UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1994 Commission File Number 1-7518
DOW CORNING CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-0495575
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 West Salzburg Road, Midland, Michigan 48686-0994
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 517-496-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
Number of shares outstanding of common stock: 2,500,000
The registrant qualifies under General Instruction H(1)(a) and (b) of Form
10-Q and is filing this Form using the reduced disclosure format described in
General Instruction H(2). The registrant is a corporation 50% of the common
stock of which is held by Corning Incorporated and 50% of the common stock of
which is held by Dow Holdings Inc., a wholly-owned subsidiary of The Dow
Chemical Company.
<PAGE>2
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
- - -----------------------------
Following is an index of the consolidated financial statements of Dow
Corning Corporation included as a part of this report.
Page
----
Consolidated balance sheets at March 31, 1994 and
December 31, 1993 3
Consolidated statements of operations and retained
earnings for the three months ended March 31, 1994
and 1993 4
Consolidated statements of cash flow for the three
months ended March 31, 1994 and 1993 5
Notes to consolidated financial statements 6
The consolidated financial statements include the accounts of Dow Corning
Corporation and all subsidiaries.
The information furnished reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the unaudited
interim periods. All such adjustments are of a normal, recurring nature.
<PAGE>3
DOW CORNING CORPORATION
-----------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(in millions of dollars except share data)
March 31, December 31,
ASSETS 1994 1993
------ --------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 260.8 $ 263.0
Short-term investments 1.0 0.9
Accounts and notes receivable (less
allowance for doubtful accounts of
$9.8 in 1994 and $8.4 in 1993) 461.8 373.0
Inventories 300.6 285.6
Other current assets 148.9 146.7
-------- --------
Total current assets 1,173.1 1,069.2
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost 2,775.1 2,710.7
Less - accumulated depreciation (1,600.8) (1,544.6)
-------- --------
1,174.3 1,166.1
-------- --------
OTHER ASSETS 1,064.4 1,027.0
-------- --------
$3,411.8 $3,262.3
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 283.8 $ 267.2
Accounts payable 132.9 147.1
Other current liabilities 341.5 356.3
-------- --------
Total current liabilities 758.2 770.6
-------- --------
LONG-TERM DEBT 370.0 314.7
-------- --------
DEFERRED TAXES AND OTHER LIABILITIES:
Deferred income taxes 18.7 14.6
Other liabilities 1,457.0 1,411.2
-------- --------
1,475.7 1,425.8
-------- --------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 107.6 102.8
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $5 par value (2,500,000
shares authorized and outstanding) 12.5 12.5
Retained earnings 641.5 604.3
Cumulative translation adjustment 46.3 31.6
-------- --------
Stockholders' equity 700.3 648.4
-------- --------
$3,411.8 $3,262.3
======== ========
<PAGE>4
DOW CORNING CORPORATION
-----------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
-----------------------------------------------------------
(in millions of dollars except share data)
Three months ended March 31,
----------------------------
1994 1993
------ ------
NET SALES $509.1 $490.8
OPERATING COSTS AND EXPENSES:
Manufacturing cost of sales 331.3 329.6
Marketing and administrative expenses 93.3 99.0
------ ------
424.6 428.6
------ ------
OPERATING INCOME 84.5 62.2
OTHER INCOME (EXPENSE):
Interest income, currency gains (losses)
and other, net (2.0) (2.8)
Interest expense (16.1) (8.5)
------ ------
INCOME BEFORE INCOME TAXES 66.4 50.9
Income taxes 25.9 16.8
Minority interests' share in income 3.3 3.4
------ ------
NET INCOME (1994 - $14.88 per share; 1993 -
$12.28 per share) 37.2 30.7
Retained earnings at beginning of period 604.3 891.3
------ ------
Retained earnings at end of period $641.5 $922.0
====== ======
<PAGE>5
DOW CORNING CORPORATION
-----------------------
CONSOLIDATED STATEMENTS OF CASH FLOW
------------------------------------
(in millions of dollars)
Three months ended March 31,
----------------------------
1994 1993
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37.2 $ 30.7
Depreciation and amortization 44.8 46.9
Other, net 12.2 10.5
Changes in operating assets and liabilities (127.6) (64.6)
------- ------
Cash provided by (used for) operating
activities (33.4) 23.5
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (36.2) (43.8)
Other, net (0.3) 1.0
------- ------
Cash used for investing activities (36.5) (42.8)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 55.8 20.0
Payments on long-term debt (19.0) (16.5)
Net change in short-term borrowings 31.0 49.6
------- ------
Cash provided by financing activities 67.8 53.1
------- ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (0.1) 0.2
------- ------
CHANGES IN CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash
equivalents (2.2) 34.0
Cash and cash equivalents at beginning of
period 263.0 8.4
------- ------
Cash and cash equivalents at end of
period $ 260.8 $ 42.4
======= ======
<PAGE>6
DOW CORNING CORPORATION
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(in millions of dollars except where noted)
NOTE 1 - INCOME TAXES
- - ---------------------
The provision for income taxes reflects the Company's estimated annual
effective tax rate.
NOTE 2 - INVENTORIES
- - --------------------
Inventory values are primarily determined by the last-in, first-out method
using the dollar value concept. It is therefore not practical to separate
inventory value by classification.
NOTE 3 - NEW ACCOUNTING STANDARDS
- - ---------------------------------
In January 1994, the Company adopted Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Post-employment Benefits." This
new standard requires, among other things, that the expected costs of benefits
paid to former or inactive employees after employment but before retirement be
recognized when the benefits are earned or become payable when certain
conditions are met rather than the previous method which recognized these
costs when they were paid. The adoption of this new standard did not
materially impact the Company's consolidated financial condition or results of
operations.
