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, 1995 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, 1995 and December 31, 1994 3
Consolidated statements of operations and retained earnings for the
three months ended March 31, 1995 and 1994 4
Consolidated statements of cash flow for the three months ended
March 31, 1995 and 1994 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)
ASSETS March 31, December 31,
------ 1995 1994
--------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 265.6 $ 201.1
Short-term investments 2.8 0.7
Accounts and notes receivable (less allowance
for doubtful accounts of $10.9 in 1995 and
$10.2 in 1994) 428.7 416.2
Anticipated implant insurance receivable 132.6 157.5
Inventories 340.6 308.4
Implant deposit 275.0 275.0
Deferred income taxes 245.5 252.9
Other current assets 41.7 24.0
-------- --------
Total current assets 1,732.5 1,635.8
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost 3,010.7 2,934.9
Less - accumulated depreciation (1,809.5) (1,743.0)
-------- --------
1,201.2 1,191.9
-------- --------
OTHER ASSETS
Anticipated implant insurance receivable 955.9 943.6
Deferred income taxes 176.4 182.7
Other assets 137.8 139.2
-------- --------
1,270.1 1,265.5
-------- --------
$4,203.8 $4,093.2
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 468.4 $ 446.8
Accounts payable 156.2 160.2
Implant reserve 432.4 475.4
Other current liabilities 228.7 242.6
-------- --------
Total current liabilities 1,285.7 1,325.0
-------- --------
LONG-TERM DEBT 378.4 335.1
-------- --------
OTHER LIABILITIES:
Implant reserve 1,307.1 1,286.9
Other liabilities 360.4 352.1
-------- --------
1,667.5 1,639.0
-------- --------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 123.5 117.9
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $5 par value (2,500,000 shares
authorized and outstanding) 12.5 12.5
Retained earnings 647.0 597.5
Cumulative translation adjustment 89.2 66.2
-------- --------
Stockholders' equity 748.7 676.2
-------- --------
$4,203.8 $4,093.2
======== ========
<PAGE>4
DOW CORNING CORPORATION
-----------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
-----------------------------------------------------------
(in millions of dollars except share data)
Three months ended March 31,
----------------------------
1995 1994
---- ----
NET SALES $611.8 $509.1
OPERATING COSTS AND EXPENSES:
Manufacturing cost of sales 396.4 331.3
Marketing and administrative expenses 100.4 93.3
------ ------
496.8 424.6
------ ------
OPERATING INCOME 115.0 84.5
OTHER INCOME (EXPENSE):
Interest income, currency gains (losses)
and other, net (4.7) (2.0)
Interest expense (20.9) (16.1)
------ ------
INCOME BEFORE INCOME TAXES 89.4 66.4
Income taxes 36.2 25.9
Minority interests' share in income 3.7 3.3
------ ------
NET INCOME (1995 - $19.80 per share; 1994 - $14.88
per share) 49.5 37.2
Retained earnings at beginning of period 597.5 604.3
------ ------
Retained earnings at end of period $647.0 $641.5
====== ======
<PAGE>5
DOW CORNING CORPORATION
-----------------------
CONSOLIDATED STATEMENTS OF CASH FLOW
------------------------------------
(in millions of dollars)
Three months ended March 31,
----------------------------
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 49.5 $ 37.2
Depreciation and amortization 46.7 44.8
Other, net 12.4 (5.3)
Changes in operating assets and liabilities (51.8) (101.8)
Implant payments (44.1) (25.8)
Implant insurance reimbursement 24.9 1.5
Noncash portion of implant charges 7.9 7.0
------ ------
Cash provided by (used for) operating
activities 45.5 (42.4)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (34.9) (36.2)
Other, net (1.7) 8.7
------ ------
Cash used for investing activities (36.6) (27.5)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 49.9 55.8
Payments on long-term debt (5.4) (19.0)
Net change in short-term borrowings 10.3 31.0
------ ------
Cash provided by financing activities 54.8 67.8
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 0.8 (0.1)
------ ------
CHANGES IN CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash
equivalents 64.5 (2.2)
Cash and cash equivalents at beginning of period 201.1 263.0
------ ------
Cash and cash equivalents at end of period $265.6 $260.8
====== ======
<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 - Per Share Computations
- -------------------------------
Per share calculations are based on 2,500,000 shares outstanding during
all periods.
NOTE 4 - 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 March 31, 1995 was $62.0. The sale
of such receivables resulted in net proceeds of approximately $29.8 in 1995.
NOTE 5 - Implant Deposit
- ------------------------
In connection with the Settlement Agreement (as further described in Note
6 of Notes to Consolidated Financial Statements), the Company has entered into
an agreement whereby $275.0 in cash and cash equivalents is restricted to use
for future breast implant settlement payments. Accordingly, this amount is
included in the caption "Implant deposit" in the accompanying consolidated
balance sheet.
<PAGE>7
NOTE 6 - Contingencies
- ----------------------
Breast Implant Litigation and Claims
- ------------------------------------
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 and the raw material
components of these products. 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.
