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As filed with the Securities and Exchange Commission on September 10, 1999
Registration No.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of
The Securities Exchange Act of 1934
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DOW CORNING CORPORATION
(Exact name of registrant as specified in its charter)
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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
(517) 496-4000
Attn: James R. Jenkins, General Counsel
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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Securities to be registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which
to be registered each class is to be registered
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<S> <C>
Senior Notes Due 2009 New York Stock Exchange ("NYSE")
</TABLE>
Securities to be registered pursuant to Section 12(g) of the Act: None
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FORWARD-LOOKING STATEMENTS
This Registration Statement contains forward-looking statements, including
statements regarding, among other items, the availability of raw materials, our
ability to retain our competitive position, estimates of environmental and
litigation liability exposure, expected realization of our business strategy
and costs associated therewith, the sufficiency of cash flow and other sources
of liquidity to fund our debt service requirements, working capital needs and
other significant expenditures and anticipated trends in the silicone business,
including with respect to industry capacity, product demand and pricing.
Forward-looking statements typically are identified by the words "believe,"
"expect," "anticipate," "intend," "seek," "estimate," "project" and similar
expressions. These forward-looking statements involve risks and uncertainties
that are beyond our control. These risks and uncertainties include
unanticipated trends in the silicone business, issues related to the Year 2000
problem and the Euro conversion and economic, competitive, legal, governmental,
and technological factors. These factors could include global economic
conditions, currency fluctuations, product demand and industry capacity,
competitive products and pricing, manufacturing efficiencies, availability and
cost of critical materials, new product development and commercialization,
manufacturing capacity, facility expansion and new plant start up costs, the
effect of regulatory and legal developments, capital resource and cash flow
activities and interest costs. Actual results could differ from those
contemplated by these forward-looking statements. In light of these risks and
uncertainties, there can be no assurance that the results and events
contemplated by the forward-looking information contained in this Registration
Statement will in fact transpire. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. We do not undertake any obligation to update or revise any forward-
looking statements.
ITEM 1. BUSINESS
Unless otherwise noted, references to "DCC," "Dow Corning," "the Company,"
"we," "our" or "us" means Dow Corning Corporation, a Michigan corporation, and
its operating subsidiaries. We are owned equally by Dow Holdings, Inc., a
wholly owned subsidiary of The Dow Chemical Company, and Corning Incorporated.
Our principal executive offices are located at 2200 West Salzburg Road,
Midland, Michigan 48686-0994, and our telephone number is (517) 496-4000.
Company Overview
Dow Corning manufactures silicone-based products, with sales of over $2.5
billion in 1998. Our products serve a wide variety of industries, including
aerospace, automotive, chemicals/petrochemicals, construction, consumer
products, electrical and electronics, food processing, industrial maintenance
and production, medical materials, paints and coatings, personal household and
automotive care, plastics, pressure sensitive adhesives and paper release
coatings, and textiles and leather. We currently manufacture over 10,000
products and serve approximately 50,000 customers, with no single customer
accounting for more than three percent of our sales in 1998.
We were incorporated in 1943 by Corning Glass Works, now Corning
Incorporated, and The Dow Chemical Company for the purposes of developing and
producing polymers and other materials based on silicon, one of the most
abundant elements in the world. Most of our products are based on polymers
known as silicones, which have a silicon-oxygen-silicon backbone. Through
chemical processing, we manufacture silicones that have a wide variety of
characteristics, in forms ranging from fluids, gels, greases and elastomeric
materials to resins and other rigid materials. Silicones combine the
temperature and chemical resistance of glass and the versatility of plastics
and, regardless of form or application, generally possess qualities such as
resistance to electricity, resistance to extreme temperatures, resistance to
deterioration from aging, water repellency, lubricating characteristics,
relative chemical and physiological inertness and resistance to ultraviolet
radiation.
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Competitive Strengths
We have expended a significant portion of our revenues on research,
development and engineering and have established a goal of deriving a
significant percentage of our total sales each year from sales of products
that, within the past five years, were new, modified or employed in new
applications. We maintain research and development facilities in the United
States, Belgium, Germany, Japan and the United Kingdom and have invested
approximately 8% of sales revenues in these activities in each of the past
three years. Building upon our extensive research and development resources, we
have utilized various silicon-based technologies to develop a wide range of
products. Depending on the market and applications, our customers may further
formulate or process our products into their own products. In addition, we sell
many of our products, such as sealants and coatings, as end products.
Bankruptcy/Reorganization
On May 15, 1995, we voluntarily filed for protection under Chapter 11 of the
U.S. Bankruptcy Code, 11 U.S.C. (S) 101-1330, et seq. Our Chapter 11 proceeding
does not include any of our subsidiaries. On , 1999, the U.S.
Bankruptcy Court for the Eastern District of Michigan, Northern Division (the
"Bankruptcy Court"), entered an order in accordance with Section 1129 of the
U.S. Bankruptcy Code confirming the Amended Joint Plan of Reorganization (the
"POR") filed by us as debtor-in-possession. The POR became effective on
, 1999 (the "Effective Date"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further discussion.
Operating Segments and International Operations
We have three geographic operating segments: Americas, Europe and Asia. We
evaluate the performance of these three segments based on operating profit or
loss from operations, excluding interest income, interest expense, royalty
income, royalty expense, currency gains and losses, certain nonrecurring gains
and losses, implant costs, Chapter 11 reorganization expenses, income taxes and
minority interests' share in income. These costs and expenses are not allocated
to the operating segments. Revenue is based on sales to external customers
only. Inventory transfers between operating segments are accounted for at cost.
During 1998, however, we changed our valuation method used for inventory
transfers between operating segments from a variable cost basis (used in 1996
and 1997) to a fully absorbed cost basis. See Note 17 of Notes to 1998
Consolidated Financial Statements for further discussion.
Products
We manufacture and distribute over 10,000 silicone-based products serving a
wide variety of industries. We manufacture products that are designed to exceed
the specifications of products ordinarily manufactured and sold in bulk. These
products include adhesives; plastic additives; materials to protect electronic
devices that typically are designed for specialized industry applications;
performance materials, which are highly refined versions of sealants and
lubricants and industrial chemicals; high performance lubricants; paper and
fabric coatings; resins, varnishes and encapsulants; silicone release agents;
and chemical additives with uses ranging from antifoam compounds that moderate
foaming in detergents and carbonated beverages to substances that help
strengthen organic polymer foam products. We rely heavily on our research and
development resources to achieve a high degree of innovation with respect to
these products.
We also manufacture products that involve less differentiated technology and
are relatively uniform among competitors. These products include items such as
silicone elastomers; curable coatings; liquid silicone rubber; sealants and
related construction materials; silicone and flourosilicone rubbers; emulsions;
purified polycrystalline silicon for semiconductor applications; silicone
chemicals; and many lubricants.
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The following list demonstrates the diversity of the industries to which our
products are sold and includes representative products manufactured by us for
each industry.
. Aerospace. We manufacture products such as ceramic matrix composites,
windshield and canopy gasket sealants, optical interlayer laminants,
abrasion-resistant coatings and adhesives.
. Automotive. We produce heat-, oil- and fuel-resistant silicone rubbers
for molding into a variety of durable parts, one- or two-part sealants
and adhesives, specialty lubricants and materials for noise, vibration
and thermal management.
. Chemicals/Petrochemicals. We develop processing aids and silicon-based
coupling agents, which are used to bind organic substances to inorganic
substances (as in building materials) and to strengthen or facilitate the
processing of certain plastics.
. Construction. We produce construction adhesive/sealants and elastomers,
silicone/polyurethane foam roof coatings, sealants, architectural
coatings and water repellents, and concrete pavement joint sealants and
treatments for new construction and renovation applications on a total
building system basis. We market our TRADE MATE(R) products to the
building trades in the United States.
. Consumer Products. We manufacture a line of silicone adhesives, sealants
and caulks, which are marketed through third parties for home improvement
and renovation by do-it-yourselfers.
. Electrical and Electronics. We produce silicone rubber, adhesives,
sealants, elastoplastic resins for coating electrical wires and for
conformal coatings of circuit boards, compounds for potting and
protecting semiconductor devices, dielectric compounds, encapsulants that
cure at room temperature, thermoset plastics, high-purity coatings,
varnishes, resins, specialty lubricants, optical fiber coatings and
fiberoptic cable filler, and semiconductor-grade silicon and silicon-
source chemicals.
. Food Processing. We manufacture silicone antifoams and aids for food
processing applications.
. Industrial Maintenance and Production. We manufacture silicone
elastomers, adhesives, sealants, dielectric compounds, a wide range of
multi-purpose silicone fluids, antifoams, release agents, surfactants,
maintenance lubricants, elastomers and greases.
. Medical Materials. We produce tubing and elastomers suitable for use in
medical-grade applications, adhesives, defoamers and fluids.
. Paints and Coatings. We offer a wide variety of additives, resins and
intermediates for high- performance paints, enamels, finishes and
coatings; fluids for printing ink formulations; and silicone rubber
compounds for temperature- and chemical-resistant printing equipment
components.
. Personal, Household and Automotive Care. We produce silicones, which, as
surfactants, emulsions, lubricants and powder treatments, are important
ingredients in such products as skin and suntan lotions, antiperspirants,
hair care products, shaving creams, cosmetics, household and automotive
polishes, starches, fabric treatments and laundry products.
. Plastics. We develop mold release additives, catalyst and polymer
modifiers, and process aids for high- performance plastics applications.
. Pressure-Sensitive Adhesives and Paper Release Coatings. We produce
release coatings for backings on tapes, labels, stamps, stickers, decals
and food packaging as well as pressure-sensitive adhesives.
. Textile and Leather Finishing. We manufacture silicone antifoams and
softeners for textile processes, cloth and leather treatments, thread and
fabric finishes, waterproofing treatments and fiber chemicals.
Sales, Marketing and Distribution
The bulk of our products are sold to purchasers for use in manufacturing or
construction. We do not expend substantial amounts for mass market advertising
due to our limited involvement in direct markets for consumer products. Rather,
we focus on providing a high level of technical support to our customers. We
seek to enhance sales by providing customers with new formulations to meet
changing needs and to assist customers in the effective use of our products.
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We market our products through both a direct sales force and independent
wholesale sales representatives. We sell our products directly to our largest
customers and utilize distributors to sell our products to end users who
purchase smaller quantities of our products. These third parties act as
wholesalers, typically purchasing our silicone-based products directly and then
reselling them to the ultimate users. In some product-market segments, these
third-party wholesalers are highly specialized in their target markets. We have
direct sales representatives and independent wholesale sales representatives
throughout the world.
Sources and Availability of Raw Materials
The principal raw material used in the production of our products is derived
from silicon, one of the most abundant elements in the world. We purchase
chemical grade silicon metal ("Silicon Metal") from producers who manufacture
the Silicon Metal from quartz that has been reacted with carbon at high
temperatures. We purchase this Silicon Metal from approximately ten domestic
and international producers. The majority of our anticipated annual
requirements are satisfied by our Silicon Metal supply contracts. We believe
that we have adequate sources of supply of Silicon Metal and that adequate
supplies of quartz are available to the producers of Silicon Metal. We consider
the worldwide production capacity of Silicon Metal to be adequate to meet
expected demand and do not expect shortages.
We also purchase substantial quantities, and believe we have adequate
sources of supply, of methanol, methyl chloride and other raw materials
required for our manufacturing operations. The raw materials that we use are
equally accessible to all of our competitors. Although from time to time
temporary shortages of particular raw materials may occur, we believe that
adequate sources of raw materials required to maintain our operations exist.
Price increases with regard to our raw materials should not have a material
impact on our long-term competitiveness because any increases are likely to
affect all producers of silicon-based and silicone-based products approximately
equally. However, a substantial increase in silicon metal prices may negatively
impact our ability to compete with our extensive non-silicon-based product
competitors. Additionally, although price increases may adversely impact our
results of operations during the period in which the increases occur, generally
these price increases should not have a significant long-term impact on our
results of operations as we generally are able either to pass the price
increases on to our customers, off-set them through technology and productivity
improvements or mitigate the impact of the increases through improvements in
raw material usage and efficiency and substitution of lower-cost products.
Generally, we maintain inventory levels of raw materials in quantities
sufficient to meet our short-term production requirements.
Intellectual Property, Patents and Licenses
Our ability to compete with other companies depends, in part, on our ability
to maintain the proprietary nature of our technology. We focus on developing
new products to satisfy customer needs. We have over 8,100 active patents
worldwide, including over 1,800 active domestic patents. We have applied for
and received approximately 150-200 patents in the United States annually for
the past several years. Of the patents filed in the United States,
approximately 15-20% relate to process innovations, with the remainder applying
to products. We also are a licensor under a number of patent licenses and
technology agreements.
Although, we consider our patents and licenses to be valuable assets, we do
not regard our business as being dependent on any single patent or license or
any group of related patents or licenses. There can be no assurance as to the
degree of protection afforded by these patents, or the likelihood that pending
patent applications will be issued. Furthermore, there can be no assurance that
others will not independently develop the same or similar technology, develop
alternative technology in substitution for the patented aspects of any of our
products or proposed products or otherwise obtain access to our proprietary
technology.
In addition to seeking U.S. and international patent protection, we rely on
unpatented proprietary technology and information to maintain our competitive
position. While we generally require our employees to enter into
confidentiality agreements to protect our rights in this technology and
information, there can be no assurance that these agreements will provide
meaningful protection for our trade secrets, know-how or other
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proprietary information. If we were unable to maintain the proprietary nature
of our significant technology and other intellectual property, our business
could be adversely affected. See "Products" and "Competition" for additional
discussion.
Technology
We were founded for the purpose of developing and producing polymers and
other materials based on silicon technology. A polymer is a chemical compound
consisting of long chains of simple chemical units. Because polymer chains may
be extremely long and because of the ability of polymer chains to interact
chemically with each other, it is possible to create substances of widely
varying viscosity, hardness and other physical properties and thereby to
produce substances ranging from fluids, gels, greases and elastomers to hard
resins. The most well-known polymers are based on chains of carbon-based
chemical groups (commonly referred to as "organic polymers") and are often
principal components of plastics.
Chemically, silicon is similar to carbon in that it readily accepts four
chemical bonds when placed in the presence of various other reactive chemicals.
Marketable silicon-based polymers generally contain a backbone of silicon-
oxygen-silicon bonds, with various organic chemical groups attached in order to
give the polymer valuable characteristics such as lubricating qualities,
viscosity and adhesiveness. Such silicon-based polymers are known generically
as silicones. Silicones, like organic polymers, may be developed and
manufactured with a wide range of physical and chemical properties that can be
varied based on the manner in which the silicon-oxygen-silicon bonds are
configured and the identity and configuration of the other elements or
molecules that are introduced in this structure. Although silicones are often
more expensive to produce than their carbon-based organic counterparts, we
believe that in many applications the performance and quality benefits of
silicones are more important factors to our customers than the initial cost of
the material. For example, silicone-based caulking compounds have been
developed for use in many of the same applications as organic caulking
compounds. The silicone-based caulk typically is easier to apply and can last
several times longer than organic caulk.
The most important chemical intermediates used in the manufacture of
silicon-based products are a mixed group of methyl chlorosilanes. Methyl
chlorosilanes are produced by means of a capital-intensive process in which
finely-ground silicon metal is reacted with methyl chloride gas. We maintain,
and plan to continue to maintain, manufacturing facilities in Carrollton,
Kentucky; Barry, Wales, United Kingdom; and elsewhere for the production,
separation and further processing of these methyl chlorosilanes into other
silicon-based products. In addition, we maintain facilities in Midland,
Michigan that produce hydrogen trichloro-silane, another important chemical
building block for certain of our silicon-based products. Hydrogen trichloro-
silane is produced using technology similar to that used to produce the methyl
chlorosilanes. These silane building blocks are then converted into many of our
products using a variety of manufacturing processes.
Customers
Our products serve a wide variety of industries. We currently manufacture
and distribute over 10,000 products and serve approximately 50,000 customers,
with no single customer accounting for more than three percent of our net sales
in 1998.
Competition
We are a leader among the companies that produce silicon-based products
throughout the world. We face substantial competition for our products from
other manufacturers of silicon-based products both in the United States and
abroad. In addition, many of our products compete with non-silicon-based
products, including organic products, in specific applications. The risk of
product substitution is common to all of our products. The principal
competitive elements in the sale of our products are cost effectiveness,
product quality and performance, application expertise, responsive customer
service and new product development.
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Some of our products compete primarily on technological differentiation,
while other products compete primarily on price, quality and customer service.
Our products are often approved for use in, and frequently are specified for,
high performance products and processes by our customers, particularly in
applications where minor differences between competing materials can be
significant. This level of specificity provides some protection against
substitution of many of our products, particularly where our product has been
tailored to meet the needs of a specific application or where certification by
the customer involves a lengthy process.
Each of our significant competitors possesses substantial resources. We
believe that we possess certain competitive advantages that enable us to retain
our position as a global leader in the development and sale of silicon-based
products. We believe that our broad global manufacturing and research base and
our ability to produce the basic intermediates necessary for most of our
products at more than one manufacturing facility enhance our price
competitiveness and flexibility. We also maintain sales, business and
information offices and research and development centers throughout the world.
In addition, the Dow Corning name and the brand names of many of our products
are recognized in specific markets around the world. We believe that our global
presence also makes us less susceptible to the potential adverse consequences
of market fluctuations or other factors particular to any specific region,
facility or industry and provides us with the flexibility to shift production
among facilities when appropriate. Generally, we believe that there are
significant barriers to entry for new silicon-based entrants in many of our
markets that contribute to our worldwide leadership position. However, we
believe that barriers to entry to many of our markets for non-silicon based
entrants, including organic entrants, are less significant.
We believe we are one of only a few organizations worldwide that can meet
both the large-scale and highly specialized needs of customers for silicon-
based products because of the capital investment, technology and know-how
required to enter the silicon-based products market on a large scale. We
compete with different companies in each of our American, European and Asian
markets. In the United States, our largest silicone-producing competitor is the
General Electric Company. In Europe, we face substantial competition from three
European companies, Rhodia S.A. (France), GE Bayer Silicones GmbH & Co. KG
(Germany) and Wacker-Chemie GmbH (Germany). These companies are significant
competitors primarily with regard to the production of silicon-based sealants
and rubber. In addition, we compete with Wacker-Chemie GmbH in the production
of some specialized products. In Asia, our principal competitor, Shin-Etsu
Chemical Co. Ltd., is a significant competitor with regard to the production of
most of our silicon-based products.
There can be no assurance that any of our existing or future competitors
with respect to any of our products will not have the benefit of greater
capital, other resources or other competitive advantages, which may negatively
impact us in any one or more of our markets.
Research and Development
Since our inception, we have been engaged in a continuous program of basic
and applied research on silicon-based materials to develop new products and
processes, improve and refine existing products and processes and develop new
applications for existing products. We also provide a wide variety of technical
services to our customers.
During the last three years, we have expended approximately 8% of sales
revenues on research and development. Research and development expenditures are
charged to operations when incurred and totaled $198.9 million in 1998, $210.4
million in 1997 and $203.5 million in 1996.
We own and operate research and development facilities in the United States,
Belgium, Germany, Japan and the United Kingdom. We also operate technical
service centers in the United States, Australia, Belgium, Brazil, China,
France, Germany, Japan, South Korea, Taiwan and the United Kingdom.
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Environmental and other Government Regulation
We have set a goal to reduce our toxic releases within the United States by
75% in the year 2000 compared to the year 1987. This goal extends beyond
voluntary commitments made by us under two programs with the U.S. Environmental
Protection Agency (the "EPA")--the 33/50 Voluntary Reduction Program, under
which we have committed to reductions of all of our toxic chemical releases,
and the Clean Air Act Early Reduction Credit Program, under which we have
committed to major reductions in methyl chloride releases at our largest U.S.
manufacturing facilities. As of December 31, 1998, we have met all voluntary
commitments under the 33/50 Voluntary Reduction Program and the Clean Air Act
Early Reduction Credit Program. In addition, as a member of the Chemical
Manufacturer's Association ("CMA"), we have voluntarily committed to and are
implementing the Guiding Principles and Codes of Management Practice specified
in the CMA's Responsible Care Program, a continuing chemical industry effort to
improve the management of chemicals. In accord with our long-term commitment to
Responsible Care, we anticipate that all of our U.S. manufacturing sites will
achieve Responsible Care "Practice in Place" status by the end of 1999, and we
hope to have all of our international manufacturing sites achieve Responsible
Care "Practice in Place" status by 2003. In September 1999, the CMA is
scheduled to perform a third party Management Systems Verification to ensure
that our Environmental Health and Safety Management System is in place and
operating effectively.
In addition to our voluntary commitments, our global operations are subject
to increasingly stringent laws and government regulations related to
environmental protection and remediation. Our environmental responsibilities
and potential liabilities receive direct and ongoing scrutiny by management to
ensure compliance with these laws and regulations. It is our stated policy that
all global operations and products will meet or exceed national or state
regulations, depending on which is more stringent. A combination of self
assessments and third party verifications is used by management to continually
measure and report our progress.
We are named as a potentially responsible party ("PRP") under federal or
state Superfund statutes at nine sites. We readily cooperate in remediation
where our liability is clear, thereby minimizing legal and administrative
costs. This approach, coupled with our long-standing preference for on-site
waste treatment, has resulted in a minimal number of Superfund sites in which
we are involved. Because current law imposes joint and several liability upon
each party at a Superfund site, we have evaluated our potential liability in
light of the number of other companies that also have been named PRPs at each
site, the estimated apportionment of costs among all PRPs, and the financial
ability and commitment of each named PRP to pay its expected share. Our
management estimated that our remaining liability for the remediation of
Superfund sites at June 30, 1999, was $5.4 million. Receivables of $3.3 million
for probable third-party recoveries have been recorded related to Superfund
sites. This is our management's best estimate of the costs for remediation and
restoration with respect to environmental matters for which we have accrued
liabilities. Although the ultimate cost with respect to these particular
matters could vary, our management believes that any costs incurred in excess
of those accrued will not have an adverse impact on our consolidated financial
position or results of operations.
As a result of financial provisions recorded with respect to breast implant
liability, we have been unable to meet some federal and state environmental
statutory financial ratio tests. Consequently, in order for us to continue to
operate hazardous waste storage facilities at some plant sites, the states
involved have required us to establish trusts to provide for aggregate
estimated closure, post-closure, corrective action and potential liability
costs of $23.4 million associated with these hazardous waste storage facilities
and we have fully funded these trusts as of August 25, 1999. Interest on the
funds held in trust is available to us under certain circumstances, and the
amount required to be held in trust could vary annually. At such time as we
satisfy the above-referenced financial ratio tests, or we no longer need or
close the permitted facilities, the funds remaining in these trusts revert to
us. The establishment and funding of these trusts is subject to the continuing
jurisdiction of the Bankruptcy Court.
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Employees
Our average employment for 1998 was 9,400 persons. Average employment for
1997, determined on a comparable basis, was 9,100 persons. Two of our U.S.
plants and several of our international plants have unionized employees. We
consider our relations with our employees to be good.
International Operations and Export Sales
Our international operations contributed approximately 61% of our net sales
in 1998. Our international operations, principally in Europe and Asia, are
conducted primarily through wholly-owned subsidiaries and a majority-owned
joint venture company and involve sales of substantially all of our products.
These products are manufactured either domestically or by one of our
international subsidiaries. See Note 17 of Notes to 1998 Consolidated Financial
Statements for further discussion.
Our international operations are affected by factors normally associated
with operations of these types and many of which are beyond our control,
including:
.exchange controls;
.fluctuations in currency values;
.local economic and labor conditions;
.dividend and payment restrictions;
.political instability; and
.international credit or financial problems.
While these factors involve risks different from those associated with domestic
business activities, we do not regard the overall risks of our international
operations, on the whole, to be materially greater than those of our operations
in the United States.
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ITEM 2. FINANCIAL INFORMATION
Selected Consolidated Financial Data
The following table sets forth selected historical consolidated financial
information of Dow Corning as of and for each of the five years ended December
31, 1998, 1997, 1996, 1995 and 1994 and as of and for the six months ended June
30, 1999 and 1998. The selected consolidated financial data as of and for each
of the five years has been derived from our consolidated financial statements,
which were audited by PricewaterhouseCoopers LLP. The selected consolidated
financial data as of and for the six months ended June 30, 1999 and 1998 has
been derived from our unaudited financial statements. The following information
should be read in conjunction with our consolidated financial statements and
the notes to those statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," included elsewhere in this
Registration Statement.