NOTE 4 - PER SHARE COMPUTATIONS
- - -------------------------------
Per share calculations are based on 2,500,000 shares outstanding during
all periods.
NOTE 5 - CONTINGENCIES
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Breast Implant Business
- - -----------------------
Prior to January 6, 1992, the Company, directly and through its
wholly-owned subsidiary, Dow Corning Wright Corporation, was engaged in the
manufacture and sale of silicone gel breast implants. As part of a review
process initiated in 1991 by the United States Food and Drug Administration
(FDA) of Premarket Approval Applications (PMAA) for silicone gel breast
implants, on January 6, 1992, the FDA asked breast implant producers and
medical practitioners to voluntarily halt the sale and use of silicone gel
breast implants pending further review of the safety and effectiveness of such
devices, and the Company complied with the FDA's request and suspended
shipments of implants. Subsequently, the Company announced that it would not
resume the production or sale of silicone gel breast implants and that it
would withdraw its PMAA for silicone gel breast implants from consideration by
the FDA. The Company also commenced a program to provide up to $1,200 (in
whole dollars) per patient to support medical costs of removing the Company's
silicone gel breast implants from women who have a documented medical need to
have their implants removed and who cannot afford the procedure. As of
April 15, 1994, approximately 3,200 women have made use of this program.
<PAGE>7
NOTE 5 - CONTINGENCIES (Continued)
- - ----------------------
Since late 1991, there has been considerable publicity associated with the
breast implant controversy, and the Company experienced a substantial increase
in the number of lawsuits against the Company relating to breast implants. As
of April 15, 1994, the Company has been named, often together with other
defendants, in approximately 14,500 pending breast implant products liability
lawsuits filed by or on behalf of individuals who claim to have or have had
silicone gel breast implants. Many of these cases involve multiple
plaintiffs. In addition, there were 45 purported breast implant products
liability class action lawsuits which had been filed against the Company as of
April 15, 1994. It is anticipated that the Company will be named as a
defendant in additional breast implant lawsuits in the future. The typical
alleged factual bases for these lawsuits include allegations that the
plaintiffs' breast implants caused specified ailments, including, among other
things, autoimmune disease, scleroderma, systemic disorders, joint swelling
and chronic fatigue. The Company is sometimes named as the manufacturer of
silicone gel breast implants, and other times the Company is named as the
supplier of silicone raw materials to other breast implant manufacturers. The
Company is vigorously defending this litigation asserting, among other
defenses, that there is no causal connection between silicone breast implants
and the ailments alleged by the plaintiffs in these cases.
During 1992 and 1993, consolidation of a substantial number of breast
implant lawsuits for pretrial purposes occurred in federal court (U.S.
District Court for the Northern District of Alabama, the "Court") and various
state courts where a substantial number of breast implant lawsuits have been
filed. As of March 31, 1994, substantially more than half of all breast
implant cases have been consolidated for pretrial purposes at the federal and
state levels. The Company anticipates that current and future breast implant
lawsuit consolidations will result in a reduction of litigation defense costs.
On September 9, 1993, the Company announced that representatives of
plaintiffs and defendants involved with silicone breast implant litigation had
developed a "Statement of Principles for Global Resolution of Breast Implant
Claims" (the "Statement of Principles"). The Statement of Principles
summarizes a proposed claims based structured resolution of claims arising out
of breast implants which have been or could be asserted against various
implant manufacturers, suppliers, physicians and hospitals. Since the
announcement of the Statement of Principles, the Company has negotiated with
other potential parties to reach a settlement agreement (as described below)
similar in concept to the Statement of Principles. As a part of this process,
the Company has participated in negotiations with other key funding
participants (as defined below) to reach an agreement regarding, among other
things, the respective contribution of each of these funding participants to
the settlement fund.
On March 23, 1994, the Company, along with other defendants and
representatives of breast implant litigation plaintiffs, signed a Breast
Implant Litigation Settlement Agreement (the "Settlement Agreement"). This
Settlement Agreement was approved by the Company's Board of Directors on
March 28, 1994. Under the Settlement Agreement, as amended, industry
participants (the "Funding Participants") would contribute up to approximately
$4.2 billion over a period of more than thirty years to establish several
special purpose funds. A related funding agreement specifies the amount that
each Funding Participant would contribute to the settlement fund. The
Settlement Agreement, if implemented, provides for a claims based structured
resolution of claims arising out of silicone breast implants, and defines the
circumstances under which payments from the funds would be made. The
Settlement Agreement includes provisions for (a) class membership and the
ability of plaintiffs to opt out of the class, (b) the establishment of
defined funds for medical diagnostic/evaluation procedures, explantation,
ruptures, compensation for specific diseases and
<PAGE>8
NOTE 5 - CONTINGENCIES (Continued)
- - ----------------------
administration, (c) payment terms and timing and (d) claims administration.
The Settlement Agreement defines periods during which breast implant
plaintiffs may elect not to settle their claims by way of the Settlement
Agreement and continue their individual breast implant litigation against
manufacturers and other defendants (the "Opt Out Plaintiffs"). In certain
circumstances, if any defendant who is a Funding Participant considers the
number of Opt Out Plaintiffs maintaining lawsuits against such defendant to be
excessive, such defendant may decide to exercise the option to withdraw from
participation in the Settlement Agreement.
On April 18, 1994, the Court issued notice of the Settlement Agreement to
breast implant plaintiffs eligible to participate in the settlement
("Settlement Class Members"). This notice begins a 60-day period during which
Settlement Class Members have the ability to become initial Opt Out
Plaintiffs. A Court supervised fairness review process of the Settlement
Agreement must be completed before the Settlement Agreement can be
implemented. If the Court grants final approval of the Settlement Agreement,
claims can then be validated. The Court's final approval of the Settlement
Agreement is subject to appeal.