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 March 31, 1995 the Company has been named, often together
with other defendants, in approximately 19,000 pending breast implant products
liability lawsuits filed by or on behalf of individuals who claim to have or
have had silicone gel breast implants. Many of these cases involve multiple
plaintiffs. In addition, there were 45 breast implant products liability
class action lawsuits which had been filed against the Company as of March 31,
1995. 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 (as described below) 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 March
31, 1995, substantially more than half of all breast implant cases have been
consolidated for pretrial purposes at the federal and state levels.
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.
<PAGE>8
NOTE 6 - Contingencies (Continued)
- ----------------------
On March 23, 1994, the Company, along with other defendants and
representatives of breast implant litigation plaintiffs, entered into a
settlement pursuant to a Breast Implant Litigation Settlement Agreement (as
amended by the Court, 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, 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 (the
"Funding Agreement") specifies the amount that each Funding Participant would
contribute to the settlement fund and the timing of those contributions. The
Settlement Agreement 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 covers claims of most breast implant recipients, and
related claims, brought in the courts of U.S. federal and state jurisdictions.
The settlement also covers the claims of breast implant recipients brought in
jurisdictions outside of the U.S. if 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 settlement
does not cover claims of breast implant recipients who have affirmatively
chosen not to participate in the Settlement Agreement, or whom the Court has
specifically excluded from the Settlement Agreement unless these potential
claimants affirmatively join the settlement. Breast implant recipients who
reside in Ontario or Quebec, Canada, or in Australia have been specifically
excluded by the Court. The Settlement Agreement defines various periods
during which, upon the occurrence of certain events, breast implant plaintiffs
may elect not to settle their claims by way of the Settlement Agreement and
pursue their individual breast implant litigation against manufacturers and
other defendants (the "Opt Out Plaintiffs"). The Settlement Agreement also
provides the children of breast implant recipients with the right to opt out
of the settlement in certain circumstances. 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. The Court afforded initial Opt Out
Plaintiffs an opportunity to rejoin the settlement within specified periods
which ended March 1, 1995. The Court has indicated that Opt Out Plaintiffs
may be allowed, on a case by case basis, to rejoin the settlement after March
1, 1995. 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, and on September 8, 1994, the Company's Board of
Directors approved the Company's continued participation in the Settlement
Agreement.
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.
<PAGE>9
NOTE 6 - Contingencies (Continued)
- ----------------------
The Settlement Agreement provides that industry participants will
contribute a total of $4.2 billion, of which the Company is obligated to
contribute up to approximately $2.02 billion, over a period of more than 30
years. The Company's required contributions under the Settlement Agreement
cannot be changed without the Company's consent. Under the terms of the
Funding Agreement, the Company has made or anticipates making settlement
payments in accordance with the following schedule:
1994 $ 42.50
1995 275.00
1997 275.00
1998 275.00
1999 through 2011 51.17 per year
2012 through 2019 38.38 per year
2020 through 2026 25.57 per year
The Company's first payment of $275.0 under the Funding Agreement is due
upon the earlier of (a) a resolution of pending appeals which confirms the
Court's final approval of the Settlement Agreement or (b) the completion of a
second opt out process or the determination that there will be no second opt
out process (as described below). The Company has placed $275.0 into an
escrow account and is required, among other things, to attempt to obtain a
letter of credit or other form of assurance in the amount of $275.0 to provide
financial assurance to the Court of the Company's ability to meet its
obligations under the Settlement Agreement. After the third payment of
$275.0, the amount of the letter of credit will be reduced to $51.2 or may be
eliminated by order of the Court. The Company continues to consider methods
to provide this assurance.
Initial claims for specific disease compensation were required to be
filed with the Court in September 1994. After these claims and the supporting
medical records have been evaluated by the Court for validity, eligibility,
accuracy, and consistency, the Court will make a final determination as to
whether the current disease compensation settlement fund is sufficient to pay
validated claims. In an effort to determine whether or the extent to which
the current disease compensation settlement fund is sufficient to pay
validated claims, the Court has conducted a study of a sample of current
disease compensation settlement fund claims. On May 1, 1995, the Court issued
a statement indicating its conclusions ("Preliminary Conclusions") that this
study of a sample of current disease compensation settlement fund claims
indicated that the total amount of current claims likely to be approved for
payment would substantially exceed the $1.2 billion presently committed under
the settlement to pay such claims and that, accordingly, amounts payable under
the current disease compensation settlement fund would be less than the
amounts specified in the Settlement Agreement. In addition, the Court
requested that the parties to the Settlement Agreement commence negotiations
relating to possible modifications of the Settlement Agreement. While
information is not yet available to the Company to sufficiently analyze the
Court's Preliminary Conclusions, the Company presently intends to honor the
Settlement Agreement and not to increase its commitments thereunder. If the
current disease compensation settlement fund is not sufficient to pay
validated claims, and if such insufficiency cannot be resolved through other
means, claimants with validated claims would have the ability to opt out
during another period as specified in the Settlement Agreement. 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.
