Materials segment, particularly in North America, as well as incremental sales growth resulting from 1995 and 1996 acquisitions. Please see Notes 1 and 5 to the Consolidated Financial Statements. Sales outside the U.S. represented 25% of total sales for the year ended December 31, 1996, compared to 27% and 24% for the years 1995 and 1994, respectively. The strength of U.S. Building Materials sales in combination with sluggish European Composites business contributed to the slightly lower percentage of sales outside the U.S. when compared to 1995. Gross margin for each of the years ended December 31, 1996 and 1995 was 26%, up from 24% in 1994. Gross margin in 1996 was adversely impacted by the lower sales volume in the European Composites business. For the year ended December 31, 1996, the Company reported a net loss of $284 million, or $5.50 per share, compared to net income of $231 million, or $4.40 per share, and net income of $159 million, or $3.35 per share, for the years ended December 31, 1995 and 1994, respectively. The 1996 net loss reflects a net after-tax charge of $542 million, or $10.49 per share, for asbestos litigation claims that may be received after 1999 and probable additional insurance recovery; after- tax special charges totaling $27 million or $.52 per share including valuation adjustments associated with prior divestitures, major product line productivity initiatives and a contribution to the Owens-Corning Foundation; an after-tax charge of $26 million or $.50 per share for restructuring and other actions; a $27 million or $.52 per share reduction of tax reserves due to favorable legislation; and an after-tax gain of $27 million or $.52 per share from the sale of the Company's interest in its former Japanese affiliate, Asahi Fiber Glass Co. Ltd. The net loss created by the special items mentioned above caused common stock equivalents and convertible securities to be excluded from the number of fully diluted shares reported in 1996 due to their anti-dilutive effect. For comparative purposes, these anti-dilutive shares have been included in the calculation of fully diluted net income per share from ongoing operations in 1996 and represent a difference of $.32 per share. Net income from ongoing operations was $257 million, or $4.65 per share, for the year ended December 31, 1996, compared to $223 million, or $4.25 per share in 1995, discussed below. The 15% increase in net income from ongoing operations in 1996 over 1995 reflects the benefits of acquisitions, strong results from Building Materials in North America, particularly in the roofing and foam businesses, and a favorable litigation settlement with a former supplier, offset in part by increased administrative costs from regional expansion into Asia Pacific and globally within the engineered pipe systems business. Please see Notes 8, 12, 18 and 21 to the Consolidated Financial Statements. Net income of $231 million, or $4.40 per share, for the year ended December 31, 1995 reflects a one time gain of $8 million, or $.15 per share, resulting from a tax loss carryback. Net income from ongoing operations 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 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, -17- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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, 18 and 19 to the Consolidated Financial Statements. In the Building Materials segment, sales increased 12% for the year ended December 31, 1996 compared to 1995. This growth reflects volume increases, particularly in North America, as well as incremental sales from 1995 and 1996 acquisitions offset by a slight decline in prices, particularly in Canada. Income from ongoing operations for Building Materials increased 14% from 1995 levels due to acquisitions, increased sales volumes and the improving performance in our Asia Pacific operation. Building Materials sales in the U.S. increased 11% and Canada also posted improvement in 1996. This improvement in the North American markets is being driven by the Company's integration of its expanded product line from acquisitions and branded products into the Company's well established channels of distribution. The expanded product line includes Luminess(TM) vinyl windows, Transitions(R) vinyl siding and FOAMULAR(R) rigid polystyrene foam insulation. The third quarter 1996 acquisition of Celfortec, a Canadian producer of FOAMULAR(R) insulation, also contributed to Building Materials growth in North America. Building Materials Europe sales increased 11% over 1995, primarily from the second quarter 1996 acquisition of the extruded polystyrene foam business of Linpac Insulation, with production facilities in the U.K. and Spain. With these acquisitions in the extruded polystyrene foam operations in Europe and Canada and the joint venture announced in 1996 to produce foam insulation in China, the Company has significantly expanded its global position in the foam insulation business as part of the Company's global building systems strategy. In 1996, the Company's roofing business continued to increase sales and improve margins through volume increases and productivity initiatives. The window business also continued to experience significant sales growth and productivity improvements during the year. Additionally, in second quarter 1996 the Company acquired the U.S. assets of Partek Insulation, a producer of rock mineral wool insulation, which has expanded the Company's insulation product offering into the high temperature insulation market. The Company further expanded its Building Materials multi-product offering in 1996 with the introduction of the branded products, Bild-R-Tape(R) used to seal sheathing joints and PinkSeal(TM) foam sealant. In the Composite Materials segment, sales decreased 5% for the year ended December 31, 1996. This sales decrease is primarily the result of sluggish European reinforcements business as well as a decline in the Canadian market, while in the U.S., composites sales remained relatively flat. Income from ongoing operations posted a 4% increase over the prior year, reflecting improved operating performance and productivity improvements, particularly in the U.S. In 1996, the Company announced three new large diameter glass reinforced plastic (GRP) pipe joint ventures, one in Colombia, Egypt and Turkey. GRP pipe is used primarily in water and wastewater systems. In addition to these ventures, the Company also formed an application development center in India and announced plans for similar such centers in Brazil and China, to develop and promote the use of composite materials as a replacement of more traditional materials. At the end of 1996, the Company announced the acquisition of the remainder of the equity interest in Knytex(R), a manufacturer of specialty glass fiber fabrics. This business, which knits, weaves, stitches or bonds glass fiber to provide value-added performance characteristics, will be combined with the Company's existing European specialty fabrics business to form Owens Corning Fabrics. -18- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company's cost of borrowed funds for the year ended December 31, 1996 was $77 million, $10 million lower than 1995. The average total debt outstanding during the year decreased substantially in 1996 compared to 1995 as the result of the mid-year 1995 conversion of $173 million of the Company's 8% convertible junior subordinated debentures into shares of common stock, combined with the issuance of $200 million of convertible preferred securities. In 1996, the Company averaged short-term debt of $129 million, approximately $55 million lower than in 1995. The average debt reduction, together with lower average short-term interest rates, contributed to the lower cost of borrowed funds in 1996. Additionally, due to several large construction projects, interest capitalized in 1996 increased about $4 million over 1995. Please see Notes 2 and 3 to the Consolidated Financial Statements. At December 31, 1996, certain of the Company's foreign subsidiaries and state tax jurisdictions, have combined tax net operating loss carryforwards the benefit of which is approximately $63 million. The Company has $580 million in net deferred tax assets at December 31, 1996, all of which management expects will be realized through future income from operations. Please see Note 8 to the Consolidated Financial Statements. LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS Cash flow from operations, excluding proceeds from insurance and payments for asbestos litigation claims, was $501 million for 1996, compared to $342 million for 1995. The increase in cash flow from operations in 1996 relates to an increase in accounts payable and accrued liabilities offset in part by an increase in inventory. Additionally, 1995 cash flow from operations was reduced by $64 million for the December 1995 funding of a Voluntary Employee's Beneficiary Association (VEBA) trust. The 1996 cash flow from operations reflects the disbursements for benefits from the VEBA trust and collection of a tax receivable. Please see Note 6 to the Consolidated Financial Statements. At December 31, 1996, the Company's net working capital and current ratio were negative $163 million and .85, compared to negative $9 million and .99 at December 31, 1995, and negative $143 million and .87 at December 31, 1994, respectively. The decrease in 1996 was primarily due to increased accounts payable and accrued liabilities, and also a larger current asbestos liability, offset somewhat by increased inventories. Excluding the impact of short-term borrowings used to finance a $110 million U.K. acquisition in June 1994, the Company's net working capital was negative $33 million and its current ratio was .97 at December 31, 1994. The Company's total borrowings at December 31, 1996, were $934 million, $41 million higher than at year-end 1995, still within the Company's target debt levels. The increase in debt is primarily the result of acquisitions and increases in inventory levels. 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 a short-term credit facility. Please see Note 4 to the Consolidated Financial Statements. -19- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) As of December 31, 1996, the Company had unused lines of credit of $440 million available under long-term bank credit facilities and an additional $195 million under short-term facilities, compared to $358 million and $239 million, respectively, at year-end 1995. The net increase in unused available lines of credit reflects primarily 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. credit facility. Capital spending for property, plant and equipment, excluding acquisitions, was $325 million during 1996. The Company anticipates 1997 capital spending, exclusive of acquisitions and investment in affiliates, will be approximately $210 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 1996, including $44 million in defense costs and $11 million for appeal bond and other costs, were $267 million. Proceeds from insurance were $101 million resulting in a net pretax cash outflow of $166 million, or $100 million after-tax. During 1996, the Company received approximately 36,400 new asbestos personal injury cases and closed approximately 22,700 cases. During 1997, the Company's total payments for asbestos litigation claims, including defense costs, are expected to be approximately $300 million. Proceeds from insurance of $100 million are expected to be available to cover these costs, resulting in a net pretax cash outflow of $200 million, or $120 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 credit 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. In June 1996 the Company filed a lawsuit in federal court in New Orleans alleging a massive scheme to defraud the Company in connection with asbestos litigation cases. The suit alleges that medical test results in tens of thousands of asbestos litigation claims were falsified by the owners and operators of certain pulmonary function testing laboratories. A second lawsuit, alleging similar practices, was filed against the owner and operator of an additional testing laboratory in February 1997. The Company believes that at least 40,000 claims in its current backlog involve plaintiffs whose pulmonary function tests were improperly administered or manipulated by the testing laboratories or otherwise inconsistent with proper medical practice. 