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 September 30, 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 September 30, 1994 and
December 31, 1993 3
Consolidated statements of operations and retained earnings for
the three months ended September 30, 1994 and 1993 4
Consolidated statements of operations and retained earnings for
the nine months ended September 30, 1994 and 1993 5
Consolidated statements of cash flow for the nine months ended
September 30, 1994 and 1993 6
Notes to consolidated financial statements 7
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 SHEET
--------------------------
(in millions of dollars except share data)
September 30, December 31,
ASSETS 1994 1993
------ ------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 166.7 $ 263.0
Short-term investments 0.4 0.9
Accounts and notes receivable (less allowance
for doubtful accounts of $10.3 in 1994 and
$8.4 in 1993) 471.4 373.0
Inventories 305.1 285.6
Other current assets 95.3 146.7
-------- --------
Total current assets 1,038.9 1,069.2
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost 2,897.4 2,710.7
Less - accumulated depreciation (1,707.5) (1,544.6)
-------- --------
1,189.9 1,166.1
-------- --------
OTHER ASSETS 1,315.9 1,027.0
-------- --------
$3,544.7 $3,262.3
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 456.5 $ 267.2
Accounts payable 137.8 147.1
Other current liabilities 231.4 356.3
-------- --------
Total current liabilities 825.7 770.6
-------- --------
LONG-TERM DEBT 362.5 314.7
-------- --------
DEFERRED TAXES AND OTHER LIABILITIES:
Deferred income taxes 26.7 14.6
Other liabilities 1,416.9 1,411.2
-------- --------
1,443.6 1,425.8
-------- --------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 115.0 102.8
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $5 par value (2,500,000 shares
authorized and outstanding) 12.5 12.5
Retained earnings 716.7 604.3
Cumulative translation adjustment 68.7 31.6
-------- --------
Stockholders' equity 797.9 648.4
-------- --------
$3,544.7 $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
September 30,
------------------
1994 1993
------ ------
NET SALES $559.7 $512.0
OPERATING COSTS AND EXPENSES:
Manufacturing cost of sales 377.0 349.4
Marketing and administrative expenses 102.2 106.8
------ ------
479.2 456.2
------ ------
OPERATING INCOME 80.5 55.8
OTHER INCOME (EXPENSE):
Interest income, currency gains (losses) and other, net 1.9 3.8
Interest expense (20.7) (8.4)
------ ------
INCOME BEFORE INCOME TAXES 61.7 51.2
Income taxes 24.1 17.4
Minority interests' share in income 2.9 3.6
------ ------
NET INCOME (1994 - $13.88 per share; 1993 - $12.08
per share) 34.7 30.2
Retained earnings at beginning of period 682.0 958.3
------ ------
Retained earnings at end of period $716.7 $988.5
====== ======
<PAGE>5
DOW CORNING CORPORATION
-----------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
-----------------------------------------------------------
(in millions of dollars except share data)
Nine months ended
September 30,
-------------------
1994 1993
-------- --------
NET SALES $1,621.2 $1,522.7
OPERATING COSTS AND EXPENSES:
Manufacturing cost of sales 1,068.0 1,032.0
Marketing and administrative expenses 296.9 301.7
-------- --------
1,364.9 1,333.7
OPERATING INCOME 256.3 189.0
OTHER INCOME (EXPENSE):
Interest income, currency gains (losses) and other, net (1.8) 1.2
Interest expense (54.3) (25.4)
-------- --------
INCOME BEFORE INCOME TAXES 200.2 164.8
Income taxes 78.1 55.5
Minority interests' share in income 9.7 12.1
-------- --------
NET INCOME (1994 - $44.96 per share; 1993 -
$38.88 per share) 112.4 97.2
Retained earnings at beginning of period 604.3 891.3
-------- --------
Retained earnings at end of period $ 716.7 $ 988.5
======== ========
<PAGE>6
DOW CORNING CORPORATION
-----------------------
CONSOLIDATED STATEMENTS OF CASH FLOW
------------------------------------
(in millions of dollars)
Nine months ended
September 30,
-------------------
1994 1993
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $112.4 $ 97.2
Depreciation and amortization 137.2 145.1
Other, net 89.9 34.1
Changes in operating assets and liabilities ( 97.4) (17.0)
Implant deposit (see Note 7) (291.7) -
Implant related spending (171.4) (60.3)
Noncash portion of implant charges 21.2 -
------ ------
Cash provided by (used for) operating (199.8) 199.1
activities ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (122.1) (131.9)
Proceeds from sale of assets - 66.3
Other, net (0.1) 9.9
------ ------
Cash used for investing activities (122.2) (55.7)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 87.2 53.5
Payments on long-term debt (58.2) (38.7)
Net change in short-term borrowings 196.4 48.4
------ ------
Cash provided by financing activities 225.4 63.2
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 0.3 0.2
------ ------
CHANGES IN CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash equivalents (96.3) 206.8
Cash and cash equivalents at beginning of period 263.0 8.4
------ ------
Cash and cash equivalents at end of period $166.7 $215.2
====== ======
<PAGE>7
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 - Sale of Assets
- - - -----------------------
In June 1992, the Company announced its intent to offer for sale its
medical device business, which principally included metal orthopedic implant
devices and other specialty devices. The Company's investment in assets was
approximately $70.0, most of which represented current assets. On July 1,
1993, the Company sold the metal orthopedic device assets for approximately
$66.3 in cash. The loss resulting from the sale of the metal orthopedic
device assets, recorded in the second quarter of 1993, did not have a material
effect on the Company's consolidated financial position or results of
operations.