<PAGE>10
NOTE 6 - Contingencies (Continued)
- ----------------------
Since July 1, 1994, many former Opt Out Plaintiffs have rejoined the
settlement. Based on information received from the Court, approximately 5,000
of the initial U.S. Opt Out Plaintiffs and approximately 2,000 potential
foreign claimants (including initial foreign Opt Out Plaintiffs and foreign
claimants excluded from the settlement class) have identified the Company as
potentially responsible, in whole or in part, with respect to their current or
potential future claims. On April 25, 1995, the Court dismissed the federal
claims of approximately 350 of the 2,000 potential foreign claimants described
above on the basis that such potential foreign claimants have an appropriate
forum for the resolution of their claims in the jurisdictions of their
residences. The Court also dismissed the federal claims of approximately 800
other foreign claimants, and the Company anticipates that future federal
claims of foreign claimants will be dismissed, on the same basis. It is
uncertain as to whether the claims of foreign claimants filed in state courts
will be dismissed by those state courts on the same basis.
The Settlement Agreement is in the process of being implemented. The
settlement implementation process can be affected by external factors as
described above such as the resolution of pending appeals, the number and
magnitude of claims filed in the settlement and the potential future
substantiation of the Court's Preliminary Conclusions as described above.
However, based on its analysis of the most current information, including
assessments by knowledgeable third parties who have been directly involved in
the negotiation and implementation of the Settlement Agreement, and its
assessment of the Company's financial resources, management believes that the
aggregate amount of the Company's obligation and the amount and timing of the
related cash payments under the Settlement Agreement are reliably
determinable. Notwithstanding the Court's Preliminary Conclusions, management
currently believes that events will not occur which would lead to the
Company's withdrawal from the settlement. Nonetheless, management will
continue to analyze additional facts and circumstances, including information
pertaining to the Court's Preliminary Conclusions and related negotiations, to
determine (a) whether and the extent to which additional provisions may be
required as a result of a second opt out period and (b) whether the Company
will ultimately withdraw from the settlement.
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. Substantially
all of the Company's insurers have reserved the right to deny coverage, in
whole or in part, due to differing theories regarding, among other things,
when coverage may attach, and their respective obligations relative to other
insurers. The Company has a substantial amount of unexhausted claims-made
insurance coverage with respect to lawsuits and claims commencing in 1986 and
thereafter. For lawsuits and claims involving implant dates prior to 1986,
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. Also, a
number of the breast implant lawsuits pending against the Company request
punitive damages and compensatory damages arising out of alleged intentional
torts. Depending on policy language, applicable law and agreements with
insurers, any such damages which may be awarded pursuant to such lawsuits may
or may not be covered, in whole or in part, by insurance.
Discussions among the Company and its primary insurers 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 insurers issuing
products liability insurance policies to the Company relative to breast
implants and other products. In 1993, the Company commenced a lawsuit against
certain of these insurers seeking, among other things, a judicial enforcement
of the obligations of the insurers under certain of these insurance policies.
Approximately 85% of the anticipated implant insurance receivable recorded in
the
<PAGE>11
NOTE 6 - Contingencies (Continued)
- ----------------------
financial statements is currently subject to litigation. This litigation
principally involves those insurers who provided coverage on an occurrence
basis and generally does not involve insurers who provided coverage on a
claims made basis.
Management continues to believe that it is probable that the Company will
recover from its insurers a substantial amount of breast implant related
payments which have been or may be made by the Company. In 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. This belief is further supported by the fact that
the Company received insurance recoveries of $71.4 in 1994 and $24.9 in the
first quarter of 1995 and entered into settlements with certain insurers for
future reimbursement. These settlements relate to only a small number of the
Company's insurers and a small portion of the Company's total insurance
program.
The Company has recorded an anticipated insurance receivable which is
less than the amount for which the Company will seek reimbursement; a
substantial portion of this anticipated insurance receivable relates to
insurers who provided coverage on an occurrence basis. The principal
uncertainties which exist with respect to the ultimate realization of this
asset include the method applied in allocating losses between insurers who
provided coverage on a claims made basis and insurers who provided coverage on
an occurrence basis, the method applied in allocating losses among the
insurers who provided coverage on an occurrence basis, delays in reimbursement
due to the insurers' failure to pay on a timely basis, and the extent to which
insurers may become insolvent in the future. The Company has taken these
factors into account when estimating the amount of insurance recovery to
record in the financial statements. Specifically, the Company selected a
reasonable and legally sound allocation theory which is one of several
generally accepted allocation theories in circumstances involving product
liability claims; the allocation theory selected is supported by recent
developments in the ongoing insurance litigation. The Company also assumed a
reasonable delay between the time the Company makes breast implant related
payments and the time the Company receives reimbursement from the insurers,
and an allowance for insolvent insurers has been provided.
The Company has reflected anticipated financial consequences to the
Company of the breast implant situation. During 1991 and 1992, the Company
recorded $25.0 and $69.0, respectively, of pretax costs related to breast
implant matters. In 1993 the Company recorded a pretax charge of $640.0.
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 anticipated insurance
recoveries of $600.0. As discussed below, the Company recorded the liability
attributable to the Settlement Agreement and the related insurance receivable
on a present value basis.