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 1996, the Company was designated as a PRP in such federal, state, local or private proceedings for five additional sites. At December 31, 1996, a total of 39 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 $17 million reserve for its Superfund (and similar state, local and private action) contingent liabilities. Based upon information presently available to the Company, and without regard to the application of insurance, the Company believes -20- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 results of operations, financial condition or long-term liquidity. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pages 23 through 71 hereof are incorporated here by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Owens Corning has nothing to report under this Item. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF OWENS CORNING The information required by this Item is incorporated by reference from the Company's 1997 Proxy Statement except that certain information concerning Owens Corning's executive officers is included on pages 11 through 12 hereof. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from the Company's 1997 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference from the Company's 1997 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference from the Company's 1997 Proxy Statement. -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 72 hereof 3. See Exhibit Index beginning on page 74 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 During the fourth quarter of 1996, the Company filed a current report on Form 8-K, dated December 19, 1996, under Item 5, "Other Events". -22- Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OWENS CORNING By /s/ G. H. Hiner Date March 14, 1997 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 March 14, 1997 Glen H. Hiner, Chairman of the Board, Chief Executive Officer and Director /s/ David W. Devonshire Date March 14, 1997 David W. Devonshire, Senior Vice President and Chief Financial Officer /s/ Steven J. Strobel Date March 14, 1997 Steven J. Strobel, Vice President and Controller /s/ Norman P. Blake Jr. Date March 18, 1997 Norman P. Blake, Jr., Director /s/ Leonard S. Coleman Jr. Date March 16, 1997 Leonard S. Coleman, Jr., Director /s/ William Colville Date March 19, 1997 William W. Colville, Director /s/ John H. Dasburg Date March 14, 1997 John H. Dasburg, Director /s/ Landon Hilliard Date March 14, 1997 Landon Hilliard, Director /s/ Trevor Holdsworth Date March 17, 1997 Trevor Holdsworth, Director /s/ Jon M. Huntsman, Jr. Date March 14, 1997 Jon M. Huntsman, Jr., Director /s/ Ann Iverson Date March 18, 1997 Ann Iverson, Director /s/ W. Walker Lewis Date March 15, 1997 W. Walker Lewis, Director /s/ Furman C. Moseley Date March 19, 1997 Furman C. Moseley, Jr., Director /s/ W. Ann Reynolds Date March 17, 1997 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, 1996, 1995 and 1994 27-28 Consolidated Balance Sheet - December 31, 1996 and 1995 29-30 Consolidated Statement of Stockholders' Equity - for the years ended December 31, 1996, 1995 and 1994 31 Consolidated Statement of Cash Flows - for the years ended December 31, 1996, 1995 and 1994 32-33 Notes to Consolidated Financial Statements Notes 1 through 22 34-71 -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, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Notes 6 and 19 to the consolidated financial statements, effective January 1, 1994, the Company changed its methods of accounting for postretirement benefits other than pensions for its non-U.S. plans, postemployment benefits and furnace rebuilds. 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 18, 1997 Toledo, Ohio -25- OWENS CORNING AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation Owens Corning and subsidiaries' (the "Company") 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 dilutive 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. The effects of anti-dilution are not presented. Unless otherwise indicated, all per share information included in the notes to the 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 cash flows 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. Capitalization of Software Developed for Internal Use The Company capitalizes the direct external and internal costs incurred in connection with the development, testing and installation of software for internal use. Internally developed software is included in plant and equipment and is amortized over its estimated useful life using the straight- line method. -26- OWENS CORNING AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Rebuilding of Glass Melting Furnaces The Company's glass melting furnaces periodically require substantial rebuilding. The Company applies 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. 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. 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. Stock Based Compensation Plans The Company applies Statement of Financial Accounting Standards No. 123 (SFAS 123) in accounting for its stock based compensation plans. In accordance with SFAS 123 the Company applies Accounting Principles Board Opinion No. 25 and related Interpretations for expense recognition. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made to 1995 and 1994 to conform with the classifications used in 1996. -27- OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994 (In millions of dollars, except share data) NET SALES $ 3,832 $ 3,612 $ 3,351 COST OF SALES 2,834 2,670 2,536 Gross margin 998 942 815 OPERATING EXPENSES Marketing and administrative expenses 506 443 391 Science and technology expenses (Note 9) 84 78 71 Provision for asbestos litigation claims (Note 21) 875 - - Restructure costs (Note 18) 38 - 89 Other (Notes 2, 4, 10, 12, 18 and 20) (1) 9 38 Total operating expenses 1,502 530 589 INCOME (LOSS) FROM OPERATIONS (504) 412 226 Cost of borrowed funds (Notes 2, 3 and 20) 77 87 94 INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (581) 325 132 Provision (Credit) for income taxes (Note 8) (288) 106 58 INCOME (LOSS) BEFORE EQUITY IN NET INCOME OF AFFILIATES (293) 219 74 Equity in net income of affiliates (Notes 5 and 12) 9 12 - INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES (284) 231 74 Cumulative effect of accounting changes (Notes 6 and 19) - - 85 NET INCOME (LOSS) $ (284) $ 231 $ 159
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, 1996, 1995 AND 1994 (Continued) 1996 1995 1994 (In millions of dollars, except share data) NET INCOME PER COMMON SHARE Primary: Income (loss) before cumulative effect of accounting changes $ (5.50) $ 4.64 $ 1.70 Cumulative effect of accounting changes (Notes 6 and 19) - - 1.91 Net income (loss) per share $ (5.50) $ 4.64 $ 3.61 Assuming full dilution: Income (loss) before cumulative effect of accounting changes $ (5.50) $ 4.40 $ 1.66 Cumulative effect of accounting changes (Notes 6 and 19) - - 1.69 Net income (loss) per share $ (5.50) $ 4.40 $ 3.35 Weighted average number of common shares outstanding and common equivalent shares during the period (in millions) Primary 51.7 49.7 44.2 Assuming full dilution 51.7 54.1 50.0
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, 1996 AND 1995 ASSETS 1996 1995 (In millions of dollars) CURRENT Cash and cash equivalents $ 45 $ 18 Receivables, less allowances of $17 million in 1996 and $19 million in 1995 (Note 10) 314 314 Inventories (Note 11) 340 253 Insurance for asbestos litigation claims - current portion (Note 21) 100 100 Deferred income taxes (Note 8) 106 70 VEBA trust (Note 6) 19 51 Income tax receivable 4 50 Investment in affiliate held for sale (Note 12) - 36 Other current assets 30 35 Total current 958 927 OTHER Insurance for asbestos litigation claims (Note 21) 454 330 Deferred income taxes (Note 8) 474 252 Goodwill, less accumulated amortization of $26 million in 1996 and $19 million in 1995 (Note 5) 286 249 Investments in affiliates (Notes 5 and 12) 64 50 Other noncurrent assets (Note 6 and 7) 155 147 Total other 1,433 1,028 PLANT AND EQUIPMENT, at cost Land 58 52 Buildings and leasehold improvements 614 581 Machinery and equipment 2,384 2,266 Construction in progress 285 168 3,341 3,067 Less: Accumulated depreciation (1,819) (1,761) Net plant and equipment 1,522 1,306 TOTAL ASSETS $ 3,913 $ 3,261
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, 1996 AND 1995 (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 (In millions of dollars) CURRENT Accounts payable and accrued liabilities (Note 13) $ 705 $ 587 Reserve for asbestos litigation claims - current portion (Note 21) 300 250 Short-term debt (Note 3) 96 64 Long-term debt - current portion (Note 2) 20 35 Total current 1,121 936 LONG-TERM DEBT (Note 2) 818 794 OTHER Reserve for asbestos litigation claims (Note 21) 1,670 887 Other employee benefits liability (Note 6) 349 367 Pension plan liability (Note 7) 63 75 Other (Note 20) 161 220 Total other 2,243 1,549 COMMITMENTS AND CONTINGENCIES (Notes 15, 20 and 21) COMPANY OBLIGATED CONVERTIBLE SECURITY OF SUBSIDIARY HOLDING SOLELY PARENT DEBENTURES (MIPS, Note 4) 194 194 MINORITY INTEREST 21 - STOCKHOLDERS' EQUITY Preferred stock, no par value; authorized 8 million shares, none outstanding (Note 17) Common stock, par value $.10 per share; authorized 100 million shares; issued 1996-52.1 million and 1995-51.4 million shares (Notes 2, 5 and 16) 606 579 Deficit (1,072) (781) Foreign currency translation adjustments (1) 9 Other (Note 7) (17) (19) Total stockholders' equity (484) (212) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,913 $ 3,261
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, 1996, 1995 AND 1994 1996 1995 1994 (In millions of dollars) COMMON STOCK Balance beginning of year $ 579 $ 348 $ 315 Issuance of stock for: Conversion of debt (Note 2) - 173 - Acquisitions (Note 5) 20 42 27 Awards under stock compensation plans (Note 16) 7 16 6 Balance end of year 606 579 348 DEFICIT Balance beginning of year (781) (1,012) (1,171) Net income (loss) (284) 231 159 Cash dividends declared (7) - - Balance end of year (1,072) (781) (1,012) FOREIGN CURRENCY TRANSLATION ADJUSTMENTS Balance beginning of year 9 (1) 5 Translation adjustments (10) 10 (6) Balance end of year (1) 9 (1) OTHER Balance beginning of year (19) (15) (18) Net increase (decrease) 2 (4) 3 Balance end of year (17) (19) (15) STOCKHOLDERS' EQUITY $ (484) $ (212) $ (680)