Management believes that the Settlement Agreement is a responsible and
cost efficient approach to resolving breast implant litigation against the
Company. Management believes that the Company's participation in the
Settlement Agreement will be viable if, among other things, (a) adequate
insurance support is provided to Funding Participants by their insurance
carriers and (b) substantially all plaintiffs participate in the settlement.
Notwithstanding the limited information available regarding most of the
claims asserted against the Company and the uncertainties related to the
eventual resolution of these claims, the Company has made efforts in the past
to reflect anticipated financial consequences to the Company of the breast
implant situation. In December 1991, the Company recorded a $25.0 pretax
charge associated with the breast implant business to cover implant
inventories, dedicated equipment and costs associated with confirming the
safety of the product. In the first quarter of 1992, the Company recorded
$24.0 of pretax costs related to silicone gel breast implant litigation,
claims and related matters. In the second quarter of 1992, the Company
recorded a $45.0 pretax charge associated with its discontinued breast implant
products. This charge represented management's best estimate at the time of
future costs for ongoing research associated with breast implants; continued
communication with patients, the medical community and other interested
parties; the retrieval of breast implant inventories from the Company's
medical customers; and various legal defense matters.
On January 14, 1994, the Company announced a pretax charge of $640.0 for
the fourth quarter of 1993. This charge included the Company's best current
estimate of its potential liability for breast implant litigation based on
current settlement negotiations, and also included provisions for legal,
administrative, and research costs related to breast implants, for a total of
$1.24 billion, less expected insurance recoveries of $600.0. The amounts
recorded by the Company for the estimated cost of settling breast implant
litigation and claims and anticipated insurance reimbursements were determined
on a present-value basis using a discount rate of 7.0% over a period of more
than 30 years.
<PAGE>9
NOTE 5 - CONTINGENCIES (Continued)
- - ----------------------
Amounts recorded in the accompanying balance sheets as a result of the
provisions described above are summarized in the following table:
March 31, December 31,
1994 1993
--------- ------------
Implant Insurance Receivable
Shown in other assets $ 695.9 $ 663.7
Implant Reserve
Shown in other current liabilities 131.7 158.7
Shown in other liabilities 1,144.3 1,100.0
Implant Deferred Tax Asset
Shown in other current assets 46.1 55.5
Shown in other assets 178.7 175.0
The amounts shown above are adjusted as insurance proceeds are received,
as payments are made against reserves, and as imputed interest is recorded on
discounted amounts. The implant insurance receivable of $695.9 shown above is
approximately $1.2 billion on an undiscounted basis. The implant reserve of
$1,276.0 shown above is approximately $2.2 billion on an undiscounted basis.
Differences between discounted amounts recorded in the financial statements
and undiscounted amounts represent imputed interest to be recorded over the
life of the liability. Cash payments net of insurance recoveries are expected
to be $131.7 in 1994, ($42.4) in 1995, $50.0 in 1996, $275.0 in 1997, $79.4 in
1998, and $495.9 thereafter.
The Company believes that a substantial portion of the indemnity,
settlement and defense costs related to breast implant lawsuits and claims
will be covered by the Company's products liability insurance subject to
deductibles, exclusions, retentions and policy limits. The Company's insurers
have reserved and may reserve the right to deny coverage, in whole or in part,
due to differing theories regarding, among other things, the applicability of
coverage and when coverage may attach. Also, a number of the breast implant
lawsuits pending against the Company request punitive damages and compensatory
damages arising out of alleged intentional torts. Depending on policy
language, applicable law and agreements with carriers, any such damages which
may be awarded pursuant to such lawsuits may or may not be covered, in whole
or in part, by insurance.
As of March 31, 1994, the Company had a substantial amount of unexhausted
claims-made insurance coverage with respect to lawsuits and claims commencing
1986 and thereafter. For lawsuits and claims involving implant dates prior to
1986, the Company believes substantial coverage exists under a number of
primary and excess occurrence policies having various limits. Because defense
costs and disposition of particular breast implant lawsuits and claims may be
covered, in whole or in part, both by the claims-made coverage issued from and
after 1986, and one or more of the occurrence policies issued prior to 1986,
determination of aggregate insurance coverage depends on, among other things,
how defense and indemnity costs are allocated among the various policy
periods.
<PAGE>10
NOTE 5 - CONTINGENCIES (Continued)
- - ----------------------
Discussions among the Company and its primary insurance carriers have
occurred and are continuing with a view toward reaching an agreement as to the
allocation of costs of breast implant litigation among the various insurance
carriers issuing products liability insurance policies to the Company relative
to breast implants and other products. The Company became dissatisfied with
the progress being made toward reaching such an agreement. Consequently, the
Company commenced a lawsuit against certain of these insurance carriers
seeking, among other things, a judicial enforcement of the obligations of the
insurance carriers under certain of these insurance policies (for additional
information regarding this lawsuit, see Legal Proceedings, Part II, Item 1).
Management continues to believe that it is probable that the Company will
recover from its insurance carriers a substantial amount of breast implant
related payments which have been or may be made by the Company. In reaching
this belief, the Company has analyzed its insurance policies, considered its
history of coverage and insurance reimbursement for these types of claims, and
consulted with knowledgeable third parties with significant experience in
insurance coverage matters. The amount recorded by the Company as an
insurance receivable is substantially less than the amount for which the
Company will seek reimbursement if a settlement proceeds.