On January 20, 1995, the Company announced a pretax charge of $241.0
($151.8 after tax) for the fourth quarter of 1994. This charge reflected the
Company's best current estimate of additional costs to resolve breast implant
litigation and claims outside of the Settlement Agreement, and included
provisions for legal, administrative, and research costs related to breast
implants. This pretax charge of $241.0 consists of a $647.0 liability less
anticipated insurance recoveries of $406.0. These amounts were recorded on an
undiscounted basis.
<PAGE>12
NOTE 6 - Contingencies (Continued)
- ----------------------
As a result of the provisions described above, as of March 31, 1995 the
Company's financial statements reflect a total liability of $1,739.5 and a
total anticipated implant insurance receivable of $1,088.5. Of these amounts,
a liability of $560.6 and an anticipated implant insurance receivable of
$373.4 have been recorded to reflect costs and insurance recoveries,
respectively, relevant to breast implant liabilities not covered by the
Settlement Agreement; these amounts are recorded on an undiscounted basis.
Because the amount and timing of the liability attributable to the Settlement
Agreement is reliably determinable, the Company recorded this liability and
the related anticipated implant insurance receivable on a present-value basis
using a discount rate of 7.0% over a period of more than 30 years. This rate
approximated the interest rate on monetary assets that are risk free and that
have maturities corresponding with the scheduled cash payments. The
Settlement Agreement liability recorded in the financial statements at March
31, 1995 is $1,178.9; this amount is $1,976.2 on an undiscounted basis. The
Settlement Agreement anticipated implant insurance receivable recorded in the
financial statements at March 31, 1995 is $715.1; this amount is $1,156.2 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. The net amount of imputed
interest recorded was $28.3 in 1994 and $7.9 in the first quarter of 1995.
Amounts recorded in the financial statements related to the Settlement
Agreement are adjusted as insurance proceeds are received, as payments are
made against reserves and as imputed interest is recorded on discounted
amounts.
Implant reserves less the anticipated implant insurance receivable
reflects management's best current estimate of the cost of ultimate resolution
of breast implant litigation and claims. The liability under the Settlement
Agreement is reliably determinable. However, additional facts and
circumstances may develop which could affect the reliability and precision of
the estimate of costs not covered by the Settlement Agreement as well as the
estimate of the anticipated implant insurance receivable. Those facts and
circumstances include, among other things, the ultimate number and extent of
claims not covered by the Settlement Agreement, the ultimate cost of resolving
those claims, the amount and timing of insurance recoveries and the allocation
of insurance payments among the Company's insurers. Management cannot
currently estimate the impact that these factors may have on the current
estimate of costs not covered by the Settlement Agreement as well as the
estimate of the anticipated implant insurance receivable. 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 the 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.
The Company is not satisfied with the rate of progress toward resolving
breast implant litigation outside of the Settlement Agreement. The Company is
also not satisfied with the progress toward achieving commitments from certain
of the Company's insurers relative to insurance recovery. While information
is not yet available to the Company to sufficiently analyze the Court's
Preliminary Conclusions, the Company is also concerned with the implications
of the Court's Preliminary Conclusions relative to the increased likelihood of
a second opt out period which may result in additional Opt Out Plaintiffs. As
a result of these and other factors, the Company may need to modify its
approach and is considering a variety of alternatives for resolving breast
implant litigation and related issues outside of the Settlement Agreement.
The Company has retained financial and legal advisors to assist in analysis of
the alternatives. In addition, alternative approaches may be necessary if
events occur that would lead to a material adverse impact on the Company's
liquidity. The Company is actively considering an action to seek protection
under the reorganization provisions of Chapter 11 of the United States
Bankruptcy Code in order to maintain normal business operations while seeking
to resolve breast implant litigation and other liabilities through the Chapter
11 reorganization process. While Chapter 11 is intended to permit a debtor to
preserve its business and assets while restructuring its liabilities, any
reorganization proceedings may have a material adverse effect on the results
of operations, financial condition or liquidity of the Company.
<PAGE>13
NOTE 6 - Contingencies (Continued)
- ----------------------
Other Litigation
- ----------------
Due to the nature of its business as a supplier of specialty materials to
a variety of industries, the Company, at any particular time, is a defendant
in a number of products liability lawsuits for injury allegedly related to the
Company's products, and, in certain instances, products manufactured by
others. Many of these lawsuits seek damages in substantial amounts. For
example, the Company has been named in products liability lawsuits pertaining
to materials previously used in connection with temporomandibular joint
implant applications and raw materials supplied by the Company to
manufacturers of the NORPLANT(R) Implant contraceptive device (NORPLANT(R) is
a registered trademark of the Population Council for Subdermal Levonorgestrel
Implants). The Company has followed a practice of aggressively defending all
products liability claims asserted against it. Although the Company intends
to continue this practice, currently pending proceedings and any future claims
are subject to the uncertainties attendant to litigation and the ultimate
outcome of any such proceedings or claims cannot be predicted with certainty.
Nonetheless, the Company believes that these products liability claims will
not have a material adverse effect on the Company's results of operations or
financial condition.
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
$106.0. Management cannot currently estimate the aggregate liability for all
PRPs at those sites at which management expects the Company has a de minimis
liability.