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, 1996, 1995 AND 1994 1996 1995 1994 (In millions of dollars) NET CASH FLOW FROM OPERATIONS Net income (loss) $ (284) $ 231 $ 159 Reconciliation of net cash provided by operating activities: Noncash items: Provision for asbestos litigation claims (Note 21) 875 - - Cumulative effect of accounting changes (Notes 6 and 19) - - (85) Provision for depreciation and amortization 132 125 118 Provision (credit) for deferred income taxes (Note 8) (258) 142 59 Other 7 5 9 (Increase) decrease in receivables (Note 10) 20 36 21 (Increase) decrease in inventories (71) (15) 17 Increase (decrease) in accounts payable and accrued liabilities 103 (50) 53 Disbursements (funding) of VEBA trust (Note 6) 45 (64) - Proceeds from insurance for asbestos litigation claims (Note 21) 101 251 87 Payments for asbestos litigation claims (Note 21) (267) (308) (215) Other (68) (68) 10 Net cash flow from operations 335 285 233 NET CASH FLOW FROM INVESTING Additions to plant and equipment (325) (276) (258) Investment in subsidiaries, net of cash acquired (Note 5) (70) (81) (120) Proceeds from the sale of affiliate (Note 12) 55 - - Other (20) (4) 23 Net cash flow from investing $ (360) $ (361) $ (355)
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, 1996, 1995 AND 1994 (Continued) 1996 1995 1994 (In millions of dollars) NET CASH FLOW FROM FINANCING (Notes 2, 3 and 4) Net additions to long-term credit facilities $ 39 $ 55 $ 10 Other additions to long-term debt 22 9 145 Other reductions to long-term debt (43) (128) (51) Net increase (decrease) in short-term debt 32 (94) 69 Issuance of preferred stock of subsidiary, net of fees - 194 - Dividends paid (3) - - Other 3 - 5 Net cash flow from financing 50 36 178 Effect of exchange rate changes on cash 2 (1) - Net increase (decrease) in cash and cash equivalents 27 (41) 56 Cash and cash equivalents at beginning of year 18 59 3 Cash and cash equivalents at end of year $ 45 $ 18 $ 59
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 1996, 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; windows; and the branded 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; glass reinforced plastic pipe; and polyester and vinyl ester resins. 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. Income from operations for the year ended December 31, 1996 includes a pretax charge of $43 million for restructuring and other actions (Note 18); a net pretax charge of $875 million for asbestos litigation claims that may be received after 1999 and probable additional insurance recovery (Note 21); a pretax gain of $37 million from the sale of the Company's interest in its former Japanese affiliate Asahi Fiber Glass Co. Ltd. (Note 12); and charges totaling $42 million including valuation adjustments associated with prior divestitures, major product line productivity initiatives and a contribution to the Owens-Corning Foundation. The impact of these special items was to reduce income from operations for Building Materials in the United States, Europe, and Canada and other by $42 million, $5 million and $3 million, respectively; Composite Materials in the United States and Europe by $5 million and $7 million, respectively; and to increase general corporate expense by $861 million. -35- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Segment Data (Continued) During the first quarter of 1994, the Company recorded a $117 million pretax charge for productivity initiatives and other actions (Note 18). The impact of this charge was to reduce income from operations for Building Materials in the United States and Canada and other by $50 million and $20 million respectively; Composite Materials in the United States, Europe, and Canada and other by $6 million, $13 million, and $3 million, respectively; and to increase general corporate expense by $25 million. 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. -36- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Segment Data (Continued) NET SALES 1996 1995 1994 (In millions of dollars) Industry Segments Building Materials United States $ 2,253 $ 2,033 $ 1,952 Europe 294 264 182 Canada and other 140 107 139 Total Building Materials 2,687 2,404 2,273 Composite Materials United States 613 610 595 Europe 400 459 355 Canada and other 132 139 128 Total Composite Materials 1,145 1,208 1,078 Intersegment sales Building Materials - - - Composite Materials 110 96 99 Eliminations (110) (96) (99) Net sales $ 3,832 $ 3,612 $ 3,351 Geographic Segments United States $ 2,866 $ 2,643 $ 2,547 Europe 694 723 537 Canada and other 272 246 267 3,832 3,612 3,351 Intersegment sales United States 98 54 43 Europe 37 21 22 Canada and other 81 88 91 Eliminations (216) (163) (156) Net sales $ 3,832 $ 3,612 $ 3,351
-37- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Segment Data (Continued) INCOME (LOSS) FROM OPERATIONS 1996 1995 1994 (In millions of dollars) Industry Segments Building Materials United States $ 193 $ 195 $ 145 Europe 16 29 26 Canada and other 10 13 18 Total Building Materials 219 237 189 Composite Materials United States 165 135 108 Europe 39 64 (8) Canada and other 18 26 9 Total Composite Materials 222 225 109 General corporate expense (945) (50) (72) Income (loss) from operations (504) 412 226 Cost of borrowed funds (77) (87) (94) Income (loss) before provision for income taxes $ (581) $ 325 $ 132 Geographic Segments United States $ 358 $ 330 $ 253 Europe 55 93 18 Canada and other 28 39 27 General corporate expense (945) (50) (72) Income (loss) from operations (504) 412 226 Cost of borrowed funds (77) (87) (94) Income (loss) before provision for income taxes $ (581) $ 325 $ 132
-38- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Segment Data (Continued) IDENTIFIABLE ASSETS AT DECEMBER 31, 1996 1995 1994 (In millions of dollars) Industry Segments Building Materials United States $ 971 $ 893 $ 718 Europe 239 170 162 Canada and other 277 194 136 Total Building Materials 1,487 1,257 1,016 Composite Materials United States 385 361 326 Europe 455 388 335 Canada and other 239 145 160 Total Composite Materials 1,079 894 821 General corporate 1,283 1,024 1,363 3,849 3,175 3,200 Investments in affiliates accounted for under the equity method 64 86 74 Total assets $ 3,913 $ 3,261 $ 3,274 Geographic Segments United States $ 1,356 $ 1,254 $ 1,044 Europe 694 558 497 Canada and other 516 339 296 General corporate 1,283 1,024 1,363 3,849 3,175 3,200 Investments in affiliates accounted for under the equity method 64 86 74 Total assets $ 3,913 $ 3,261 $ 3,274
-39- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Segment Data (Continued) PROVISION FOR DEPRECIATION AND AMORTIZATION 1996 1995 1994 (In millions of dollars) Industry Segments Building Materials United States $ 52 $ 49 $ 48 Europe 14 11 6 Canada and other 6 8 8 Total Building Materials 72 68 62 Composite Materials United States 22 22 22 Europe 18 18 17 Canada and other 8 7 8 Total Composite Materials 48 47 47 General corporate 12 10 9 Total provision for depreciation and amortization $ 132 $ 125 $ 118 Geographic Segments United States $ 74 $ 71 $ 70 Europe 32 29 23 Canada and other 14 15 16 General corporate 12 10 9 Total provision for depreciation and amortization $ 132 $ 125 $ 118
-40- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Segment Data (Continued) ADDITIONS TO PLANT AND EQUIPMENT 1996 1995 1994 (In millions of dollars) Industry Segments Building Materials United States $ 95 $ 60 $ 85 Europe 10 36 41 Canada and other 36 33 7 Total Building Materials 141 129 133 Composite Materials United States 63 37 41 Europe 30 39 35 Canada and other 34 18 26 Total Composite Materials 127 94 102 General corporate 57 53 23 Total additions $ 325 $ 276 $ 258 Geographic Segments United States $ 158 $ 97 $ 126 Europe 40 75 76 Canada and other 70 51 33 General corporate 57 53 23 Total additions $ 325 $ 276 $ 258
-41- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. Long-Term Debt 1996 1995 (In millions of dollars) Unsecured U.S. credit facility due in 1999, variable $ 35 $ 55 Unsecured U.K. credit facility due through 2001, variable 59 - Unsecured European credit facilities due through 2002, variable 41 40 Unsecured Canadian credit facility due in 1999, variable - - Guaranteed debentures due in 2001, 10% 150 150 Debentures due in 2002, 8.875% 150 150 Debentures due in 2012, 9.375% 150 150 Guaranteed debentures due in 1998, 9.8% 100 100 Eurobonds due through 2001, 9.814% (Note 20) 54 63 Bonds due in 2000, 7.25%, payable in Deutsche marks (Note 20) 50 50 Notes due through 2002, 6.06% to 8.50%, payable in foreign currencies 14 26 Other long-term debt due through 2012, at rates from 5.375% to 12.47% 35 45 838 829 Less: Current portion (20) (35) Total long-term debt $ 818 $ 794
The U.S. credit facility has a maximum commitment of $475 million at December 31, 1996, of which $109 million was used for standby letters of credit and $331 million was unused. The rate of interest is either the bank's base rate, or .81% over the certificate of deposit rate, or .5% over the London Interbank Offered Rate (LIBOR). The rate of interest on this facility was 6.125% at December 31, 1996. A commitment fee of 1/5 of 1% is charged on the unused portions of this facility. The U.K. credit facility, payable in British pounds, has a commitment of 35 million British pounds ($59 million U.S. dollars) all of which was used at December 31, 1996. The rate of interest on the facility was 6.61% at December 31, 1996. The commitment fee on any unused portion of the facility was .31% at December 31, 1996. -42- 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 ($51 million U.S. dollars) of which 300 million Belgian francs ($10 million U.S. dollars) was unused at December 31, 1996. The rate of interest on the facilities ranges from 3.78% to 3.89% at December 31, 1996. The commitment fee on the unused portions of the facilities range from 3/20 to 1/4 of 1%. 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, 1996. The rate of interest is either .69% over the Canadian cost of funds rate, or .5% over LIBOR on U.S. deposits, or .6% over the Canadian bankers' acceptance rate. A commitment fee of 1/5 of 1% is charged on the unused portions of this facility. 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, 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. In May 1995, the Company repurchased a portion of the $140 million issue of Eurobonds for $77 million. -43- 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, 1996 are: Credit Other Long- Year Facilities Term Debt (In millions of dollars) 1997 $ 8 $ 12 1998 17 115 1999 62 22 2000 27 73 2001 21 171
3.Short-Term Debt 1996 1995 (In millions of dollars) Balance outstanding at December 31 $ 96 $ 64 Weighted average interest rates on short-term debt outstanding at December 31 6.2% 7.5%