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<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------ ------------------
1998 1997 1996 1995 1994 1999 1998
-------- -------- -------- -------- -------- -------- --------
(dollars in millions, except per share
amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations:
Net sales.............. $2,568.0 $2,643.5 $2,532.3 $2,492.9 $2,204.6 $1,281.7 $1,280.0
Manufacturing cost of
sales................. 1,771.0 1,795.9 1,674.0 1,664.4 1,470.3 884.3 859.5
Marketing and
administrative
expenses.............. 471.4 466.9 462.3 450.3 415.4 259.3 251.9
Implant costs (1)...... 1,070.8 -- -- 351.1 241.0 -- --
Restructuring costs.... 28.1 -- -- -- -- 8.6 --
-------- -------- -------- -------- -------- -------- --------
Operating income
(loss)................ (773.3) 380.7 396.0 27.1 77.9 129.5 168.6
Interest income........ 78.3 70.4 54.1 36.6 18.0 38.8 36.6
Interest (expense)..... (214.3) (11.0) (7.8) (43.0) (70.3) (42.4) (6.0)
Other income (expense)
(net)................. 8.2 32.2 16.1 (22.6) (11.0) (10.5) (6.4)
Reorganization costs... 33.1 45.0 49.4 21.0 -- 37.2 16.9
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes.......... (934.2) 427.3 409.0 (22.9) 14.6 78.2 175.9
Income tax provision
(benefit)............. (347.8) 168.8 168.9 (9.6) 7.9 29.9 69.5
Minority interests'
share in income....... 8.6 20.9 18.4 17.3 13.5 1.0 5.6
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ (595.0) $ 237.6 $ 221.7 $ (30.6) $ (6.8) $ 47.3 $ 100.8
======== ======== ======== ======== ======== ======== ======== ===
Net income (loss) per
common share.......... $(238.00) $ 95.04 $ 88.68 $ (12.24) $ (2.72) $ 18.92 $ 40.32
Balance Sheet Data (at
period end):
Working capital........ $ 826.4 $ 889.0 $1,044.2 $1,376.2 $ 310.8 $ 740.5 $ 875.9
Property, plant and
equipment, net........ 1,710.0 1,480.1 1,305.3 1,207.6 1,191.9 1,642.5 1,552.9
Non-current anticipated
implant insurance
receivable............ 729.1 911.6 999.0 1,126.0 943.6 729.1 910.3
Restricted insurance
proceeds.............. 627.4 517.2 480.9 108.3 -- 781.1 562.4
Total assets........... 6,166.3 5,318.7 5,114.1 4,958.4 4,093.2 6,131.2 5,422.6
Long-term debt......... 147.9 140.9 103.3 110.8 335.1 123.8 140.0
Long-term debt:
liabilities subject to
compromise............ 270.0 267.2 270.4 273.4 -- 269.1 265.6
Implant reserve........ 3,229.0 2,406.3 2,424.4 2,471.5 1,286.9 3,223.4 2,398.9
Stockholders' equity... 436.3 1,026.3 838.3 646.9 676.2 411.7 1,129.9
</TABLE>
- --------
(1) Includes charge for estimated costs related to breast implant litigation
for the years ended December 31, 1998, 1995 and 1994. See Notes 3 and 4 of
Notes to 1998 Consolidated Financial Statements for further discussion.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our consolidated financial condition and
results of operations for the six months ended June 30, 1999 and the years
ended December 31, 1998, 1997 and 1996. The following should be read in
conjunction with our consolidated financial statements and the notes to those
statements appearing elsewhere in this Registration Statement.
General
We experienced an increase in net sales of $1.7 million or 0.1% for the six
months ended June 30, 1999 compared to the six months ended June 30, 1998. Our
income from continuing operations was $129.5 million for the six months ended
June 30, 1999 compared to $168.6 million for the six months ended June 30,
1998.
Breast Implant Issues and the Related Chapter 11 Proceeding
Funding Obligations Arising Under Our Amended Joint Plan of Reorganization.
In 1995, we voluntarily filed for protection under Chapter 11 of the U.S.
Bankruptcy Code in response to numerous breast implant claims against us. After
lengthy negotiations supervised by a court-appointed mediator, together with
our stockholders and the creditor committee representing tort claimants, we
agreed to the POR. On , 1999, the Bankruptcy Court confirmed the POR and
established the Effective Date. We believe that the implementation of the POR
will resolve substantially all of the present and potential future breast
implant and other products liability claims against us. Pursuant to the POR, we
will provide up to $4.5 billion to satisfy claims of our creditors. We will
commit up to $3.2 billion of the $4.5 billion to resolve products liability
claims through several settlement options or through litigation. Pursuant to
the POR, products liability claims to be resolved by settlement will be
administered by a settlement facility (the "Settlement Facility"), and products
liability claims to be resolved by litigation will be administered by a
litigation facility (the "Litigation Facility"). Payments made by us will be
placed in trust and withdrawn by the Settlement Facility to pay eligible
settling claimants and to cover the Settlement Facility's operating expenses.
Amounts will also be withdrawn from the trust as necessary to fund the
resolution of claims through the Litigation Facility. As of June 30, 1999, we
have recorded liabilities of approximately $3.2 billion to recognize our best
estimate of the anticipated financial consequences to Dow Corning to resolve
all tort claims arising from the POR and the breast implant controversy.
Additionally, pursuant to the POR, we will provide up to $1.3 billion to
satisfy commercial claims, which will be paid in full, including interest
accrued during the pendency of our Chapter 11 proceeding at a rate of 6.28%,
compounded annually. As of June 30, 1999, we have recorded liabilities of
approximately $1.0 billion relating to the claims of unsecured commercial
creditors, including interest payable. Of this amount, approximately $250
million will be paid in cash, and approximately $750 million of ten-year senior
unsecured notes will be issued, to the unsecured commercial creditors as the
Bankruptcy Court approves these claims for payment. However, since the
commercial claims reconciliation process is ongoing, the amount of cash to be
paid and senior unsecured notes to be issued could vary. If the amounts due to
unsecured commercial creditors reaches $1.3 billion as contemplated in the POR,
approximately $315 million would be paid in cash, and approximately $1.0
billion of ten-year senior unsecured notes would be issued to the unsecured
commercial creditors.
We will fund the Settlement Facility and the Litigation Facility
(collectively, the "Facilities") pursuant to a funding payment agreement (the
"Funding Payment Agreement"). We will fund the Facilities over a 16-year
period. We anticipate that we will be able to meet our payment obligations to
the Facilities utilizing cash flow from operations, insurance proceeds, cash on
hand and prospective borrowings. Under certain circumstances, to assist in the
timely funding of the Facilities, we also will have access to a ten-year
unsecured revolving credit commitment established by The Dow Chemical Company
and Corning Incorporated to assist in timely funding of the Facilities. During
the first five years of this revolving credit commitment, the maximum aggregate
amount available to us is $300.0 million. Beginning in the sixth year following
the Effective Date, the amount of availability under the credit facility will
decrease by the amount of $50.0 million per year. Borrowings under
11
<PAGE>
this revolving credit commitment bear interest at a rate equal to 150 basis
points above the 90-day London Interbank Offer Rate ("LIBOR") as announced by
or published by the Wall Street Journal.
The first payment under the Funding Payment Agreement is $985.0 million (the
"Initial Payment") plus any amounts earned after April 30, 1999 on $905.0
million of the Initial Payment, which amounts totaled $6.2 million as of June
30, 1999. Subsequent to this first payment, during the first five years of the
Funding Payment Agreement, the maximum annual amounts that we will pay are
$47.0 million in the first year, $103.0 million in the second year, $374.0
million in the third year, $204.0 million in the fourth year and $205.0 million
in fifth year. Thereafter, the maximum aggregate amount that we will pay is
$1,254.0 million for the ensuing eleven-year period. The timing of the actual
amounts that we will pay under the Funding Payment Agreement will be affected
by the rate at which claims are resolved by the Facilities and the rate at
which we receive insurance proceeds from our insurers. See Note 3 of Notes to
1998 Consolidated Financial Statements for further discussion.
Under the POR, the Settlement Facility will allow breast implant claimants
who choose to settle their claims against us and who meet certain documentation
and eligibility criteria to combine up to three settlement options, which will
result in payments ranging from $2,000 to more than $250,000 (the "Base
Payments"). The settlement options available under the POR are:
. an expedited payment option, available for three years after the
Effective Date, that will pay $2,000 to qualifying breast implant
claimants who want to settle their claims immediately and do not intend
to file a disease claim (the "Expedited Release Payment Option");
. a rupture settlement option that will pay $20,000 to qualifying breast
implant claimants who, prior to the second anniversary of the Effective
Date, have undergone surgery to remove a ruptured breast implant
manufactured by us (the "Rupture Payment Option");
. an "explantation" payment option that will pay $5,000 for removal (on or
after December 31, 1990 but no later than ten years after the Effective
Date) of breast implants manufactured by us (the "Explantation Payment
Option"); and
. a disease payment option that will pay between $10,000 and $250,000 to
breast implant claimants who file a claim within 15 years of the
Effective Date if they have or have had certain specified symptoms or
medical conditions that are adequately documented and evaluated (the
"Disease Payment Option").
Claimants qualifying for either the Expedited Release Payment Option or the
Disease Payment Option may, under certain circumstances, also qualify for the
Rupture Payment Option and the Explantation Payment Option. In addition,
claimants qualifying for the Disease Payment Option may be eligible for
payments in excess of the Base Payments (the "Premium Payments") in an amount
up to 20% of the Disease Payment Option amounts specified above if sufficient
funds ultimately are available. Claimants qualifying for the Rupture Payment
Option may be eligible for a Premium Payment of up to $5,000 if sufficient
funds ultimately are available.
The POR also provides that claimants who are eligible for payments under the
Disease Payment Option may qualify for additional compensation if their medical
condition changes. In addition, amounts otherwise payable under the Disease
Payment Option will be reduced by one-half for breast implant claimants who
have had breast implants manufactured by us in addition to breast implants
produced by another manufacturer. Settlement amounts payable to breast implant
claimants who have had breast implants produced by another manufacturer using
raw materials supplied by us will be determined after review and evaluation and
paid from a fixed fund; payments could amount to 40% of amounts payable under
the Expedited Release Payment Option or the Disease Payment Option.
Settlement payments to non-U.S. breast implant claimants under the POR will
be equal to either 35% or 60% of similar payments made to U.S. breast implant
claimants, depending on the country of residence of the non-U.S. breast implant
claimant receiving settlement payments. These reduced amounts are designed to
12
<PAGE>
account for differing local economic and legal system factors. Furthermore, the
POR incorporates the terms and conditions of three Canadian class action
settlements in the provinces of Ontario, Quebec and British Columbia, Canada
and a settlement of Australian breast implant litigation by claimants who
choose to participate in the Australian settlement. The British Columbian
settlement is available to claimants in the remaining provinces of Canada as
well. See Note 3 of Notes to 1998 Consolidated Financial Statements for further
discussion.
Under the POR, non-breast implant products liability claimants, such as
claimants with knee or hip orthopedic devices or chin and facial implants, who
choose to settle their claims through the Settlement Facility mechanism can
choose the Expedited Release Payment Option, under which such claimants will be
paid $600, or the Disease Payment Option, under which such claimants will be
paid $600, or the Disease Payment Option, under which such claimants will
receive settlement payments of between $2,500 and $7,500 depending on the type
of product used and the severity of particular claimants' injuries.
Qualified claims of settling products liability claimants will be processed
under the supervision of an independent claims administrator.
Under the POR, products liability claimants choosing to litigate their
claims will be required to pursue their claims through litigation against the
Litigation Facility, including a mandated pre-trial mediation program. We
contemplate that this process also will include some common issues procedures
(the "Common Issues Procedures") to resolve, among other things, the core issue
of whether silicone implants cause the diseases alleged by products liability
claimants. See Note 3 of Notes to 1998 Consolidated Financial Statements for
further discussion. The U.S. District Court for the Eastern District of
Michigan ultimately will determine whether the Common Issues Procedures will be
implemented.
If use of the Common Issues Procedures results in a conclusion that silicone
implants do not cause disease, some or all disease claims against the
Litigation Facility will be disallowed and some or all products liability
claimants choosing to resolve their disease claims by litigation may not
receive any distribution from the Litigation Facility. If use of the Common
Issues Procedures results in a conclusion that silicone implants do cause
disease, individual claims that remain against the Litigation Facility will be
resolved through further litigation or settlement. In any event, non-disease
claims (for example, those claims related to mechanical failure or local
complications) could continue to proceed against the Litigation Facility. The
POR also contemplates that other common issue procedures may be undertaken by
the Litigation Facility, including trials to determine, for example, the
application of bulk-supplier defenses to raw material claims and other issues.
Claimants who choose to pursue their claims against us through the Litigation
Facility will forgo any right to receive benefits under the settlement options
provided through the Settlement Facility. The result of implementing the Common
Issues Procedures will not affect those claimants who choose to resolve their
claims through the Settlement Facility.
The POR provides that punitive damage claims will not be allowed.
Under the POR, products liability claims relating to long-term contraceptive
implants will be assigned to the Litigation Facility for administrative
purposes and will be resolved as to us by indemnification from or litigation
against the ultimate manufacturers of these implants.
Historic Expenses Related to Breast Implant Matters and Insurance Matters.
Since the early 1990s, expenses related to breast implant litigation and our
related Chapter 11 proceeding have had a significant negative impact on our
profitability. As of December 31, 1998, our reserves for resolution of breast
implant products liability claims were approximately $3.2 billion and our
insurance assets, consisting of an insurance receivable plus restricted
insurance proceeds, related to such claims totaled approximately $1.5 billion.
Our management believes that it is probable that we will recover from our
insurers a substantial amount of breast implant related payments that either
previously have been made by us or will be made by us pursuant to the POR. This
belief stems from the fact that, in 1996, litigation between us and certain of
our products liability
13
<PAGE>
insurers concluded favorably to us, and the fact that we have entered into a
number of buy-out and coverage-in-place settlements with our insurance carriers
over a number of years. Additionally, we received aggregate insurance
settlement recoveries of $875.7 million from September 1, 1994 through August
25, 1999, and have entered into other settlements with some insurers for future
reimbursement.
Anticipated Implant Insurance Receivable and Restricted Insurance Proceeds.
As of June 30, 1999, cash proceeds received since the commencement of our
Chapter 11 proceeding from settlements with insurers totaled $723.8 million.
This amount, along with related investment income of $57.3 million (net of tax)
is restricted as to its use pursuant to orders from the Bankruptcy Court.
Accordingly, $781.1 million is included in the caption "Restricted insurance
proceeds" in our consolidated balance sheet as of June 30, 1999. The
"Restricted insurance proceeds" are invested in investment categories approved
by the Bankruptcy Court. As of June 30, 1999, the marketable securities
included in the caption "Restricted insurance proceeds" consisted primarily of
state and municipal securities, and fixed and floating rate corporate notes.
A majority of the "Restricted insurance proceeds" and the "Anticipated
implant insurance receivable" recorded in our consolidated balance sheets
relates to policies that name The Dow Chemical Company and us as co-insureds
(the "Shared Insurance Assets"). Together with The Dow Chemical Company, we
will have rights to petition the Bankruptcy Court for distribution of the
"Restricted insurance proceeds" primarily for the purpose of making specified
indemnity payments or reimbursing specified expense payments under conditions
prescribed by the Bankruptcy Court. We anticipate that future settlements of
policies that name us as a co-insured will be subject to the approval of the
Bankruptcy Court and restricted in a manner similar to that described above.
A substantial portion of the "Anticipated implant insurance receivable"
recorded in our consolidated balance sheets relates to amounts expected to be
recovered from the insurance companies that issued occurrence-based products
liability policies to us from 1962 through 1985 (the "Occurrence Insurers").
See "Liquidity and Capital Resources" below for a further discussion of
insurance matters. The principal uncertainties that exist with respect to the
realization of this asset include the ultimate cost of resolving breast implant
litigation and claims, the results of litigation against and settlement
negotiations with insurers and the extent to which insurers may become
insolvent in the future. We took these factors into account when estimating the
amount of insurance receivable to record in our consolidated financial
statements. As additional facts and circumstances develop, it is possible that
the amount recorded as "Anticipated implant insurance receivable" may be
revised to reflect any material developments relating to insurance matters.
Future revisions, if required, could have an adverse effect on our financial
position and results of operations in the period or periods in which these
revisions are recorded.
We believe that it is probable that we will have access to the Shared
Insurance Assets and other insurance proceeds in an amount sufficient to
ultimately realize the "Restricted insurance proceeds" and "Anticipated implant
insurance receivable" recorded in our consolidated balance sheets.
Proposed Insurance Allocation Agreement Between Dow Corning and The Dow
Chemical Company. As stated above, a number of our products liability insurance
policies name The Dow Chemical Company and us as co-insureds. Upon approval of
the POR, a portion of the Shared Insurance Assets will, under certain
conditions, become payable by us to The Dow Chemical Company under an insurance
allocation agreement between The Dow Chemical Company and us (the "Insurance
Allocation Agreement"). Under the Insurance Allocation Agreement, 25% of
certain of the Shared Insurance Assets would be paid by us to The Dow Chemical
Company. However, the amount of Shared Insurance Assets that would be payable
to The Dow Chemical Company by us under the Insurance Allocation Agreement
would not exceed approximately $320.0 million. In addition, a portion of any of
the amounts paid to The Dow Chemical Company, to the extent not used by The Dow
Chemical Company to pay certain products liability claims, would revert to us
after the expiration of a 17.5-year period commencing on the Effective Date.
See Notes 3 and 4 of Notes to Consolidated Financial Statements for further
discussion.
14
<PAGE>
Results of Operations
We currently manufacture and distribute over 10,000 silicone-based products
and serve approximately 50,000 customers, with no single customer accounting
for more than three percent of our net sales in 1998. The following table sets
forth the percentage relationship of certain cost and expense items to net
sales for the periods indicated:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended June
December 31, 30,
-------------------- ------------
1998 1997 1996 1999 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Manufacturing costs of sales............. 69.0 67.9 66.1 69.0 67.1
----- ----- ----- ----- -----
Gross margin............................. 31.0 32.1 33.9 31.0 32.9
Marketing and administrative expenses.... 18.3 17.7 18.3 20.2 19.7
Implant costs............................ 41.7 -- -- -- --
Restructuring costs...................... 1.1 -- -- 0.7 --
----- ----- ----- ----- -----
Operating income (loss).................. (30.1) 14.4 15.6 10.1 13.2
Interest income.......................... 3.0 2.7 2.2 3.0 2.8
Interest expense......................... (8.3) (0.4) (0.3) (3.3) (0.5)
Other income (expense) (net)............. 0.3 1.2 0.7 (0.8) 0.5
Reorganization costs..................... 1.3 1.7 2.0 2.9 1.3
----- ----- ----- ----- -----
Income (loss) before income taxes........ (36.4) 16.2 16.2 6.1 13.7
Income tax provision (benefit)........... (13.5) 6.4 6.7 2.3 5.4
Minority interests' share in income...... 0.3 0.8 0.7 0.1 0.4
----- ----- ----- ----- -----
Net income (loss)........................ (23.2)% 9.0% 8.8% 3.7% 7.9%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net sales for the six months ended June 30, 1999 were $1,281.7 million,
essentially unchanged from net sales of $1,280.0 million for the six months
ended June 30, 1998. Improved sales in the Asia operating segment, attributable
to a partial recovery from the economic turmoil experienced during the first
half of 1998, were offset by a weakening of sales in Europe and the Americas.
The lower U.S.-dollar sales for Europe in 1999 compared to 1998 resulted from
lower reported U.S.-dollar sales due to the strengthening of the U.S. dollar
exchange rate against European currencies. The decline in net sales in the
Americas operating segment was attributable primarily to a continued decline in
demand for semiconductor-grade silicon.
Manufacturing cost of sales for the six months ended June 30, 1999 were
$884.3 million compared to $859.5 million for the six months ended June 30,
1998. As a percent of net sales, manufacturing cost of sales was 69.0% for the
six months ended June 30, 1999 compared to 67.1% for the six months ended June
30, 1998. Manufacturing cost of sales increased as a percent of net sales for
the six months ended June 30, 1999 compared to the six months ended June 30,
1998 due to a general reduction in product sales prices experienced in 1999.
Marketing and administrative expenses for the six months ended June 30, 1999
were $259.3 compared to $251.9 million for the six months ended June 30, 1998.
Operating income for the six months ended June 30, 1999 was $129.5 million
compared to $168.6 million for the six months ended June 30, 1998. In addition
to the factors discussed above, operating income for the six months ended June
30, 1999 was negatively affected by additional restructuring charges of $8.6
million relating to the global restructuring we announced in late 1998.
15
<PAGE>
Interest income was $38.8 million for the six months ended June 30, 1999
compared to $36.6 million for the six months ended June 30, 1998. Interest
income in the first six months of 1999 and in 1998 and 1997 was attributable
primarily to escrowed insurance proceeds and other amounts deposited for use to
satisfy liabilities arising out of our Chapter 11 proceeding. Upon payment of
the POR amounts anticipated to be funded out of our cash balance, we anticipate
that our interest income in the future will be substantially less than amounts
earned in the first six months of 1999.
Interest expense for the six months ended June 30, 1999 increased
substantially to $42.4 million compared to $6.0 million for the six months
ended June 30, 1998. The increased interest expense in the first six months of
1999 was attributable to interest payable by us to commercial creditors under
the terms of the POR, and by the recording of $16.2 million in additional
amounts payable under the POR to tort claimants in our Chapter 11 proceeding.
Reorganization costs for the six months ended June 30, 1999 also increased
substantially to $37.2 million compared to $16.9 million for the six months
ended June 30, 1998. The increased level of reorganization costs in the first
six months of 1999 was attributable to the costs associated with soliciting
acceptances of the POR from claimants in our Chapter 11 proceeding.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
We experienced a decrease in net sales for 1998 compared to 1997 of $75.5
million, or 3.0%. The decrease in sales in 1998 as compared to 1997 was
attributable principally to the impact of a strong U.S. dollar exchange rate on
sales revenues denominated in non-U.S. currencies, particularly in the Asia
operating segment. Sales also were negatively impacted by demand weaknesses,
which began in Asia in late 1997 and spread to other parts of the world during
1998.
Our operating loss was $773.3 million in 1998, compared to a profit of
$380.7 million in 1997. The 1998 loss was attributable primarily to an implant
charge of $1,070.8 million. The implant charge was recognized for the
anticipated financial consequences to resolve all claims arising from our
Chapter 11 proceeding and from the breast implant controversy. The impact of a
strong U.S. dollar exchange rate on reported sales revenue, particularly in the
Asia operating segment, and the impact of a restructuring charge of $28.1
million also negatively affected 1998 operating results. The restructuring
charge was recorded to reflect costs incurred or to be incurred to implement
announced actions relating to a global restructuring of our operations designed
to improve operating efficiencies and to enable us to better meet customers'
expectations.
In 1998, we reported a loss of $595.0 million, compared to a profit of
$237.6 million in 1997. In addition to the factors discussed above, our 1998
results were negatively affected by a cumulative interest expense charge of
$201.7 million ($127.1 million after tax) for the amount of interest payable
for the period from May 15, 1995 through December 31, 1998 to our commercial
creditors according to the POR. The amount of this charge was determined using
the U.S. federal judgment rate of 6.28% that was in effect on May 15, 1995 as
specified in the POR. Excluding the implant charge, restructuring charge and
cumulative interest expense charge from 1998 net income, our net income
decreased by $13.2 million, or 5.6%, in 1998 as compared to 1997. The decrease
in net income reflects the reduction in operating income described above,
partially offset by lower reorganization costs incurred in our Chapter 11
proceeding and a lower tax provision on net income from continuing operations.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
We experienced an increase in net sales for 1997 compared to 1996 of $111.2
million, or 4.4%. The increase in sales in 1997 as compared to 1996 was
attributable principally to strong volume growth in most product lines and
operating segments, partially offset by the impact of a strong U.S. dollar
exchange rate on sales revenues denominated in non-U.S. currencies and by local
pricing pressures in all operating segments.
16
<PAGE>
Our operating income decreased by $15.3 million, or 3.9%, in 1997 as
compared to 1996. This decrease was attributable principally to an increase in
the cost of purchased raw materials, which more than offset the increase in
sales described above.
Our net income increased by $15.9 million, or 7.2%, in 1997 as compared to
1996. The increase in net income reflects the reduction in operating income
described above, offset by increased interest income and lower reorganization
costs incurred in our Chapter 11 proceeding. Reported interest income in both
1997 and 1996 was attributable primarily to escrowed insurance proceeds and
other amounts deposited for use to satisfy liabilities arising out of our
Chapter 11 proceeding.
Operating Segments
We have three geographic operating segments: Americas, Europe, and Asia. The
financial results for our three operating segments have been prepared on a
basis that is consistent with the manner in which we internally disaggregate
financial information for the purpose of assisting in making internal operating
decisions. We evaluate the performance of these three segments based on
operating profit or loss from operations excluding interest income, interest
expense, royalty income, royalty expense, currency gains and losses, certain
nonrecurring gains and losses, implant costs, Chapter 11 reorganization
expenses, income taxes and minority interests' share in income. These costs and
expenses are not allocated to the operating segments. Revenue is based on sales
to external customers only. Inventory transfers between operating segments are
accounted for at cost. During 1998, however, we changed our valuation method
used for inventory transfers between operating segments from a variable cost
basis (used in 1997 and 1996) to a fully absorbed cost basis. There is no
impact on our consolidated results from this change in valuation method for
inventory transfers between operating segments. On an operating-segment basis,
this change would have positively impacted the Americas operating segment's
results and negatively impacted the Asia operating segment's results.