The Company records accruals for environmental matters when it is
probable that a liability has been incurred and the Company's costs can be
reasonably estimated. The amount accrued for environmental matters at March
31, 1995 was $15.8, although possible costs could range up to $32.0. While
there are a number of uncertainties with respect to the Company's estimate of
its ultimate liability for cleanup costs at these sites, it is the opinion of
the Company that the possibility 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 financially capable of paying their share of
the ultimate liability, and the portion of waste sent to the sites for which
management believes the Company might be held responsible based on available
records.
NOTE 7 - Reclassifications
- --------------------------
Certain reclassifications of prior year amounts have been made to conform
to the presentation adopted in 1995.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
The consolidated interim financial statements should be read in
conjunction with the consolidated financial statements as of and for the year
ended December 31, 1994.
<PAGE>14
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS
- ----------------------------------------
(in millions of dollars)
Results of Operations
- ---------------------
First quarter net sales increased $102.7 or 20.2% over levels reported
for the comparable period in 1994. The increase for the first three months of
1995 is attributable to higher sales volumes, particularly in the United
States and Europe, combined with favorable currency effects in Europe and
Asia.
Manufacturing cost of sales, as a percent of net sales, was 64.8% in the
first quarter of 1995 compared to 65.1% in the first quarter of 1994. This
decease is due principally to lower personnel, depreciation and other
operating costs, partly offset by a higher cost of raw materials.
Marketing and administrative expenses, as a percent of net sales, were
16.4% for the first quarter of 1995 and 18.3% for the same period in 1994.
This decrease is principally due to lower personnel costs.
Other expense for the first quarter of 1995 increased $7.5 over the
comparable period in 1994 due principally to higher interest expense caused by
higher average levels of debt.
The effective tax rate in the first quarter of 1995 was 40.5%, compared
to 39.0% for the same period in 1994. The higher effective rate in 1995 is
attributable to higher state income taxes combined with earnings growth
outside of the United States.
Credit Availability
- -------------------
At March 31, 1995, the Company had in place 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,
1995, there was $375.0 outstanding under this facility. Availability of
credit under this facility may be affected by certain debt restrictions and
provisions as described below.
The Company has a number of debt agreements, including the Revolving
Credit Agreement, which contain debt restrictions and provisions relating to
property liens, sale and leaseback transactions, debt to tangible capital
ratio and funds flow. The Revolving Credit Agreement provides participating
banks the right, subject to a vote of a majority in interest, to demand
payment in the event that breast implant litigation expenditures, net of
insurance recoveries, exceed certain limits. On May 2, 1995, one of three
credit rating agencies which rate the Company's debt further downgraded the
Company's long-term debt rating. This downgrade provides a counterparty to
certain interest rate swap agreements with an option to present those
agreements to the Company for settlement. Failure of the Company to perform
upon request, without some agreement to extend or waive the option, could
result in violations of default provisions of one or more of the Company's
debt agreements. As of May 3, 1995, the Company had not received notice of
option exercise by such swap agreement counterparty or notice of default under
the Company's debt agreements and was in compliance with all debt restrictions
and provisions. However, no assurance can be given that events will not occur
that could lead to violations of debt restrictions and provisions in the
future, and no assurance can be given that such credit will continue to be
available.
Under the provisions of the Revolving Credit Agreement, the Company is
subject to certain restrictions as to the payment of dividends or distribution
of assets for other specified purposes. 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, 1994, the Company is restricted from
issuing dividends or distributing assets for other specified purposes in
excess of $71.9 in 1995, and is not currently paying dividends.
<PAGE>15
The Company's ability to generate the financial liquidity required to
meet ongoing operational needs, to meet its obligations under the Settlement
Agreement and to resolve breast implant claims not covered by the Settlement
Agreement is based on, among other things, future operational cash flows, the
cost to resolve breast implant litigation, recovery of substantial amounts
from the Company's insurance carriers and current and potential future
financing arrangements.
Developing facts and circumstances could result in a material and adverse
effect on the Company's liquidity. These facts and circumstances could
include, among other things, continuing lack of satisfactory progress in
resolving claims not covered by the Settlement Agreement, possible events
which could lead to violations of debt restrictions and provisions as
described above and continuing lack of satisfactory progress relative to
insurance recovery. In an effort to provide the Company with additional
financial flexibility, should such facts and circumstances develop, the
Company will continue to evaluate alternative financing arrangements as well
as other alternatives discussed below. However, there can be no assurance
that alternative financing will be concluded successfully in the future.
Alternatives for Resolving Litigation
- ----------------------------------------------------
The Company is not satisfied with the rate of progress toward resolving
breast implant litigation outside of the Settlement Agreement. The Company is
also not satisfied with the progress toward achieving commitments from certain
of the Company's insurers relative to insurance recovery. While information
is not yet available to the Company to sufficiently analyze the Court's
Preliminary Conclusions, the Company is also concerned with the implications
of the Court's Preliminary Conclusions relative to the increased likelihood of
a second opt out period which may result in additional Opt Out Plaintiffs. As
a result of these and other factors, the Company may need to modify its
approach and is considering a variety of alternatives for resolving breast
implant litigation and related issues outside of the Settlement Agreement.