In 1996 and 1995 the Company entered into two revolving credit agreements. During each quarter the Company may borrow up to a predetermined amount from $5 million to $6 million in 1996 and $13 million to $16 million in 1995. 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 1997 and bear interest at market rates in effect at the time of each borrowing. The Company had unused short-term lines of credit totaling $195 million and $239 million at December 31, 1996 and 1995, respectively. 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. -44- 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 $13 million and $8 million have been recorded as other expenses on the Company's consolidated statement of income for the years ended December 31, 1996 and 1995, respectively. 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 1996, 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 $89 million, $126 million and $155 million for 1996, 1995 and 1994, respectively. The 1996 acquisitions exchanged 472,250 shares of the Company's common stock and $69 million in cash. The 1995 acquisitions exchanged 946,922 shares of the Company's common stock and $82 million in cash of which $1 million was paid in the first quarter of 1996. 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 $47 million, $41 million and $134 million for the years ended December 31, 1996, 1995 and 1994, respectively. The largest of these acquisitions was the $110 million 1994 acquisition of Pilkington Insulation Limited and Kitsons Insulation Products Limited, the United Kingdom based insulation manufacturing and industrial supply businesses of Pilkington PLC. -45- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. Acquisitions and Divestitures of Businesses (Continued) The initial purchase price allocations were based on preliminary estimates of fair market value and are subject to revision. The 1996 acquisitions include goodwill of $32 million. 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. 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 pro forma effect of the acquisitions was not material to net income for the years ended December 31, 1996, 1995 or 1994. 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. This joint venture is being accounted for under the equity method. For the nine months ended September 30, 1994 resin sales totaled $58 million 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 in 1994 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 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. -46- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. Postemployment and Postretirement Benefits Other Than Pensions (Continued) 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.) The following table reconciles the status of the accrued postretirement benefits cost liability at October 31, 1996 and 1995, as reflected on the balance sheet at December 31, 1996 and 1995: 1996 1995 (In millions of dollars) Accumulated Postretirement Benefits Obligation: Retirees $ (191) $ (194) Fully eligible active plan participants (28) (21) Other active plan participants (58) (54) Funded status (277) (269) Unrecognized net gain (10) (11) Unrecognized net reduction in prior service cost (52) (72) Benefit payments subsequent to the valuation date 4 3 Accrued postretirement benefits cost liability (includes current liabilities of $22 million and $19 million in 1996 and 1995, respectively) $ (335) $ (349)
The net postretirement benefits cost for 1996, 1995 and 1994 included the following components: 1996 1995 1994 (In millions of dollars) Service cost $ 8 $ 7 $ 8 Interest cost on accumulated post- retirement benefits obligation 19 19 19 Net amortization and deferral (20) (24) (20) Net postretirement benefits cost $ 7 $ 2 $ 7
-47- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. Postemployment and Postretirement Benefits Other Than Pensions (Continued) For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care claims was assumed for 1997. The rate was assumed to decrease to 9.5% for 1998, 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, 1996, by $16 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 7.8% in 1996, 7.5% in 1995, and 8.5% in 1994. 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 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, 1996 and 1995, as reflected on the balance sheet at December 31, 1996 and 1995: 1996 1995 (In millions of dollars) Funded status $ (34) $ (40) Unrecognized net gain (6) (2) Benefit payments subsequent to the valuation date - 1 Accrued postemployment benefit cost liability (includes current liabilities of $4 million in 1996 and 1995) $ (40) $ (41)
The net postemployment benefits expense was $2 million, $2 million and $3 million for 1996, 1995 and 1994, respectively. -48- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. Postemployment and Postretirement Benefits Other Than Pensions (Continued) In December 1995, the Company established a Voluntary Employees' Beneficiary Association (VEBA) trust to cover certain employee welfare and postretirement benefits to be paid in 1996 and early 1997. The funded status of the trust at December 31, 1996, is $19 million, all of which is current. At December 31, 1995 the funded status of the trust was $64 million, of which $13 million was 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. 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 became 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 and 1995 was $13 million and $4 million, respectively. -49- 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: 1996 1995 1994 (In millions of dollars) Service cost $ 14 $ 20 $ 22 Interest cost on projected benefit obligation 62 64 58 Actual return on plan assets (106) (114) (13) Net amortization and deferral 25 30 (64) Net pension expense $ (5) $ - $ 3
The funded status at October 31, 1996 and 1995 is as follows: 1996 1995 (In millions of dollars) Over Under Over Under Funded Funded Funded Funded Vested benefit obligation $ 679 $ 19 $ 359 $ 312 Accumulated benefit obligation $ 757 $ 21 $ 395 $ 355 Plan assets at fair value $ 839 $ 10 $ 500 $ 316 Projected benefit obligation 805 29 447 365 Plan assets in excess of (less than) projected benefit obligation 34 (19) 53 (49) Unrecognized loss 53 9 15 59 Unrecognized prior service cost (55) 1 (30) (31) Unrecognized transition amount (41) - (35) (11) Adjustment to minimum liability - (5) - (7) Net pension liability (includes current liabilities of $3 million in 1996 and $2 million in 1995 and noncurrent assets of $43 million in 1996 and $41 million in 1995) $ (9) $ (14) $ 3 $ (39)
-50- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. Pension Plans (Continued) The 1996, 1995 and 1994 primary actuarial assumptions used for pension plans were: 1996 1995 1994 Discount rate 7.8% 7.5% 8.5% Expected long-term rate of return on plan assets 9.0% 9.0% 9.5% Rate of compensation increase 5.1% 5.1% 5.1%
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 $10 million in 1996, $12 million in 1995, and $10 million in 1994. 8. Income Taxes 1996 1995 1994 (In millions of dollars) Income (loss) before provision (credit) for income taxes: U.S. $ (622) $ 226 $ 119 Foreign 41 99 13 Total $ (581) $ 325 $ 132 Provision (credit) for income taxes: Current U.S. $ (36) $ (45) $ (2) State and local (6) (4) (7) Foreign 12 13 5 Total current (30) (36) (4) Deferred U.S. (211) 113 51 State and local (48) 15 13 Foreign 1 14 (2) Total deferred (258) 142 62 Total provision (credit) for income taxes $(288) $ 106 $ 58
-51- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. Income Taxes (Continued) The reconciliation between the U.S. federal statutory rate and the Company's effective income tax rate is: 1996 1995 1994 U.S. federal statutory rate (35)% 35% 35% State and local income taxes (6) 2 3 Adjustment of tax reserves due to favorable legislation (5) - - Operating losses of foreign subsidiaries - - 7 Utilization of research and development credits - (3) - Utilization of operating loss carryforwards (1) - (7) Utilization of tax loss carryback - (2) - Adjustment of valuation allowances (1) - - Other (2) 1 6 Effective tax rate (50)% 33% 44%
As of December 31, 1996, the Company has not provided for withholding or U.S. federal income taxes on approximately $211 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 $22 million of deferred income taxes would have been provided. During 1996 and 1995, the Company utilized tax net operating loss carryforwards for certain of its foreign subsidiaries and certain of its state tax jurisdictions of approximately $7 million and $2 million, respectively. At December 31, 1996 the Company had tax net operating loss carryforwards for certain of its foreign subsidiaries and certain of its state tax jurisdictions of approximately $63 million, of which $40 million expire through 2011, and the remaining $23 million of which have an indefinite carryforward. The cumulative temporary differences giving rise to the deferred tax assets and liabilities at December 31, 1996 and 1995 are as follows: -52- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. Income Taxes (Continued) 1996 1995 Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities (In millions of dollars) Asbestos litigation claims $ 525 $ - $ 244 $ - Other employee benefits 157 - 160 - Pension plans 22 11 23 13 Depreciation - 200 - 169 Operating loss carryforwards 63 - 42 - State and local taxes - 38 - 21 Other 140 56 102 26 Subtotal 907 305 571 229 Valuation allowances (22) - (20) - Total deferred taxes $ 885 $ 305 $ 551 $ 229
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 $78 million in 1996, $69 million in 1995, and $64 million in 1994. 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. 10.Accounts Receivable Securitization In 1996 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, 1996 and 1995, $100 million 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 years ended December 31, 1996 and 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. -53- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. Inventories Inventories are summarized as follows: 1996 1995 (In millions of dollars) Finished goods $ 273 $ 210 Materials and supplies 149 127 FIFO inventory 422 337 Less: Reduction to LIFO basis (82) (84) $ 340 $ 253
Approximately $216 million and $175 million of FIFO inventories were valued using the LIFO method at December 31, 1996 and 1995, respectively. During 1995 and 1994, 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 and 1994 cost of sales by $7 million and $3 million, respectively. 12. Investments in Affiliates At December 31, 1996 and 1995, 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 1996 1995 Alpha/Owens-Corning, L.L.C. (USA) 50% 50% Amiantit Fiberglass Industries, Ltd. (Saudi Arabia) 30% 30% Arabian Fiberglass Insulation Company, Ltd. (Saudi Arabia) 49% 49% Asahi Fiber Glass Company, Ltd. (Japan) - 28% Knytex Company, L.L.C. (USA) 50% 50% LG Owens-Corning Corp. (Korea) 30% 31% OC Andercol Tuberias S.A. (Colombia) 50% - OC India (India) 49% - OC Yapi Merkezi Boru Sanayi Ve' Ficaret (Turkey) 50% - Owens-Corning Canos, S.A. (Argentina) 50% 50% Owens-Corning Eternit Rohre GmbH (Germany) 50% 50% Owens-Corning Pipe Botswana (Pty.), Ltd. (Botswana) 49% 49% Owens-Corning Tubs S.A. (Spain) 50% 50% Siam Fiberglass Co., Ltd. (Thailand) 17% 20% Vitro-Fibras, S.A. (Mexico) 40% 40%
Early in 1996, the Company sold its ownership interest in its Japanese affiliate Asahi Fiber Glass Co. Ltd., and recorded a pretax gain of $37 million. -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: 1996 1995 1994 (In millions of dollars) At December 31: Current assets $ 200 $ 338 $ 328 Noncurrent assets 259 503 513 Current liabilities 149 340 331 Noncurrent liabilities 168 236 250 For the year: Net sales 516 962 630 Gross margin 126 178 96 Net income 36 47 7
The Company's equity in undistributed net income of affiliates was $3 million at December 31, 1996. 13. Accounts Payable and Accrued Liabilities 1996 1995 (In millions of dollars) Accounts payable $ 379 $ 302 Payroll and vacation pay 84 87 Payroll, property, and miscellaneous taxes 35 39 Other employee benefits liability (Note 6) 26 23 Other 181 136 $ 705 $ 587
-55- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. Consolidated Statement of Cash Flows Cash payments for income taxes, net of refunds, and cost of borrowed funds are summarized as follows: 1996 1995 1994 (In millions of dollars) Income taxes $ (25) $ (34) $ (4) Cost of borrowed funds 86 94 97