Restatement of segment operating profit for 1997 and 1996 to conform to 1998 is
impracticable.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In millions)
<S> <C> <C> <C>
AMERICAS
Sales....................................... $1,300.6 $1,315.8 $1,225.2
Segment Operating Profit.................... 350.7 303.8 307.7
</TABLE>
Sales for the Americas operating segment declined slightly in 1998 as
compared to 1997, reflecting reduced market demand for semiconductor-grade
silicon and flat demand for other products. Despite this decline, segment
operating profit increased in 1998 as compared to 1997 due primarily to the
change from a variable cost valuation method to a fully absorbed valuation
method for inventory transfers between operating segments as noted above. Fixed
expenses incurred by the Americas operating segment did not change
significantly in 1998 as compared to 1997.
Sales for the Americas operating segment increased by $90.6 million or 7.4%
in 1997 as compared to 1996. Sales growth was driven by strong market demand
for semiconductor-grade silicon and methyl chlorosilane intermediates. Despite
the additional sales revenue generated during 1997, segment operating profit
declined slightly in 1997 as compared to 1996 due to increased raw material
costs and the inclusion of certain previously unallocated expenses to the
Americas operating segment. Actual fixed expenses, adjusted to remove the
effect of this adjustment, increased at a rate lower than reported sales
growth.
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In millions)
<S> <C> <C> <C>
EUROPE
Sales............................................. $619.5 $608.7 $610.1
Segment Operating Profit.......................... 70.6 80.5 86.5
</TABLE>
17
<PAGE>
Sales for the Europe operating segment increased by $10.8 million, or 1.8%,
in 1998 as compared to 1997, despite a weakening of demand late in the year.
The market was characterized during 1998 by an excess of supply in many product
lines, contributing to a general deterioration in selling prices. Sales
performance was mixed across our product lines, as was the case in 1997. An
increase in fixed expenses, associated with the start up of increased
manufacturing capabilities at our Barry, Wales, United Kingdom facility,
contributed to reduced Segment Operating Profit in 1998 despite the increase in
sales discussed above.
Sales for the Europe operating segment were essentially flat when comparing
1997 to 1996. Sales performance was mixed across our product lines. Fixed
expenses declined slightly. Flat sales, combined with higher raw material
costs, resulted in a slight decline in segment operating profit.
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In millions)
<S> <C> <C> <C>
ASIA
Sales................................................... $647.9 $718.9 $697.0
Segment Operating Profit................................ 68.2 178.3 165.2
</TABLE>
Sales and Segment Operating Profit for the Asia operating segment for 1998
reflect thirteen months of activity for the Asia operating segment. Prior to
1998, the fiscal year for Asia ended in November. During 1998, the fiscal year
was changed to match the calendar year. As a result, sales for 1998 reported
above were increased by approximately $43.9 million to reflect the additional
month of activity. The impact of the additional month of activity on Segment
Operating Profit for 1998 was negligible.
Sales for the Asia operating segment, adjusted to remove the additional
month of sales revenue discussed above, decreased by $114.9 million, or 16.0%,
in 1998 as compared to 1997, reflecting the impact of the Asian economic
crisis, which began in late 1997. The decline in sales resulted from a
significant decrease in demand for all products in all markets, exacerbated by
the strengthening of the U.S. dollar against all Asian currencies, which
reduced reported U.S.- dollar sales revenue. This decline in sales, combined
with the previously-discussed change during 1998 from a variable cost valuation
method to a fully absorbed valuation method for inventory transfers between
operating segments, contributed to the sharp decrease in Segment Operating
Profit for 1998 compared to 1997.
Sales for the Asia operating segment increased by $21.9 million, or 3.1%, in
1997 compared to 1996. Sales revenue across most product lines was flat, except
for sales of certain products used as sealants primarily in the construction
industries. The sales increase was fueled by strong product demand, which more
than offset the effects of aggressive local price competition and the negative
impact of exchange rate movements, although market demand weakened late in the
year at the onset of the Asian economic crisis. Fixed expenses declined
slightly.
Liquidity and Capital Resources
In General. Our net cash flow from operating activities was $330.4 million,
$432.7 million and $544.6 million for the years ended December 31, 1998, 1997
and 1996, respectively. The items affecting net income are discussed in the
Results of Operations section. In addition, net cash flow from operating
activities for the year ended December 31, 1998 as compared to the year ended
December 31, 1997 was impacted negatively by increases during 1998 in our level
of accounts and notes receivable and inventories. The increase in inventories
was due primarily to lower than anticipated sales during the year.
Our working capital decreased to $826.4 million at the end of 1998 from
$889.0 million at the end of 1997, a decrease of $62.6 million. Cash and cash
equivalents and short-term marketable securities decreased by $61.8 million in
1998. Trade receivables increased by $7.1 million. Inventories increased by
$73.0 million, reflecting the impact of lower than anticipated sales, which
began in Asia in late 1997 and spread to other parts of the world during 1998.
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<PAGE>
Short-term borrowings at December 31, 1998 were $14.0 million, a decrease of
$0.8 million from December 31, 1997. Long-term debt due within one year
increased $1.4 million to $25.6 million at the end of 1998 compared to $24.2
million at the end of 1997. Long-term debt due in 1999 will be funded by
operating cash flows. Accounts payable decreased slightly to $163.9 million at
December 31, 1998, from $167.0 million at December 31, 1997.
Long-term debt, representing primarily notes payable and our subsidiaries'
credit facilities, was $147.9 million at December 31, 1998, an increase of $7.0
million from December 31, 1997. The principal component of long-term debt at
both December 31, 1998 and 1997 consisted of outstanding borrowings under a
$150.0 million revolving credit agreement entered into by Hemlock Semiconductor
Corporation ("HSC"), one of our subsidiaries. The amount outstanding under this
credit facility bears interest at the rate of LIBOR plus 0.8%. This credit
facility, which expires in 2002, is used by HSC to finance manufacturing
facility capacity additions. At July 31, 1999, the amount outstanding under
this credit facility was $90.0 million, and the weighted average interest rate
was 6.0%. In addition, our non-U.S. subsidiaries currently maintain credit
facilities in an aggregate amount of approximately $80.0 million.
Capital Expenditures. Our capital expenditures were $399.8 million, $425.2
million and $312.6 million for the years ended December 31, 1998, 1997 and
1996, respectively. Our capital expenditure pattern is influenced by the timing
of capacity additions for silicone intermediate products and for semiconductor-
grade silicon metal. Our capital expenditures during 1998, 1997 and 1996
included spending for major capacity additions for silicone intermediate
products at our Barry, Wales, United Kingdom facility and semiconductor-grade
silicon metal at HSC. Management believes that capital expenditures have been
adequate to maintain our business and to provide for growth opportunities. We
expect that our capital expenditures for 1999 will decline to approximately
$250.0 million. Capital expenditures for 1999 are expected to be funded from
internally available funds and borrowings under existing credit facilities. We
plan to continue to invest to expand our manufacturing capacity consistent with
expectations regarding future demand. These plans, if undertaken, are expected
to maintain our historical relationship between sales growth and capital
expenditures. We are considering further expansion or construction of
additional manufacturing facilities that, if undertaken, would significantly
increase our level of capital expenditures over the next five to seven years.
Investments in Marketable Securities and POR Obligations. Since May 15,
1995, we have been operating as a debtor-in-possession under Chapter 11 of the
U.S. Bankruptcy Code. Since that date, our consolidated balance sheets have
reflected substantial amounts of investments in marketable securities. Certain
of these investments are restricted as to their use pursuant to orders of the
Bankruptcy Court, and certain investments are restricted as to their use in
connection with the Revised Settlement Agreement (as defined in Item 8 below).
These restricted investments are invested in investment categories approved by
the Bankruptcy Court, and are included under the captions "Restricted insurance
proceeds" and "Implant deposit" in our consolidated balance sheets. As of June
30, 1999, the amount of restricted investments reflected under these captions
totaled $1,056.1 million, and these restricted investments consisted primarily
of certificates of deposit, fixed rate and floating rate federal agency and
corporate notes, commercial paper, state and municipal securities, and money
market funds. In addition, our consolidated balance sheets have reflected
investments in marketable securities that were not restricted in any manner
under the captions "Marketable securities" in the current and noncurrent
section of our consolidated balance sheet. As of June 30, 1999, the amount of
unrestricted investments reflected under these captions totaled $383.7 million,
and these unrestricted investments consisted principally of obligations backed
by the U. S. Government or one of its agencies and corporate issue preferred
equities. Amounts earned on these restricted and unrestricted investments have
been reflected under the caption "Interest income" in our consolidated
statements of operations and retained earnings.
In addition to the restricted and unrestricted marketable securities
described above, we maintained cash balances of $204.5 million as of June 30,
1999.
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The POR and related agreements require us to make cash payments soon after
the Effective Date of:
. between $250.0 million and $315.0 million to our unsecured commercial
creditors;
. approximately $1,000.0 million relating to claims of tort creditors; and
. approximately $150.0 million to The Dow Chemical Company pursuant to the
Insurance Allocation Agreement.
With respect to amounts payable to our unsecured commercial creditors, as of
June 30, 1999, we have recorded liabilities of approximately $1.0 billion
relating to the claims of unsecured commercial creditors, including interest
payable. Of this amount, approximately $250 million will be paid in cash, and
approximately $750 million of ten-year senior unsecured notes will be issued to
the unsecured commercial creditors as the Bankruptcy Court approves these
claims for payment. However, since the commercial claims reconciliation process
is ongoing, the exact amount of cash to be paid and senior unsecured notes to
be issued is not known. If the amounts due to unsecured commercial creditors
reaches $1.3 billion as contemplated in the POR, approximately $315 million
would be paid in cash, and approximately $1.0 billion of ten-year senior
unsecured notes would be issued to the unsecured commercial creditors.
We intend to fund these cash payments from a combination of the restricted
and unrestricted investments described above and from our cash balances.
Payment of these amounts will result in a significant decrease in the amount of
interest income that we will earn in the future. In addition to these cash
payments, the POR and related agreements also require us to issue the ten-year
senior unsecured notes that are the subject of this Registration Statement on
or soon after the Effective Date to our commercial creditors. The interest rate
payable on the ten-year senior unsecured notes will be established as of the
Effective Date by adding an agreed to or arbitrated interest factor to the ten-
year U.S. Treasury security interest rate at that time. The establishment of
the interest rate will take into account, among other things, the credit
ratings applicable to the ten-year senior unsecured notes as determined by
specified financial rating agencies. Issuance of the ten-year senior unsecured
notes, on or after the Effective Date, will require us to record a significant
amount of interest expense in the future.
The POR and related agreements also require us to make significant cash
payments over a 16-year period to fund amounts payable to the tort creditors
pursuant to the Funding Payment Agreement. Management believes that the
issuance of the ten-year senior unsecured notes, together with funds generated
from operations, anticipated insurance proceeds, borrowings under existing
credit facilities and potential future borrowings will provide us with
sufficient liquidity to meet our liquidity obligations (including obligations
under the POR, working capital requirements, capital expenditures and debt
service requirements) through at least 2001. See Note 4 of Notes to 1998
Consolidated Financial Statements for further discussion. This belief is based
on, among other things, management's estimate of future cash flow from
operations, estimated costs of implementing the POR, estimated recoveries and
the timing of these recoveries from our insurance carriers and current and
anticipated financing arrangements. In the event the anticipated insurance
proceeds are not received in the amounts and on the schedule anticipated by us,
we will be dependent to a larger degree on our cash flow from operations and
additional borrowings. There can be no assurance that this cash flow and
additional borrowings will be sufficient to fund our liquidity and capital
requirements.
Under certain circumstances, the Settlement Facility and Dow Corning would
also have access to a $300.0 million revolving credit facility made available
by The Dow Chemical Company and Corning Incorporated to facilitate timely
payments to the Settlement Facility. Repayment of advances made by The Dow
Chemical Company and Corning Incorporated to us under this credit facility will
be subordinate to our other obligations under the Funding Payment Agreement and
the senior unsecured notes in the event we default in respect of these
obligations. In addition, the Settlement Facility will have no obligation for
repayment of any advances made to us under this credit facility.
Insurance Matters. We have a substantial amount of unexhausted claims-made,
occurrence and occurrence- noticed products liability insurance coverage with
respect to breast implant lawsuits and claims
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<PAGE>
commencing in 1986 and thereafter. For breast implant lawsuits and claims
involving implant dates prior to 1986, substantial coverage exists under a
number of primary and excess occurrence and occurrence-noticed policies having
various limits. For breast implant lawsuits and claims may be covered, in whole
or in part, both by the coverage issued from and after 1986, and one or more of
the policies issued prior to 1986, the ultimate determination of aggregate
insurance coverage depends on, among other things, how defense and indemnity
costs are allocated among the different policy periods. Depending on policy
language, applicable law and agreements with insurers, damages that may be
awarded pursuant to breast implant lawsuits may or may not be covered, in whole
or in part, by insurance. Under the POR, however, punitive damages are waived
with respect to claims covered by the POR.
A substantial number of our insurers 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. Since 1993, we have been involved in litigation against the
Occurrence Insurers. This litigation resulted from an inability of the
Occurrence Insurers to reach an agreement with us on a formula for the
allocation among the Occurrence Insurers of payments of defense and indemnity
expenses submitted by us related to breast implant products liability lawsuits.
We sought a judicial enforcement of the obligations of the Occurrence Insurers
under the relevant insurance policies described above. We have settled our
claims with a number of these Occurrence Insurers.
During 1994, the court hearing this lawsuit:
. ruled that some of our primary Occurrence Insurers have a duty to defend
us with respect to breast implant products liability lawsuits;
. directed these insurers to reimburse us for certain defense costs
previously incurred; and
. ruled in our favor on allocation of defense costs.
During 1995, this court ruled in our favor on allocation of indemnity costs,
holding that each primary Occurrence Insurer was obligated to pay the defense
costs for all cases alleging a date of implant either before or during the
insurers' policy periods and for all cases involving unknown implant dates;
once implant dates become known, the appropriate insurer becomes responsible
for relevant defense costs. The court also ruled that relevant insurance
contracts afford coverage for punitive damages except where specific policy
provisions expressly exclude coverage for such damages. In addition, a trial on
the merits of the claims in this litigation commenced.
During 1996, a jury found the remaining Occurrence Insurers liable for
coverage including costs of defense and settlement of our breast implant
lawsuits in the United States and in other countries. The court also ruled that
we are entitled to recover substantially all defense, settlement and judgment
costs previously incurred. Certain of the Occurrence Insurers have appealed the
results of this litigation. We are uncertain as to when these appeals will be
resolved. In the interim, we are continuing settlement negotiations with the
Occurrence Insurers as well as other insurers that are not involved in the
litigation. Furthermore, we are pursuing resolution of a significant portion of
currently unresolved insurance coverage provided by solvent non-Occurrence
Insurers through arbitration proceedings. We are also pursuing recovery from
insolvent insurance carriers by way of settlement discussions.
From September 1, 1994 through August 25, 1999, we received insurance
recoveries of $875.7 million and entered into settlements with certain insurers
for future reimbursement. We expect to recover from our insurers a substantial
amount of breast implant-related payments that have been or will be made by us.
Net Deferred Tax Assets
As of December 31, 1998, our consolidated balance sheet reflected net
deferred tax assets of $1,007.8 million. The majority of these deferred tax
assets relate to gross temporary differences associated with our best estimate
of the anticipated financial consequences to the Company to resolve all claims
(including interest
21
<PAGE>
payable to our commercial creditors) arising from the POR and the breast
implant controversy. See Note 14 of Notes to 1998 Consolidated Financial
Statements for additional information.
Based on our recent level of pretax earnings, management believes that there
will be sufficient future taxable income generated to realize our net deferred
tax assets. In addition, the realization of these deferred tax assets is not
dependent on material improvements in future profitability, extraordinary
transactions, or implementation of tax planning strategies.
Inflation
We expect that future impacts of inflation will be mitigated by a
combination of productivity gains, product substitutions and selective product
price increases. The impact of inflation on our long-term financial position
and results of operations has been minimal.
New Accounting Principle
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"), which establishes accounting and reporting standards for derivative
instruments and hedging activities. FAS 133 requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. We currently enter into
currency derivative instruments, primarily in the form of forward exchange
contracts, to manage certain currency exposures, which principally include
monetary assets and liabilities not denominated in functional currencies, and
net investments in non-U.S. entities for which the U.S. dollar is not the
functional currency. Management believes that its current foreign currency
hedge instruments qualify as hedges under FAS 133. The effective date of FAS
133 was subsequently postponed. As a result, we are not required to adopt FAS
133 until the first quarter of 2001. Our adoption of FAS 133 is not expected to
have a material effect on our financial position or results of operations.
Year 2000
Our Year 2000 ("Y2K") project, which began in April 1996, is a global effort
designed to address, through the use of reasonable efforts, the risk that
certain internal or external systems may inaccurately interpret dates after
December 31, 1999.
We have completed an assessment of required modifications or replacements of
our key internal software to become Y2K compliant. The assessment involved all
known areas of concern, including business applications, manufacturing,
engineering, research and facilities systems, third party suppliers and service
providers. Implementation, including testing, of required changes to key
applications was substantially complete at June 30, 1999. The remaining
implementation will extend into the third quarter of 1999 due to plant shutdown
schedules.
Over the past few years, we have implemented a significant project to
upgrade and improve access to business information with integrated enterprise-
wide financial and operational systems and standardized desktop computing. This
initiative has mitigated to some extent the amount of Y2K costs incurred to
date. Our current estimate of the total cost for Y2K compliance is
approximately $20.0 million, of which approximately $17.0 million has been
incurred through June 30, 1999.
We have initiated formal communications with all of our significant
customers, suppliers and other third parties to determine the extent to which
we are vulnerable to third parties' failures to remediate their own potential
problems related to Y2K issues. Risk assessments, readiness evaluation and
contingency plans to protect our business from Y2K related interruptions from
these third parties and from key customers are expected to be completed before
December 31, 1999. Contingency plans relative to critical material suppliers,
22
<PAGE>
including actions such as increasing inventories and changing suppliers, will
be executed during the fourth quarter of 1999, if necessary.
Our risk management program includes emergency backup and recovery
procedures to be followed in the event of a failure of a key application. This
program is being expanded to include specific procedures for potential Y2K
issues. We are taking what we consider to be reasonable steps to prevent major
interruptions in our business due to Y2K issues. Our operating results and
ability to conduct business is dependent upon the infrastructure of the
geographic regions in which our operations and customers are located. A
breakdown in the infrastructure of a particular region could adversely impact
our operating results. We believe that the reasonable worst case scenario would
involve the failure of a number of our third party service providers,
particularly those in countries outside the United States, to adequately
address Y2K issues, which could result in significant interruptions in our
normal business operations. Those interruptions could materially and adversely
affect our results of operations, liquidity and financial condition.
The Euro
On January 1, 1999, the Euro was adopted as the national currency of 11
European Union member nations. During a three-year transition period, the Euro
will be used as a non-cash transactional currency. The conversion to the Euro
is not expected to have a significant or material impact on the results of
operations, financial position or liquidity of our European operations or on
our consolidated results of operations or financial position.
QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK
Qualitative Information
The global nature of our business gives rise to foreign currency exchange
rate risks. Since we conduct operations in many countries, we have assets,
liabilities and cash flows denominated in currencies other than the U.S.
dollar. Our principal foreign currency exposures presenting the primary risk of
loss are those affected by the dollar/euro, dollar/yen and dollar/sterling
markets. Our principal foreign currency exposures have not changed materially
from December 31, 1998. To mitigate our exposure to these risks, we have
established policies and procedures regarding our management of financial
market risks and our use of financial instruments to manage those risks. Our
primary objective in hedging foreign currency exchange rate risks is to
preserve the value of net monetary assets denominated in nonfunctional
currencies. The types of instruments we use to manage these risks are primarily
foreign currency forward exchange contracts with original maturities generally
less than 12 months. We do not enter into foreign currency transactions for
trading or speculative purposes.
Since May 15, 1995, we have been operating as a debtor-in-possession under
Chapter 11 of the U.S. Bankruptcy Code. As such, we are liable to commercial
claimants for approximately $800.0 million of commercial claims that existed as
of May 15, 1995. In addition, the POR contemplates payments of interest to
these commercial creditors accrued at the rate of 6.28%, compounded annually,
commencing on May 15, 1995 and continuing for the duration of our Chapter 11
proceeding. As of June 30, 1999, the amount of interest that would be paid to
commercial creditors was approximately $232.9 million. The POR contemplates
settling these commercial claims, including the payment of interest as
described above, by the payment of cash (of between $250.0 million and $315.0
million) and through the issuance of ten-year senior unsecured notes for the
remaining amounts due. The interest rate payable on the ten-year senior
unsecured notes is %, which rate was established prior to the Effective Date
by adding an agreed to or arbitrated interest factor to the ten-year U.S.
Treasury security interest rate at that time. The establishment of the interest
rate took into account, among other things, the credit ratings applicable to
the ten-year senior unsecured notes as determined by specified financial rating
agencies.
23
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In addition to the rate of interest to be paid on the ten-year senior
unsecured notes described above, we may be exposed to changes in interest rates
in the future primarily as a result of any borrowing activities we may
undertake, which could include short-term and long-term borrowings to maintain
liquidity and fund our business operations. The nature and amount of our long-
term and short-term debt, if any, may vary as a result of future business
requirements, market conditions and other factors.
Inherent in our business is exposure to price changes for several
commodities. We do not hold any financial instruments that hedge these
exposures.
Quantitative Information
We use sensitivity analysis to assess the market risk associated with
foreign currency exchange risk. We define market risk as the potential change
in the fair value of assets and liabilities resulting from an adverse movement
in foreign currency exchange rates. For purposes of this analysis, a 10% change
in foreign currency exchange rates from levels on December 31, 1998, with all
other variables (including interest rates) held constant, was chosen, as this
percent of change reflects our view of change that is reasonably possible over
a one-year period. We primarily hedge foreign currency exchange rate risks from
transactional currency/functional currency exchange rate exposures as measured
by the value of net monetary assets in nonfunctional currencies. Our net
monetary position is the net book value of our net monetary assets in
nonfunctional currencies combined with the net book value of our foreign
currency forward exchange contracts that have been designated as a hedge of
this exposure. A 10% adverse change in transactional currency/functional
currency exchange rates would result in a decrease in the fair value of our net
monetary position of approximately $4.0 million at December 31, 1998. We
selectively enter into foreign exchange forward contracts to hedge our
functional currency/reporting currency exchange rate exposures. Our net asset
position is the net book value of our net assets in functional currencies other
than the U.S. dollar combined with the net book value of our foreign currency
forward exchange contracts that have been designated as a hedge of this
exposure. A 10% adverse change in functional currency/reporting currency
exchange rates would result in a decrease in the fair value of our net asset
position of approximately $67.0 million at December 31, 1998.
ITEM 3. PROPERTIES
We own or lease extensive property for use in our business and believe that
our properties are in good operating condition and generally are suited for the
purposes for which they are presently being used.
We own substantially all of our 25 manufacturing sites, including nine
principal manufacturing facilities located in the United States, Belgium,
Germany, Japan and the United Kingdom. Principal U.S. production plants are
located in Kentucky and Michigan. Presently, we produce our basic silicon-based
materials at manufacturing facilities located in Carrollton, Kentucky; Barry,
Wales, United Kingdom; and, to a lesser extent, Chiba, Japan. Approximately 60%
of our aggregate investment in plant and equipment is represented by our U.S.
facilities.
We own our executive and corporate offices located near Midland, Michigan
and some of our international offices. We also own research and development
facilities in the United States, Belgium, Germany, Japan and the United
Kingdom. Domestic and international sales offices are maintained primarily in
leased facilities. See Note 16 of Notes to 1998 Consolidated Financial
Statements for further discussion of lease commitments.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our Common Stock, par value $5.00 per share, of persons owning of
record or known to us to be the beneficial owner of more than five percent of
our outstanding Common Stock. No directors or executive officers own any shares
of our Common Stock.