Management believes that the Company will generate the financial
liquidity required to meet ongoing operational needs and to participate in the
Settlement Agreement. This belief is based on, among other things,
management's estimate of future operational cash flows, its assessment that
recovery of substantial amounts of settlement obligations from its insurance
carriers is probable, and its evaluation of current financing arrangements.
The Implant Reserves less the Implant Insurance Receivable reflects
management's best current estimate of the cost of ultimate resolution of
breast implant litigation. As the Settlement Agreement process continues,
additional circumstances may develop which could affect the reliability and
precision of the current estimate. Those circumstances include, among other
things, the number and extent of claims not covered by a settlement, the
amount and timing of insurance recoveries and the allocation of insurance
payments among the Company's insurance carriers, and the possibility of
resolution of the litigation through alternatives to the Settlement Agreement.
As additional facts and circumstances develop, the estimate may be revised, or
provisions may be necessary to reflect any additional costs of resolving
breast implant litigation and claims not covered by a settlement. Future
charges resulting from any revisions or provisions, if required, could have a
material adverse effect on Dow Corning's financial position or results of
operations in the period or periods in which such charges are recorded.
Environmental Matters
- - ---------------------
The Company has been advised by the United States Environmental
Protection Agency (EPA) or by similar state regulatory agencies that the
Company, together with others, is a Potentially Responsible Party (PRP) with
respect to a portion of the cleanup costs and other related matters involving
a number of abandoned hazardous waste disposal facilities. Management
believes that there are 13 sites at which the Company may have some liability,
although management currently expects to settle the Company's liability for a
majority of these sites for de minimis amounts. Based upon preliminary
estimates by the EPA or the PRP groups formed with respect to these sites, the
aggregate liabilities for all PRPs at these sites at which management
currently believes the Company may have more than the de minimis liability is
$79.3. Management cannot currently estimate the aggregate liability for all
PRPs at those sites at which management expects the Company has a de minimis
liability.
<PAGE>11
NOTE 5 - CONTINGENCIES (Continued)
- - ----------------------
The Company records a charge to earnings for sites when it is probable
that a liability has been incurred and the Company's costs can be reasonably
estimated. The Company has accrued for its estimated liabilities with respect
to these sites; such accrual is substantially less than the estimated
aggregate liability for all PRPs at these sites as it reflects the Company's
estimated share of total remaining cleanup costs. While there are a number of
uncertainties with respect to the Company's estimate of its ultimate liability
for cleanup costs at these sites, it is the opinion of the Company that these
matters will not materially adversely affect the Company's consolidated
financial position or results of operations. This opinion is based upon the
number of identified PRPs at each site, the number of such PRPs that are
believed by management to be solvent, and the portion of waste sent to the
sites for which management believes the Company might be held responsible
based on available records.
Receivables Sold
- - ----------------
The Company has sold certain receivables subject to recourse provisions.
The Company has agreements in place whereby it may sell on an ongoing basis
fractional ownership interests in a designated pool of U.S. trade receivables,
with limited recourse, in amounts up to $65.0. As of March 31, 1994, the
Company had no amounts outstanding under these agreements. In addition, $2.9
of receivables had been sold at March 31, 1994 under other agreements.
DOW CORNING FIRE STOP(R)
- - ------------------------
In May 1993, the Company began communicating additional information and
test results to the owners of buildings which contain DOW CORNING FIRE STOP(R)
Intumescent Wrap Strip 2002, recommending that the owners conduct a review
with a qualified Fire Protection Engineer to determine whether remedial action
is warranted, including possible replacement of the product due to uncertainty
about its ability to perform consistently and predictably over time. DOW
CORNING FIRE STOP(R) Intumescent Wrap Strip 2002 is a non-silicone,
resin-based fire stop product which is installed in buildings as a passive
fire protection product. The Company ceased the sale of this product in 1992.
The potential liability associated with replacement of this product cannot be
estimated at this time. However, management believes that the ultimate
resolution of this issue will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
The consolidated interim financial statements should be read in
conjunction with the consolidated financial statements as of and for the year
ended December 31, 1993.
<PAGE>12
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS
- - ----------------------------------------
(in millions of dollars)
Results of Operations
- - ---------------------
First quarter net sales increased $18.3 or 3.7% over levels reported for
the comparable period in 1993. The increase for the first three months of
1994 is attributable to higher sales volumes, particularly in Europe, offset
slightly by lower selling prices.
Manufacturing cost of sales, as a percent of net sales, was 65.1% in the
first quarter of 1994 as compared to 67.2% for the same period in 1993. This
decrease is principally attributable to lower personnel and depreciation
costs.
Marketing and administrative expenses, as a percent of net sales, were
18.3% for the first quarter of 1994 and 20.2% for the first quarter of 1993.
This decrease is also attributable to lower personnel costs combined with
lower variable selling costs.
Interest expense was up relative to the prior year as a result of $7.0 in
imputed interest recognized on the net discounted implant liability (as
further discussed in Note 5 of Notes to Consolidated Financial Statements) and
higher average levels of debt.
The effective tax rate in the first quarter of 1994 was 39%, compared to
33% for the same period in 1993. The higher effective rate in 1994 is due to
lower anticipated foreign tax credits.
Credit Availability
- - -------------------
During 1993, the Company terminated a revolving credit agreement which
was in place at December 31, 1992, and replaced it with a revolving credit
agreement with 16 domestic and foreign banks which provides for borrowings on
a revolving credit basis until November 1997 of up to $400.0. At March 31,
1994, there was $150.0 outstanding under this facility. The Company also has
agreements with several banks whereby it may borrow up to $294.8 under
short-term lines of credit. The Company pays a fixed service fee for certain
of these facilities in lieu of any compensating cash balances. Included in
short-term borrowings are amounts outstanding under these facilities at
March 31, 1994, of $116.6.