The Company has retained financial and legal advisors to assist in analysis of
the alternatives. In addition, alternative approaches may be necessary if
events occur that would lead to a material adverse impact on the Company's
liquidity. The Company is actively considering an action to seek protection
under the reorganization provisions of Chapter 11 of the United States
Bankruptcy Code in order to maintain normal business operations while seeking
to resolve breast implant litigation and other liabilities through the Chapter
11 reorganization process. While Chapter 11 is intended to permit a debtor to
preserve its business and assets while restructuring its liabilities, any
reorganization proceedings may have a material adverse effect on the results
of operations, financial condition or liquidity of the Company.
<PAGE>16
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
ENVIRONMENTAL MATTERS
The Company has agreed to participate in the Toxic Substances Control Act
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 Class Action Lawsuits
- -------------------------------------------------------
As of March 31, 1995, the Company had been named, generally as one of
several defendants, in 45 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 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 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>17
ITEM 1. LEGAL PROCEEDINGS (Continued)
- --------------------------
Among the 12 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 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 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 class action cases in Florida, Indiana, Louisiana and Oregon remain
pending, with only the Louisiana case having been certified as a class action.
A 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 class of breast implant recipients in the Province of Quebec,
Canada, against Dow Corning Corporation and Dow Corning Canada, Inc. The
court has authorized this 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 raw 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 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 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 federal
class actions in the Federal District Court for the District of Minnesota
claims an unspecified amount of monetary damages, but claims more than $50,000
for each plaintiff on fraud claims. The 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 federal class actions in the Federal
District Court for the Western District of Pennsylvania claims damages of
$50,000 compensatory and $50,000 punitive for each plaintiff. Each other
federal class action specifies monetary damages in an unspecified amount
except that they claim
<PAGE>18
ITEM 1. LEGAL PROCEEDINGS (Continued)
- --------------------------
the minimal jurisdictional amount. The state class action in the Dade County,
Florida Eleventh Judicial Circuit Court claims $500 million in punitive
damages and unspecified compensatory damages for the class. Each other state
class action specifies monetary damages in an unspecified amount except that
they claim the minimal jurisdictional amounts. The class action in Ontario,
Canada claims $80,000 in monetary damages for each named plaintiff and
unspecified monetary damages for other members of the class.
Monetary damages claimed in these cases in the aggregate are 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 March 31, 1995, the Company has been named, often along with other
defendants, in approximately 19,000 individual breast implant products
liability lawsuits filed in federal courts and state courts in many different
jurisdictions by or on behalf of individuals who claim to have or have had
silicone gel breast implants; 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 million. 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 (the "Court") 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 in 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
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 March 31, 1995, substantially
more than half of all breast implant cases were consolidated for pretrial
purposes at the federal and state levels. For more information on these
matters, see Note 6 of Notes to Consolidated Financial Statements.
<PAGE>19
ITEM 1. LEGAL PROCEEDINGS (Continued)
- --------------------------
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, entered into a
settlement pursuant to a Breast Implant Litigation Settlement Agreement (as
amended by the Court, 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, 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 (the
"Funding Agreement") specifies the amount that each Funding Participant would
contribute to the settlement fund and the timing of those contributions. The
Settlement Agreement 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 covers claims of most breast implant recipients, and
related claims, brought in the courts of U.S. federal and state jurisdictions.
The settlement also covers the claims of breast implant recipients brought in
jurisdictions outside of the U.S. if 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 settlement
does not cover claims of breast implant recipients who have affirmatively
chosen not to participate in the Settlement Agreement, or whom the Court has
specifically excluded from the Settlement Agreement unless these potential
claimants affirmatively join the settlement. Breast implant recipients who
reside in Ontario or Quebec, Canada, or in Australia have been specifically
excluded by the Court. The Settlement Agreement defines various periods
during which, upon the occurrence of certain events, breast implant plaintiffs
may elect not to settle their claims by way of the Settlement Agreement and
pursue their individual breast implant litigation against manufacturers and
other defendants (the "Opt Out Plaintiffs"). The Settlement Agreement also
provides the children of breast implant recipients with the right to opt out
of the settlement in certain circumstances. 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.
<PAGE>20
ITEM 1. LEGAL PROCEEDINGS (Continued)
- --------------------------
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. The Court afforded initial Opt Out
Plaintiffs an opportunity to rejoin the settlement within specified periods
which ended March 1, 1995. The Court has indicated that Opt Out Plaintiffs
may be allowed, on a case by case basis, to rejoin the settlement after March
1, 1995. 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, and on September 8, 1994, the Company's Board of
Directors approved the Company's continued participation in the Settlement
Agreement.