<TABLE>
<CAPTION>
Nature of
Title of Name and Address of Number of Beneficial
Class Beneficial Owner Shares Ownership Percent
-------- ------------------- --------- ---------- -------
<C> <S> <C> <C> <C>
Common Stock Corning Incorporated 1,250,000 Sole voting and 50.0%
One Riverfront Plaza investment power
Corning, New York 14831
Common Stock Dow Holdings, Inc., a 1,250,000 Sole voting and 50.0%
wholly owned subsidiary investment power
of The Dow Chemical Company
2030 Dow Center
Midland, Michigan 48674
</TABLE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
Directors
The following table sets forth information regarding the Company's
directors:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<C> <C> <S>
Roger G. Ackerman....... 60 Chairman of the Board and Chief Executive
Officer, Corning Incorporated
Gary E. Anderson........ 54 President and Chief Executive Officer, Dow
Corning Corporation
David T. Buzzelli....... 58 Senior Consultant to The Dow Chemical
Company (former Vice President, Environment,
Health & Safety, Public Affairs and
Information Systems, The Dow Chemical
Company)
Van C. Campbell......... 60 Retired Vice Chairman-Finance and
Administration, Corning Incorporated
Enrique C. Falla........ 60 Senior Consultant to The Dow Chemical
Company (former Executive Vice President,
The Dow Chemical Company)
Norman E. Garrity....... 57 Co-Chief Operating Officer, Corning
Incorporated and President, Corning
Technologies
Richard A. Hazleton..... 56 Chairman of the Board, Dow Corning
Corporation
William S. Stavropoulos. 60 President and Chief Executive Officer, The
Dow Chemical Company
</TABLE>
Our directors are elected by the shareholders at the annual meeting of
shareholders of Dow Corning, and each director is elected to serve until the
next annual meeting of shareholders and until his successor is elected and
qualifies.
Roger G. Ackerman--Chairman of the Board and Chief Executive Officer of
Corning Incorporated. Mr. Ackerman has been with Corning Incorporated since
1962 in a variety of engineering, sales and management positions. In 1972, he
was elected the President of a Corning Incorporated subsidiary, Corhart
Refractories Co., in 1975, the General Manager and Senior Vice President of the
Corning Incorporated's Ceramic Products Division and in 1980, a Senior Vice
President of Corning Incorporated. In 1981, he became the director of Corning
Incorporated's Manufacturing and Engineering Division, in 1983, the President
of MetPath Inc. (now Quest Diagnostics Incorporated) and in 1985, Group
President and a director of Corning
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<PAGE>
Incorporated. In 1990, he was elected the President and Chief Operating Officer
of Corning Incorporated and in 1996, he was elected to his present position.
Mr. Ackerman is a graduate of Rutgers University and attended Harvard
University's Program for Management Development. He also holds an honorary
doctoral degree from Rutgers University.
Mr. Ackerman also serves as a director of Massachusetts Mutual Life
Insurance Company and the Pittson Company.
Gary E. Anderson--President and Chief Executive Officer of Dow Corning. Mr.
Anderson began his Dow Corning career in 1967 in the Products Development-
Fluids area and became a Building Superintendent in the Resins and Chemical
Manufacturing area in 1969. Mr. Anderson became a Project Engineer in Process
Engineering in 1973 and a Project Engineer Supervisor in the Resins and
Chemicals area in 1974. Mr. Anderson was named Evaluator/Controller for Fluids
and Lubricants in 1976 and became a Manager of Economic Evaluation and Business
Control in 1977. Mr. Anderson was promoted to Director, Manufacturing and
Engineering in Europe in 1979 and became a European Area vice president in
1980. Mr. Anderson was on leave from Dow Corning in 1983-84 to serve as acting
Deputy Assistant Secretary for Basic Industries in the Department of Commerce.
In 1984, Mr. Anderson returned to Dow Corning and became General Manager of
Fluids, Resins and Process Industries. He was elected a Vice President in 1986
and was named a Group Vice President, Businesses, in 1989. In 1993, Mr.
Anderson was elected Executive Vice President of Dow Corning. In 1994, he was
elected President of Dow Corning and in August 1999 he was also elected Chief
Executive Officer of Dow Corning.
Mr. Anderson holds a bachelor's degree in chemical engineering from Michigan
Technological University and a master's degree in business administration from
Central Michigan University.
Mr. Anderson is also a director of Chemical Bank, Bay Area in Bay City,
Michigan.
David T. Buzzelli--Senior Consultant to The Dow Chemical Company. Mr.
Buzzelli joined The Dow Chemical Company in 1965, and held several process
engineering positions before becoming Technical Director of the Michigan
Division Process Development Group in 1976. In 1984, he was appointed Director
of Government and Public Affairs for The Dow Chemical Company and a Vice
President of Dow Chemical U.S.A. Mr. Buzzelli was appointed Chairman, President
and Chief Executive Officer of Dow Chemical Canada Inc. in 1986. From 1990 to
1997, he was Vice President and Corporate Director of Environment, Health and
Safety. In addition, from 1993 to 1997, he was Corporate Director of Public
Affairs and, from 1994 until 1997, he had management responsibility for
Information Systems for The Dow Chemical Company. In 1997, Mr. Buzzelli was
named Senior Consultant.
Mr. Buzzelli graduated from the University of Minnesota in 1964 with a
bachelor's degree in chemical engineering. He received his master's degree in
chemical engineering from the University of Delaware in 1965.
Van C. Campbell--Retired Vice Chairman-Finance and Administration, Corning
Incorporated. Mr. Campbell joined Corning Incorporated in 1964. He was elected
an Assistant Treasurer in 1971, Treasurer in 1972, a Vice President in 1973,
Financial Vice President in 1975 and Senior Vice President for Finance in 1980.
He became General Manager of Corning Incorporated's Consumer Products Division
in 1981. He was elected Vice Chairman, responsible for finance and
administration and a director of Corning Incorporated in 1983, positions from
which he retired on April 30, 1999. Mr. Campbell has been a director of Dow
Corning since 1983, and previously had been a director from 1977 through 1981.
Mr. Campbell is a graduate of Cornell University and has a master's degree
in business administration from Harvard University.
Mr. Campbell is also a director of Armstrong World Industries, Inc., Quest
Diagnostics, Inc. and Covance Inc.
Enrique C. Falla--Senior Consultant to The Dow Chemical Company. Mr. Falla
joined Dow Latin America in 1967 as a financial staff assistant. Beginning in
1971, Mr. Falla served, in turn, as Area Treasurer, General Manager for the
Mexico Region, Director of Administration and Director of Business Development
for
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<PAGE>
Dow Latin America. In 1979, he was appointed Commercial Vice President for Dow
Latin America, and became President of Dow Latin America in 1980. He was named
Financial Vice President for The Dow Chemical Company in 1984, was appointed to
the Board of Directors of The Dow Chemical Company in 1985, and was elected an
Executive Vice President of The Dow Chemical Company in 1991. In 1997, Mr.
Falla was named Senior Consultant.
Mr. Falla has a bachelor's degree in business administration and a master's
degree in economics/finance from the University of Miami.
Mr. Falla is also a director of Guidant Corporation.
Norman E. Garrity--Co-Chief Operating Officer, Corning Incorporated and
President, Corning Technologies. Mr. Garrity joined Corning Incorporated in
1966, serving in various production, sales and marketing positions. In 1984, he
was named General Manager of Corning Incorporated's Electrical Products
Division and a Vice President of Corning Incorporated. In 1987, he was named a
Senior Vice President of Manufacturing and Engineering for the Corning
Specialty Materials Group and became an Executive Vice President of Corning
Incorporated in 1990. In 1996, he was elected to his present positions and in
that same year became a member of the Board of Directors for both Corning
Incorporated and Dow Corning.
Mr. Garrity has a bachelor's degree and advanced degrees from Bucknell
University.
Richard A. Hazleton--Chairman of the Board of the Company. Mr. Hazleton
began his Dow Corning career in 1965 as a chemical engineer. In 1968, Mr.
Hazleton was named Economic Evaluator for Process Engineering. He was promoted
to Business Evaluator Controller in 1973 and in 1976, became Manager of
Planning and Evaluation for Europe. Mr. Hazleton was named European Area vice
president and European Area Finance Director in 1978. Mr. Hazleton returned to
the United States in 1981 as Corporate Controller and in 1983, became Midland
Plant Manager. Mr. Hazleton was named a U.S. Area vice president and Director
of Manufacturing and Engineering in 1985 and in 1987, was elected a Vice
President. Mr. Hazleton became General Manager of the Fluids, Resins and
Process Industries Business in 1989. In 1991, he was named European Area
President. He became a member of the Dow Corning Board of Directors in December
1992, was elected President of Dow Corning in January 1993, and assumed the
additional responsibilities of Chief Executive Officer in June 1993. In
September 1994, he was elected Chairman of the Board and Chief Executive
Officer of Dow Corning. In August 1999, Mr. Hazleton was succeeded as Chief
Executive Officer by Mr. Anderson. Mr. Hazleton continues as Chairman of the
Board of Dow Corning.
Mr. Hazleton holds bachelor's and master's degrees in chemical engineering
from Purdue University, and he earned a master's degree in business
administration from Central Michigan University. Mr. Hazleton attended Harvard
University's Advanced Management Program in 1983.
Mr. Hazleton is also a director of Chemical Bank and Trust Company of
Midland, Michigan.
William S. Stavropoulos--President and Chief Executive Officer of The Dow
Chemical Company. Mr. Stavropoulos joined The Dow Chemical Company as a
research chemist in pharmaceutical research in 1967. He became Research Manager
of Diagnostics Products Research in 1973 and Business Manager of that division
in 1976. He became Business Manager of Polyolefins in 1977. Mr. Stavropoulos
became Director of Marketing for Dow U.S.A. Plastics Department in 1979, and
was named Commercial Vice President for Dow Latin America in 1980. He then
became President of Dow Latin America in 1984, and was named Commercial Vice
President for Dow U.S.A. Basics and Hydrocarbons in 1985. He became Group Vice
President for Dow U.S.A. Plastics and Hydrocarbons in 1987. In 1990, Mr.
Stavropoulos was named President of Dow U.S.A. and was elected a Vice President
of The Dow Chemical Company. In 1991, he was elected a Senior Vice President
and member of the Board of Directors of The Dow Chemical Company. He became
President and Chief Operating Officer of The Dow Chemical Company in 1993, and
assumed his current position in 1995.
Mr. Stavropoulos holds a bachelor's degree in pharmaceutical chemistry from
Fordham University and a doctoral degree in medicinal chemistry from the
University of Washington.
Mr. Stavropoulos is also a director of NCR Corporation, Bell South
Corporation and Chemical Financial Corporation and Chemical Bank and Trust
Company, both of Midland, Michigan.
27
<PAGE>
Executive Officers
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------------------------------------------
<C> <C> <S>
Gary E. Anderson 54 President and Chief Executive Officer
Gifford E. Brown 52 Vice President, Planning & Finance and Chief
Financial Officer
Barbara S. Carmichael 50 Vice President and Chief Communications Officer
James V. Chittick 59 Vice President
John W. Churchfield 52 Vice President
Richard J. Francel 48 Controller
Siegfried Haberer 56 Executive Vice President
Richard A. Hazleton 56 Chairman of the Board
Richard H. Hoover 51 Vice President
James R. Jenkins 54 Vice President, Secretary and General Counsel
Burnett S. Kelly 55 Vice President and Chief Human Resources
Officer
Robert P. Krasa 52 Vice President
Jere D. Marciniak 52 Vice President
Endvar Rossi 52 Vice President
Ronney R. Sexton 53 Treasurer
Neville J. Whitfield 55 Vice President
</TABLE>
Our executive officers are elected or appointed by the directors immediately
after the annual meeting of shareholders. The executive officers hold office
until the first meeting of the Board of Directors following the next annual
meeting of shareholders and until their respective successors are chosen and
qualify, or until their resignation or removal.
Gary E. Anderson--See "Directors" above.
Gifford E. Brown--Mr. Brown joined the Company as an accountant in 1969 and
has held numerous positions in accounting and control and in systems and
information management both in the United States and in Dow Corning's
international divisions prior to becoming Manager of Economic
Evaluation/Business Control in 1988. In 1991, he became Director of Corporate
Planning and Business Development, and in 1992, he assumed the role of Director
of Administration and Finance and vice president of the Asian Area. He assumed
his post as Executive Director of Human Resources in February 1995, and was
elected a Vice President in February 1997. In July 1999, Mr. Brown was elected
Vice President, Planning & Finance and Chief Financial Officer.
Mr. Brown holds a bachelor's degree in accounting and finance from Bentley
College in Boston and has participated in the Massachusetts Institute of
Technology's Sloan School of Management senior executive program.
Barbara S. Carmichael--Ms. Carmichael joined the Company in 1990 as Director
of Corporate Communications. In 1991, Ms. Carmichael was named a U.S. Area vice
president and in 1993, she was named Executive Director of Corporate
Communications. In 1995, she was elected a Vice President and in 1999, was
named Chief Communications Officer.
Ms. Carmichael holds a bachelor's degree in English from Carleton College
and a master's degree in English from the University of Minnesota.
James V. Chittick--Mr. Chittick joined the Company in 1963 in Product
Development. During his career at the Company, he has worked at five plants--
the Hemlock Medical Plant, the Trumbull Lubricants and Rubber
28
<PAGE>
Finishing Plant, the Midland Plant, the Seneffe Belgium Plant, and the
Elizabethtown, Kentucky Plant. Mr. Chittick was Plant Manager at both the
Seneffe and Elizabethtown plants. Mr. Chittick has also held the positions of
Section Manager for Process Engineering, Material Flow Manager for the European
Area, Director of Facilities Engineering, U.S. Area vice president and Director
of Quality and Supply and Executive Director of Human Resources. In February
1995, Mr. Chittick was named Executive Director of Manufacturing and
Engineering, and in March 1995, Mr. Chittick was elected a Vice President.
Mr. Chittick holds a bachelor's degree in chemical engineering from the
South Dakota School of Mines and Technology and a master's degree in business
administration from Central Michigan University.
John W. Churchfield--Mr. Churchfield began his career with the Company in
1969 and in his early years was involved in silicone product development, sales
and product marketing in the United States. In 1978, Mr. Churchfield joined the
Corporate Economic Evaluation staff and became Manager of that department that
year. From 1981 through 1984, Mr. Churchfield was Director of Finance for the
Company's European Area. In 1984, Mr. Churchfield became vice president of
Sales and Marketing for the European Area. In 1986, Mr. Churchfield was elected
Executive Vice President of Dow Corning Toray Silicone Co., Ltd. in Tokyo,
Japan, and in 1989, he became General Manager of Heat Cured Rubber Products and
Automotive/Fabrication Industries for Dow Corning. In 1991, he was named
General Manager, Designed Products Business. He was elected Vice President,
Planning & Finance and Chief Financial Officer in 1993. In July 1999, Mr.
Churchfield was succeeded as Chief Financial Officer by Mr. Brown. He continues
as a Vice President with strategic and operational responsibilities.
Mr. Churchfield has a bachelor's degree in chemical engineering from Grove
City College. He attended the Harvard University's Advanced Management Program
in 1990.
Richard J. Francel--Mr. Francel joined the Company in 1973, and held
positions in Process Engineering until 1977, when he became supervisor of
Material Flow at the Hemlock Semiconductor Plant. After holding positions in
Barry, Wales and in the Inter-American Area, he became Manager of Computer
Services in 1984 and Controller of U.S. Area manufacturing in 1987. In 1990, he
became Director of Finance for the Asian Area. Mr. Francel was named Controller
in 1997.
Mr. Francel holds a bachelor's degree in mechanical engineering from
Bucknell University and a master's degree in industrial engineering from
Stanford University.
Siegfried Haberer--Mr. Haberer joined Dow Corning in 1970. Prior to assuming
his current post, Mr. Haberer was president of the European Area, General
Manager of the Global Rubber Business, Manager of the European Elastomers and
Engineering Industries Business, Director of Marketing USA Elastomers and
Engineering Industries Business, and Marketing Manager of the European
Elastomers and Engineering Industries Business. He was elected a Vice President
in 1993 and, in 1998, was elected Executive Vice President and a member of the
Office of the CEO.
Mr. Haberer is a Diplom Ingenieur graduate (the equivalent of a bachelor of
science degree in electrical engineering) of Technische Hochschule (Germany).
Richard A. Hazleton--See "Directors" above.
Richard H. Hoover--Mr. Hoover joined Dow Corning in 1971 as a salesperson
for Fluids, Emulsions and Compounds. He moved to Fluids and Lubricants
Marketing in 1976 and in 1978, was named Product Market Manager of the Latin
American Area. In 1982, he became Regional Manager in Mexico and in 1986,
Market Development Manager for the Fluids, Resins and Process Industries
Business. Mr. Hoover became Manager of the Select Industries Commercial Unit in
1987. He was named Manager of the Construction Commercial Unit in 1989 and
became Manager of the Performance Materials Business in 1991. In 1993, Mr.
Hoover was named a U.S. Area vice president and Business Group Manager for
Advanced Materials in the United States. In June 1994, he became Executive
Director of Health and Environmental Policy. In February 1996, Mr. Hoover
became president of the Asian Area and was elected a Vice President with
strategic and operational responsibilities.
29
<PAGE>
Mr. Hoover received a bachelor's degree in chemical engineering from the
University of Kansas.
James R. Jenkins--Mr. Jenkins joined the Dow Corning legal department in
1976 as a Staff Attorney. In 1978, Mr. Jenkins was named Senior Attorney and he
completed studies at the Parker School of Foreign and Comparative Law at
Columbia University. In early 1981, Mr. Jenkins became Senior Managing Counsel
of Dow Corning and in 1982, he was elected Secretary and General Counsel. Mr.
Jenkins was elected Vice President, Secretary and General Counsel of Dow
Corning in 1984.
Mr. Jenkins received a bachelor's degree and a law degree from the
University of Michigan. Mr. Jenkins completed Harvard University's Program for
Management Development in 1982.
Mr. Jenkins is a director of Chemical Bank and Trust Company of Midland
Michigan.
Burnett S. Kelly--Mr. Kelly joined Dow Corning in 1978 as a staff attorney
after serving as Counsel to the Chairman of the Equal Employment Opportunity
Commission in Washington D.C. He served as Manager of Employee Relations from
1985 to 1989 and became Manager of the Hemlock Medical Plant in 1989. Mr. Kelly
was named Manager of the Medical Materials Commercial Unit in 1991 and
Director, Human Resources in 1992. In 1993, Mr. Kelly was named president of
the U.S. Area. In December 1993, he was elected a Vice President. In January
1999, Mr. Kelly was elected Vice President and Chief Human Resources Officer.
Mr. Kelly received a bachelor's degree from Michigan State University and a
law degree from the Detroit College of Law.
R.P. Krasa--Mr. Krasa joined Dow Corning in 1974 and was named Economic
Evaluator for Elastomers in 1977 and also led the Engineered Products Product
Management Group. He became Greensboro Plant Manager in 1980 and returned to
Midland in 1981 to become Manager of Economic Evaluation. In 1984, Mr. Krasa
was named Manager of the Automotive/Electrical Commercial Unit and in 1986, was
elected President of Dow Corning STI. He was named Silicone Rubber Global
Product Line Manager in 1988 and was elected Executive Vice President of Dow
Corning Toray Silicone Co., Ltd. in 1989 and was elected President and Chief
Executive Officer of that company in 1991. In 1994, he became president of the
Asian Area and was elected a Vice President with strategic and operational
responsibilities.
Mr. Krasa holds a bachelor's degree in chemical engineering from Iowa State
University and a master's degree in business administration from Central
Michigan University. In addition, Mr. Krasa completed Harvard University's
Program for Management Development in 1983.
Jere D. Marciniak--Mr. Marciniak joined Dow Corning in 1977. Mr. Marciniak
was named Product Marketing Manager in 1979. In 1980, Mr. Marciniak was named
Elastomer Marketing Manager for the European Area. Mr. Marciniak was named vice
president for the U.S. Area and Director of Sales and Marketing Administration
in 1989. He assumed the position of General Manager of the Global Sealants
Business in August 1993. Also in August 1993, Mr. Marciniak became the General
Manager of the U.S. Area Core Products Business Group. After the integration of
the Company's U.S. and Inter-America Areas, Mr. Marciniak was named a vice
president for the Americas Area and General Manager of the Core Products
Business Group. From January 1998 until January 1999, Mr. Marciniak served as
the president of the European Area. In January 1998, Mr. Marciniak was elected
a Vice President with strategic and operational responsibilities.
Mr. Marciniak received a bachelor's and master's degrees in business
administration from Central Michigan University.
Endvar Rossi--Mr. Rossi joined the Company in 1970 and held various
positions in Sales and Marketing, including serving for nearly four years in
the Marketing Group of Latin America Area. In 1979, he was named Sales and
Marketing Manager for the Brazil Region, and later Brazil Region Manager. In
1986, he became European Area Director of Sales and Marketing and a European
Area vice president in 1988. He became Inter-America president in 1992. Mr.
Rossi was named Executive Director of Marketing and Sales for the Company in
1996, and was elected a Vice President in 1997.
30
<PAGE>
Mr. Rossi holds a bachelor's degree in economics from the Pontificia
Universidade Catolica de Sao Paulo (Brazil) and has completed Harvard
University's Program for Management Development.
Ronney R. Sexton--Mr. Sexton joined the Company in 1977 as a senior
accounting specialist. He was named Manager of Corporate Accounting in 1979 and
was elected Assistant Corporate Controller by the Board of Directors in 1980.
In 1981, Mr. Sexton was elected Treasurer of the Company. Mr. Sexton was named
U.S. Area controller and a vice president for the U.S. Area in 1984. Mr. Sexton
became Director of Acquisitions and Partnering Investments in 1990 and was
elected Auditor in 1994. He was named a vice president for the Americas Area in
1996 and was again elected Treasurer in 1998.
Mr. Sexton earned a bachelor's degree in mathematics and business
administration from Alma College and a master's degree in business
administration from the University of Michigan.
Neville J. Whitfield--Mr. Whitfield joined a Dow Corning affiliate in 1967
and was initially involved in research and development in the fluids and resins
business. In 1976, Mr. Whitfield managed the European regional sales offices
and in 1978, he was named European Research and Development Manager for
Elastomers. In 1980, Mr. Whitfield began managing European distribution,
scheduling, planning and purchasing and in 1982, he was named Manager of the
European Paper and Textile Industry Groups. In 1984, Mr. Whitfield was named
Manager of the PCCI Commercial Unit in the U.S. He was named U.S. Marketing
Director for the fluids and resins business in 1986 and in 1988, he was named
European Finance and SIM Director. In 1993, Mr. Whitfield was elected a Vice
President with strategic and operational responsibilities.
Mr. Whitfield is an honors chemistry graduate from Durham University
(England). He completed Harvard University's Program for Management Development
in 1979.
ITEM 6. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information with respect to compensation
earned during 1998 by our Chief Executive Officer and our four other most
highly compensated executive officers (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------------ ------------------
Awards Payouts
---------- -------
Securities
Underlying LTP All Other
Name and Current Bonus SARs Payouts Compensation
Principal Position Year Salary ($) ($)(1) (#)(2) ($)(3) ($)(4)
------------------ ---- --------- ------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Hazleton..... 1998 612,500 257,250 3,586 5,160 6,400
Chairman of the Board
(5)
Gary E. Anderson........ 1998 424,500 140,085 2,032 9,803 6,400
President and Chief
Executive Officer (5)
James R. Jenkins........ 1998 287,500 25,875 589 5,160 6,400
Vice President,
Secretary and
General Counsel
Siegfried Haberer....... 1998 252,750 25,275 867 -- 15,165
Executive Vice
President
Robert P. Krasa......... 1998 242,750 24,275 746 3,440 6,400
Vice President
</TABLE>
- --------
(1) Represents bonuses earned with respect to 1998 (paid in February 1999)
under our Executive Compensation Plan, which provides payouts based on
corporate and individual performance with respect to a specific fiscal
year. All or a portion of the bonus can be irrevocably deferred until a
later fiscal year (and will earn interest quarterly at money market rates),
at the option of the executive officer.
31
<PAGE>
(2) Represents phantom stock appreciation rights granted during 1998. See
"Option/SARs Grants in Last Fiscal Year."
(3) Represents amounts paid out during 1998 under our prior Long Term
Performance Plan (the "LTP"). See "--Former LTP."
(4) Represents matching contributions by us under our Capital Accumulation Plan
("CAP"), a broad-based defined contribution retirement plan or, with
respect to Mr. Haberer, our global savings plan, a broad-based defined
contribution retirement plan for overseas employees. The CAP permits
employees to contribute up to 15% of their earnings (21% of their earnings
beginning June 1, 1999). Employee contributions to the CAP can be made on
either a pre-tax or after tax basis. We match up to 4% of earnings
contributed to the CAP by an employee.
(5) Mr. Hazleton served as our Chairman of the Board and Chief Executive
Officer until August 16, 1999, at which time Mr. Anderson was elected our
President and Chief Executive Officer. Mr. Hazleton continues as our
Chairman of the Board.
Option/SAR Grants in Last Fiscal Year
The following table sets forth certain information regarding phantom stock
appreciation rights (phantom "SARs") granted during 1998 to each of the Named
Executive Officers. None of the Named Executive Officers received options
during 1998.