Various debt agreements, the Revolving Credit Agreement included, contain
various debt restrictions and provisions relating to property liens, sale and
leaseback transactions, debt to tangible capital ratio, and funds flow. In
addition, the Revolving Credit Agreement provides the participating banks with
the right, subject to a majority vote, to demand payment in the event that
uninsured breast implant litigation expenditures and judgments exceed certain
limits. These limits have been exceeded due to the financial obligations of
the Company under the Settlement Agreement (as described in Note 5 of Notes to
Consolidated Financial Statements). However, the participating banks have not
exercised their right to demand payment. Based on continuing discussions with
the participating banks regarding the Company's obligations under the
Settlement Agreement, and absent any material changes in circumstances,
management believes that such banks will not exercise their right to demand
payment under the terms of the Revolving Credit Agreement.
<PAGE>13
Under the provisions of the Revolving Credit Agreement, the Company is
subject to certain restrictions as to the payment of dividends. The amount of
the restriction is based on a formula which considers, among other things, the
income before income taxes for the most recent fiscal year. Based on the
computation completed for the year ended December 31, 1993, the Company is
restricted from issuing dividends in 1994.
Management believes that, in light of the Company's positive operating
cash flow, the credit facilities currently in place are adequate to meet the
short-term financing needs of the Company. Management also believes that the
Company will generate the financial liquidity required to meet ongoing
operational needs and to participate in the breast implant litigation
Settlement Agreement (as described in Note 5 of Notes to Consolidated
Financial Statements). This belief is based on, among other things,
management's estimate of future operational cash flows, its assessment that
recovery of substantial amounts of settlement obligations from its insurance
carriers is probable, and its evaluation of current financing arrangements.
Contingencies
- - -------------
For information regarding contingencies, including a discussion of breast
implant litigation and the Company's environmental liabilities, see Note 5 of
Notes to Consolidated Financial Statements.
<PAGE>14
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
- - --------------------------
ENVIRONMENTAL MATTERS
The Company has agreed to participate in the Toxic Substances Control Act
(TSCA) Section 8(e) compliance audit program. The Company expects to pay a
civil penalty which will exceed $100,000. While the exact amount of the civil
penalty is not yet known, the United States Environmental Protection Agency
(EPA) has put a limit of $1 million on any civil penalty to be paid.
BREAST IMPLANT LITIGATION
Breast Implant Products Liability Purported Class Action Lawsuits
- - -----------------------------------------------------------------
As of April 15, 1994, the Company had been named, generally as one of
several defendants, in 45 purported breast implant products liability class
action lawsuits filed on behalf of individuals who claim to have or have had
silicone gel breast implants. Of these lawsuits, 31 have been brought in
various Federal District Courts, 12 have been brought in various state courts,
and 2 have been brought in courts in Canada.
Among the Federal District Court class action lawsuits, 27 were filed in
1992, 3 were filed in 1993, and 1 was filed in the first quarter of 1994.
These cases have been filed in the Federal District Courts for the Northern
District of Alabama, the District of Arizona, the Northern District of
California (3 cases), the Central District of California, the Southern
District of California, the District of Hawaii, the Northern District of
Illinois, the Eastern District of Kentucky, the Northern District of
Louisiana, the Eastern District of Michigan, the District of Minnesota
(2 cases), the Eastern District of New York (2 cases), the Northern District
of Ohio (3 cases), the Southern District of Ohio (7 cases), the Eastern
District of Pennsylvania, the Western District of Pennsylvania (2 cases), the
District of Utah and the Eastern District of Virginia. In the purported class
action case filed in the Federal District Court for the Eastern District of
Virginia, all proceedings have been stayed and class certification has been
denied. All of these federal purported breast implant products liability
class action lawsuits have been transferred to the Federal District Court for
the Northern District of Alabama for discovery purposes (see "Consolidation of
Breast Implant Products Liability Lawsuits" below).
In one of the federal class actions filed in the Southern District of
Ohio (later transferred to the Northern District of Alabama), a class action
was conditionally certified on behalf of all breast implant recipients in the
United States (and their spouses). The Federal District Court in Alabama has
announced that this certification order will be reconsidered and could be
confirmed, modified, or vacated. In a case filed in the first quarter of 1994
in the Northern District of Alabama, the Judge has conditionally certified a
non-mandatory worldwide class action and has given preliminary approval to a
proposed class action settlement involving certain manufacturers (including
the Company) of breast implants and suppliers. In the class action filed in
the District of Utah, a class certification motion has been denied. In the
class action filed in the Eastern District of Michigan, the Court was asked to
certify a class action on behalf of breast implant recipients residing outside
the United States; this motion was denied, but class certification may be
sought again in the future.
<PAGE>15
ITEM 1. LEGAL PROCEEDINGS (Continued)
- - --------------------------
Among the 12 purported class action lawsuits brought in various state
courts, 9 were filed in 1992 and 3 were filed in the first quarter of 1994.