<PAGE>8
NOTE 6 - Contingencies
- - - ----------------------
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
October 14, 1994, approximately 4,100 women have made use of this program.
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 October 14, 1994, the Company has been named, often together
with other defendants, in approximately 18,100 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
October 14, 1994. It is anticipated that the Company will be named as a
defendant in additional breast implant lawsuits in the future by those breast
implant recipients not participating in the Breast Implant Litigation
Settlement Agreement (as described below). 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. Once the Breast Implant Litigation Settlement
Agreement becomes final and binding, it is anticipated that lawsuits brought
by those breast implant plaintiffs participating in the settlement will be
dismissed.
Consolidation of a substantial number of breast implant lawsuits for
pretrial purposes has 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
September 30, 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 breast implant lawsuit consolidations and
implementation of the Breast Implant Litigation Settlement Agreement will
result in a reduction of litigation defense costs.
<PAGE>9
NOTE 6 - Contingencies (Continued)
- - - ----------------------
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. The Company
negotiated with other potential parties to reach a Breast Implant Litigation
Settlement Agreement similar in concept to the Statement of Principles.
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"). The
Company's participation in 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")
agreed to 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 and the timing of those contributions. 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"). Under the terms of the Settlement Agreement, in certain
circumstances, if any defendant who is a Funding Participant considers the
number of Opt Out Plaintiffs to be excessive, such defendant may decide to
exercise the option to withdraw from participation in the settlement during a
number of periods specified in the Settlement Agreement.
On April 1, 1994, the Court preliminarily approved the Settlement
Agreement. On April 18, 1994, the Court issued notice of the Settlement
Agreement to breast implant recipients and others who may be eligible to
participate in the settlement ("Settlement Class Members"). This notice began
a 60-day period, ending June 17, 1994, during which Settlement Class Members
had the ability to become initial Opt Out Plaintiffs. This period was
extended to July 1, 1994 with respect to certain Settlement Class Members
whose Court issued notice was delayed. In addition, the Court has afforded
initial Opt Out Plaintiffs an opportunity to rejoin the settlement within
specified periods which currently end no later than December 1, 1994. A Court
hearing to review the fairness of the Settlement Agreement was completed on
August 22, 1994. On September 1, 1994, the Court granted final approval to
the Settlement Agreement, determining that it is fair, reasonable and
adequate. In large part, the settlement covers claims of breast implant
recipients which could be litigated in the courts of U.S. federal and state
jurisdictions. The settlement does not
<PAGE>10
NOTE 6 - Contingencies (Continued)
- - - ----------------------
cover claims of breast implant recipients who the Court has specifically
excluded from the settlement (unless these potential claimants affirmatively
join the settlement) or who have chosen not to participate in the settlement.
The settlement also does not cover the claims of breast implant recipients
which could be litigated in jurisdictions outside of the U.S. (unless payments
received by those potential claimants from the settlement fund, and related
releases, serve to preclude them from bringing legal actions in these other
jurisdictions). The Court's final approval of the Settlement Agreement has
been appealed to the U.S. Court of Appeals for the Eleventh Circuit primarily
by certain providers of health care indemnity payments or services and by
certain foreign claimants.