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 $87 million in 1996, $63 million in 1995, and $54 million in 1994. At December 31, 1996, 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) 1997 $ 66 1998 57 1999 41 2000 28 2001 17 2002 through 2015 107 $ 316
-56- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 16. Stock Compensation Plans The Company has four stock-based compensation plans. The Company's Stock Performance Incentive Plan ("SPIP") grants stock options, restricted stock, performance restricted stock and phantom performance units. The Owens-Corning 1995 Stock Plan ("95 Stock Plan") grants options and restricted stock. SPIP and the 95 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 1996 and 1995, the total number of shares available under the Plans for stock awards was 2,236,577 and 1,924,271 shares, respectively. During 1995 an advance of 54,355 shares was taken from the 1996 allocation for SPIP. The following are descriptions of the awards granted under the Plans: Stock Options Under the Plans, the exercise prices of each option equal the market price of the Company's common stock on the date of grant and an option's maximum term is 10 years. Shares issued from the exercise of options are recorded in the common stock accounts at the option price. The awards and vesting periods of such awards are determined at the discretion of the compensation committee of the Board of Directors. During 1996 and 1995, respectively, 1,102,510 and 1,006,950 stock options were awarded under the Plans. Restricted Stock Awards Under the Plans, compensation expense is measured based on the market price of the stock at the date of grant and is recognized on a straight-line basis over the vesting period. Stock restrictions lapse, subject to alternate vesting plans for death, disability, approved early retirement and involuntary termination, over various periods ending in 2006. At December 31, 1996, the Company had 376,409 shares of restricted stock outstanding. During 1996 and 1995, 78,510 and 148,924 shares of restricted shares were granted, respectively. The weighted-average grant-date fair value for shares granted was $42.67 and $40.78 for 1996 and 1995, respectively. Performance Restricted Stock Awards Under the Plans, certain officers are awarded performance shares. Performance shares represent the opportunity to earn up to a specified number of shares of the Company's common stock, if the Company achieves specified performance goals during the designated performance period. Officers, other than the Chief Executive Officer, earn any portion of their award not earned during the performance period seven years after the end of the performance period, if their employment continues until that time. Compensation expense is measured based on market price of the Company's common stock on the date of grant and is -57- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 16. Stock Compensation Plans (Continued) amortized over the performance period, approximately three years. At December 31, 1996, the Company had 63,300 units outstanding. During 1996 and 1995, respectively, 38,200 and 27,300, performance shares were granted. The weighted- average grant-date fair value for shares granted was $43.79 and $45.00 for 1996 and 1995, respectively. Phantom Performance Units Under the Plans, certain officers are awarded phantom performance units. Each unit provides the holder the opportunity to earn a cash award equal to the fair market value of the Company's common stock upon the attainment of certain performance goals. Officers, other than the Chief Executive Officer, earn any portion of their award not earned during the performance period seven years after the end of the performance period, if their employment continues until that time. Compensation expense is measured based on market price of the Company's common stock and is amortized over the performance period, approximately three years. At December 31, 1996 the Company had 124,600 units of phantom performance units outstanding. During 1996 and 1995, 79,600 and 56,000 units, respectively, were awarded. The Company also has a plan to award stock, receipt of which may be deferred at the discretion of the directors, and stock options to nonemployee directors, of which 70,000 shares were available for this purpose as of December 31, 1996. In 1996, 30,000 options and 4,000 stock awards were granted, of which 1,000 were issued in conjunction with the plan for nonemployee directors. 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. The weighted-average grant-date fair value for shares granted was $39.63 and $35.25 for 1996 and 1995, respectively. Under a prior plan the Company had 5,417 and 7,211 deferred stock awards outstanding, at December 31, 1996 and 1995, respectively. Under the terms of this plan, no further awards may be made. The Company applies Financial Accounting Standards Board Statement No. 123 (SFAS 123) in accounting for its stock based compensation plans. In accordance with SFAS 123 the Company applies Accounting Principles Board Opinion No. 25 and related Interpretations for expense recognition. All stock options issued by the Company are exercisable at a price equal to the market price at the date of grant. Accordingly, no compensation cost has been recognized for any of the options granted under the plans. The compensation cost that has been recorded for awards other than options was $8 million and $3 million in 1996 and 1995, respectively. A summary of the status of the Company's plans that issue options as of December 31, 1996 and 1995 and changes during the years ending on those dates is presented below: -58- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 16. Stock Compensation Plans (Continued) 1996 1995 Weighted Weighted Number Average Number Average of Exercise of Exercise Shares Price Shares Price Beginning of year 3,943,110 $ 33.34 3,290,454 $ 31.55 Options granted 1,132,510 $ 42.92 1,016,950 $ 37.46 Options exercised (142,232) $ 30.60 (300,663) $ 27.18 Options canceled (38,949) $ 41.01 (63,631) $ 35.67 End of year 4,894,439 $ 35.59 3,943,110 $ 33.34 Exercisable 2,872,156 $ 32.66 2,107,427 $ 30.97 Weighted-average fair-value of options granted during the year $ 12.50 $ 11.24
The following table summarizes information about options outstanding at December 31, 1996: Options Outstanding Range of Number Weighted-Average Exercise Outstanding Remaining Exercise Prices at 12/31/96 Contractual Life Price $ 17.86 - 26.875 666,035 3.8 $ 23.08 27.00 - 31.50 564,321 5.0 $ 30.63 31.625 - 34.875 831,006 7.0 $ 32.25 35.00 - 40.50 1,707,092 7.3 $ 38.75 40.625 - 47.00 1,125,985 9.1 $ 43.15
Options Exercisable Range of Number Weighted Exercise Exercisable Average Prices at 12/31/96 Exercise Price $ 17.86 - 26.875 666,035 $ 23.08 27.00 - 31.50 551,655 $ 30.62 31.625 - 34.875 561,350 $ 32.21 35.00 - 40.50 1,035,088 $ 39.53 40.625 - 47.00 58,028 $ 43.95
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions by year: Assumptions 1996 1995 Risk-free interest rate 6.04% 5.96% Expected life 5 years 5 years Expected volatility 24.39% 26.25% Expected dividends 1.43% 1.43%
-59- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 16. Stock Compensation Plans (Continued) Had compensation cost for the Plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method described in SFAS 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1996 1995 Net income As reported $ (284) $ 231 Pro forma $ (288) $ 230 Primary earnings per share As reported $(5.50) $ 4.64 Pro forma $(5.57) $ 4.62 Fully diluted earnings per share As reported $(5.50) $ 4.40 Pro forma $(5.57) $ 4.38
The Company cautions that the pro forma net income and per share results in the initial years of adoption are overstated due to the recognition of pro forma compensation cost over the vesting period. 17. Share Purchase Rights In December 1996, the Company's Board of Directors declared a dividend distribution of one preferred share purchase right for each share of the Company's common stock. The new rights replaced preferred share purchase rights issued in 1986, which expired on December 30, 1996. 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 $190. 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 business days after a person or group acquires, or announces a tender offer for, 15% or more of the Company's outstanding shares of common stock. The rights expire on December 30, 2006, unless redeemed earlier by the Company. The rights are redeemable by the Company at one cent each at any time prior to public announcement or notice to the Company that an acquiring person or group has purchased 15% or more of the Company's outstanding common stock (an "Acquisition Event"). At any time after an Acquisition Event and prior to the acquisition by such person or group of 50% or more of the Company's outstanding common stock, the Board of Directors may exchange one share of common stock for each right outstanding, other than rights held by the acquiring person or group. At any time after an Acquisition Event and the rights become exercisable, each right, other than rights held by the acquiring person or group, would entitle its holder to buy common stock of the Company (or, if the Company is subsequently acquired in a merger or other business combination, such shares of the acquiring or surviving company) having a market value of twice the exercise price of the right. -60- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 18. Restructuring of Operations and Other Actions During the fourth quarter of 1996, the Company recorded a $43 million pretax charge for restructuring and other actions which includes the costs associated with a work force realignment, a replacement of computer technology as well as asset valuations and expenses related to exited businesses. The $43 million pretax charge was comprised of a $38 million restructure charge and a $5 million charge related to an exited business. The components of the restructure charge include $20 million for personnel reductions, $8 million in computer technology and $10 million for asset valuations and exited businesses. The $20 million for personnel reductions represents severance costs associated with the elimination of nearly 400 positions worldwide. The primary employee group affected is manufacturing personnel. During 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 was 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 costs associated with the administration of the Company's former commercial roofing business. The components of the $89 million restructure included: $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 included science and technology, field sales, corporate administrative, and commercial roofing and resin business personnel. 19. 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 in 1994 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. -61- 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 generally 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, 1996 December 31, 1995 (In millions of dollars) Forward currency exchange contracts $ 128 $ 234 Combined interest rate currency swaps 120 70 Options purchased 22 25 Currency swaps 120 120 Interest rate swaps 50 150 Treasury rate locks 29 -