<TABLE>
<CAPTION>
Potential
Realizable Value At
Assumed Annual
Rates of Stock
Price
Individual Grants Appreciation(1)
---------------------------------------------------- -------------------
Number of Percent of Total
Securities SARs Granted
Underlying to Employees in
SARs Fiscal Year Base Price Expiration
Name Granted(2)(#) (%) ($/Sh) Date 5% ($) 10% ($)
---- ------------- ---------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mr. Hazleton............ 3,586 10% 702 3/31/08 3,954,086 6,084,227
Mr. Anderson............ 2,032 5% 702 3/31/08 2,240,575 3,447,616
Mr. Jenkins............. 589 1% 702 3/31/08 649,458 999,333
Mr. Haberer............. 867 2% 702 3/31/08 955,993 1,471,005
Mr. Krasa............... 746 2% 702 3/31/08 822,573 1,265,709
</TABLE>
- --------
(1) Based on a ten-year term and annual compounding, the 5% and 10%
calculations are set forth in compliance with the rules of the Securities
and Exchange Commission. The appreciation calculations are not necessarily
indicative of future values of the phantom SARs or of our common stock.
(2) Value of each phantom SAR on any given day is equal to the difference
between our hypothetical average market value divided by the number of
shares of Dow Corning stock outstanding as of the valuation date and the
phantom SAR base price, which is the value when the phantom SAR is granted.
Our hypothetical average market value is calculated by reference to our
adjusted after-tax profit from the eight most recently completed fiscal
quarters multiplied by our return on assets for the same period. The
phantom SARs vest three years after the effective date of grant. After
vesting, in any one calendar year the Named Executive Officer may elect to
exercise up to 50% (if he exercises at least 20%) of the phantom SARs for a
cash payment equal to the appreciated value of such phantom SARs. After
retirement, the Named Executive Officer may elect to exercise 100% of the
phantom SARs in any one calendar year. The Named Executive Officer may
elect to exercise the phantom SARs (subject to the foregoing limitations)
at any time during the seven-year period following the date of vesting if
he remains employed by us. In the absence of such election by the Named
Executive Officer, 50% of the phantom SARs will automatically be exercised
on May 15, 2006 and the remaining phantom SARs will automatically be
exercised on March 31, 2008. Notwithstanding the forgoing, a Named
Executive Officer cannot exercise a phantom SAR unless Dow Corning had
positive economic profit for the calendar year preceding the exercise. If
the Named Executive Officer retires prior to the vesting of the phantom
SARs, the number of phantom SARs
32
<PAGE>
will be prorated based on months of active service during the vesting
periods; if the Named Executive Officer's employment is terminated prior to
the vesting date for any other reason, the phantom SARs terminate (subject
to the ability of a committee composed of some of our executives to make
appropriate exceptions in its discretion). If the Named Executive Officer
retires before or after the vesting date, the Named Executive Officer will
have three years and fifteen days from the vesting date to exercise the
phantom SARs, at which date the phantom SARs will be automatically
exercised. If the Named Executive Officer dies while employed by us, the
phantom SARs vest 100% and are exercised automatically and a minimum payout
or the resulting appreciated value of such SARs before or at the time of
such exercise is paid to the Named Executive Officer's beneficiary.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table sets forth certain information regarding phantom SARs
exercised during 1998 by each of the Named Executive Officers and all phantom
SARs held by each of the Named Executive Officers at the end of 1998. None of
the Named Executive Officers has ever received options.
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised In-The-
Underlying Underlying Unexercised Money SARs At Fiscal Year-
SARs Value SARs at Fiscal Year-End End
Exercised(1) Realized Exercisable/Unexercisable Exercisable/Unexercisable(2)
Name (#) ($) (#) ($)
---- ------------ -------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Mr. Hazleton............ 278 140,657 4,214 / 6,879 1,303,983 / 178,250
Mr. Anderson............ 599 298,931 2,612 / 4,049 831,579 / 109,180
Mr. Jenkins............. 271 115,823 528 / 1,184 142,774 / 32,207
Mr. Haberer............. 388 175,565 525 / 1,587 126,987 / 38,974
Mr. Krasa............... 325 160,829 837 / 1,487 238,972 / 40,110
</TABLE>
(1) Represents the number of phantom SARs for which cash payments were received
upon exercise during 1998.
(2) Based on a December 31, 1998 value of $622, calculated in accordance with
the valuation described in footnote (2) under "--Options/SAR Grants in Last
Fiscal Year."
Pension Plans
We maintain a defined benefit retirement program for a majority of our
employees who are based in the U.S. Employees are 100% vested in the Retirement
Program after completing five years of credited service. Retirement benefits
are calculated by reference to years of credited service and average
compensation (average earnings for the three consecutive 12-month periods when
the employee's wages were the highest), reduced by social security benefits
(after reaching age 62). Full benefits are available after an employee:
. retires at age 65;
. retires at age 60 or more with at least 10 years of credited service; or
. retires when his or her age plus credited years of service equals 85.
Reduced benefits are available for earlier retirement at or after an employee
attains the age of 50 or more years with at least 10 years of credited
services. Some benefits are also provided in the event of the employee's death
or disability or termination of employment before early retirement eligibility.
We also maintain a Supplemental Retirement Benefit Plan ("SRBP") intended to
provide retirement benefits to some employees (including all of the Named
Executive Officers) supplementing those benefits provided under the defined
benefit retirement plan. The vesting provisions under the SRBP are the same as
those under the Retirement Program. The benefit payable under the SRBP is
calculated by reference to actual compensation received without regard to
limits imposed by the Internal Revenue Code and is reduced by benefits received
under the Retirement Program.
33
<PAGE>
The following table shows the estimated annual benefit (prior to an offset
for other retirement benefits received) which an employee is entitled to
receive under the Retirement Program and the SRBP, on a straight life annuity
basis assuming retirement at age 60 in the indicated compensation
classification with certain years of service. As of December 31, 1998, Messrs.
Hazleton, Anderson, Jenkins and Krasa had 33.4, 31.1, 22.0 and 24.7 credited
years of service, respectively.
<TABLE>
<CAPTION>
Years of Credited Service
-------------------------
Compensation 15 20 25 30 35
------------ -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$ 125,000 27,170 36,227 45,283 54,340 63,396
150,000 33,170 44,227 55,283 66,340 77,396
175,000 39,170 52,227 65,283 78,340 91,396
200,000 45,170 60,227 75,283 90,340 105,396
225,000 51,170 68,227 85,283 102,340 119,396
250,000 57,170 76,227 95,283 114,340 133,396
300,000 69,170 92,227 115,283 138,340 161,396
400,000 93,170 124,227 155,283 186,340 217,396
450,000 105,170 140,227 175,283 210,340 245,396
500,000 117,170 156,227 195,283 234,340 273,396
600,000 141,170 188,227 235,283 282,340 329,396
700,000 165,170 220,227 275,283 330,340 385,396
800,000 189,170 252,227 315,283 378,340 441,396
900,000 213,170 284,227 355,283 426,340 497,396
1,000,000 237,170 316,227 395,283 474,340 553,396
</TABLE>
Mr. Haberer does not participate in the plans described above. Instead, Mr.
Haberer participates in government pension plans provided in Belgium and
Germany. In addition, Mr. Haberer participates in a defined benefit pension
plan sponsored by Dow Corning's German subsidiaries for its German employees
and in defined contribution global retirement and savings plans sponsored by
Dow Corning for its international employees. Under the German pension plan,
retirement benefits are calculated on a pension formula by years of credited
service on the last annual base salary plus an average of 5% of salary. The
maximum years of credited service under the plan is 40 years and full benefits
are provided if the employee retires at the age of 60 or under certain
circumstances, at the age of 55. Some benefits are also provided in the event
of the employee's death or disability. As of December 31, 1998, Mr. Haberer had
29 credited years of service.
34
<PAGE>
Former Long Term Performance Plan
Prior to 1990, we maintained the LTP, pursuant to which executive officers
were eligible to receive awards. Payments under the LTP were determined by
certain target performance levels over a specified number of years. The awards
paid out at four levels:
. a minimum performance level below which no payment would be made;
. a target performance level at which target payments would be made;
. a higher performance level at which twice the target payment would be
made; and
. a maximum award level.
Awards were pro-rated between the first and fourth performance level. Payments
were made in the year following the final results of the last year covered by
the award. However, executive officers were required to defer at least 50% of
their award into deferred units that were treated like phantom SARs. The
executive officer elected 5 consecutive years in which to be paid deferred
amounts. At the end of each deferral year, the value of deferred units was and
is recalculated using the average Dow Corning earnings of the most recent two
fiscal years and a price/earnings multiple of 10. We no longer make awards
under the LTP; however, prior awards continue to be paid out according to
previously established payment schedules and criteria.
Director Compensation
None of our directors receives compensation for serving as a director.
Employment Contracts, Termination and Change-in-Control Arrangements
We maintain a severance pay plan that provides most U.S. employees (and U.S.
citizens assigned overseas) with certain benefits. An employee whose employment
is terminated by us (other than for specified reasons, including cause) or who
holds a management position and resigns for good reason after a Change in
Control, is entitled to receive from one months salary to six months salary
based on the number of years of service to us. If, however, an employee is
involuntarily terminated within 12 or 18 months (18 months in the case of the
Named Executive Officers) after a Change in Control, the employee is entitled
to receive certain benefits which, in the case of the Named Executive Officers,
include eighteen months salary plus annual target bonus, payable in a lump sum
or, at the election of the Named Executive Officer, 50% in a lump sum and the
remainder over an 11-month period commencing 11 months after termination. If
the deferred payment method is chosen, the Named Executive Officer will receive
21 months salary plus annual target bonus, reduced by any wages received from a
new employer during the payment period. A Change in Control is defined as an
event which results in The Dow Chemical Company and Corning Incorporated
collectively owning less than 51% of our issued and outstanding voting common
stock. The severance plan may not be terminated until two years after the
Effective Date.
Compensation Committee Interlocks and Insider Participation
The Executive Committee of our Board of Directors makes all compensation
decisions relative to the Named Executive Officers and other employees. The
committee's members include: Mr. Anderson, Mr. Ackerman from Corning
Incorporated and Mr. Stavropoulos from The Dow Chemical Company. Mr. Anderson
is Dow Corning's President and Chief Executive Officer. Mr. Ackerman and Mr.
Stavropoulos determine the salaries of the Chairman of the Board and the
President and Chief Executive Officer.
We purchased raw materials and services totaling $63.7 million in 1998,
$59.5 million in 1997 and $51.1 million in 1996 from The Dow Chemical Company
and its affiliates. We believe the costs of these purchases were competitive
with alternative sources of supply.
35
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 6. "Executive Compensation--Compensation Committee Interlocks and
Insider Participation."
ITEM 8. LEGAL PROCEEDINGS
Breast Implant Litigation and Claims
Background. Prior to 1992, we were engaged in the manufacture and sale of
silicone gel breast implants and the raw material components of those
products. In January 1992, the United States Food and Drug Administration
asked breast implant producers to voluntarily halt the sale of silicone gel
breast implants pending the FDA's further review of the safety and
effectiveness of such devices, and we complied with the FDA's request.
Subsequently, we announced that we would not resume the production or sale of
breast implants.
Between 1991 and 1995, we experienced a substantial increase in the number
of lawsuits against us that related to breast implants. As of August 25, 1999,
we had been named, often together with other defendants, in approximately
19,000 pending breast implant products liability lawsuits filed in the United
States by, or on behalf of, individuals who claim to have, or have had, breast
implants. Many of these cases involve multiple plaintiffs. In addition, there
are 46 breast implant products liability class action lawsuits that have been
filed in the United States against us as of August 25, 1999; however, only
three of these class actions have been certified. We sometimes are named as
the manufacturer of breast implants, and other times we are named as the
supplier of silicone raw materials to other breast implant manufacturers.
We filed for protection under Chapter 11 of the U.S. Bankruptcy Code in
response to numerous breast implant claims against us. Since the commencement
of our Chapter 11 proceeding, we have been dismissed from a number of breast
implant lawsuits in which we were named as a supplier of silicone raw material
to other breast implant manufacturers. Other breast implant manufacturers,
however, that purchased silicone raw materials from us, and other defendants
in breast implant litigation, have filed claims for indemnity and contribution
against us in our Chapter 11 proceeding. See Note 4 of Notes to 1998
Consolidated Financial Statement for further discussion.
The typical alleged factual bases for these lawsuits primarily include
allegations that the plaintiffs' breast implants:
. caused specific, recognized autoimmune diseases including scleroderma,
systemic lupus erythematosus, and multiple sclerosis;
. caused a vague combination of symptoms, including chronic fatigue and
joint pain, alleged to be a new disease not generally recognized in the
medical community and variously described by terms such as "human
adjuvant disease," "siliconosis," "atypical connective tissue disease,"
and "atypical neurological disease;"
. have or may have ruptured;
. caused other local complications; or
. caused disfigurement.
We assert, among other defenses, that there is no causal connection between
silicone breast implants and the ailments alleged by the plaintiffs in these
cases. A substantial number of breast implant lawsuits were consolidated for
pretrial purposes in the U.S. District Court for the Northern District of
Alabama, and in various state courts. Further information related to the
jurisdictional status of these cases is described in Note 4 of Notes to 1998
Consolidated Financial Statements.
Our filing for protection under Chapter 11 of the U.S. Bankruptcy Code has
resulted in a stay of this litigation in the United States. However, claims
prosecuted against us in non-U.S. jurisdictions are not stayed
36
<PAGE>
by our Chapter 11 proceeding. In addition to the 19,000 U.S. breast implant
lawsuits referred to above, approximately 6,000 breast implant lawsuits have
been filed in non-U.S. jurisdictions, primarily in Australia. Of these
lawsuits, approximately 400 have been served and are in a position to proceed
under the legal systems of their relevant jurisdictions, 3,400 have been
effectively terminated or otherwise settled as to us under the Australian court
system, and 2,200 are inactive. We believe that many of the non-U.S. lawsuit
claims are duplicative of proofs of claim filed by such non-U.S. claimants in
our Chapter 11 proceeding. Approximately 5,700 non-U.S. plaintiffs have filed
lawsuits in the United States (included in the 19,000 lawsuits referenced
above); however, these lawsuits are stayed by our Chapter 11 proceeding. In
addition to the 46 U.S. class action lawsuits referred to above, five class
action lawsuits are pending in non-U.S. jurisdictions. Two of these non- U.S.
class actions have not been served and none of the non-U.S. class actions are
stayed by our Chapter 11 proceeding.
In April 1998, we announced tentative settlements of two of the non-U.S.
class actions in the provinces of Ontario and Quebec, Canada, which would
resolve approximately 10,000 claims filed in our Chapter 11 proceeding. The
amounts of these settlements, as subsequently amended, are approximately $37.0
million for Quebec claimants and $18.0 million for Ontario claimants. Each of
these tentative settlements has been approved by the appropriate Provincial
Court. In September 1998, we announced a $25.1 tentative settlement of a third
non-U.S. class action in the province of British Columbia, Canada, which would
resolve approximately 4,100 claims filed in our Chapter 11 proceeding. Some
Canadian claimants in provinces other than Ontario, Quebec or British Columbia
also have chosen to resolve their claims through the British Columbia
settlement, which was approved by the British Columbia Provincial Court on
February 11, 1999. All three Canadian class action settlements are also subject
to the approval of the Bankruptcy Court, and if approved would be administered
pursuant to the POR.
In January 1999, we announced a tentative settlement of between $21.0
million and $36.0 million to resolve approximately 2,400 to 4,500 claims
originating in Australia filed in our Chapter 11 proceeding. This settlement
supersedes a previously announced tentative settlement of claims originating in
Australia and New Zealand; this settlement does not resolve claims originating
in New Zealand. If less than 2,400 Australian claimants choose to participate
in this settlement, we may terminate it. This settlement is subject to approval
of the Bankruptcy Court. Payments under the tentative settlement would be
provided for in our POR but would be administered and made in Australia. See
Note 4 of Notes to 1998 Consolidated Financial Statements for definitions and
discussions regarding our Chapter 11 proceeding.
Settlement Agreement. In 1994, together with other defendants and
representatives of breast implant litigation plaintiffs, we entered into a
settlement agreement under the supervision of the U.S. District Court for the
Northern District of Alabama. Under the 1994 settlement agreement, certain
industry participants originally agreed to contribute up to $4.2 billion, of
which we agreed to contribute up to $2.02 billion, over a period of more than
thirty years. Although this settlement agreement was designed to cover claims
of most breast implant recipients brought in the courts of U.S. federal and
state jurisdictions, approximately 7,000 U.S. and non-U.S. potential claimants
elected not to settle their claims by way of this settlement agreement and
elected to pursue their individual breast implant litigation against us. In
1995, the Alabama District Court concluded the total amount of claims likely to
be approved for payment would result in substantially lower payments to
claimants than anticipated under this settlement agreement, and the Alabama
District Court requested that the parties negotiate possible modifications to
this settlement agreement. We did not actively participate in the subsequent
negotiations and are not a party to the resulting revision to the 1994
settlement agreement (the "Revised Settlement Agreement"). We have not
exercised our option to withdraw from, and we have not been released from, the
1994 settlement agreement. In addition, we have not been officially excluded
from participating in the Revised Settlement Agreement. We anticipate breast
implant litigation and claims pending against us will be resolved in our
Chapter 11 proceeding. See Note 4 of Notes to 1998 Consolidated Financial
Statements for further discussion.
37
<PAGE>
Other Products Liability Litigation
Due to the nature of our business as a supplier of specialty materials to a
variety of industries, at any particular time we are a defendant in a number of
products liability lawsuits for injuries allegedly related to our products and,
in certain instances, products manufactured by others. Many of these lawsuits
seek damages in substantial amounts. For example, we have been named in
products liability lawsuits pertaining to materials previously used in
connection with temporomandibular joint implant applications and raw materials
supplied by us to manufacturers of the NORPLANT(R) Implant contraceptive
device. (NORPLANT(R) is a registered trademark of the Population Council for
Subdermal Levonorgestorel Implants). With respect to NORPLANT(R) claims brought
against the manufacturer of these products, we expect to be released from many
claims pursuant to a settlement agreement currently being implemented between
the manufacturer of these products and certain claimants. We believe that any
damages resulting from NORPLANT(R) and other products liability lawsuits will
be covered by substantial insurance or certain indemnity arrangements.
We have followed a practice of aggressively defending all products liability
claims asserted against us and although we intend 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. The prosecution of
lawsuits and claims against us, but not our subsidiaries, are stayed in the
United States as a result of our filing for protection under Chapter 11 of the
U.S. Bankruptcy Code. However, lawsuits prosecuted against us in non-U.S.
jurisdictions are not stayed by our Chapter 11 proceeding. We currently are
unable to estimate our potential liability for these claims; however, we
believe that these products liability claims will not have a material adverse
effect on our consolidated results of operations or financial condition. See
Note 4 of Notes to 1998 Consolidated Financial Statements for further
discussion.
Insurance Matters
We have a substantial amount of unexhausted claims-made, occurrence and
occurrence-noticed products liability insurance coverage with respect to breast
implant lawsuits and claims commencing in 1986 and thereafter. A substantial
number of our insurers 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. We
sought a judicial enforcement in a Michigan court of the obligations of the
Occurrence Insurers under the relevant insurance policies and over the past
five years have received a number of favorable rulings on various liability and
reimbursement issues. Based on the results of this litigation thus far,
management believes it is probable we will recover from our insurers a
substantial amount of breast implant related payments that have been or may be
made by us. In addition to the results of this litigation, this belief is
further supported by the fact that we received insurance recoveries of $875.7
million from September 1, 1994 through August 25, 1999, and entered into
settlements with certain insurers for future reimbursement. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources--Insurance Matters."
Securities Laws Class Action Lawsuits
In 1992, Dow Corning and some of our former and present directors and
officers were named, as defendants with others, in two securities laws class
action lawsuits filed by purchasers of stock of Corning Incorporated and The
Dow Chemical Company. These cases were originally filed as several separate
cases in the U.S. District Court for the Southern District of New York; they
were later consolidated so that there is one case involving claims on behalf of
purchasers of stock of Corning Incorporated and one case involving claims on
behalf of purchasers of stock of The Dow Chemical Company. The plaintiffs in
these cases allege, among other things, misrepresentations and omissions of
material facts and breach of duty with respect to purchases of stock of Corning
Incorporated and The Dow Chemical Company relative to the breast implant issue.
The relief sought in these cases is monetary damages in unspecified amounts.
38
<PAGE>
Our filing for protection under Chapter 11 of the U.S. Bankruptcy Code has
resulted in a stay of this litigation with respect to us. These cases have been
dismissed without prejudice with respect to directors, officers and other
individuals originally named as defendants. Corning Incorporated and The Dow
Chemical Company continue as defendants in this litigation.
Tax Matters
In January 1997, we received a Statutory Notice of Deficiency from the U.S.
Internal Revenue Service. This notice asserted tax deficiencies totaling
approximately $105.3 million related to our consolidated federal income tax
returns for the 1994, 1993 and 1992 calendar years. Subsequently, we reached a
tentative settlement with the IRS that would resolve the issues raised in this
notice. The tentative settlement is subject to the approval of the Joint
Committee of Taxation of the Congress of the United States (the "Joint
Committee"). If the tentative settlement is ultimately approved by the Joint
Committee, we will receive a refund of approximately $5.0 million. We
anticipate that the Joint Committee will approve the tentative settlement.
In May 1999, we received a second Statutory Notice of Deficiency from the
IRS. This second notice asserts tax deficiencies totaling approximately $65.3
million relating to our consolidated federal income tax returns for the 1996
and 1995 calendar years. We believe that the deficiencies asserted by the IRS
in the second notice are excessive and we are contesting the IRS' claims. We
anticipate that this matter will be resolved either in our Chapter 11
proceeding or through procedures provided by the Internal Revenue Code, and
that such resolution will not have a material adverse impact on our
consolidated financial position or results of operations. We are currently
engaged in discussions with the IRS in an effort to resolve this matter.
Environmental Matters
We have been advised by the EPA or by similar state regulatory agencies
that, together with others, we are a PRP with respect to a portion of the
cleanup costs and other related matters involving a number of abandoned
hazardous waste disposal sites. We do not believe that any costs incurred in
excess of those accrued will have a material adverse impact on our consolidated
financial position or results of operations. See "Business-- Environmental and
Other Governmental Regulation."
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no established public trading market for our Common Stock. There
are two holders of our Common Stock. See "Item 4. Security Ownership of Certain
Beneficial Owners and Management" for more information. We did not declare any
dividends in 1998 or 1997. Our most recent shareholder dividend was declared
and paid in December, 1992.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
Summary of Terms of Senior Unsecured Notes
We plan to issue senior unsecured notes to our unsecured commercial
creditors. We anticipate that the principal amount of these notes will be
between $750.0 million and $1.0 billion. With respect to amounts payable to our
unsecured commercial creditors, as of June 30, 1999, we have recorded
liabilities of approximately $1.0 billion relating to the claims of unsecured
commercial creditors, including interest payable. Of this amount, approximately
$250 million will be paid in cash, and approximately $750 million of ten-year
senior unsecured notes will be issued to the unsecured commercial creditors as
the Bankruptcy Court approves
39
<PAGE>
these claims for payment. However, since the commercial claims reconciliation
process is ongoing, the exact amount of cash to be paid and senior unsecured
notes to be issued is not known. If the amounts due to unsecured commercial
creditors reaches $1.3 billion as contemplated in the POR, approximately $315
million would be paid in cash, and approximately $1.0 billion of ten-year
senior unsecured notes would be issued to the unsecured commercial creditors.
We are authorized to issue up to an aggregate amount of senior unsecured notes
equal to 76% of the aggregate amount of allowed unsecured commercial creditor
claims.
The minimum denomination of the senior unsecured notes will be $1,000, with
fractional interests to be paid in cash on the Effective Date, and the senior
unsecured notes will mature ten years from the Effective Date. We are required
to use commercially reasonable best efforts to obtain, prior to the issuance of
our senior unsecured notes, an investment grade rating on the senior unsecured
notes issued pursuant to the POR of "Baa3" or higher by Moody's Investors
Service, Inc. or "BBB minus" or higher by Standard & Poor's Rating Services, a
division of the McGraw-Hill Companies, Inc.
The interest rate on the senior unsecured notes will be %, which rate was
set based on a certain basis point spread above 10-year U.S. Treasury
securities (the "Senior Note Spread") as of the Effective Date. The Senior Note
Spread and the make-whole spread (collectively, the "Rate Spreads") were
determined through negotiations among interested parties, including our
financial advisors and the committee retained in our Chapter 11 proceeding (the
"Interest Rate Parties"). Interest will be payable semi-annually, commencing no
later than six months after the Effective Date.
The senior unsecured notes will rank senior to or pari passu with all of our
existing and future unsecured indebtedness, however, should we secure other
indebtedness, the senior unsecured notes will be equally and ratably secured.
In addition, the senior unsecured notes, at our option, will:
. not be redeemable at any time prior to their maturity; or
. will be redeemable in whole or in part at any time and from time to time,
at our option, in exchange for a redemption premium.
The senior unsecured notes will be prepayable without premium or penalty at
any time and will not be subject to any sinking fund provisions.
The covenants attached to the issuance of the senior unsecured note will be
those covenants that are customary for similarly rated securities, for example,
limitations on liens and limitations on consolidations, mergers and sales of
assets. Similarly, the applicable events of default will be those events of
defaults that are customary for similarly rated securities, after applicable
grace periods, including:
. payment defaults for interest or principal on the senior unsecured notes;
. covenant defaults on the senior unsecured notes after applicable notice
periods;
. payment defaults under the Funding Payment Agreement in excess of $100.0
million;
. cross-acceleration with respect to our debt in excess of $100.0 million;
. final judgment defaults in excess of $100.0 million; and
. bankruptcy, insolvency or reorganization defaults.