The date by which the Company was required to decide whether to remain as
a participant in or to exercise the first of its options to withdraw from the
Settlement Agreement was extended to September 9, 1994. On September 8, 1994,
the Company's Board of Directors approved the Company's continued
participation in the Settlement Agreement primarily based on management's
belief that the Settlement Agreement remains the most responsible and cost
efficient approach to resolving breast implant litigation against the Company.
Adequate and timely support by the Company's insurance carriers, which
management believes is probable, and participation in the settlement by
substantially all recipients of the Company's breast implant products,
continue to be important factors to the Company's satisfactory participation
in the Settlement Agreement and the ultimate success of the Settlement
Agreement.
Initial claims for specific disease compensation were required to be
filed with the Court by September 16, 1994. After these claims and the
supporting medical records have been evaluated by the Court for validity,
eligibility, accuracy, and consistency, the Court will determine whether the
disease compensation settlement fund is sufficient to pay validated claims.
The date by which this process will be completed is uncertain. If the
settlement fund is not sufficient and if such insufficiency cannot be resolved
through other means, claimants with validated claims may have the ability to
opt out during another specified period. In that event, if any defendant who
is a Funding Participant considers the number of new Opt Out Plaintiffs
against said defendant to be excessive, such defendant may decide to exercise
a second option to withdraw from participation in the settlement.
Various preliminary estimates of the aggregate number of initial Opt Out
Plaintiffs have been made public. However, since July 1, 1994, many initial
Opt Out Plaintiffs with claims against the Company have rejoined the
settlement, and the Company anticipates that the ultimate number of initial
Opt Out Plaintiffs will be significantly less than the original estimates due
to the continuing ability of initial Opt Out Plaintiffs to rejoin the
settlement before December 1, 1994. The Court is in the process of recording
information as it is received from initial Opt Out Plaintiffs. Because this
process is ongoing and the periods for rejoining the settlement have been
modified, the Company has not yet received information sufficient to evaluate
(a) the ultimate number of initial Opt Out Plaintiffs with claims against the
Company, (b) the severity of those claims, and (c) the validity, eligibility,
accuracy and consistency of information submitted by the initial Opt Out
Plaintiffs. Once opt out information provided by the Court and other sources
is sufficient to assess the
<PAGE>11
NOTE 6 - Contingencies (Continued)
- - - ----------------------
number and severity of opt out claims, the Company's qualitative evaluation of
the claims of Opt Out Plaintiffs and its evaluation of the potential financial
impact of these claims on the Company can proceed. Based on currently
available information, the Company does not have a sufficient basis to revise
the Company's previous estimate of the cost of ultimate resolution of breast
implant litigation. However, depending on the results of the evaluation
described above, it may be necessary to revise this estimate in the future.
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 estimate
of its potential liability for breast implant litigation based on settlement
negotiations, and also included provisions for legal, administrative, and
research costs related to breast implants, for a total of $1.24 billion, less
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.
Amounts recorded in the accompanying balance sheets as a result of the
provisions described above are summarized in the following table:
September 30, December 31,
1994 1993
------------- ------------
Implant Insurance Receivable
Included in accounts and notes
receivable $ 53.5 $ -
Included in other assets 655.8 663.7
Implant Reserve
Included in other current liabilities (74.9) (158.7)
Included in other liabilities (1,080.6) (1,100.0)
Implant Deferred Tax Asset
Included in other current assets 26.2 55.5
Included in other assets 148.7 175.0
<PAGE>12
NOTE 6 - Contingencies (Continued)
- - - ----------------------
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 $709.3 shown above is
approximately $1.2 billion on an undiscounted basis. The implant reserve of
$1,155.5 shown above is approximately $2.1 billion on an undiscounted basis.
Differences between discounted amounts recorded in the financial statements
and undiscounted amounts represent interest to be recorded over the life of
the net liability. Cash payments net of insurance recoveries were $171.4
during the nine months ended September 30, 1994. The Company expects
insurance recoveries to exceed payments by $9.0 during the fourth quarter of
1994. Cash payments net of insurance recoveries are expected to be $7.3 in
1995, $0.0 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 September 30, 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.
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, and in 1993
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
<PAGE>13
NOTE 6 - Contingencies (Continued)
- - - ----------------------
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 the Settlement Agreement 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 and anticipated future
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 14 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 $106.2. Management cannot
currently estimate the aggregate liability for all PRPs at those sites at
which management expects the Company has a de minimis liability.