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 Settlement Agreement provides that industry participants will
contribute a total of $4.2 billion, of which the Company is obligated to
contribute up to approximately $2.02 billion, over a period of more than 30
years. The Company's required contributions under the Settlement Agreement
cannot be changed without the Company's consent. Under the terms of the
Funding Agreement, the Company has made or anticipates making settlement
payments in accordance with the following schedule:
1994 $ 42.50 million
1995 275.00 million
1997 275.00 million
1998 275.00 million
1999 through 2011 51.17 million per year
2012 through 2019 38.38 million per year
2020 through 2026 25.57 million per year
The Company's first payment of $275.0 million under the Funding Agreement
is due upon the earlier of (a) a resolution of pending appeals which confirms
the Court's final approval of the Settlement Agreement or (b) the completion
of a second opt out process or the determination that there will be no second
opt out process (as described below). The Company has placed $275.0 million
into an escrow account and is required, among other things, to attempt to
obtain a letter of credit or other form of assurance in the amount of $275.0
million to provide financial assurance to the Court of the Company's ability
to meet its obligations under the Settlement Agreement. After the third
payment of $275.0 million, the amount of the letter of credit will be reduced
to $51.2 million or may be eliminated by order of the Court. The Company
continues to consider methods to provide this assurance.
Initial claims for specific disease compensation were required to be
filed with the Court in September 1994. After these claims and the supporting
medical records have been evaluated by the Court for validity, eligibility,
accuracy, and consistency, the Court will make a final determination as to
whether the current disease compensation settlement fund is sufficient to pay
validated claims. In an effort to determine whether or the extent to which
the current disease compensation settlement fund is sufficient to pay
validated claims, the Court has conducted a study of a sample of current
disease compensation settlement fund claims. On May 1, 1995, the Court issued
a statement indicating its conclusions ("Preliminary Conclusions") that this
study of a sample of current disease compensation settlement fund claims
indicated that the total amount of current claims likely to be approved for
payment would substantially exceed the
<PAGE>21
ITEM 1. LEGAL PROCEEDINGS (Continued)
- --------------------------
$1.2 billion presently committed under the settlement to pay such claims and
that, accordingly, amounts payable under the current disease compensation
settlement fund would be less than the amounts specified in the Settlement
Agreement. In addition, the Court requested that the parties to the
Settlement Agreement commence negotiations relating to possible modifications
of the Settlement Agreement. While information is not yet available to the
Company to sufficiently analyze the Court's Preliminary Conclusions, the
Company presently intends to honor the Settlement Agreement and not to
increase its commitments thereunder. If the current disease compensation
settlement fund is not sufficient to pay validated claims, and if such
insufficiency cannot be resolved through other means, claimants with validated
claims would have the ability to opt out during another period as specified in
the Settlement Agreement. 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.
Since July 1, 1994, many former Opt Out Plaintiffs have rejoined the
settlement. Based on information received from the Court, approximately 5,000
of the initial U.S. Opt Out Plaintiffs and approximately 2,000 potential
foreign claimants (including initial foreign Opt Out Plaintiffs and foreign
claimants excluded from the settlement class) have identified the Company as
potentially responsible, in whole or in part, with respect to their current or
potential future claims. On April 25, 1995, the Court dismissed the federal
claims of approximately 350 of the 2,000 potential foreign claimants described
above on the basis that such potential foreign claimants have an appropriate
forum for the resolution of their claims in the jurisdictions of their
residences. The Court also dismissed the federal claims of approximately 800
other foreign claimants, and the Company anticipates that future federal
claims of foreign claimants will be dismissed, on the same basis. It is
uncertain as to whether the claims of foreign claimants filed in state courts
will be dismissed by those state courts on the same basis.
The Settlement Agreement is in the process of being implemented. The
settlement implementation process can be affected by external factors as
described above such as the resolution of pending appeals, the number and
magnitude of claims filed in the settlement and the potential future
substantiation of the Court's Preliminary Conclusions as described above.
However, based on its analysis of the most current information, including
assessments by knowledgeable third parties who have been directly involved in
the negotiation and implementation of the Settlement Agreement, and its
assessment of the Company's financial resources, management believes that the
aggregate amount of the Company's obligation and the amount and timing of the
related cash payments under the Settlement Agreement are reliably
determinable. Notwithstanding the Court's Preliminary Conclusions, management
currently believes that events will not occur which would lead to the
Company's withdrawal from the settlement. Nonetheless, management will
continue to analyze additional facts and circumstances, including information
pertaining to the Court's Preliminary Conclusions and related negotiations, to
determine (a) whether and the extent to which additional provisions may be
required as a result of a second opt out period and (b) whether the Company
will ultimately withdraw from the settlement.
OTHER LITIGATION
Due to the nature of its business as a supplier of specialty materials to
a variety of industries, the Company, at any particular time, is a defendant
in a number of products liability lawsuits for injury allegedly related to the
Company's products, and, in certain instances, products manufactured by
others. Many of these lawsuits seek damages in substantial amounts. For
example, the Company has been named in products liability lawsuits pertaining
to materials previously used in connection with temporomandibular joint
implant applications and raw materials supplied by the Company to
manufacturers of the
<PAGE>22
ITEM 1. LEGAL PROCEEDINGS (Continued)
- --------------------------
NORPLANT(R) Implant contraceptive device (NORPLANT(R) is a registered
trademark of the Population Council for Subdermal Levonorgestrel Implants).