These cases have been filed in the following state courts: The Dade County,
Florida Eleventh Judicial Circuit Court; the District Court for the Third
Judicial District of Utah; the Philadelphia County, Pennsylvania Court of
Common Pleas; the Dauphin County, Pennsylvania Court of Common Pleas; the Cook
County, Illinois Circuit Court (2 cases); the Marion County, Indiana Superior
Court; the Civil District Court for the Parish of Orleans, Louisiana; the
District Court for Douglas County, Nebraska; the Second Judicial District
Court for the County of Bernalillo, New Mexico; and the Circuit Court for
Multnomah County, Oregon (2 cases). In 5 of these cases (the 2 cases in the
Cook County, Illinois Circuit Court, the case in the District Court for the
Third Judicial District of Utah, the case in the Philadelphia County,
Pennsylvania Court of Common Pleas and the case in the Dauphin County,
Pennsylvania Court of Common Pleas), either the purported class action claims
have been dismissed or class certification has been denied. The complaint
filed in the Second Judicial District Court for the County of Bernalillo, New
Mexico was dismissed. The case filed in Douglas County, Nebraska and one of
the cases filed in Multnomah County, Oregon were removed from state to federal
court and were then transferred to the Federal District Court for the Northern
District of Alabama; the purported class action claims in the Douglas County,
Nebraska case have been withdrawn. In the case filed in the Civil District
Court for the Parish of Orleans, Louisiana, the Court certified a class of
women with silicone breast implants who either reside in or received their
implants in the State of Louisiana; this order certifying a class action has
been upheld on appeal. State purported class action cases in Florida,
Indiana, and Louisiana remain active.
A purported class action was filed in Ontario, Canada during 1993 against
Dow Corning Canada, Inc., a wholly-owned subsidiary of the Company. The Judge
has entered an order certifying a class of breast implant recipients in the
Province of Ontario, Canada; the Ontario Court of Appeals has declined to hear
an appeal from this class certification order. In 1993, a petition was filed
in Montreal, Canada seeking authorization to institute a class action on
behalf of a purported class of breast implant recipients in the Province of
Quebec, Canada, against Dow Corning Corporation and Dow Corning Canada, Inc.
The court has not yet decided whether to authorize such a class action.
The typical alleged factual bases for these lawsuits include allegations
that the plaintiffs' breast implants caused specified ailments, including,
among other things, autoimmune disease, scleroderma, systemic disorders, joint
swelling and chronic fatigue. The Company is sometimes named as the
manufacturer of silicone gel breast implants, and other times the Company is
named as the supplier of silicone materials to other breast implant
manufacturers.
Plaintiffs in these cases typically seek relief in the form of monetary
damages, often in unspecified amounts, and have also asked for certain types
of equitable relief such as requiring the Company to fund the removal of the
breast implants of the class members, to fund medical research into any
ailments caused by silicone gel breast implants and to fund periodic medical
checkups for the class members. The purported federal class action in the
Federal District Court for the Eastern District of Pennsylvania claims
monetary damages of more than $75,000 for each plaintiff. One of the
purported federal class actions in the Federal District Court for the Southern
District of Ohio claims monetary damages of more than $50,000 for each
plaintiff. One of the purported federal class actions in the Federal District
Court for the District of Minnesota claims an unspecified amount of monetary
damages, but claims less than $50,000 for each plaintiff on fraud claims. The
purported federal class action in the Federal District Court for the Southern
District of California claims more than $50,000 for each plaintiff. One of
the purported federal class actions in the Federal District Court for the
Western District of Pennsylvania claims damages of $50,000
<PAGE>16
ITEM 1. LEGAL PROCEEDINGS (Continued)
- - --------------------------
compensatory and $50,000 punitive damages for each plaintiff. Each other
purported federal class action specifies monetary damages in an unspecified
amount except that they claim the minimal jurisdictional amount. The
purported state class action in the Dade County, Florida Eleventh Judicial
Circuit Court claims $500,000,000 in punitive damages and unspecified
compensatory damages for the class. Each other purported state class action
specifies monetary damages in an unspecified amount except that they claim the
minimal jurisdictional amounts. The purported class action in Ontario, Canada
claims $80,000 in monetary damages for each named plaintiff and unspecified
monetary damages for other members of the purported class.
Monetary damages claimed in these cases in the aggregate may be
substantial; however, the Company does not consider the monetary damages
claimed to be a realistic measure of the Company's ultimate resolution costs.
Individual Breast Implant Products Liability Lawsuits
- - -----------------------------------------------------
As of April 15, 1994, the Company has been named, often along with other
defendants, in approximately 14,500 individual breast implant products
liability lawsuits filed in federal courts and state courts in many different
jurisdictions; many of these cases involve multiple plaintiffs. The typical
alleged factual bases for these lawsuits include allegations that the
plaintiffs' breast implants caused specified ailments, including, among
others, autoimmune disease, scleroderma, systemic disorders, joint swelling
and chronic fatigue. The Company is sometimes named as the manufacturer of
silicone gel breast implants, and other times the Company is named as the
supplier of silicone raw materials to other breast implant manufacturers.
Plaintiffs in these cases typically seek relief in the form of monetary
damages, often in unspecified amounts. In those individual breast implant
cases where management is aware that monetary damages are specified, the
amount of monetary damages alleged ranges from approximately $100,000 to
approximately $140,000,000. Also, many of these cases only specify as
monetary damages an amount in excess of the jurisdictional minimum for the
courts in which such cases are filed. Monetary damages claimed in these cases
in the aggregate may be substantial; however, the Company does not consider
the monetary damages claimed to be a realistic measure of the Company's
ultimate resolution costs.
Consolidation of Breast Implant Products Liability Lawsuits
- - -----------------------------------------------------------
Many of these breast implant products liability cases have been or are in
the process of being consolidated for purposes of case management in federal
and state courts. As previously reported, on June 25, 1992, the Judicial
Panel on Multidistrict Litigation in In Re Silicone Gel Breast Implants
Products Liability Litigation consolidated all federal breast implant cases
for discovery purposes in the Federal District Court for the Northern District
of Alabama under the multidistrict litigation rules "in order to avoid
duplication of discovery, prevent inconsistent pretrial rulings, and preserve
the resources of the parties, their counsel and the judiciary." Substantially
all federal breast implant cases have been consolidated or are in the process
of transfer, or are likely to be transferred, to the Federal District Court
for the Northern District of Alabama. A substantial number of breast implant
cases originally filed in state courts have been removed to federal court and
either have been or are likely to be similarly transferred and consolidated.