We will prepare and file an application to list the senior unsecured notes
on the New York Stock Exchange and will use our reasonable best efforts to
cause the senior unsecured notes to be approved for listing no later than the
Effective Date. Additionally, we may enter into a registration rights agreement
with those holders in whose hands the senior unsecured notes will not be freely
transferable as of the Effective Date.
Bank One will serve as trustee under the senior unsecured notes and other
applicable indentures. Bank One's trustee obligations will be governed by the
laws of the State of New York.
40
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ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 209, 561 and 562 of the Michigan Business Corporation Act set forth
provisions that define the extent to which a corporation organized under the
laws of Michigan may indemnify directors, officers, employees and agents.
Article IX of our Restated Articles of Incorporation and Article XI of our By-
Laws provide for the indemnification by us of each person who is or was or had
agreed to become a director, officer, employee or agent of Dow Corning, or, at
our request, a director, officer, employee or agent of another enterprise,
against all expenses and other amounts for which indemnification may be made
under law.
Sections 561 and 562 of the Michigan Business Corporation Act give
corporations the power to indemnify officers and directors and certain other
persons under specified circumstances.
Section 209 of the Michigan Business Corporation Act empowers a corporation
in its original articles of incorporation or an amendment thereto validly
approved by shareholders to eliminate or limit the personal liability of a
director to the corporation or its shareholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision cannot eliminate
or limit the liability of a director for:
. breach of the director's duty of loyalty;
. acts or omissions not in good faith or which involve intentional
misconduct or knowing violations of law;
. approval of payment of a stock dividend, a stock repurchase, a
distribution of assets, or the making of a loan to an officer, director
or employee of the corporation or a subsidiary thereof, which was illegal
under Section 551(1) of the Michigan Business Corporation Act;
. any transaction from which the director derived an improper personal
benefit; or
. an act or omission occurring before the effective date of the provision.
We also maintain directors' and officers' reimbursement and liability
insurance and have entered into agreements with our directors and certain
officers providing for indemnification in certain events.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in the financial
statements that are listed on page F-1 of this Form 10 and are filed herewith.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements. See page F-1 for a listing of financial statements
filed as part of this Form 10.
(b) Exhibits. See the Exhibits Index beginning on page X-1 of this Form 10
for a list of exhibits filed or to be filed as part of this Form 10.
41
<PAGE>
DOW CORNING CORPORATION
AND SUBSIDIARY COMPANIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements. The following Consolidated Financial Statements of the
Company and the Reports of Independent Auditors are included at pages F-1
through F-79 of this Registration Statement.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Financial Statements
Nature of operations.................................................... F-2
Statement of management responsibility for financial statements......... F-6
Report of independent accountants....................................... F-7
Consolidated balance sheets at December 31, 1998 and 1997............... F-8
Consolidated statements of operations and retained earnings for the
years ended December 31, 1998, 1997 and 1996........................... F-10
Consolidated statements of comprehensive income for the years ended
December 31, 1998, 1997 and 1996....................................... F-11
Consolidated statements of cash flows for the years ended December 31,
1998, 1997 and 1996.................................................... F-12
Notes to consolidated financial statements.............................. F-13
Supplementary data for the years ended December 31, 1998 and 1997:
Quarterly financial information....................................... F-51
Unaudited Financial Statements
Report of independent accountants....................................... F-52
Consolidated balance sheets at June 30, 1999 and December 31, 1998...... F-53
Consolidated statements of operations and retained earnings for the
three months ended June 30, 1999 and 1998.............................. F-54
Consolidated statements of cash flows for the six months ended June 30,
1999 and 1998.......................................................... F-56
Notes to consolidated financial statements.............................. F-57
</TABLE>
F-1
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NATURE OF OPERATIONS
Business
Dow Corning Corporation ("Dow Corning") was incorporated in 1943 by Corning
Glass Works, now Corning Incorporated ("Corning"), and The Dow Chemical Company
("Dow Chemical") for the purpose of developing and producing polymers and other
materials based on silicon chemistry. Corning provided the basic silicone
technology and Dow Chemical supplied the chemical processing and manufacturing
know-how. Both companies provided initial key employees.
Dow Corning built a new business based on silicon chemistry. Silicon is one
of the most abundant elements in the world. Most of Dow Corning's products are
based on polymers known as silicones which have a silicon-oxygen-silicon
backbone. Through various chemical processes, Dow Corning manufactures
silicones that have an extremely wide variety of characteristics, in forms
ranging from fluids, gels, greases and elastomeric materials to resins and
other rigid materials. Silicones combine the temperature and chemical
resistance of glass and the versatility of plastics and, regardless of form or
application, generally possess such qualities as electrical resistance,
resistance to extreme temperatures, resistance to deterioration from aging,
water repellency, lubricating characteristics, relative chemical and
physiological inertness and resistance to ultraviolet radiation.
Dow Corning and its wholly-owned or majority-owned subsidiary corporations
(hereinafter, the consolidated operations of Dow Corning Corporation and its
subsidiaries will be referred to as the "Company"), currently manufacture over
10,000 products and serve approximately 50,000 customers worldwide, with no
single customer accounting for more than three percent of the Company's sales
in 1998.
Raw Materials
The principal raw material used in the production of Dow Corning products is
silicon. The Company purchases chemical grade silicon metal from producers who
manufacture the silicon metal from quartz that has been reacted with carbon at
high temperatures. The majority of the Company's anticipated annual
requirements are satisfied by its silicon supply contracts. The Company
believes that it has adequate sources of supply of silicon and believes that
adequate supplies of quartz are available to the producers of silicon. The
Company considers worldwide production capacity of silicon to be adequate to
meet expected demand and does not expect shortages.
Dow Corning also purchases substantial quantities, and believes it has
adequate sources of supply, of methanol, methyl chloride and other raw
materials required for its manufacturing operations. The raw materials that the
Company uses are equally accessible to all of its competitors. Although from
time to time temporary shortages of particular raw materials may exist, the
Company believes that adequate sources of raw materials required to maintain
its operations exist. Generally, the Company maintains inventory levels of raw
materials in quantities sufficient to meet its short-term production
requirements.
International Operations
The international operations of Dow Corning, principally in Europe and Asia,
are conducted primarily through wholly-owned subsidiaries and involve sales of
substantially all Dow Corning products. These products are manufactured either
domestically or by one of the Company's international subsidiaries. See Note 17
of Notes to consolidated financial statements included in this report for
financial information relating to international operations.
The Company's international operations are affected by factors normally
associated with such operations, including exchange controls, fluctuations in
currency values, local economic and labor conditions, dividend and
F-2
<PAGE>
payment restrictions, political instability and international credit or
financial problems, many of which are beyond the control of the Company. While
these conditions associated with international business involve risks different
from those associated with domestic business activities, Dow Corning does not
regard the overall risks of its international operations, on the whole, to be
materially greater than those of its operations in the United States.
Competition
Dow Corning is a leader among the various companies that produce silicon-
based products throughout the world. The Company faces substantial competition
for its products both in the United States and abroad from other manufacturers
of silicon-based products. In addition, many of the Company's products compete
with non-silicon-based products in specific applications. The risk of product
substitution is common to all Dow Corning products. The principal competitive
elements in the sale of Dow Corning products are: product quality and
performance, responsive customer service, new product development, cost
effectiveness, and application expertise.
Research and Development
Since its inception, Dow Corning has been engaged in a continuous program of
basic and applied research on silicon-based materials to develop new products
and processes, to improve and refine existing products and processes and to
develop new applications for existing products. The Company also provides a
wide variety of technical services to its customers. Research and development
costs are charged to operations when incurred and totaled $198.9 million in
1998, $210.4 million in 1997, and $203.5 million in 1996.
The Company operates research and development facilities located in the
United States, Belgium, Germany, Japan and the United Kingdom. The Company also
operates technical service centers in the United States, Australia, Belgium,
Brazil, China, France, Germany, Japan, South Korea, Taiwan and the United
Kingdom.
Patents and Licenses
Dow Corning regularly applies for United States and international patents
and owns, directly or indirectly, a substantial number of such patents. The
Company is a licensor under a number of patent licenses and technology
agreements. While Dow Corning considers its patents and licenses to be valuable
assets, it does not regard its business as being materially dependent on any
single patent or license or any group of related patents or licenses.
Protection of the Environment
Dow Corning has set a goal to reduce its toxic releases within the United
States by 75% in the year 2000 compared to 1987. This goal extends beyond
voluntary commitments made by the Company under two programs with the United
States Environmental Protection Agency--the 33/50 Voluntary Reduction Program
under which the Company has committed to reductions of all of its toxic
chemical releases, and the Clean Air Act Early Reduction Credit Program under
which the Company has committed to major reductions in methyl chloride releases
at its largest U.S. manufacturing facilities. As of December 31, 1998, the
Company has met all voluntary commitments under the 33/50 Voluntary Reduction
Program and the Clean Air Act Early Reduction Credit Program. As a member of
the Chemical Manufacturers Association, the Company is also committed to and is
implementing the Codes of Management Practices specified in the Chemical
Manufacturers Association's Responsible Care(R) program, a continuing chemical
industry effort to improve the management of chemicals (Responsible Care(R) is
a registered trademark of the Chemical Manufacturers Association).
Dow Corning expends funds consistent with its commitments to reduce the
discharge of materials into the environment. The Company expects that its
pollution control-related expenditures will be partially offset
F-3
<PAGE>
through the recovery of raw materials in the pollution control process. The
Company believes that these expenditures should not materially affect Dow
Corning's earnings or competitive position.
The Company records a charge to earnings for environmental matters when it
is probable that a liability has been incurred and the Company's costs can be
reasonably estimated. For information concerning environmental matters, see
Note 3 of Notes to consolidated financial statements.
Employees
Dow Corning's average employment for 1998 was approximately 9,400 persons.
Properties
Dow Corning owns or leases extensive property for use in its business and
believes that its properties are in good operating condition and are generally
suited for the purposes for which they are presently being used.
Principal United States manufacturing plants are located in Kentucky and
Michigan. Principal international manufacturing plants are located in Belgium,
Germany, Japan and the United Kingdom. Dow Corning owns substantially all of
its manufacturing facilities. Approximately 60% of Dow Corning's aggregate
investment in plant and equipment is represented by its United States
facilities.
Dow Corning owns its executive and corporate offices (which are located near
Midland, Michigan) and certain international offices. The Company also owns
research and development facilities in the United States, Belgium, Germany,
Japan and the United Kingdom. Domestic and international sales offices are
primarily in leased facilities. For information concerning lease commitments,
see Note 16 of Notes to consolidated financial statements.
F-4
<PAGE>
(THIS PAGE INTENTIONALLY BLANK)
F-5
<PAGE>
STATEMENT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Dow Corning Corporation is responsible for the
preparation, presentation and integrity of the consolidated financial
statements and other information included in this report. The financial
statements have been prepared in conformity with generally accepted accounting
principles appropriate in the circumstances and necessarily include amounts
based on management's best estimates and judgments.
In meeting its responsibility for the reliability of these financial
statements, Dow Corning maintains comprehensive systems of internal accounting
control. These systems are designed to provide reasonable assurance at
reasonable cost that corporate assets are protected against loss or
unauthorized use and that transactions and events are properly recorded. Such
systems are reinforced by written policies, selection and training of competent
financial personnel, appropriate division of responsibilities and a program of
internal audits.
The financial statements have been audited by our independent accountants,
PricewaterhouseCoopers LLP. Their responsibility is to express an independent
professional opinion with respect to the consolidated financial statements on
the basis of an audit conducted in accordance with generally accepted auditing
standards. In addition to the audit performed by the independent accountants,
Dow Corning maintains a professional staff of internal auditors whose audit
coverage is coordinated with that of the independent accountants.
The Board of Directors, through its Audit Committee, is responsible for
reviewing and monitoring Dow Corning's financial reporting and accounting
practices and recommending annually the appointment of the independent
accountants. The Committee, composed of a majority of nonmanagement directors,
meets periodically with management, the internal auditors and the independent
accountants to review and assess the activities of each. Both the independent
accountants and the internal auditors meet with the Committee to review the
results of their audits and their assessment of the adequacy of the system of
internal accounting controls and the quality of financial reporting.
July 30, 1999
/s/ Richard A. Hazleton /s/ Gifford E. Brown
- ------------------------------------- -------------------------------------
Richard A. Hazleton Gifford E. Brown
Chairman and Chief Executive Office Vice President, Planning & Finance
and
Chief Financial Officer
F-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Dow Corning Corporation
In our opinion, the accompanying balance sheets and related consolidated
statements of operations and retained earnings, of comprehensive income and of
cash flows present fairly, in all material respects, the financial position of
Dow Corning Corporation and its subsidiaries at December 31, 1998 and 1997, and
their results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of management; our responsibility is to express an opinion on
these financial statements based upon our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Notes 1 and 4 to the consolidated financial statements, on May 15, 1995, Dow
Corning Corporation voluntarily filed for protection under Chapter 11 of the
United States Bankruptcy Code. This action, which was taken primarily as a
result of breast implant litigation as discussed in Note 3 to the financial
statements, raises substantial doubt about the Company's ability to continue as
a going concern in its present form. Management's plans in regard to these
matters are also described in Notes 3 and 4. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
January 20, 1999 except for
Notes 3, 4, 14, and 17 which are
as of July 30, 1999
F-7
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(in millions of dollars)
ASSETS
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 193.4 $ 253.1
--------- ---------
Marketable securities.................................. 95.3 97.4
--------- ---------
Accounts and notes receivable--Trade (less allowance
for doubtful accounts of $13.5 in 1998, and of $11.7
in 1997).............................................. 431.5 424.4
Anticipated implant insurance receivable............... 163.2 85.5
Other receivables...................................... 80.9 49.9
--------- ---------
675.6 559.8
--------- ---------
Inventories............................................ 398.9 325.9
--------- ---------
Other current assets--
Deferred income taxes................................ 164.2 122.3
Other................................................ 28.2 20.3
--------- ---------
192.4 142.6
--------- ---------
Total current assets............................... 1,555.6 1,378.8
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements............................. 160.3 144.0
Buildings.............................................. 581.2 522.9
Machinery and equipment................................ 2,588.8 2,372.4
Construction-in-progress............................... 544.2 461.9
--------- ---------
3,874.5 3,501.2
Less--Accumulated depreciation......................... (2,164.5) (2,021.1)
--------- ---------
1,710.0 1,480.1
--------- ---------
OTHER ASSETS:
Marketable securities.................................. 264.5 242.9
Anticipated implant insurance receivable............... 729.1 911.6
Restricted insurance proceeds.......................... 627.4 517.2
Implant deposit........................................ 275.0 275.0
Environmental trusts................................... 23.4 23.2
Deferred income taxes.................................. 846.8 393.8
Other.................................................. 134.5 96.1
--------- ---------
2,900.7 2,459.8
--------- ---------
$ 6,166.3 $ 5,318.7
========= =========
</TABLE>
The Notes to consolidated financial statements are an integral part of these
financial statements.
F-8
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(in millions of dollars except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable............................................ $ 14.0 $ 14.8
Current portion of long-term debt........................ 25.6 24.2
Trade accounts payable................................... 163.9 167.0
Accrued payrolls and employee benefits................... 59.8 59.6
Accrued taxes............................................ 126.3 117.8
Accrued interest......................................... 201.7 --
Other current liabilities................................ 137.9 106.4
-------- --------
Total current liabilities.............................. 729.2 489.8
-------- --------
LONG-TERM DEBT............................................. 147.9 140.9
-------- --------
OTHER LONG-TERM LIABILITIES................................ 106.9 90.0
-------- --------
LIABILITIES SUBJECT TO COMPROMISE:
Trade accounts payable................................... 67.3 66.2
Accrued employee benefits................................ 266.9 192.5
Accrued taxes............................................ 3.5 3.6
Implant reserve.......................................... 3,229.0 2,406.3
Notes payable............................................ 375.0 375.0
Long-term debt........................................... 270.0 267.2
Co-insurance payable..................................... 320.0 --
Other.................................................... 77.9 130.3
-------- --------
Total liabilities subject to compromise................ 4,609.6 3,441.1
-------- --------
CONTINGENT LIABILITIES (NOTE 3)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES............. 136.4 130.6
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $5.00 par value--2,500,000 shares
authorized and outstanding.............................. 12.5 12.5
Retained earnings........................................ 431.2 1,026.2
Cumulative translation adjustment........................ 20.7 (12.4)
Other equity adjustment.................................. (28.1) --
-------- --------
Stockholders' equity................................... 436.3 1,026.3
-------- --------
$6,166.3 $5,318.7
======== ========
</TABLE>
The Notes to consolidated financial statements are an integral part of these
financial statements.
F-9
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(in millions of dollars except share data)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES........................................ $2,568.0 $2,643.5 $2,532.3
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Manufacturing cost of sales.................... 1,771.0 1,795.9 1,674.0
Marketing and administrative expenses.......... 471.4 466.9 462.3
Implant costs.................................. 1,070.8 -- --
Restructuring costs............................ 28.1 -- --
-------- -------- --------
3,341.3 2,262.8 2,136.3
-------- -------- --------
OPERATING INCOME (LOSS).......................... (773.3) 380.7 396.0
OTHER INCOME (EXPENSE):
Interest income................................ 78.3 70.4 54.1
Interest expense............................... (214.3) (11.0) (7.8)
Other, net..................................... 8.2 32.2 16.1
-------- -------- --------
INCOME (LOSS) BEFORE REORGANIZATION COSTS AND
INCOME TAXES.................................... (901.1) 472.3 458.4
Reorganization costs........................... 33.1 45.0 49.4
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES................ (934.2) 427.3 409.0
Income tax provision (benefit)................... (347.8) 168.8 168.9
Minority interests' share in income.............. 8.6 20.9 18.4
-------- -------- --------
NET INCOME (LOSS) (1998--($238.00) per share;
1997--$95.04 per share; 1996--$88.68 per
share).......................................... (595.0) 237.6 221.7
Retained earnings at beginning of year........... 1,026.2 788.6 566.9
-------- -------- --------
Retained earnings at end of year................. $ 431.2 $1,026.2 $ 788.6
======== ======== ========
</TABLE>
The Notes to consolidated financial statements are an integral part of these
financial statements.
F-10
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions of dollars)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
NET INCOME (LOSS).................................. $ (595.0) $ 237.6 $ 221.7
-------- ------- -------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX
Foreign currency translation adjustments......... 35.9 (48.6) (29.2)
Unrealized gains (losses) on securities:
Restricted assets.............................. 0.7 -- --
Unrestricted investments....................... (2.6) -- --
Minimum pension liability adjustment............. (42.2) -- --
-------- ------- -------
Other comprehensive income (loss), before tax.... (8.2) (48.6) (29.2)
COMPREHENSIVE INCOME RELATED TAX EXPENSE
(BENEFIT)......................................... (13.2) 1.0 1.1
-------- ------- -------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX...... 5.0 (49.6) (30.3)
-------- ------- -------
COMPREHENSIVE INCOME (LOSS)........................ $ (590.0) $ 188.0 $ 191.4
======== ======= =======
</TABLE>
The Notes to consolidated financial statements are an integral part of these
financial statements.
F-11
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of dollars)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ (595.0) $ 237.6 $ 221.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 188.1 185.5 188.9
Deferred income taxes......................... (495.0) 17.0 32.8
Reorganization costs.......................... 33.1 45.0 49.4
Other......................................... (29.5) 52.5 30.7
Implant payments................................ (13.5) (17.3) (25.3)
Implant insurance reimbursement................. 98.4 25.5 368.4
Implant liability............................... 797.1 -- --
Co-insurance payable............................ 320.0 -- --
Restricted insurance proceeds................... (89.4) (36.8) (374.8)
Changes in assets and liabilities:
Accounts and notes receivable................. (63.9) (22.2) (32.0)
Inventories................................... (62.1) (41.4) 16.6
Accounts payable.............................. (4.7) 3.7 29.2
Accrued taxes................................. 5.5 32.4 8.0
Accrued interest.............................. 201.7 -- --
Other......................................... 39.6 (48.8) 31.0
--------- ------- -------
Cash provided by operating activities....... 330.4 432.7 544.6
--------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ (399.8) (425.2) (312.6)
Proceeds from sales of marketable securities.... 1,214.1 331.3 26.8
Purchases of marketable securities.............. (1,215.9) (462.5) (224.9)
Other........................................... 33.5 14.9 (2.4)
--------- ------- -------
Cash used for investing activities.......... (368.1) (541.5) (513.1)
--------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings............................ 38.6 115.9 47.3
Payments on long-term debt...................... (24.6) (53.4) (57.0)
Net change in other short-term borrowings....... (1.6) 10.9 (8.9)
--------- ------- -------
Cash provided by (used for) financing
activities................................. 12.4 73.4 (18.6)
--------- ------- -------
CASH FLOWS USED FOR REORGANIZATION COSTS.......... (33.1) (45.0) (49.4)
--------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH........... (1.3) (10.9) (6.4)
--------- ------- -------
CHANGES IN CASH AND CASH EQUIVALENTS:
Net (decrease) in cash and cash equivalents..... (59.7) (91.3) (42.9)
Cash and cash equivalents at beginning of year.. 253.1 344.4 387.3
--------- ------- -------
Cash and cash equivalents at end of year........ $ 193.4 $ 253.1 $ 344.4
========= ======= =======
</TABLE>
The Notes to consolidated financial statements are an integral part of these
financial statements.
F-12
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of dollars except where noted)
NOTE 1--BUSINESS AND BASIS OF PRESENTATION
Dow Corning was incorporated in 1943 by Corning and Dow Chemical for the
purpose of developing and producing polymers and other materials based on
silicon chemistry. Dow Corning Corporation operates in various countries around
the world through numerous wholly-owned or majority-owned subsidiary
corporations. Most of the Company's products are based on polymers known as
silicones which have a silicon-oxygen-silicon backbone. Through various
chemical processes, the Company manufactures silicones that have an extremely
wide variety of characteristics in forms ranging from fluids, gels, greases and
elastomeric materials to resins and other rigid materials. Silicones combine
the temperature and chemical resistance of glass and the versatility of
plastics and, regardless of form or application, generally possess such
qualities as electrical resistance, resistance to extreme temperatures,
resistance to deterioration from aging, water repellency, lubricating
characteristics, relative chemical and physiological inertness and resistance
to ultraviolet radiation. The Company currently manufactures over 10,000
products and serves approximately 50,000 customers worldwide, with no single
customer accounting for more than three percent of the Company's sales in 1998.
Principal United States manufacturing plants are located in Kentucky and
Michigan. Principal international manufacturing plants are located in Belgium,
Germany, Japan and the United Kingdom. The Company also owns research and
development facilities in the United States, Belgium, Germany, Japan and the
United Kingdom. Dow Corning's average employment for 1998 was approximately
9,400 persons.
On May 15, 1995, Dow Corning Corporation, excluding its subsidiaries (the
"Debtor Company"), voluntarily filed for protection under Chapter 11 of the
U.S. Bankruptcy Code (the "Bankruptcy Code") with the U.S. Bankruptcy Court for
the Eastern District of Michigan, Northern Division, in Bay City, Michigan (the
"Bankruptcy Court"). The Debtor Company consists of a majority of the Company's
United States operations and certain international branches. The Debtor
Company's Chapter 11 proceeding (the "Chapter 11 Proceeding") does not include
any subsidiaries of the Debtor Company (see Note 4 below for further discussion
of this matter).
The consolidated financial statements of the Company have been prepared on a
"going-concern" basis, which contemplates the realization of assets and the
liquidation of liabilities in the ordinary course of business. However, as a
result of the Chapter 11 Proceeding of the Debtor Company, such realization of
assets and liquidation of liabilities is subject to significant uncertainties
including the approval of a plan of reorganization by the Bankruptcy Court.
Also, the ability of the Company to continue as a going concern (including its
ability to meet post-petition obligations of the Debtor Company and to meet
obligations of the subsidiaries of the Debtor Company) is dependent primarily
on (a) the ability of the Company to maintain adequate cash on hand, the
ability of the Company to generate cash from operations and the ability of the
subsidiaries of the Debtor Company to obtain necessary financing and (b) if
required, the availability of a debtor-in-possession credit facility.
Management believes that conditions (a) and (b) will be satisfied.
The Company's financial statements have been presented in conformity with
the American Institute of Certified Public Accountants' Statement of Position
90-7 ("SOP 90-7"), "Financial Reporting By Entities In Reorganization Under the
Bankruptcy Code," issued November 19, 1990. SOP 90-7 requires a segregation of
liabilities subject to compromise by the Bankruptcy Court as of the bankruptcy
filing date (May 15, 1995) and identification of all transactions and events
that are directly associated with the reorganization of the Debtor Company.