The Company records accruals for environmental matters when it is probable
that a liability has been incurred and the Company's costs can be reasonably
estimated. The amount accrued for environmental matters at September 30, 1994
was $16.5, although possible costs could range up to $32.2. While there are a
number of uncertainties with respect to the Company's estimate of its ultimate
liability for
<PAGE>14
NOTE 6 - Contingencies (Continued)
- - - ----------------------
cleanup costs at these sites, it is the opinion of the Company that the
possibility that costs in excess of those accrued or disclosed will have a
material adverse impact on the Company's consolidated financial position or
results of operations is remote. This opinion is based upon the number of
identified PRPs at each site, the number of such PRPs that are believed by
management to be 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 sells certain receivables with limited recourse provisions.
Dow Corning Corporation sells on an ongoing basis substantially all of its
U.S. trade receivables, with limited recourse, to Bay Asset Funding
Corporation ("BAFC"), a wholly owned but separate corporate entity of the
Company. BAFC has agreements in place with third parties whereby it may sell
on an ongoing basis fractional ownership interests in such trade receivables,
with limited recourse, for a purchase price of up to $65.0. The agreements
contemplate that (a) the trade receivables sold to BAFC by the Company are
solely the assets of BAFC, (b) the creditors of BAFC are separate from the
creditors of the Company, and (c) in the event of a liquidation of BAFC, such
creditors would be entitled to satisfy their claims from BAFC's assets prior
to any distribution to the Company. Net of related reserves, the amount of
receivables sold under third party agreements which remained uncollected at
September 30, 1994 was $55.0. The sale of such receivables resulted in net
proceeds of approximately $54.3.
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.
<PAGE>15
NOTE 7 - Restricted Cash and Cash Equivalents
- - - ---------------------------------------------
The Company has entered into agreements whereby $291.7 in cash and cash
equivalents is restricted to use for future breast implant settlement and
related payments. Accordingly, this amount is included in the caption "Other
Assets" in the accompanying balance sheet, and "Implant Deposit" in the
accompanying statement of cash flows.
NOTE 8 - Reclassifications
- - - --------------------------
Certain reclassifications of prior year amounts have been made to conform
to the presentation adopted in 1994.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
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>16
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS
- - - ----------------------------------------
(in millions of dollars)
Results of Operations
- - - ---------------------
Third quarter net sales increased $47.7 or 9.3% over levels reported for
the comparable period in 1993. Net sales for the first nine months of 1994
increased $98.5 or 6.5% over 1993. These increases are principally
attributable to higher sales volumes, particularly in Europe and the United
States, offset slightly by lower selling prices, particularly in Asia. Local
currencies strengthening in Japan and Europe also had a favorable effect on
sales for the third quarter of 1994. Currency strengthening in Japan had a
favorable effect on sales for the first nine months of 1994.
Manufacturing cost of sales, as a percent of net sales, was 67.4% for the
third quarter of 1994 and 68.2% for the third quarter of 1993. For the first
nine months, this percentage was 65.9% in 1994 and 67.8% in 1993. These
decreases are attributable to lower personnel and depreciation costs.
Marketing and administrative expenses, as a percent of net sales, were
18.3% for the third quarter of 1994 and 20.9% for the third quarter of 1993.
For the first nine months, this percentage was 18.3% in 1994 and 19.8% in
1993. These decreases are 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 $21.2 in
imputed interest expense recognized on the net discounted implant liability
(as further discussed in Note 6 of Notes to Consolidated Financial Statements)
and higher average levels of debt.
The effective tax rate for the third quarter and first nine months of 1994
approximated 39.0%, compared to 34.0% for the third quarter of 1993 and 33.7%
for the first nine months of 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 15 domestic and foreign banks which provides for borrowings on
a revolving credit basis until November 1997 of up to $400.0. At September
30, 1994, there was $375.0 outstanding under this facility. The Company also
has agreements with several banks whereby it may borrow up to $205.2 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
September 30, 1994, of $59.6.
<PAGE>17
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 upon the occurrence
of certain events including the Company exercising one of its options to
withdraw from the Settlement Agreement or breast implant litigation
expenditures net of insurance recoveries exceeding certain limits. Under the
terms of the Revolving Credit Agreement as amended on May 27, 1994, these
limits have not been exceeded as of October 14, 1994.