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, 1996, the Company has 31 forward currency exchange contracts maturing in 1997 which exchange 3.9 billion Belgian francs, 33 million U.S. dollars, 17 million British pounds, 89 million French francs, 12 billion Italian lira, and various other currencies. As of December 31, 1995, the Company had 21 forward currency exchange contracts which matured in 1996 and exchanged 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. Gains and losses on these foreign currency hedges are included in the carrying amount of the related assets and liabilities. At December 31, 1996 and 1995, deferred gains and losses on these foreign currency hedges are not material to the consolidated financial statements. -62- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 20. Derivative Financial Instruments and Fair Value of Financial Instruments (Continued) The Company entered 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 had two forward currency exchange contracts that matured in 1996 which exchanged 1 billion Belgian francs against approximately 34 million U.S. dollars to hedge its equity investments in certain of its European subsidiaries. At December 31, 1995, losses of $4 million on hedges of net investments in foreign subsidiaries were included in stockholders' equity. The Company 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). Gains of $4 million are included in other income in 1996 as part of the total gain on the sale. 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 combined interest rate currency swaps to hedge its equity investments in certain foreign subsidiaries to manage its exposure against fluctuations in foreign currency rates. As of December 31, 1996, the Company has three combined interest rate currency swaps maturing in 1999 to manage this exposure. These contracts exchange 921 million Belgian francs, 50 million French francs and 17 million Dutch guilders. Gains and losses on the currency swap portions of these contracts are included in stockholders' equity. The differential interest to be paid or received on the interest rate swap portion of these contracts is accrued as interest rates change and is recognized over the life of these agreements. The deferred gains and losses on the differential interest rate changes are not material to the consolidated financial statements in 1996. The Company enters into option contracts to hedge anticipated transactions with certain of its foreign subsidiaries. As of December 31, 1996, the Company has eight currency option contracts maturing in 1997 which hedge the 1997 royalty payments of the Company's European subsidiaries. As of December 31, 1996, the currency option contracts exchanged 446 million Belgian francs and 5 million British pounds against approximately 22 million U.S. dollars. As of December 31, 1995, the Company had eight currency option contracts which exchanged 526 million Belgian francs and 6 million British pounds against approximately 25 million U.S. dollars. Gains on the Company's hedges of these anticipated transactions are included as deferred revenue. At December 31, 1996 and 1995, deferred gains on option contracts are not material to the consolidated financial statements. -63- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 20. Derivative Financial Instruments and Fair Value of Financial Instruments (Continued) In 1994, the Company entered into two currency swap transactions to manage its exposure against foreign currency fluctuations on the principal amount of its guaranteed 9.814% Eurobonds (Note 2). During 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 a combined interest rate currency swap and a currency swap exchanging 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 life of the original hedge. At December 31, 1996 and 1995, $5 million and $7 million, respectively 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. As of December 31, 1996, the Company has one interest rate swap agreement to convert $50 million in equipment lease payments from a floating LIBOR to a fixed rate of 5.52%. The differential interest to be paid or received is accrued as interest rates change and is recognized over the life of the agreement. As of December 31, 1996, this amount was not material to the consolidated financial statements. As of December 1995, the Company had four interest rate swap agreements to reduce the interest rates on its fixed rate borrowings. These agreements, which were terminated in 1996, effectively converted an aggregate principal amount of $150 million of fixed rate long-term debt into variable rate borrowings. The $8 million gain recognized from the termination of these swaps is being amortized over the remaining life of the debt. As of December 31, 1996, the Company has one cash-settled treasury rate lock as a hedge against interest rate fluctuations on a lease commitment. This contract effectively locks in a treasury rate of 6.015% on a notional amount of $29 million. The differential interest to be paid or received at the contract termination date, March 1997, will be deferred and amortized over the life of the lease. -64- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 20. Derivative Financial Instruments and Fair Value of Financial Instruments (Continued) Other Financial Instruments with Off-Balance-Sheet Risk As of December 31, 1996 and 1995, the Company is contingently liable for guarantees of indebtedness owed by certain unconsolidated affiliates of $57 million and $44 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, 1996 and 1995, 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. 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. -65- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 20. Derivative Financial Instruments and Fair Value of Financial Instruments (Continued) The estimated fair values of the Company's financial instruments as of December 31, 1996 and 1995, which have fair values different than their carrying amounts, are as follows: 1996 1995 Carrying Fair Carrying Fair Amount Value Amount Value (In millions of dollars) Assets: Long-term notes receivable $ 23 $ 21 $ 24 $ 22 Liabilities: Long-term debt 818 881 794 875 Off-Balance-Sheet Financial Instruments - Unrealized gains Foreign currency swaps - 32 - 39 Interest rate swaps - 1 - 14 Combined interest rate currency swaps - 1 - -
As of December 31, 1996 and 1995, 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, 1996 and 1995, the Company has also entered into certain forward currency exchange option contracts and treasury rate locks, the fair values of which are not material to the consolidated financial statements. -66- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, 1996, approximately 157,900 asbestos personal injury claims were pending against the Company, of which 36,400 were received in 1996. The Company received approximately 55,900 such claims in 1995, and 29,100 in 1994. Many of the recent claims appear to be the product of mass screening programs and not to involve malignancies or other significant asbestos related impairment. The Company believes that at least 40,000 of the recent claims involve plaintiffs whose pulmonary function tests (PFTs) were improperly administered or manipulated by the testing laboratory or otherwise inconsistent with proper medical practice, and it is investigating a number of testing organizations and their methods. In 1996 the Company filed suit in federal court against the owners and operators of certain pulmonary function testing laboratories in the southeastern U.S. challenging such improper testing practices. This matter is now in active pre-trial discovery. During 1996 the Company was engaged in discussions with a group of approximately 30 leading plaintiffs' law firms to explore approaches toward resolution of its asbestos liability. The discussions involved the possible resolution of both pending claims and claims that may be filed in the future. The law firms involved in the talks agreed to refrain from serving any further asbestos claims on the Company unless they involved malignancies. This agreement, which expired as to certain of the firms on November 1, 1996, was extended until January 1, 1997, by firms representing a substantial majority of the cases historically filed by the group. This agreement may have impacted the number of cases received by the Company during the second, third and fourth quarters of 1996. -67- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 21. Contingent Liabilities (Continued) Through December 31, 1996, the Company had resolved (by settlement or otherwise) approximately 183,300 asbestos personal injury claims, including the dismissal in May 1996, for lack of medical proof, of approximately 15,000 maritime cases which named Owens Corning as a defendant, resulting in an 11,700 case reduction in the backlog after reduction for duplicate cases and cases previously settled. During 1994, 1995, and 1996, the Company resolved approximately 60,600 asbestos personal injury claims, over 99% without trial, and incurred total indemnity payments of $626 million (an average of about $10,300 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 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, 1996, the Company had approximately $329 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 primary level non-products insurance, the Company has a significant amount of unconfirmed potential non-products coverage with excess level carriers. For purposes of calculating the amount of insurance applicable to asbestos liabilities, the Company has estimated its probable recoveries in respect of this additional non-products coverage at $225 million, which amount was recorded in the second quarter of 1996. This coverage is unconfirmed and the amount and timing of recoveries from these excess level policies will depend on subsequent negotiations or proceedings. -68- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 21. Contingent Liabilities (Continued) Reserve Prior to the second quarter of 1996 the Company's financial statements included a reserve for the estimated cost associated with asbestos personal injury claims that may be received through the year 1999. Such financial statements did not include any provision for the cost of unasserted claims which might be received in years subsequent to 1999 because management was unable to predict the number of such claims and other factors which would affect the cost of such claims. Throughout 1996, the Company continued to review the feasibility of making provision for the cost of unasserted asbestos personal injury claims with respect to claims which may be received by the Company during and after the year 2000. In conducting such review the Company took into account, among other things, the effect of recent federal court decisions relating to punitive damages and the certification of class actions in asbestos cases, the pendency of the discussions with the group of plaintiffs' law firms referred to above, the results of its continuing investigations of medical screening practices of the kind at issue in the federal PFT lawsuit, recent developments as to the prospects for federal and state tort reform, the continued rate of case filings at historically high levels, additional information on filings received during the 1993- 1995 period and other factors. As a result of the review, the Company took a non-recurring, noncash charge to earnings of $1.1 billion in the second quarter of 1996. This charge represented the Company's estimate of the indemnity and defense costs associated with unasserted asbestos personal injury claims that may be received by the Company in years subsequent to 1999. The combined effect of the $1.1 billion charge and the $225 million probable additional non-products insurance recovery was an $875 million charge in the second quarter of 1996. 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 in the future, and its estimated insurance recoveries in respect of such claims are reported separately as follows: -69- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 21. Contingent Liabilities (Continued) December 31, December 31, 1996 1995 (In millions of dollars) Reserve for asbestos litigation claims Current $ 300 $ 250 Other 1,670 887 Total Reserve 1,970 1,137 Insurance for asbestos litigation claims Current 100 100 Other 454 330 Total Insurance 554 430 Net Asbestos Liability $ 1,416 $ 707