The Company anticipates that any federal breast implant products liability
cases filed after June 25, 1992, as well as some state breast implant cases
removed to federal courts, will be transferred to the Federal
<PAGE>17
ITEM 1. LEGAL PROCEEDINGS (Continued)
- - --------------------------
District Court for the Northern District of Alabama for discovery purposes
under the multidistrict litigation rules. In addition, the consolidation of
many state breast implant products liability cases has proceeded in many
jurisdictions where a substantial number of state breast implant lawsuits have
been filed; however, this consolidation of state cases has not occurred in all
jurisdictions. As of March 31, 1994, substantially more than half of all
breast implant cases were consolidated for pretrial purposes at the federal
and state levels. The Company views these case consolidation measures as
positive steps toward the management of these various lawsuits and anticipates
that current and future breast implant lawsuit consolidations will result in a
reduction of litigation defense costs per case. For more information on these
matters, see Note 5 of Notes to Consolidated Financial Statements.
Settlement to Resolve Breast Implant Claims
- - -------------------------------------------
On September 9, 1993, the Company announced that representatives of
plaintiffs and defendants involved with silicone breast implant litigation had
developed a "Statement of Principles for Global Resolution of Breast Implant
Claims" (the "Statement of Principles"). The Statement of Principles
summarizes a proposed claims based structured resolution of claims arising out
of breast implants which have been or could be asserted against various
implant manufacturers, suppliers, physicians and hospitals. Since the
announcement of the Statement of Principles, the Company has negotiated with
other potential parties to reach a settlement agreement (as described below)
similar in concept to the Statement of Principles. As a part of this process,
the Company has participated in negotiations with other key funding
participants (as defined below) to reach an agreement regarding, among other
things, the respective contribution of each of these funding participants to
the settlement fund.
On March 23, 1994, the Company, along with other defendants and
representatives of breast implant litigation plaintiffs, signed a Breast
Implant Litigation Settlement Agreement (the "Settlement Agreement"). This
Settlement Agreement was approved by the Company's Board of Directors on
March 28, 1994. Under the Settlement Agreement, as amended, industry
participants (the "Funding Participants") would contribute up to approximately
$4.2 billion over a period of more than thirty years to establish several
special purpose funds. A related funding agreement specifies the amount that
each Funding Participant would contribute to the settlement fund. The
Settlement Agreement, if implemented, provides for a claims based structured
resolution of claims arising out of silicone breast implants, and defines the
circumstances under which payments from the funds would be made. The
Settlement Agreement includes provisions for (a) class membership and the
ability of plaintiffs to opt out of the class, (b) the establishment of
defined funds for medical diagnostic/evaluation procedures, explantation,
ruptures, compensation for specific diseases and administration, (c) payment
terms and timing and (d) claims administration. The Settlement Agreement
defines periods during which breast implant plaintiffs may elect not to settle
their claims by way of the Settlement Agreement and continue their individual
breast implant litigation against manufacturers and other defendants (the "Opt
Out Plaintiffs"). In certain circumstances, if any defendant who is a Funding
Participant considers the number of Opt Out Plaintiffs maintaining lawsuits
against such defendant to be excessive, such defendant may decide to exercise
the option to withdraw from participation in the Settlement Agreement.
On April 1, 1994, the U.S. District Court for the Northern District of
Alabama (the "Court") preliminarily approved the Settlement Agreement. The
same order also temporarily stayed and suspended federal and state class
action certification or notice proceedings relative to federal or state class
action lawsuits filed by plaintiffs included in the settlement class.
<PAGE>18
ITEM 1. LEGAL PROCEEDINGS (Continued)
- - --------------------------
On April 18, 1994, the Court issued notice of the Settlement Agreement to
breast implant plaintiffs eligible to participate in the settlement
("Settlement Class Members"). This notice begins a 60-day period during which
Settlement Class Members have the ability to become initial Opt Out
Plaintiffs. A Court supervised fairness review process of the Settlement
Agreement must be completed before the Settlement Agreement can be
implemented. If the Court grants final approval of the Settlement Agreement,
claims can then be validated. The Court's final approval of the Settlement
Agreement is subject to appeal.
SECURITIES LAWS AND SHAREHOLDER DERIVATIVE LAWSUITS
Securities Laws Purported Class Action Lawsuits
- - -----------------------------------------------
As of April 15, 1994, the Company and certain of its directors and
officers were named, as defendants with others, in two purported securities
laws class action lawsuits filed by purchasers of stock of Corning
Incorporated (Corning) and The Dow Chemical Company (Dow). These cases were
originally filed as several separate cases in the Federal District Court for
the Southern District of New York in the first quarter of 1992; these cases
were consolidated in the second quarter of 1992 so that there is one case
involving claims on behalf of purchasers of stock of Corning and one case
involving claims on behalf of purchasers of stock of Dow. The plaintiffs in
these cases allege, among other things, misrepresentations and omissions of
material facts and breach of duty with respect to purchasers of stock of
Corning and Dow relative to the breast implant issue. The relief sought in
these cases is monetary damages in unspecified amounts. Motions to dismiss
both cases have been filed by all defendants.
Shareholder Derivative Lawsuits
- - -------------------------------
As of April 15, 1994, the Company and/or certain of its directors and
officers were named in three shareholder derivative lawsuits filed by
shareholders of Corning and Dow Chemical. The plaintiffs in these cases
allege various breaches of fiduciary duties claimed to be owed by the
defendants relative to the breast implant issue. The relief sought by the
shareholders filing these suits on behalf of Dow Chemical and Corning is
monetary damages in unspecified amounts. Motions to dismiss these cases have
been filed by all defendants.