The Company has followed a practice of aggressively defending all products
liability claims asserted against it. Although the Company intends to
continue this practice, currently pending proceedings and any future claims
are subject to the uncertainties attendant to litigation and the ultimate
outcome of any such proceedings or claims cannot be predicted with certainty.
Nonetheless, the Company believes that these products liability claims will
not have a material adverse effect on the Company's results of operations or
financial condition.
SECURITIES LAWS AND SHAREHOLDER DERIVATIVE LAWSUITS
Securities Laws Class Action Lawsuits
- -------------------------------------
As of March 31, 1995, the Company and certain of its directors and
officers were named, as defendants with others, in two securities laws class
action lawsuits filed by purchasers of stock of Corning Incorporated (Corning)
and The Dow Chemical Company (Dow Chemical). These cases were originally
filed as several separate cases in the Federal District Court for the Southern
District of New York in the first quarter of 1992; these cases were
consolidated in the second quarter of 1992 so 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 Chemical. The plaintiffs in
these cases allege, among other things, misrepresentations and omissions of
material facts and breach of duty with respect to purchasers of stock of
Corning and Dow Chemical relative to the breast implant issue. The relief
sought in these cases is monetary damages in unspecified amounts. Motions to
dismiss both cases have been filed by all defendants.
Shareholder Derivative Lawsuits
- -------------------------------
As of March 31, 1995, 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 provided information in response to the subpoenas and cooperated with
the Assistant U.S. Attorney as this grand jury investigation proceeded. On
April 24, 1995, the Company was advised by the United States Attorney in
Baltimore, Maryland, indicating that the Department of Justice has decided not
to pursue any federal criminal charges against the Company relating to the
Company's gel-filled breast implant product. This investigation, therefore,
has been concluded.
<PAGE>23
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. On November 16, 1994, the court further ruled in favor of the
Company on allocation of defense costs. The court ruled that each primary
occurrence insurer is obligated to pay the defense costs for all cases
alleging a date of implant either before or during the insurers' policy period
and for all cases involving unknown implant dates.
Notwithstanding this litigation, the Company is continuing its
negotiations with the Insurers to obtain an Insurance Allocation Agreement as
described above.
ITEMS 2. through 4.
- -------------------
Items omitted in accordance with General Instruction H of Form 10-Q.
ITEM 5. OTHER INFORMATION
- --------------------------
None.
<PAGE>24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
See the Exhibit Index which is located on page 26.
(b) Reports on Form 8-K
The Company has filed a Form 8-K on January 20, 1995, in connection
with a special charge to reflect the Company's best current estimate of
additional costs to resolve breast implant litigation and claims outside of
the settlement agreement.
<PAGE>25
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 May 3, 1995 R. A. Hazleton
----------------- -------------------------------------
R. A. Hazleton
Chairman and Chief Executive Officer
Date May 3, 1995 J. W. Churchfield
----------------- -------------------------------------
J. W. Churchfield
Vice President for Planning and
Finance and Chief Financial Officer
<PAGE>26
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 27
EXHIBIT 12
----------
DOW CORNING CORPORATION
-----------------------
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
(in millions of dollars)
Three months ended March 31,
----------------------------
1995 1994
---- ----
Earnings:
Income from continuing operations before income
taxes and minority interest $ 89.4 $66.4
Less:
Equity in earnings (losses) of less than
50%-owned companies in excess of distributed
income (0.1) (0.1)
Add:
Fixed charges 27.1 22.2
Amortization of capitalized interest 2.4 2.4
Deduct:
Interest capitalized during the period 2.7 2.4
------ -----
Earnings for computation purposes $116.3 $88.7
====== =====
Fixed charges:
Interest on indebtedness, expensed or
capitalized $ 23.2 $18.5
Portion of rents representative of the
interest factor 3.8 3.5
Amortization of debt expense 0.1 0.2
------ -----
Fixed charges for computation purposes $ 27.1 $22.2
====== =====
Ratio of earnings to fixed charges 4.3 4.0
=== ===
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> MAR-31-1995<F1>
<CASH> 265,600
<SECURITIES> 2,800
<RECEIVABLES> 439,600
<ALLOWANCES> 10,900
<INVENTORY> 340,600
<CURRENT-ASSETS> 1,732,500
<PP&E> 3,010,700
<DEPRECIATION> 1,809,500
<TOTAL-ASSETS> 4,203,800
<CURRENT-LIABILITIES> 1,285,700
<BONDS> 378,400
<COMMON> 12,500
0
0
<OTHER-SE> 736,200
<TOTAL-LIABILITY-AND-EQUITY> 4,203,800
<SALES> 611,800
<TOTAL-REVENUES> 611,800
<CGS> 396,400
<TOTAL-COSTS> 496,800
<OTHER-EXPENSES> 4,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,900
<INCOME-PRETAX> 89,400
<INCOME-TAX> 36,200
<INCOME-CONTINUING> 49,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,500
<EPS-PRIMARY> 19.80
<EPS-DILUTED> 19.80
<FN>
<F1>When computing ratios, please use the consolidated financial statements of
Dow Corning Corporation.
</FN>
</TABLE>