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 insurance, including the additional $225 million in non- products coverage 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. The Company believes that its estimate of liabilities and insurance will be sufficient to provide for the costs of all pending and future asbestos personal injury claims that involve malignancies or significant asbestos- related functional impairment. While such estimates cover unimpaired claims, the number and cost of unimpaired claims are much harder to predict and such estimates reflect the Company's belief that such claims have little or no value. The Company 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. -70- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 21. Contingent Liabilities (Continued) 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. 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. -71- OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 22. Quarterly Financial Information (Unaudited) Quarter First Second Third Fourth (In millions of dollars, except share data) 1996 Net sales $ 849 $ 956 $ 1,025 $ 1,002 Cost of sales 631 701 752 750 Gross margin $ 218 $ 255 $ 273 $ 252 Net income (loss) $ 39 $ (473) $ 80 $ 70 Net income per share: Primary net income per share $ .75 $ (9.19) $ 1.53 $ 1.32 Fully diluted net income per share $ .73 $ (9.19) $ 1.44 $ 1.25 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
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. -72- INDEX TO FINANCIAL STATEMENT SCHEDULES Number Description Page II Valuation and Qualifying Accounts and Reserves - for the years ended December 31, 1996, 1995, and 1994 73 -73- OWENS CORNING AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Column A Column B Column C Column D Column E Additions (1) (2) Balance at Charged to Charged to Balance Beginning Costs and Other at End Classification of Period Expenses Accounts Deductions of Period (In millions of dollars) FOR THE YEAR ENDED DECEMBER 31, 1996: Allowance deducted from asset to which it applies - Doubtful Accounts $ 19 $ 3 $ - $ 5(A) $ 17 FOR THE YEAR ENDED DECEMBER 31, 1995: Allowance deducted from asset to which it applies - Doubtful Accounts $ 16 $ 5 $ - $ 2(A) $ 19 FOR THE YEAR ENDED DECEMBER 31, 1994: Allowance deducted from asset to which it applies - Doubtful Accounts $ 16 $ 5 $ - $ 5(A) $ 16 Shown separately - Rebuilding furnaces 124 - - 124(B) -
Notes: (A) Uncollectible accounts written off, net of recoveries. (B) Effective January 1, 1994, the Company adopted the capital method for rebuilding furnaces. See Note 19 to the Consolidated Financial Statements. -74- EXHIBIT INDEX Exhibit Number Document Description (3) Articles of Incorporation and By-Laws. (i) Certificate of Incorporation of Owens Corning, as amended (incorporated herein by reference to Exhibit (3) to the Company's annual report on Form 10-K (File No. 1-3660) for 1995). (ii) By-Laws of Owens Corning, as amended (incorporated herein by reference to Exhibit (3) to the Company's annual report on Form 10-K (File No. 1-3660) for 1995). (4) Instruments Defining the Rights of Security Holders, Including Indentures. Credit Agreement, dated as of November 2, 1993, among Owens-Corning Fiberglas Corporation**, the Banks listed on Annex A thereto, and Credit Suisse, as Agent for the Banks (incorporated herein by reference to Exhibit (4) to the Company's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended September 30, 1993), as amended by Amendment No. 1 thereto (incorporated herein by reference to Exhibit (10) to the Company's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended June 30, 1994), by Amendment No. 2 and Amendment No. 3 thereto (incorporated herein by reference to Exhibit (4) to the Company's annual report on Form 10-K (File No. 1-3660) for 1995) and by Amendment No. 4 thereto (filed herewith). The Company agrees to furnish to the Securities and Exchange Commission, upon request, copies of all instruments defining the rights of holders of long- term debt of the Company where the total amount of securities authorized under each issue does not exceed ten percent of the Company's total assets. (10) Material Contracts. Credit Agreement, dated as of November 2, 1993, among Owens-Corning Fiberglas Corporation**, the Banks listed on Annex A thereto, and Credit Suisse, as Agent for the Banks (incorporated herein by reference to Exhibit (4) to the Company's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended September 30, 1993), as amended by Amendment No. 1 thereto (incorporated herein by reference to Exhibit (10) to the Company's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended June 30, 1994), by Amendment No. 2 and Amendment No. 3 thereto (incorporated herein by reference to Exhibit (4) to the Company's annual report on Form 10-K (File No. 1-3660) for 1995) and by Amendment No. 4 thereto (filed as Exhibit (4) to this annual report on Form 10-K). Rights Agreement, dated as of December 12, 1996 (incorporated herein by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A (File No. 1-3660), dated December 19, 1996). -75- EXHIBIT INDEX Exhibit Number Document Description The following documents are incorporated herein by reference to Exhibit (10) to the Company's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended June 30, 1996: * - Long-Term Performance Incentive Plan Terms Applicable to Certain Executive Officers. * - Long-Term Performance Incentive Plan Terms Applicable to Officers Other Than Certain Executive Officers. * - Stock Performance Incentive Plan, as amended. *Corporate Incentive Plan Terms Applicable to Certain Executive Officers (incorporated herein by reference to Exhibit (10) to the Company's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended March 31, 1996). The following documents are incorporated herein by reference to Exhibit (10) to the Company's annual report on Form 10-K (File No. 1-3660) for 1995: * - Corporate Incentive Plan Terms Applicable to Key Employees Other Than Certain Executive Officers. * - Agreement, dated December 2, 1994, with Christian L. Campbell. The following documents are incorporated herein by reference to Exhibit (10) to the Company's annual report on Form 10-K (File No. 1-3660) for 1994: * - Agreement, dated as of January 1, 1995, with William W. Colville. * - Agreement, dated June 16, 1993, with David W. Devonshire. *Director's Charitable Award Program (incorporated herein by reference to Exhibit (10) to the Company's quarterly report on form 10-Q (File No. 1-3660) for the quarter ended September 30, 1993). *Executive Supplemental Benefit Plan, as amended (incorporated herein by reference to Exhibit (10) to the Company's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended March 31, 1993). *Employment Agreement, dated as of December 15, 1991, with Glen H. Hiner (incorporated herein by reference to Exhibit (10) to the Company's annual report on Form 10-K (File No. 1-3660) for 1991), as amended by First Amending Agreement made as of April 1, 1992 (incorporated herein by reference to Exhibit (19) to the Company's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended June 30, 1992). *1987 Stock Plan for Directors, as amended (incorporated herein by reference to Exhibit (19) to the Company's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended March 31, 1992). -76- EXHIBIT INDEX Exhibit Number Document Description *Form of Key Management Severance Benefits Agreement (incorporated herein by reference to Exhibit (10) to the Company's annual report on Form 10-K (File No. 1-3660) for 1991). *Form of Directors' Indemnification Agreement (incorporated herein by reference to Exhibit (10) to the Company's annual report on Form 10-K (File No. 1- 3660) for 1989). The following documents are incorporated herein by reference to Exhibit (10) to the Company's annual report on Form 10-K (File No. 1-3660) for 1987: * - Officers Deferred Compensation Plan. * - Deferred Compensation Plan for Directors, as amended. (11) Statement re Computation of Per Share Earnings (filed herewith). (21) Subsidiaries of Owens Corning (filed herewith). (23) Consent of Arthur Andersen LLP (filed herewith). (27) Financial Data Schedule (filed herewith). (99) Additional Exhibits. Specimen Certificate of Common Stock of Owens Corning (filed herewith). * Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. ** Now known as Owens Corning EX-4 2 Exhibit (4) AMENDMENT NO. 4 dated as of December 31, 1996 to CREDIT AGREEMENT dated as of November 2, 1993 THIS AMENDMENT NO. 4 (this "Amendment"), dated as of December 31, 1996, among OWENS CORNING (formerly known as Owens- Corning Fiberglas Corporation), a Delaware corporation (the "Borrower"), the banks listed on the signature pages hereof (the "Banks"), and CREDIT SUISSE, as Agent (the "Agent") (with capitalized terms used herein and not otherwise defined herein having the meanings ascribed thereto in the Credit Agreement hereafter referred to), W I T N E S S E T H: WHEREAS, the Borrower, the Banks and the Agent have entered into a Credit Agreement dated as of November 2, 1993 (as amended from time to time, the "Credit Agreement"); WHEREAS, the Borrower has requested, and the Banks and the Agent have agreed to, the amendments to the Credit Agreement set forth in this Amendment; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Borrower, the Banks and the Agent agree as follows: 1. Amendments. Upon and after the Effective Date (as defined in section 2 hereof), the Credit Agreement shall be amended as follows: (a) Section 4.06 shall be amended by (i) inserting the words ", (g) so long as the Insurance Settlement Agreement shall remain in effect in substantially the same form as in effect on the Amendment No. 4 Effective Date, Debt of the Borrower under the Insurance Settlement Note in an aggregate principal amount not to exceed $100,000,000" between the words "thereto" and "and" at the end of clause (f) thereof and (ii) relettering the last clause thereof, presently clause (g), as clause (h). (b) Section 4.08 shall be deleted in its entirety and replaced with the following: "Section 4.08. Reserved." (c) Section 4.09 shall be deleted in its entirety and replaced with the following: "Section 4.09. Reserved." (d) Section 4.10(e) shall be amended by deleting "$20,000,000" and inserting in lieu thereof "$40,000,000". (e) Section 4.10(f) shall be amended by deleting the words "together with the Investments referred to in Section 4.08(h)". (f) Section 10.01 shall be amended by deleting the definitions of "Business Unit", "Investment" and "Money Market Investments" in their entirety. (g) Section 10.01 shall be further amended by deleting clause (c) in its entirety from the definition of "Jackson Transaction" and relettering the last clause thereof, presently clause (d), as clause (c). (h) Section 10.01 shall be further amended by inserting the following definitions in the appropriate alphabetical locations: "'Amendment No. 4 Effective Date' means the `Effective Date' as defined in Amendment No. 4 to this Agreement dated as of December 31, 1996." "'Insurance Settlement Agreement' means the Settlement Agreement and Mutual Release, dated as of September 5, 1995, among the Borrower and an insurer made known to the Banks, as in effect on the Amendment No. 4 Effective Date." "'Insurance Settlement Note' means the Promissory Note, dated September 15, 1995, issued by the Borrower pursuant to the Insurance Settlement Agreement in favor of an insurer made known to the Banks in the principal amount of $100,000,000." (i) Schedules 4.08(a) and 4.08(b) shall be deleted in their entirety. 