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 6 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 and anticipated future
financing arrangements.
Contingencies
- - - -------------
For information regarding contingencies, including a discussion of breast
implant litigation and the Company's environmental liabilities, see Note 6 of
Notes to Consolidated Financial Statements.
Management Changes
- - - ------------------
On September 16, 1994, Keith R. McKennon, formerly Chairman of the Board,
retired from the Board of Directors and was named Director Emeritus. Richard
A. Hazleton, formerly President and Chief Executive Officer, was elected
Chairman of the Board and will continue as Chief Executive Officer. Gary E.
Anderson, formerly Executive Vice President, was elected President.
<PAGE>18
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 October 14, 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. In a case filed in the first quarter of 1994
in the Northern District of Alabama, the Judge has certified a non-mandatory
worldwide class action and has given approval to a proposed class action
settlement involving certain manufacturers (including the Company) of breast
implants and suppliers (see "Settlement to Resolve Breast Implant Claims"
below). 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, that 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>19
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 6 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 cases in the Philadelphia County and the
Dauphin County, Pennsylvania Courts of Common Pleas, and the case in the
Second Judicial District Court for the County of Bernalillo, New Mexico)
either the purported class action claims have been dismissed or class
certification has been denied. 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, that 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, Louisiana and Oregon remain pending, with only the Louisiana case
having been certified as a class action.
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
<PAGE>20
ITEM 1. LEGAL PROCEEDINGS (Continued)
- - - --------------------------
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 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 October 14, 1994, the Company has been named, often along with other
defendants, in approximately 18,100 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.
<PAGE>21
ITEM 1. LEGAL PROCEEDINGS (Continued)
- - - --------------------------
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 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 September 30, 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 breast implant lawsuit consolidations will result in a reduction of
litigation defense costs per case. For more information on these matters, see
Note 6 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. The Company
negotiated with other potential parties to reach a Breast Implant Litigation
Settlement Agreement similar in concept to the Statement of Principles.
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"). The
Company's participation in 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")
agreed to contribute up to
<PAGE>22
ITEM 1. LEGAL PROCEEDINGS (Continued)
- - - --------------------------
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 and the timing of those contributions. 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"). Under the terms of the Settlement Agreement, in certain
circumstances, if any defendant who is a Funding Participant considers the
number of Opt Out Plaintiffs to be excessive, such defendant may decide to
exercise the option to withdraw from participation in the settlement during a
number of periods specified in the Settlement Agreement.
On April 1, 1994, the Court preliminarily approved the Settlement
Agreement. On April 18, 1994, the Court issued notice of the Settlement
Agreement to breast implant recipients and others who may be eligible to
participate in the settlement ("Settlement Class Members"). This notice began
a 60-day period, ending June 17, 1994, during which Settlement Class Members
had the ability to become initial Opt Out Plaintiffs. This period was
extended to July 1, 1994 with respect to certain Settlement Class Members
whose Court issued notice was delayed. In addition, the Court has afforded
initial Opt Out Plaintiffs an opportunity to rejoin the settlement within
specified periods which currently end no later than December 1, 1994. A Court
hearing to review the fairness of the Settlement Agreement was completed on
August 22, 1994. On September 1, 1994, the Court granted final approval to
the Settlement Agreement, determining that it is fair, reasonable and
adequate. In large part, the settlement covers claims of breast implant
recipients which could be litigated in the courts of U.S. federal and state
jurisdictions. The settlement does not cover claims of breast implant
recipients who the Court has specifically excluded from the settlement (unless
these potential claimants affirmatively join the settlement) or who have
chosen not to participate in the settlement. The settlement also does not
cover the claims of breast implant recipients which could be litigated in
jurisdictions outside of the U.S. (unless payments received by those potential
claimants from the settlement fund, and related releases, serve to preclude
them from bringing legal actions in these other jurisdictions). The Court's
final approval of the Settlement Agreement has been appealed to the U.S. Court
of Appeals for the Eleventh Circuit primarily by certain providers of health
care indemnity payments or services and by certain foreign claimants.