GRAND JURY INVESTIGATION
On February 8, 1993, the Company received two federal grand jury
subpoenas initiated by the Assistant U.S. Attorney in Baltimore, Maryland
seeking documents and information related to silicone breast implants. The
Company has provided information in response to the subpoenas and continues to
cooperate with the Assistant U.S. Attorney as this grand jury investigation
proceeds.
<PAGE>19
ITEM 1. LEGAL PROCEEDINGS (Continued)
- - --------------------------
LAWSUIT AGAINST INSURANCE CARRIERS
On June 30, 1993, the Company filed a complaint, which was subsequently
amended, in the Superior Court of California against 99 insurance companies
which issued occurrence based products liability insurance policies to the
Company from 1962 through 1985 ("Insurers"). The complaint also names as
defendants three state insurance guaranty funds. This action (the "California
Action") resulted from an inability of some of the Insurers to reach an
agreement with the Company on a formula for the allocation among the Insurers
of payments of defense and indemnity expenses submitted by the Company related
to breast implant products liability lawsuits and claims ("Insurance
Allocation Agreement"). The California Action was filed to seek, among other
things, a judicial enforcement of the obligations of the Insurers under the
relevant insurance policies.
On September 10, 1993, several of the Company's insurers filed a
complaint against the Company and other insurers for declaratory relief in
Wayne County Michigan Circuit Court (the "Michigan Action"). This complaint
named additional insurers, particularly the insurers that provided coverage on
a claims-made basis subsequent to 1985, and raised issues similar to those
described above for determination by the courts.
On September 13, 1993, plaintiff insurers in the Michigan Action brought
a motion in the California Action for the California Action to be stayed or
dismissed in favor of the Michigan Action on the grounds of inconvenient
forum. On October 1, 1993, the California Court dismissed the California
Action on the grounds of inconvenient forum. In light of this ruling, the
Company has elected to litigate the coverage issues on breast implant products
liability lawsuits and claims in the Michigan Action.
On March 11, 1994, the court in the Michigan Action ruled that certain of
the Company's primary insurers have a duty to defend the Company with respect
to breast implant products liability lawsuits. These insurers were also
directed to reimburse the Company for certain defense costs previously
incurred.
Notwithstanding this litigation, the Company is continuing its
negotiations with the Insurers to obtain an Insurance Allocation Agreement as
described above.
SECURITIES AND EXCHANGE COMMISSION INFORMAL INVESTIGATION
The Company received a request, dated July 9, 1993, from the Boston
Regional Office of the Securities and Exchange Commission for certain
documents and information related to silicone breast implants. The request
states that an informal investigation of the Company and its equity owners is
being conducted by the Boston Regional Office. On July 30, 1993, the Company
responded to this request enclosing the documents and information requested
along with related information. The Company will continue to cooperate with
the Boston Regional Office.
ITEMS 2. THROUGH 4.
- - -------------------
Items omitted in accordance with General Instruction H of Form 10-Q.
<PAGE>20
ITEM 5. OTHER INFORMATION
- - --------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - -----------------------------------------
(a) Exhibits
See the Exhibit Index which is located on page 22.
(b) Reports on Form 8-K
The Company has filed a Form 8-K on January 14, 1994, in connection
with a special charge to reflect the Company's best estimate of the costs of
resolving breast implant litigation and related matters.
The Company has filed a Form 8-K on February 14, 1994, in connection
with a preliminary agreement for a proposed settlement of breast implant
litigation and related matters.
The Company has filed a Form 8-K on March 24, 1994, in connection
with a written agreement specifying the terms for the Company's participation
in a proposed settlement of breast implant litigation and related matters.
The Company has filed a Form 8-K on March 29, 1994, in connection
with the review and approval by the Company's board of directors of a written
agreement specifying the terms for the Company's participation in a proposed
settlement of breast implant litigation and related matters.
<PAGE>21
SIGNATURES
----------
Pursuant to the requirements 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.
DOW CORNING CORPORATION
Date April 27, 1994 R. A. Hazleton
------------------ ------------------------
R. A. Hazleton
President and Chief
Executive Officer
Date April 27, 1994 J. W. Churchfield
------------------ ------------------------
J. W. Churchfield
Vice President for
Planning and Finance and
Chief Financial Officer
<PAGE>22
DOW CORNING CORPORATION
-----------------------
EXHIBIT INDEX
-------------
These exhibits are numbered in accordance with Exhibit Table I of
Item 601 of Regulation S-K.
Exhibit
Number Description Page Number
------- ----------- -----------
12 Computation of ratio of earnings to fixed charges 23
EXHIBIT 12
----------
DOW CORNING CORPORATION
-----------------------
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
(in millions of dollars)
Three months
ended March 31,
1994 1993
------ ------
Earnings:
Income from continuing operations before income
taxes and minority interest $66.4 $50.9
Less:
Equity in earnings (losses) of less than
50%-owned companies in excess of distributed
income (0.1) (0.6)
Add:
Fixed charges 22.2 15.3
Amortization of capitalized interest 2.4 2.4
Deduct:
Interest capitalized during the period 2.4 2.8
----- -----
Earnings for computation purposes $88.7 $66.4
===== =====
Fixed charges:
Interest on indebtedness, expensed or capitalized $18.5 $11.3
Portion of rents representative of the interest
factor 3.5 3.9
Amortization of debt expense 0.2 0.1
----- -----
Fixed charges for computation purposes $22.2 $15.3
===== =====
Ratio of earnings to fixed charges 4.0 4.3
===== =====