2. Effective Date. This Amendment shall become effective as of the date first above written upon the date (the "Effective Date") that the Agent shall have received (i) executed counterparts of this Amendment from the Borrower, the Agent and the Majority Banks and (ii) a certified copy of the Insurance Settlement Agreement (as defined in Section 1(h) hereof). 3. Governing Law. This Amendment shall be construed in accordance with and governed by the law of the State of New York (without giving effect to its choice of laws principles). 4. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be deemed to be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 5. Reference to Agreement. From and after the Effective Date, each reference in the Credit Agreement to "this Agreement", "hereof", "hereunder" or words of like import, and all references to the Credit Agreement in any and all agreements, instruments, documents, notes, certificates and other writings of every kind and nature shall be deemed to mean the Credit Agreement as modified and amended by this Amendment. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective authorized officers as of the date first above written. OWENS CORNING (formerly known as Owens-Corning Fiberglas Corporation) By ______________________________ Name: Title: By ______________________________ Name: Title: CREDIT SUISSE, as Agent and as a Bank By ______________________________ Name: Title: ABN AMRO BANK, N.V., BY ABN AMRO NORTH AMERICA, INC., AS AGENT By ______________________________ Name: Title: By ______________________________ Name: Title: THE BANK OF NEW YORK By ______________________________ Name: Title: THE BANK OF NOVA SCOTIA By ______________________________ Name: Title: BARCLAYS BANK PLC By ______________________________ Name: Title: CHEMICAL BANK By ______________________________ Name: Title: CITIBANK, N.A. By ______________________________ Name: Title: THE FIRST NATIONAL BANK OF CHICAGO By ______________________________ Name: Title: THE FUJI BANK, LIMITED By ______________________________ Name: Title: MELLON BANK, N.A. By ______________________________ Name: Title: THE BANK OF TOKYO-MITSUBISHI, LTD., CHICAGO BRANCH By ______________________________ Name: Title: THE NORTHERN TRUST COMPANY By ______________________________ Name: Title: ROYAL BANK OF CANADA By ______________________________ Name: Title: THE TORONTO-DOMINION BANK By ______________________________ Name: Title: SUNTRUST BANK, ATLANTA (formerly Trust Company Bank) By ______________________________ Name: Title: By ______________________________ Name: Title: KREDIETBANK, N.V. By ______________________________ Name: Title EX-11 3 Exhibit (11) OWENS CORNING AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Primary: 1996 1995 1994 (In millions of dollars, except share data) Net income (loss) $ (284) $ 231 $ 159 Weighted average number of shares outstanding (thousands) 51,722 49,152 43,647 Weighted average common equivalent shares (thousands): Deferred awards - 16 21 Stock options using weighted average market price - 543 541 Primary weighted average number of common shares outstanding and common equivalent shares (thousands) 51,722 49,711 44,209 Primary per share amount $ (5.50) $ 4.64 $ 3.61 Fully Diluted: Net income (loss) $ (284) $ 238 $ 168 Weighted average number of shares outstanding (thousands) 51,722 49,152 43,647 Weighted average common equivalent shares (thousands): Deferred awards - 16 21 Stock options using the higher of average market price or market price at end of period - 566 559 Shares from assumed conversion of debt - 1,562 5,798 Shares from assumed conversion of preferred securities - 2,810 - Fully diluted weighted average number of common shares outstanding and common equivalent shares (thousands) 51,722 54,106 50,025 Fully diluted per share amount $ (5.50) $ 4.40 $ 3.35
EX-21 4 Exhibit (21) State or Other Jurisdiction Under the Laws of Subsidiaries of Owens Corning (2/28/97) Which Organized Barbcorp, Inc. Delaware Crown Manufacturing Inc. Canada Dansk-Svensk Glasfiber A/S Denmark Deutsche Owens-Corning Glasswool GmbH Germany Eric Company Delaware European Owens-Corning Fiberglas, S.A. Belgium Falcon Foam Corporation Delaware IPM, Inc. Delaware Kitsons Insulation Products Ltd. United Kingdom Knytex Company, LLC Delaware Lmp Impianti Srl Italy Matcorp, Inc. Delaware N.V. Owens-Corning S.A. Belgium OC Celfortec Inc. Canada O/C/FIRST CORPORATION Ohio OCFOGO, Inc. Delaware O.C. Funding B.V. The Netherlands O/C/SECOND CORPORATION Delaware OCW Acquisition Corporation (dba, Delsan) Delaware Owens-Corning A/S Norway Owens Corning Building Materials Espana S.A. Spain Owens-Corning Building Products (U.K.) Ltd. United Kingdom Owens Corning Canada Inc. Canada Owens-Corning Capital Holdings I, Inc. Delaware Owens-Corning Capital Holdings II, Inc. Delaware Owens-Corning Capital L.L.C. Delaware Owens Corning Cayman (China) Holdings Cayman Islands Owens-Corning Cayman Limited Cayman Islands Owens-Corning Changchun Guan Dao Company Ltd. PRC China Owens Corning Espana SA Spain Owens-Corning Fiberglas A.S. Limitada Brazil Owens-Corning Fiberglas Deutschland GmbH Germany Owens-Corning Fiberglas Espana, S.A. Spain Owens-Corning Fiberglas France S.A. France Owens-Corning Fiberglas (G.B.) Ltd. United Kingdom Owens-Corning Fiberglas (Italy) S.r.l. Italy Owens-Corning Fiberglas Norway A/S Norway Owens-Corning Fiberglas S.A. Uruguay Owens-Corning Fiberglas Sweden AB Sweden Owens-Corning Fiberglas Sweden Inc. Delaware Owens-Corning Fiberglas Technology Inc. Illinois Owens-Corning Fiberglas (U.K.) Ltd. United Kingdom Owens-Corning Finance (U.K.) plc United Kingdom Owens-Corning FSC, Inc. Barbados State or Other Jurisdiction Under the Laws of Subsidiaries of Owens Corning (2/28/97) Which Organized Owens-Corning Funding Corporation Delaware Owens-Corning (Guangzhou) Fiberglas Co., Ltd. PRC China Owens-Corning Holdings Limited Cayman Islands Owens Corning HT, Inc. Delaware Owens-Corning Isolation France S.A. France Owens Corning (Japan) Ltd. Japan Owens-Corning Ontario Holdings Inc. Canada Owens-Corning Overseas Holdings, Inc. Delaware Owens-Corning (Overseas) Management Limited Cyprus Owens Corning Pipe (Africa) Pvt. Ltd. Zimbabwe Owens Corning Polyfoam UK Ltd. United Kingdom Owens Corning Polypan SPA Italy Owens-Corning Real Estate Corporation Ohio Owens Corning (Shanghai) Fiberglas Co., Ltd. PRC China Owens Corning (Singapore) PTE Ltd. Singapore Owens Corning South Africa (Pty) Ltd. South Africa Owens-Corning Trading, Ltd. British Virgin Islands Owens-Corning (UK) Holdings Limited United Kingdom Owens-Corning Veil Netherlands B.V. The Netherlands Owens-Corning Veil U.K. Ltd. United Kingdom Palmetto Products, Inc. Delaware Scanglas Ltd. United Kingdom Soltech, Inc. Kentucky UC Industries, Inc. Delaware WD s.a. Belgium Western Fiberglass of Texas, Inc. Utah Willcorp, Inc. Delaware Wrexham A.R. Glass Ltd. United Kingdom EX-23 5 Exhibit (23) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated January 18, 1997, included in Owens Corning's annual report on Form 10-K for the year ended December 31, 1996, into the Company's previously filed Registration Statements, File Nos. 33-9563, 33-9986, 33-9987, 33-18262, 33-20997, 33-27209, 33-31687, 33- 48707, 33-57886, 33-60487 and 333-09367. ARTHUR ANDERSEN LLP Toledo, Ohio March 19, 1997 EX-27 6
5 This schedule contains summary financial information extracted from SEC form 10-K and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1996 DEC-31-1996 45 0 331 17 340 958 3,341 1,819 3,913 1,121 818 606 0 0 (1,090) 3,913 3,832 3,832 2,834 2,834 (1) 0 77 (581) (288) (284) 0 0 0 (284) (5.50) (5.50)
EX-99 7 EXHIBIT (99) COMMON STOCK COMMON STOCK NUMBER [Text shown ] SHARES NR [in this ] [section ] [appears in ] CORPORATE SEAL, DELAWARE [engraved ] OWENS CORNING [border bars] 1938 [Stock vignette graphic: semi globe, surmounted by eagle, flanked by 2 male figures] THIS CERTIFICATE IS CUSIP 69073F 10 3 TRANSFERABLE IN NEW SEE REVERSE FOR CERTAIN DEFINITIONS YORK AND TORONTO OWENS CORNING INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS IS TO CERTIFY THAT IS THE OWNER OF FULL-PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF 10c EACH OF THE COMMON STOCK OF Owens Corning (hereinafter referred to as the "Corporation") transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to all of the provisions of the Certificate of Incorporation, as amended, of the Corporation (a copy of which certificate is on file with the Transfer Agent), to all of which the holder by acceptance hereof assents. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the seal of the Corporation and the signatures of its duly authorized officers. Dated Countersigned and Registered: CHASEMELLON SHAREHOLDER SERVICES Transfer Agent and Registrar, BY /s/ /s/ Authorized Officer Secretary Chairman of the Board and Chief Executive Officer The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -as tenants in common UNIF GIFT MIN ACT- TEN ENT -as tenants by the entireties _____ Custodian_______ JT TEN -as joint tenants with right (Cust) (Minor) of survivorship and not as under Uniform Gifts tenants in common to Minors Act__________ (State) Additional abbreviations may also be used though not in the above list. For value received,____________hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE __________________________________________________________________ __________________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________ __________________________________________________________________ Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated____________________ X_______________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. [Notice appears vertically on right side of certificate] This certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Rights Agreement between the Company and The Chase Manhattan Bank dated as of December 12, 1996 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Company will mail to the holder of this certificate a copy of the Rights Agreement without charge promptly after receipt of a written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights beneficially owned by an Acquiring Person or any Associate or Affiliate thereof (as such terms are defined in the Rights Agreement) will become null and void. The Rights shall not be exercisable, and shall be void so long as held, by a holder in any jurisdiction where the requisite qualification for the issuance to such holder, or the exercise by such holder of the Rights in such jurisdiction, shall not have been obtained or be obtainable. -----END PRIVACY-ENHANCED MESSAGE-----