The date by which the Company was required to decide whether to remain as
a participant in or to exercise the first of its options to withdraw from the
Settlement Agreement was extended to September 9, 1994. On September 8, 1994,
the Company's Board of Directors approved the Company's continued
participation in the Settlement Agreement. Initial claims for specific
disease compensation were required
<PAGE>23
ITEM 1. LEGAL PROCEEDINGS (Continued)
- - - --------------------------
to be filed with the Court by September 16, 1994. After these claims and the
supporting medical records have been evaluated by the Court for validity,
eligibility, accuracy, and consistency, the Court will determine whether the
disease compensation settlement fund is sufficient to pay validated claims.
The date by which this process will be completed is uncertain. If the
settlement fund is not sufficient and if such insufficiency cannot be resolved
through other means, claimants with validated claims may have the ability to
opt out during another specified period. In that event, if any defendant who
is a Funding Participant considers the number of new Opt Out Plaintiffs
against said defendant to be excessive, such defendant may decide to exercise
a second option to withdraw from participation in the settlement.
SECURITIES LAWS AND SHAREHOLDER DERIVATIVE LAWSUITS
Securities Laws Purported Class Action Lawsuits
- - - -----------------------------------------------
As of October 14, 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 October 14, 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>24
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.
<PAGE>25
ITEMS 2. through 4.
- - - -------------------
Items omitted in accordance with General Instruction H of Form 10-Q.
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 27.
(b) Reports on Form 8-K
The Registrant has filed no reports on Form 8-K during the quarter.
<PAGE>26
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 November 7, 1994 R. A. Hazleton
------------------------------ ----------------------------
R. A. Hazleton
Chairman and Chief Executive
Officer
Date November 7, 1994 J. W. Churchfield
------------------------------ ----------------------------
J. W. Churchfield
Vice President for Planning
and Finance and Chief
Financial Officer
<PAGE>27
DOW CORNING CORPORATION
-----------------------
EXHIBIT INDEX
-------------
These exhibits are numbered in accordance with Exhibit Table I of Item 601
of Regulation S-K.
Exhibit Page
Number Description Number
- - - ------- ----------- ------
12 Computation of ratio of earnings to fixed charges 28
EXHIBIT 12
----------
DOW CORNING CORPORATION
-----------------------
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
(in millions of dollars)
Nine months ended
September 30,
-----------------
1994 1993
------ ------
Earnings:
Income from continuing operations before income
taxes and minority interest $200.2 $164.8
Less:
Equity in earnings (losses) of less than 50%-owned
companies in excess of distributed income (0.6) (0.4)
Add:
Fixed charges 73.2 45.8
Amortization of capitalized interest 7.1 7.1
------ ------
Deduct:
Interest capitalized during the period 7.1 8.4
Earnings for computation purposes $274.0 $209.7
====== ======
Fixed charges:
Interest on indebtedness, expensed or capitalized<F1> $ 61.5 $ 33.8
Portion of rents representative of the interest factor 11.1 11.6
Amortization of debt expense 0.6 0.4
------ ------
Fixed charges for computation purposes $ 73.2 $ 45.8
====== ======
Ratio of earnings to fixed charges 3.7 4.6
====== ======
[FN]
<F1> For the nine months ended September 30, 1994, interest on indebtedness,
expensed or capitalized includes $21.2 in imputed interest recognized on the
net discounted implant liability (as further discussed in Note 6 of Notes to
Consolidated Financial Statements).
[/FN]
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994<F1>
<CASH> 166,700
<SECURITIES> 400
<RECEIVABLES> 481,700
<ALLOWANCES> 10,300
<INVENTORY> 305,100
<CURRENT-ASSETS> 1,038,900
<PP&E> 2,897,400
<DEPRECIATION> 1,707,500
<TOTAL-ASSETS> 3,544,700
<CURRENT-LIABILITIES> 825,700
<BONDS> 362,500
<COMMON> 12,500
0
0
<OTHER-SE> 785,400
<TOTAL-LIABILITY-AND-EQUITY> 3,544,700
<SALES> 1,621,200
<TOTAL-REVENUES> 1,621,200
<CGS> 1,068,000
<TOTAL-COSTS> 1,364,900
<OTHER-EXPENSES> 1,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,300
<INCOME-PRETAX> 200,200
<INCOME-TAX> 78,100
<INCOME-CONTINUING> 112,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112,400
<EPS-PRIMARY> 44.96
<EPS-DILUTED> 44.96
<FN>
<F1>When computing ratios, please use the consolidated financial statements of
Dow Corning Corporation.
</FN>
</TABLE>