F-13
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Dow Corning Corporation and all of its wholly-owned and majority-owned domestic
and international subsidiaries. The Company's interests in 20% to 50% owned
affiliates are carried on the equity basis and are included under the caption
"OTHER ASSETS--Other" in the consolidated balance sheets. Intercompany
transactions and balances have been eliminated in consolidation.
The Company's consolidated statement of operations and retained earnings for
the year ended December 31, 1998, includes thirteen months of activity for the
Asia geographical operating segment. As a result, net sales in the consolidated
statement of operations and retained earnings for the year ended December 31,
1998, were increased by approximately $43.9 as a result of the additional month
of activity. The impact of the additional month of activity on the Company's
consolidated net income for the year ended December 31, 1998 was not material.
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments purchased with an
original maturity of ninety days or less. The carrying amounts for cash
equivalents approximate their fair market values.
Inventories
Inventories are stated at the lower of cost or market. The cost of the
majority of inventories is determined using the last-in, first-out (LIFO)
method and the remainder is valued using the first-in, first-out (FIFO) method.
Property and Depreciation
Property, plant and equipment is carried at cost less any impairment and is
depreciated principally using accelerated methods over estimated useful lives
ranging from 10 to 20 years for land improvements, 10 to 45 years for buildings
and 3 to 20 years for machinery and equipment. Upon retirement or other
disposal, the asset cost and related accumulated depreciation are removed from
the accounts and the net amount, less any proceeds, is charged or credited to
income.
Expenditures for maintenance and repairs are charged against income as
incurred. Expenditures which significantly increase asset value or extend
useful asset lives are capitalized.
The Company follows the policy of capitalizing interest as a component of
the cost of capital assets constructed for its own use. However, for the period
from May 15, 1995 through the third quarter of 1998, in conformity with the
provisions of SOP 90-7, the Company had discontinued accruing interest expense
related to unsecured pre-petition debts of the Debtor Company. In addition, for
the period from May 15, 1995 through the third quarter of 1998, the Company had
also discontinued the capitalization of interest as a component of the cost of
capital assets for its own use, since any amounts that would have been
capitalized after the application of SOP 90-7 would have been considered
immaterial. The Company's results for 1998 reflect a charge of $201.7 ($127.1
after tax) for the amount of interest payable to creditors of the Debtor
Company represented by the Committee of Unsecured Creditors pursuant to the
Joint Plan of Reorganization. This charge was taken because management has
concluded that the payment of interest to such creditors is probable. The
F-14
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
amount of the charge for interest payable to these creditors was determined
using the United States federal judgment rate of 6.28% that was in effect on
May 15, 1995 as specified in the Joint Plan of Reorganization. In accordance
with the provisions of Statement of Financial Accounting Standards No. 34,
"Capitalization of Interest Cost," $53.3 ($33.6 after tax), net of related
amortization, of this interest was capitalized as part of the historical cost
of acquiring certain assets. The actual amount of interest that will ultimately
be paid to these creditors is uncertain. See Note 3 for a further discussion of
adjustments reflected in 1998 results. The terms "Committee of Unsecured
Creditors" and "Joint Plan of Reorganization" are defined and discussed in Note
4 below.
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of", effective January 1, 1996. This statement establishes
accounting standards for the impairment of long-lived assets, certain
identifiable assets and certain identifiable intangibles to be disposed of. The
adoption of the new standard did not have a material impact on the Company's
consolidated statement of operations and retained earnings for the year ended
December 31, 1996.
Restricted and Unrestricted Investments
The Company accounts for investments in debt and equity securities in
conformity with Statement of Financial Accounting Standards No. 115 ("SFAS
115"), "Accounting for Certain Investments in Debt and Equity Securities." SFAS
115 requires the use of fair value accounting for trading or available-for-sale
securities, while retaining the use of the amortized cost method for
investments in debt securities that the Company has the positive intent and
ability to hold to maturity. Investments in debt and equity securities are
included in the captions "Marketable securities," "Restricted insurance
proceeds," "Implant deposit," and "Environmental trusts" in the consolidated
balance sheets. All such investments are considered to be available for sale.
See Notes 6 and 8 below for additional information relating to investments in
debt and equity securities.
Intangibles
Other assets include $16.2 and $27.1 of intangible assets, net of
accumulated amortization, at December 31, 1998 and 1997, respectively.
Goodwill, representing the excess of cost over net assets of businesses
acquired is included in the above amounts, and is being amortized on a
straight-line basis over 10 years. Other identifiable intangible assets are
amortized on a straight-line basis over their estimated useful lives.
Income Taxes
The Company accounts for income taxes in conformity with the provisions of
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes." SFAS 109 requires a company to recognize deferred tax assets
and liabilities for the expected future tax consequences of events that have
been recognized in a company's financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
Research and Development Costs
Research and development costs are charged to operations when incurred and
are included in manufacturing cost of sales. These costs totaled $198.9 in
1998, $210.4 in 1997, and $203.5 in 1996.
F-15
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
Currency Translation
Assets and liabilities of international subsidiaries, for which the U.S.
dollar is not the functional currency, are translated into U.S. dollars at end-
of-period exchange rates; translation gains and losses, hedging activity and
related tax effects for these subsidiaries are reported as a separate component
of stockholders' equity and as a component of comprehensive income. Historical
exchange rates are used for non-monetary assets and related elements of
expense. Revenues and expenses for these international subsidiaries are
translated at average exchange rates during the period. For all consolidated
entities for which the U.S. dollar is the functional currency, monetary assets
and liabilities are remeasured into U.S. dollars using end-of-period exchange
rates; remeasurement gains and losses, hedging activity and related tax effects
for these entities are recognized in the consolidated statements of operations
and retained earnings. All other revenues and expenses are remeasured at
average exchange rates during the period. Foreign currency transaction gains
and losses are included in the consolidated statements of operations and
retained earnings.
Currency Derivatives
The Company enters into currency derivative instruments to manage certain
currency exposures, which principally include monetary assets and liabilities
not denominated in functional currencies, and net investments in non-U.S.
entities for which the U. S dollar is not the functional currency. The Company
does not hold or enter into currency derivative instruments for trading or
speculative purposes. All currency derivative instruments are designated as
hedges of currency exposures. The derivative instruments are reviewed regularly
against the exposure to which they have been designated to ensure that they
continue to serve as an effective hedge. Effectiveness is determined by whether
the instruments provide a direct offset to changes in the market value of the
hedged exposure caused by changes in foreign currency exchange rates. To the
extent that the position created by the instruments is in excess of the
exposure to which it has been designated, the gain or loss attributable to that
excess position is recognized currently under the caption "Other, net" in the
consolidated statements of operations and retained earnings, and the excess
position is eliminated by entering into offsetting instruments. The types of
instruments used to manage these risks are primarily forward exchange
contracts.
Realized and unrealized gains and losses on currency derivative instruments
are recognized currently under the caption "Other, net" in the consolidated
statements of operations and retained earnings if designated as a hedge of
monetary assets and liabilities, or in the cumulative translation adjustment
account, net of tax, under the caption "Cumulative translation adjustment" in
the consolidated balance sheets if designated as a hedge of a net investment.
Any gains or losses on currency derivative instruments which are intended to
hedge the tax effects of the currency exposure are included in the tax
provision in the consolidated statements of operations and retained earnings in
the period in which such tax effects are recognized.
Discounts and premiums on all forward exchange contracts are amortized over
the life of the contracts and are included under the caption "Other, net" in
the consolidated statements of operations and retained earnings. Discounts and
premiums on forward exchange contracts which are intended to hedge the tax
effects of the currency exposure are amortized over the life of the contracts
and are included in the tax provision in the consolidated statements of
operations and retained earnings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
reported amounts of revenues and expenses during the reporting period and the
disclosures
F-16
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
concerning contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform to
the presentation adopted in 1998.
NOTE 3--CONTINGENCIES
Breast Implant Litigation and Claims--Background
Prior to 1992, the Company was engaged in the manufacture and sale of
silicone gel breast implants and the raw material components of those products.
In January, 1992, the United States Food and Drug Administration ("FDA") asked
breast implant producers to voluntarily halt the sale of silicone gel breast
implants pending the FDA's further review of the safety and effectiveness of
such devices, and the Company complied with the FDA's request. Subsequently,
the Company announced that it would not resume the production or sale of breast
implants.
Between 1991 and 1995, the Company experienced a substantial increase in the
number of lawsuits against the Company relating to breast implants. As of July
30, 1999, the Company has been named, often together with other defendants, in
approximately 19,000 pending breast implant products liability lawsuits filed
in the United States by, or on behalf of, individuals who claim to have, or
have had, breast implants. Many of these cases involve multiple plaintiffs. In
addition, there are 46 breast implant products liability class action lawsuits
which have been filed in the United States against the Company as of July 30,
1999; however, only three of these class actions have been certified. The
Company has sometimes been named as the manufacturer of breast implants, and
other times the Company is named as the supplier of silicone raw materials to
other breast implant manufacturers. Since the commencement of the Debtor
Company's Chapter 11 Proceeding, the Debtor Company has been dismissed from a
number of breast implant lawsuits in which the Debtor Company was named as a
supplier of silicone raw material to other breast implant manufacturers.
However, other breast implant manufacturers which purchased silicone raw
materials from the Debtor Company, and other defendants in breast implant
litigation, have filed claims for indemnity and contribution against the Debtor
Company in the Debtor Company's Chapter 11 Proceeding (see Note 4 for further
discussion).
The typical alleged factual bases for these lawsuits primarily include
allegations that the plaintiffs' breast implants (a) caused specific,
recognized autoimmune diseases including scleroderma, systemic lupus
erythematosus, and multiple sclerosis, (b) caused a vague combination of
symptoms, including chronic fatigue and joint pain, alleged to be a new disease
not generally recognized in the medical community and variously described by
terms such as "human adjuvant disease," "siliconosis," "atypical connective
tissue disease," and "atypical neurological disease," (c) have or may have
ruptured, (d) caused other local complications, and/or (e) caused
disfigurement. The Company vigorously asserts, among other defenses, that there
is no causal connection between silicone breast implants and the ailments
alleged by the plaintiffs in these cases. A substantial number of breast
implant lawsuits were consolidated for pretrial purposes in the U.S. District
Court for the Northern District of Alabama (the "Court"), and in various state
courts. Further information related to the jurisdictional status of these cases
is described in Note 4 below.
The Debtor Company's filing for protection under Chapter 11 of the
Bankruptcy Code has resulted in a stay of this litigation in the United States.
However, claims prosecuted against the Debtor Company in non-U.S. jurisdictions
and against subsidiaries of the Debtor Company are not stayed by the Chapter 11
Proceeding. In
F-17
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
addition to the 19,000 U.S. breast implant lawsuits referred to above,
approximately 6,000 individual claims had been filed in non-U.S. jurisdictions,
primarily in Australia. Of these claims, approximately 400 have been served and
are in a position to proceed under the legal systems of their relevant
jurisdictions, 3,400 have been effectively terminated or otherwise settled as
to the Company under the Australian court system, and 2,200 are inactive. The
Company believes that many of the non-U.S. lawsuit claims are duplicative of
proofs of claim filed by such non-U.S. claimants in the Debtor Company's
Chapter 11 Proceeding. Approximately 5,700 non-U.S. plaintiffs have filed
lawsuits in the United States (included in the 19,000 lawsuits referenced
above); however, these lawsuits are stayed by the Debtor Company's Chapter 11
Proceeding. In addition to the 46 U.S. class action lawsuits referred to above,
five class action lawsuits are pending in non-U.S. jurisdictions. Two of these
non-U.S. class actions have not been served and none of the non-U.S. class
actions are stayed by the Chapter 11 Proceeding.
In April 1998, the Company announced tentative settlements of two of the
non-U.S. class actions in the provinces of Ontario and Quebec, Canada, which
would resolve approximately 10,000 claims filed in the Debtor Company's Chapter
11 Proceeding. The amounts of these settlements, as subsequently amended, are
approximately $37.0 for Quebec claimants and $18.0 for Ontario claimants. Each
of these tentative settlements has been approved by the appropriate Provincial
Court. In September 1998, the Company announced a $25.1 tentative settlement of
a third non-U.S. class action in the province of British Columbia, Canada,
which would resolve approximately 4,100 claims filed in the Debtor Company's
Chapter 11 Proceeding. Some Canadian claimants in provinces other than Ontario,
Quebec, or British Columbia have also chosen to resolve their claims via the
British Columbia settlement, which was approved by the British Columbia
Provincial Court on February 11, 1999. All three Canadian class action
settlements are also subject to the approval of the Bankruptcy Court, and if
approved would be administered pursuant to the Company's ultimate plan of
reorganization.
In January 1999, the Company announced a tentative settlement of between
$21.0 and $36.0 to resolve approximately 2,400 to 4,500 claims filed in the
Debtor Company's Chapter 11 Proceeding originating in Australia. This
settlement supersedes a previously announced tentative settlement of claims
originating in Australia and New Zealand; this settlement does not resolve
claims originating in New Zealand. If less than 2,400 Australian claimants
choose to participate in this settlement, the Company may terminate it. This
settlement is subject to approval of the Bankruptcy Court. Payments under the
tentative settlement would be provided for in the Debtor Company's ultimate
plan of reorganization but would be administered and made in Australia (see
Note 4 for definitions and discussions regarding the Debtor Company's Chapter
11 Proceeding).
Breast Implant Litigation and Claims--Settlement Agreement
In 1994, the Company, along with other defendants and representatives of
breast implant litigation plaintiffs, entered into a settlement agreement under
the supervision of the Court (the "Settlement Agreement"). Under the Settlement
Agreement, certain industry participants originally agreed to contribute up to
$4.2 billion, of which the Company agreed to contribute up to $2.02 billion,
over a period of more than thirty years. Although the Settlement Agreement was
designed to cover claims of most breast implant recipients brought in the
courts of U.S. federal and state jurisdictions, approximately 7,000 U.S. and
non-U.S. potential claimants elected not to settle their claims by way of the
Settlement Agreement and elected to pursue their individual breast implant
litigation against the Company. In 1995, the Court concluded the total amount
of claims likely to be approved for payment would result in substantially lower
payments to claimants than anticipated under the Settlement Agreement, and the
Court requested that the parties negotiate possible modifications to the
Settlement Agreement. The Company did not actively participate in the
subsequent negotiations and is not a party to the resulting revision to the
Settlement Agreement (the "Revised Settlement Agreement"). The Company has not
exercised its option to withdraw from, and the Company has not been
F-18
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
released from, the Settlement Agreement. In addition, the Company has not been
officially excluded from participating in the Revised Settlement Agreement. The
Company anticipates breast implant litigation and claims pending against it
will be resolved in the Debtor Company's Chapter 11 Proceeding (see Note 4
below for further discussion).
Breast Implant Litigation and Claims--Insurance Matters
The Company has a substantial amount of unexhausted claims-made, occurrence
and occurrence-noticed products liability insurance coverage with respect to
breast implant lawsuits and claims commencing in 1986 and thereafter. For
breast implant lawsuits and claims involving implant dates prior to 1986,
substantial coverage exists under a number of primary and excess occurrence and
occurrence-noticed policies having various limits. For breast implant lawsuits
and claims filed after 1985 in cases with implant dates prior to 1986,
potential coverage exists under all of the above referenced policies. Because
defense costs and disposition of particular breast implant lawsuits and claims
may be covered, in whole or in part, both by the coverage issued from and after
1986, and one or more of the policies issued prior to 1986, the ultimate
determination of aggregate insurance coverage depends on, among other things,
how defense and indemnity costs are allocated among the various policy periods.
Depending on policy language, applicable law and agreements with insurers,
damages which may be awarded pursuant to breast implant lawsuits may or may not
be covered, in whole or in part, by insurance.
A substantial number of the Company's insurers 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. Since 1993, the Company has been involved in litigation against
certain insurance companies which issued occurrence based products liability
insurance policies to the Company from 1962 through 1985 ("Occurrence
Insurers"). This litigation resulted from an inability of the Occurrence
Insurers to reach an agreement with the Company on a formula for the allocation
among the Occurrence Insurers of payments of defense and indemnity expenses
submitted by the Company related to breast implant products liability lawsuits.
The Company sought a judicial enforcement of the obligations of the Occurrence
Insurers under the relevant insurance policies. Following certain initial
procedural steps, this litigation was conducted in the Wayne County, Michigan
Circuit Court (the "Michigan Court"). A number of the Occurrence Insurers have
been dismissed from this litigation pursuant to settlements reached with the
Company.
During 1994, the Michigan Court (a) ruled that certain of the Company's
primary Occurrence Insurers have a duty to defend the Company with respect to
breast implant products liability lawsuits, (b) directed these insurers to
reimburse the Company for certain defense costs previously incurred, and (c)
ruled in favor of the Company on allocation of defense costs.
During 1995, the Michigan Court ruled in favor of the Company on allocation
of indemnity costs, ordering 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 periods and for all cases involving unknown
implant dates; once implant dates become known, the appropriate insurer becomes
responsible for relevant defense costs. The Michigan Court also ruled that
relevant insurance contracts afford coverage for punitive damages except where
specific policy provisions expressly exclude coverage for such damages. In
addition, a trial on the merits of the claims in this litigation commenced.
During 1996, a Michigan Court jury found the remaining Occurrence Insurers
liable for coverage including costs of defense and settlement of the Company's
breast implant lawsuits in the United States and in other countries. The
Michigan Court also ruled that the Company is entitled to recover substantially
all defense,
F-19
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
settlement and judgment costs previously incurred. Certain of the Occurrence
Insurers have appealed the results of this litigation to the Michigan Court of
Appeals. The Company is uncertain as to when these appeals will be resolved. In
the interim, the Company is continuing settlement negotiations with the
Occurrence Insurers as well as other insurers that are not involved in the
litigation. Furthermore, the Company is pursuing resolution of a significant
portion of currently unresolved insurance coverage provided by solvent non-
Occurrence Insurers through arbitration proceedings. The Company is also
pursuing recovery from insolvent insurance carriers via settlement discussions.
Based on the status of this litigation, management continues to believe it
is probable 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.
This belief is further supported by the fact that the Company received
insurance recoveries of $864.7 from September 1, 1994, through July 30, 1999
(see Note 6 for further discussion), and entered into settlements with certain
insurers for future reimbursement.
Breast Implant Litigation and Claims--Financial Provisions
The Company has taken steps in the past to reflect the anticipated financial
consequences to the Company of the breast implant situation. Prior to 1995, the
Company recorded aggregate pre-tax charges of $1.981 billion and related
insurance receivables of $1.006 billion to reflect (a) the Company's best
estimate, at the time, of its potential liability under the Settlement
Agreement, (b) the Company's best estimate, at the time, of additional costs to
resolve breast implant litigation outside of the Settlement Agreement, and (c)
legal, administrative, and research costs related to the breast implant
controversy. The portion of the pre-1995 charges related to the Settlement
Agreement and related to the anticipated implant insurance receivable were
recorded on a present value basis. In 1995, the Company recorded a pre-tax
charge of $784.0 and related insurance receivable of $432.9 to abandon this
present value treatment. Since May 15, 1995, the Company's implant reserve has
been reduced only as a result of payments made by the Debtor Company for
certain legal, administrative, and research costs related to the breast implant
controversy that were taken into consideration when the reserve was originally
recorded.
The Company's results for 1998 reflect a charge of $201.7 ($127.1 after tax)
for the amount of interest payable to creditors of the Debtor Company
represented by the Committee of Unsecured Creditors pursuant to the Joint Plan
of Reorganization. This charge was taken because management has concluded that
the payment of interest to such creditors is probable. The amount of the charge
for interest payable to these creditors was determined using the United States
federal judgment rate of 6.28% that was in effect on May 15, 1995 as specified
in the Joint Plan of Reorganization. The actual amount of interest that will
ultimately be paid to these creditors is uncertain. The terms "Committee of
Unsecured Creditors" and "Joint Plan of Reorganization" are defined and
discussed in Note 4 below.
The Company's results for 1998 also reflect a pre-tax charge of $1,070.8
($674.6 after tax) representing its best estimate of anticipated financial
consequences to the Company to resolve all claims arising from the Debtor
Company's Chapter 11 Proceeding and from the breast implant controversy. This
charge was taken because management has concluded that implementation of the
Joint Plan of Reorganization is probable. Components of this charge include:
(a) an additional $797.1 to resolve implant liabilities arising under the terms
of the Joint Plan of Reorganization and outside of the U. S., (b) $320.0 to
reflect an estimate of amounts of insurance proceeds payable or to be paid to
Dow Chemical pursuant to the Insurance Allocation Agreement, (c) ($53.3) of
income relating to the capitalization of the interest expense referred to
above, net of related amortization in accordance with the provisions of
Statement of Financial Accounting Standards No. 34,
F-20
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
"Capitalization of Interest Cost," and (d) $7.0 for other miscellaneous costs.
The terms "Joint Plan of Reorganization" and "Insurance Allocation Agreement"
are defined and discussed in Note 4 below.
The Company anticipates that the ultimate cost to resolve implant litigation
and claims and related issues will be estimated for purposes of determining the
feasibility of any plan of reorganization during the Debtor Company's Chapter
11 Proceeding (see Note 4 below). Notwithstanding the inherent uncertainties
associated with estimating the ultimate cost of resolving implant litigation
and claims and related issues, management believes it has accrued amounts
required under generally accepted accounting principles. As additional facts
and circumstances develop, it is at least reasonably possible that amounts
recorded in the Company's consolidated financial statements may be revised in
the near term to reflect any material developments relating to the resolution
of implant litigation and claims and related issues. Future revisions, if
required, could have a material effect on the Company's financial position or
results of operations in the period or periods in which such revisions are
recorded.
The "Anticipated implant insurance receivable" recorded in the consolidated
balance sheets is the result of the provisions described above; a substantial
portion of this "Anticipated implant insurance receivable" relates to amounts
expected to be recovered from the Occurrence Insurers. The principal
uncertainties which exist with respect to the realization of this asset include
the ultimate cost of resolving implant litigation and claims, the results of
litigation against and settlement negotiations with insurers, and the extent to
which insurers may become insolvent in the future. The Company took these
factors into account when estimating the amount of insurance recovery to record
in the financial statements. As additional facts and circumstances develop, it
is at least reasonably possible that the estimate may be revised in the near
term to reflect any material developments relating to insurance matters. Future
revisions, if required, could have a material effect on the Company's financial
position or results of operations in the period or periods in which such
revisions are recorded. Notwithstanding the above, the Company believes it is
probable that the "Anticipated implant insurance receivable" recorded in the
consolidated balance sheet as of December 31, 1998, will ultimately be
realized.
Securities Laws Class Action Lawsuits
As previously reported, in 1992 the Company and certain of its former and
present directors and officers were named, as defendants with others, in two
securities laws class action lawsuits filed by purchasers of stock of Corning
and Dow Chemical. These cases were originally filed as several separate cases
in the Federal District Court for the Southern District of New York; they were
subsequently consolidated 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.
The Debtor Company's filing for protection under Chapter 11 of the
Bankruptcy Code has resulted in a stay of this litigation with respect to the
Debtor Company. These cases have been dismissed without prejudice with respect
to directors, officers and other individuals originally named as defendants.
Corning and Dow Chemical continue as defendants in this litigation.
Tax Matters
In January, 1997, the Company received a Statutory Notice of Deficiency (a
"Notice") from the United States Internal Revenue Service ("IRS"). This Notice
asserted tax deficiencies totaling approximately $105.3
F-21
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
related to the Company's consolidated federal income tax returns for the 1992,
1993 and 1994 calendar years. Subsequently, the Company reached a tentative
settlement with the IRS which would resolve the issues raised in this Notice.
The tentative settlement is subject to the approval of the Joint Committee of
Taxation of the Congress of the United States (the "Joint Committee"). If the
tentative settlement is ultimately approved by the Joint Committee, the Company
would receive a refund of approximately $5.0. The Company anticipates that the
Joint Committee will approve the tentative settlement.
In May, 1999, the Company received a second Notice from the IRS. This Notice
asserts tax deficiencies totaling approximately $65.3 relating to the Company's
consolidated federal income tax returns for the 1995 and 1996 calendar years.
The Company believes that the deficiencies asserted by the IRS are excessive
and is vigorously contesting the IRS' claims. The Company anticipates that this
matter will be resolved either in the Debtor Company's Chapter 11 Proceeding or
through procedures provided by the Internal Revenue Code, and that such
resolution will not have a material adverse impact on the Company's
consolidated financial position or results of operations. The Company is
currently engaged in discussions with the IRS in an effort to resolve this
matter.
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 sites. Management currently believes that
there are 11 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 those sites at which management currently believes
the Company may have more than a de minimis liability is $12.5. Management
cannot currently estimate the aggregate liability for all PRPs at all 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 as of December 31,
1998, was $7.4. In addition, receivables of $3.3 for probable third-party
recoveries have been recorded related to these environmental matters.
As additional facts and circumstances develop, it is at least reasonably
possible that either the accrued liability or the recorded receivable related
to environmental matters may be revised in the near term. While there are a
number of uncertainties with respect to the Company's estimate of its ultimate
liability for cleanup costs at these hazardous waste disposal sites, the
Company believes that any costs incurred in excess of those accrued will not
have a material adverse impact on the Company's consolidated financial position
or results of operations. This opinion is based upon the number of identified
PRPs at each site, the number of such PRPs that are believed by management to
be 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.
As a result of financial provisions recorded with respect to breast implant
liabilities, the Company has been unable to meet certain federal and state
environmental statutory financial ratio tests. Consequently, in order for the
Debtor Company to continue to operate hazardous waste storage facilities at
certain plant sites, the states involved have required the Debtor Company to
establish trusts to provide for aggregate estimated
F-22
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
closure, post-closure, corrective action and potential liability costs of $23.4
associated with these hazardous waste storage facilities; the Debtor Company
has fully funded these trusts as of July 30, 1999. Interest on the funds held
in trust will be available to the Debtor Company under certain circumstances,
and the amount required to be held in trust may vary annually. At such time as
the Company satisfies the above referenced financial ratio tests, or the Debtor
Company no longer needs or closes the permitted facilities, the funds then
remaining in these trusts will revert to the Debtor Company. The establishment
and funding of these trusts is subject to the continuing jurisdiction of the
Bankruptcy Court.
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. 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 believes that any
damages resulting from these lawsuits would be covered by substantial insurance
or certain indemnity arrangements. This belief is supported in part by the fact
that the indemnitors under these arrangements have been honoring their
indemnity commitments. The Company has followed a practice of aggressively
defending all products liability claims asserted against it, and 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. The prosecution of lawsuits and claims against the Debtor Company
has been stayed in the United States as a result of the Debtor Company's filing
for protection under Chapter 11 of the Bankruptcy Code. However, lawsuits
prosecuted against the Debtor Company in non-U.S. jurisdictions and against
subsidiaries of the Debtor Company are not stayed by the Chapter 11 Proceeding.
The Company is currently unable to estimate its potential liability for these
lawsuits; however, the Company believes that any damages resulting from these
products liability lawsuits and claims will not have a material adverse effect
on the Company's consolidated results of operations or financial condition. The
Company anticipates that the cost to resolve a substantial portion of these
lawsuits and claims will ultimately be determined during the Debtor Company's
Chapter 11 Proceeding (see Note 4 below).
NOTE 4--PROCEEDING UNDER CHAPTER 11
Filing for Chapter 11 Protection
On May 15, 1995, the Debtor Company voluntarily filed for protection under
Chapter 11 of the Bankruptcy Code. The Debtor Company consists of a majority of
the Company's U.S. operations and certain international branches. The Debtor
Company's Chapter 11 Proceeding does not include any subsidiaries of the Debtor
Company. This action was taken because (a) the Debtor Company was not satisfied
with the rate of progress toward resolving breast implant litigation outside of
the Settlement Agreement, (b) the Debtor Company was not satisfied with the
rate of progress toward achieving commitments from certain of the Company's
insurers relative to insurance recovery, and (c) the Debtor Company was
concerned by the uncertainty associated with the conclusions of the Court
relative to the Settlement Agreement (see Note 3 above for further discussion).
The Debtor Company is operating as a debtor-in-possession under the
supervision of the Bankruptcy Court. As a debtor-in-possession, the Debtor
Company is authorized to operate its business but may not engage
F-23
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
in transactions outside the ordinary course of its business without the
approval of the Bankruptcy Court. Under the Bankruptcy Code, any creditor
actions to obtain possession of property from the Debtor Company are stayed by
the Chapter 11 Proceeding. As a result, the creditors of the Debtor Company are
precluded from collecting pre-petition debts without the approval of the
Bankruptcy Court. Certain pre-petition liabilities, including wages and
benefits of employees and obligations to certain international vendors, have
been paid after obtaining the approval of the Bankruptcy Court. Also, in 1996,
the Bankruptcy Court granted the Debtor Company's motion to allow for the
offset of certain receivables and payables between the Debtor Company and its
subsidiaries existing as of May 15, 1995.
Subject to certain exceptions under the Bankruptcy Code, the Debtor
Company's Chapter 11 filing automatically stayed the continuation of any
judicial or administrative proceedings against the Debtor Company. The Debtor
Company filed notices to remove certain lawsuits filed by plaintiffs from state
courts to federal courts. The Debtor Company also filed transfer motions
seeking to transfer certain lawsuits filed by plaintiffs from various federal
courts to the federal district court having jurisdiction over the Debtor
Company's Chapter 11 Proceeding (the U.S. District Court for the Eastern
District of Michigan, the "U.S. District Court in Michigan"). The purpose of
these transfer motions was to lay a foundation for the eventual consolidation
of these lawsuits in connection with a threshold "common issues" trial on the
core issue, among others, of whether silicone gel implants cause the diseases
claimed by those who filed such lawsuits.
In September, 1995, the U.S. District Court in Michigan granted the Debtor
Company's transfer motion to transfer certain lawsuits filed by plaintiffs to
the U.S. District Court in Michigan. This court also indicated that if trials
ultimately proceed, they should be conducted in either the U.S. District Court
in Michigan or the U.S. district court for the district in which the claim
underlying the lawsuit arose. In the interim, the U.S. District Court for the
Northern District of Alabama has been assigned jurisdiction over these cases
for pretrial purposes. The U.S. District Court in Michigan also suggested that
a "common issues" trial could proceed, if needed, in connection with the
Bankruptcy Court's estimation of products liability claims against the Debtor
Company during the Debtor Company's Chapter 11 Proceeding.
The U.S. Trustee appointed a "Committee of Unsecured Creditors," a
"Committee of Tort Claimants" and an "Official Physicians' Committee"
(collectively, the "Creditor Committees") in the Chapter 11 Proceeding. In
accordance with the provisions of the Bankruptcy Code, the Creditor Committees
have been appointed to represent the diversity of interests of the entire
constituency that each committee is designated to serve, and the Creditor
Committees have the right to be heard with respect to transactions outside the
ordinary course of business and other matters arising in the Chapter 11
Proceeding.
Bar Date and Creditors' Claims
In June, 1996, the Bankruptcy Court established bar dates, deadlines for
creditors to file claims against the Debtor Company, of January 15, 1997, for
all claims against the Debtor Company arising out of the United States and its
territories, and of February 14, 1997, for all claims against the Debtor
Company arising out of non-U.S. jurisdictions. Creditors who are required to
file claims but fail to meet the bar dates generally were prohibited from
voting upon the Joint Plan of Reorganization (as defined below) and may be
prohibited from receiving distributions under any plan of reorganization.
As of July 30, 1999, approximately 905,000 proofs of claim have been filed
by creditors of the Debtor Company with the Bankruptcy Court. Of these proofs
of claim, approximately 644,000 are Implant Primary Claims (claims by implant
recipients), approximately 207,000 are Implant Supplemental Claims (claims by
persons related to implant recipients) and approximately 54,000 are General
Claims (claims by lenders, holders
F-24
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
of public debt securities, vendors and other miscellaneous parties, including
claims for contribution and indemnity). Because the cataloging of filed proofs
of claim is ongoing, the ultimate number of claims is not precisely
determinable at this time.
The Bankruptcy Court and the Debtor Company continue to assess the validity
and accuracy of the information contained in or submitted with the filed proofs
of claim. In addition, the Debtor Company believes that a significant number of
the filed proofs of claim are duplicative. As of July 30, 1999, the Bankruptcy
Court had disallowed approximately 138,000 of these duplicate claims. The
process of identifying possible duplicate claims is ongoing. The Debtor Company
anticipates that all duplicate claims will ultimately be disallowed. In
addition, a number of these proofs of claim were received subsequent to the bar
date and may be disallowed on that basis. Other than as described above, there
has been no determination of allowability of the filed proofs of claim by
either the Bankruptcy Court or the Debtor Company.
In addition to the proofs of claim filed by creditors of the Debtor Company
with the Bankruptcy Court as described above, Dow Chemical has, pursuant to
certain rules promulgated under the U.S. Bankruptcy Code, filed a proof of
claim against the Debtor Company with the Bankruptcy Court on behalf of
claimants who had not previously filed their own individual proofs of claim
against the Debtor Company with the Bankruptcy Court. The purpose of this
filing by Dow Chemical was to ensure that all breast implant claims against the
Debtor Company's shareholders are resolved consistently and contemporaneously
with claims against the Debtor Company through the Chapter 11 Proceeding.
In April 1997, the Debtor Company filed (a) an omnibus objection with the
Bankruptcy Court challenging all claims alleging that silicone breast implants
caused disease, and (b) a motion for summary judgment requesting that the
Bankruptcy Court dismiss all such claims on the basis that there is no
scientifically valid evidence sufficient to support such claims. Also in April
1997, the Debtor Company filed a motion with the Chief Judge of the U.S. Court
of Appeals for the Sixth Circuit requesting that, to the extent that a U.S.
District Judge is required to decide the Debtor Company's motion for summary
judgment or to decide issues related to disease claims which might survive the
motion for summary judgment, such issues be referred to U.S. District Judge Sam
C. Pointer, Jr. (of the U.S. District Court for the Northern District of
Alabama) due to his experience as the federal multi-district litigation judge
for breast implant litigation. As a result, the Chief Justice of the United
States granted his approval of this request in June, 1997. Judge Pointer has
been temporarily assigned to the U.S. District Court in Michigan to preside
over any proceedings regarding claims arising from implanted medical devices,
including breast implant claims, against the Debtor Company and its
shareholders.
In December, 1997, the Bankruptcy Court recommended that, although it has
the authority to decide the issues presented in the Debtor Company's omnibus
objection and motion for summary judgment described above, the U.S. District
Court in Michigan should take responsibility for ruling on such matters. The
U.S. District Court in Michigan has indicated that it will take such
responsibility with the participation of Judge Pointer. In addition, the U.S.
District Court in Michigan indicated that the report issued on November 30,
1998, by Judge Pointer's National Science Panel, established in the U.S.
District Court for the Northern District of Alabama under the U.S. Federal
Rules of Civil Procedure, may be used in connection with resolving the issue of
whether silicone gel implants cause the diseases claimed by those who assert
such claims. The report concluded that the weight of scientific evidence does
not indicate a link between silicone breast implants and systemic diseases,
such as connective tissue diseases, related signs and symptoms and immune
system dysfunction.
In August, 1997, the Committee of Tort Claimants filed a motion with the
Bankruptcy Court requesting that issues regarding estimation or liquidation of
products liability claims in the Debtor Company's Chapter 11
F-25
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
Proceeding, including issues relating to confirmation of a plan of
reorganization, be removed from the Bankruptcy Court to the U.S. District Court
in Michigan. This motion will be adjudicated by the U.S. District Court in
Michigan. In September, 1997, the U.S. District Court in Michigan conducted a
hearing on this motion, but no decision has yet been rendered.
Exclusivity Periods and Related Matters
Under applicable provisions of the Bankruptcy Code, a debtor in Chapter 11
has certain periods of exclusivity during which it has the exclusive right to
file and seek acceptances of its reorganization plan. After the expiration of
such periods, as may be extended from time to time, any creditor or shareholder
has the right to file a plan of reorganization with the Bankruptcy Court.
The Debtor Company had the exclusive right to file a plan of reorganization
for 120 days after its Chapter 11 filing (the "Plan Exclusivity Period").
During the course of the Chapter 11 Proceeding, the Bankruptcy Court has
extended the Plan Exclusivity Period from time to time. The Plan Exclusivity
Period has continued due to the Debtor Company's filing of the Initial Plan,
the First Amended Plan, the Second Amended Plan, and the Joint Plan of
Reorganization (as defined and discussed below), and the terms of relevant
Bankruptcy Court orders. In May, 1996, the Bankruptcy Court extended the Debtor
Company's exclusive statutory 60-day period for soliciting acceptances of its
plan of reorganization (the "Solicitation Exclusivity Period") for an
indefinite period, subject to further order of the Bankruptcy Court. The Plan
Exclusivity Period and the Solicitation Exclusivity Period shall be referred to
collectively as the "Exclusivity Periods."
Plans of Reorganization and Disclosure Statements
In December, 1996, the Debtor Company filed its initial plan of
reorganization (the "Initial Plan") and related initial disclosure statement
with the Bankruptcy Court. Under the Initial Plan, the Debtor Company would
have committed up to $3.0 billion to satisfy the claims of its creditors. In
August, 1997, the Initial Plan was superseded by the Debtor Company's filing of
its first amended plan of reorganization (the "First Amended Plan") and a
related first amended disclosure statement (the "First Amended Disclosure
Statement"). Under the First Amended Plan, the Debtor Company would have
committed up to $3.7 billion to satisfy the claims of its creditors. In
November, 1997, the Bankruptcy Court indicated that the Debtor Company's First
Amended Disclosure Statement would not be approved and expressed concerns about
certain provisions of the First Amended Plan. In February, 1998, the Debtor
Company filed its second amended plan of reorganization (the "Second Amended
Plan") and related second amended disclosure statement (the "Second Amended
Disclosure Statement"). Under the Second Amended Plan, the Debtor Company would
have committed up to $4.4 billion to satisfy the claims of its creditors,
including $3.0 billion to resolve products liability claims through several
settlement options or through litigation. On November 9, 1998, the Second
Amended Plan was superseded by the Debtor Company's filing of a third amended
plan of reorganization, which was subsequently amended in 1999 (the "Joint Plan
of Reorganization") and related third amended disclosure statement, which was
subsequently amended in 1999 (the "Joint Disclosure Statement"). The Joint Plan
of Reorganization and the Joint Disclosure Statement are discussed below.
In an effort to encourage resolution of key issues between the Debtor
Company and the Creditor Committees, the Bankruptcy Court had appointed a
mediator in November, 1997. On July 2, 1998, following unsuccessful attempts by
the Debtor Company and the Committee of Tort Claimants to reach an agreement
regarding the resolution of products liability claims, the mediator presented
the Debtor Company, the Committee of Tort Claimants, Dow Chemical, and Corning
with a proposal to settle such claims (the "Mediator's Proposal"). On July 7,
1998, all four parties advised the Bankruptcy Court that they would accept
F-26
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
the Mediator's Proposal. The Mediator's Proposal did not address issues between
the Debtor Company and other parties to the Chapter 11 Proceeding, including
the Committee of Unsecured Creditors and the Official Physicians' Committee.
Subsequently, the mediator assisted the Debtor Company, the Committee of
Tort Claimants, Dow Chemical, and Corning in the conversion of the Mediator's
Proposal into a plan of reorganization, related disclosure statement, and other
necessary supporting documents. As a result of this process, on November 9,
1998, the Debtor Company, along with the Committee of Tort Claimants, filed the
Joint Plan of Reorganization and the Joint Disclosure Statement with the
Bankruptcy Court.
The Joint Plan of Reorganization would provide breast implant claimants with
a range of settlement options essentially replicating the options provided by
the Revised Settlement Agreement (see Note 3 above). Under certain
circumstances, breast implant claimants would be able to qualify for more than
one settlement option. Payments similar to the amounts provided for in the
Revised Settlement Agreement (the "Base Payments") would be made to most
settling breast implant claimants. Under certain circumstances, breast implant
claimants might qualify for payments in excess of the Base Payments (the
"Premium Payments"), if funds are available. The Joint Plan of Reorganization
would also provide a mechanism for the resolution of products liability claims
other than breast implant claims.
The Joint Plan of Reorganization would provide up to $4.5 billion to satisfy
claims of the Debtor Company's creditors. Specifically, under the Joint Plan of
Reorganization, the Debtor Company would commit up to $3.172 billion to resolve
products liability claims through several settlement options or through
litigation. Products liability claims to be resolved by settlement would be
administered by a settlement facility (the "Settlement Facility"), and product
liability claims to be resolve by litigation would be administered by a
litigation facility (the "Litigation Facility"). Payments made by the Debtor
Company would be placed in a trust and withdrawn by the Settlement Facility to
pay eligible settling claimants and to cover the Settlement Facility's
operating expenses. Amounts would also be withdrawn from the trust as necessary
to fund the resolution of claims via the Litigation Facility. In addition, the
Joint Plan of Reorganization would provide $1.3 billion to satisfy commercial
claims which would be paid in full, including interest accrued at a rate of
6.28%, compounded annually. The Joint Plan of Reorganization would provide that
ten-year senior notes of the Debtor Company would be issued to satisfy
approximately 75% of the amount of allowed unsecured commercial creditor
claims; the remaining amount of allowed unsecured commercial creditor claims
would be satisfied by cash payments.
Under the Joint Plan of Reorganization, the Settlement Facility would allow
breast implant claimants who choose to settle their claims against the Debtor
Company and who meet certain documentation and eligibility criteria to combine
up to three settlement options, which would result in Base Payments ranging
from $2,000.00 to more than $250,000.00. The settlement options available under
the Joint Plan of Reorganization are: (a) an expedited payment option,
available for three years after the effective date of the Joint Plan of
Reorganization, which would pay $2,000.00 to qualifying breast implant
claimants who want to settle their claims immediately and do not intend to file
a disease claim (the "Expedited Release Payment Option"), (b) a rupture
settlement option which would pay $20,000.00 to qualifying breast implant
claimants who have undergone or will have undergone surgery no later than two
years after the effective date of the Joint Plan of Reorganization to remove a
ruptured breast implant manufactured by the Debtor Company (the "Rupture
Payment Option"), (c) an explantation payment option which would pay $5,000.00
for removal (on or after December 31, 1990, but no later than ten years after
the effective date of the Joint Plan of Reorganization) of breast implants
manufactured by the Debtor Company (the "Explantation Payment Option"), and (d)
a disease payment option which would pay between $10,000.00 and $250,000.00 to
breast implant claimants who file a
F-27
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
claim within 15 years of the effective date of the Joint Plan of Reorganization
if they have or have had certain specified symptoms or medical conditions which
are adequately documented and evaluated (the "Disease Payment Option").
Claimants qualifying for either the Expedited Release Payment Option or the
Disease Payment Option may, under certain circumstances, also qualify for the
Rupture Payment Option and the Explantation Payment Option. In addition,
claimants qualifying for the Disease Payment Option may be eligible for a
Premium Payment of up to 20% of the Disease Payment Option amounts specified
above if sufficient funds are ultimately available. Claimants qualifying for
the Rupture Payment Option may be eligible for a Premium Payment of $5,000.00
if sufficient funds are ultimately available.
The Joint Plan of Reorganization also would provide that claimants who are
eligible for payments under the Disease Payment Option may qualify for
additional compensation if their medical condition changes. For certain
claimants, amounts otherwise payable under the Disease Payment Option would be
reduced by one-half for breast implant claimants who have had breast implants
manufactured by the Debtor Company and also have had breast implants produced
by another manufacturer. Settlement amounts payable to breast implant claimants
who have had breast implants produced by another manufacturer using raw
materials supplied by the Debtor Company would be determined after review and
evaluation and paid from a fixed fund; payments could amount to a maximum of
40% of amounts payable under the Expedited Release Payment Option or the
Disease Payment Option.
Settlement payments to non-U.S. breast implant claimants under the Joint
Plan of Reorganization would be equal to either 35% or 60% of similar payments
made to U.S. breast implant claimants, depending on the country of residence of
the non-U.S. breast implant claimant receiving settlement payments. These
reduced amounts are designed to account for differing local economic and legal
system factors. Furthermore, the Joint Plan of Reorganization incorporates the
terms and conditions of three Canadian class action settlements in the
provinces of Ontario, Quebec, and British Columbia, Canada and a settlement of
Australia breast implant litigation (see Note 3 for further discussion). In
addition, in response to concerns raised by representatives of claimants in
several foreign countries regarding difficulties in obtaining the necessary
documentation to demonstrate product identification to the Settlement Facility,
modifications were made to the Joint Plan of Reorganization to, among other
things, provide additional settlement options with relaxed product
identification requirements and reduced payment amounts.
Under the Joint Plan of Reorganization, non-breast implant products
liability claimants who choose to settle their claims through the Settlement
Facility mechanism would be able to choose (a) the Expedited Release Payment
Option under which such claimants would be paid $600.00, or (b) the Disease
Payment Option under which such claimants would receive settlement payments of
between $2,500.00 and $7,500.00 depending on the type of product used and the
severity of particular claimants' injuries.
If the Joint Plan of Reorganization is approved and confirmed, qualified
claims will be processed under the supervision of an independent claims
administrator using the claims processing facility established under the
Revised Settlement Agreement.
Under the Joint Plan of Reorganization, products liability claimants
choosing to litigate their claims would be required to pursue their claims
through litigation against the Litigation Facility, including a mandated pre-
trial mediation program. As contemplated by the Debtor Company, this process
would also include certain common issues procedures (the "Common Issues
Procedures") to resolve, among other things, the core issue of whether silicone
implants cause certain diseases as alleged by products liability claimants (see
Note 3 for
F-28
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
further discussion). The U.S. District Court in Michigan would ultimately
determine whether the Common Issues Procedures will be implemented. The result
of implementing the Common Issues Procedures would not affect those claimants
who choose to resolve their claims through the Settlement Facility.
If use of the Common Issues Procedures would result in a conclusion that
silicone implants do not cause disease, some or all disease claims against the
Litigation Facility would be disallowed and some or all products liability
claimants choosing to resolve their disease claims by litigation may not
receive any distribution from the Litigation Facility. If use of the Common
Issues Procedures would result in a conclusion that silicone implants do cause
disease, individual claims that remain against the Litigation Facility would be
resolved through further litigation or settlement. In any event, non-disease
claims (for example, those claims related to mechanical failure and/or local
complications) could continue to proceed against the Litigation Facility. The
Joint Plan of Reorganization also contemplates that other common issue
procedures may be requested by the Litigation Facility, including trials to
determine, for example, the application of bulk-supplier defenses to raw
material claims and other issues. Claimants who choose to pursue their claim
against the Debtor Company through the Litigation Facility would forgo any
right to receive benefits under the various settlement options provided through
the Settlement Facility.
The Debtor Company would fund the Settlement Facility and the Litigation
Facility (collectively, the "Facilities") pursuant to a funding payment
agreement (the "Funding Payment Agreement"). The Debtor Company would fund the
Facilities over a 16-year period. The Debtor Company anticipates that it would
be able to meet its payment obligations to the Facilities utilizing cash flow
from operations, insurance proceeds, cash on hand and/or prospective
borrowings. Under certain circumstances, the Debtor Company would also have
access to a ten-year unsecured revolving credit commitment, established by Dow
Chemical and Corning, to assist in the timely funding of the Facilities. During
the first five years of this revolving credit commitment, the maximum aggregate
amount available to the Debtor Company would be $300.0. Beginning in the sixth
year following the effective date of the Joint Plan of Reorganization, the
maximum aggregate amount available to the Debtor Company would decrease by
$50.0 per year.
Pursuant to the Funding Payment Agreement, funds will be paid by the
reorganized Debtor Company (a) to the Settlement Facility with respect to
products liability claims, as such claims are processed and allowed by the
Settlement Facility, and (b) via the Settlement Facility with respect to
products liability claims allowed through the Litigation Facility, as such
claims are resolved. The amounts of funds to be paid by the reorganized Debtor
Company to the Settlement Facility and the Litigation Facility, respectively,
are subject to annual and aggregate funding limits provided in the Funding
Payment Agreement.
The initial payment under the Funding Payment Agreement, to be made when the
Joint Plan of Reorganization becomes effective, would equal $985.0 plus any
amounts earned after April 30, 1999, on $905.0 of the initial payment amount.
During the five years after the effective date of the Joint Plan of
Reorganization, the maximum annual amounts to be paid by the Debtor Company
under the Funding Payment Agreement are $47.0 in the first year, $103.0 in the
second year, $374.0 in the third year, $204.0 in the fourth year and $205.0 in
the fifth year. Thereafter, the maximum aggregate amount to be paid by the
Debtor Company would be $1,254.0 during the ensuing eleven year period. The
timing of the actual amounts payable by the Debtor Company under the Funding
Payment Agreement. would be affected by the rate at which claims are resolved
by the Facilities and the rate at which insurance proceeds are received by the
Debtor Company from its insurers (See Note 3 for additional information
relating to insurance matters).
The Joint Plan of Reorganization provides that punitive damage claims will
not be allowed.
F-29
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
Under the Joint Plan of Reorganization, products liability claims relating
to long-term contraceptive implants would be channeled to the Litigation
Facility for administrative purposes and would be resolved as to the Debtor
Company by indemnification from and/or litigation against the ultimate
manufacturers of these implants.
Releases of Debtor Company and Other Parties
If the Joint Plan of Reorganization is confirmed, personal injury claims,
and certain related claims, would be transferred to the Settlement Facility and
the Litigation Facility for handling and payment. In addition, all claims
subject to the jurisdiction of the Bankruptcy Court against (a) the Debtor
Company, its subsidiaries and affiliates, (b) Dow Chemical, Corning and their
respective subsidiaries and affiliates, (c) certain of the Debtor Company's
insurers who have settled coverage issues with the Debtor Company relating to
products liability claims and (d) all of the officers, directors, employees and
representatives of these parties would (as to the Debtor Company) be discharged
and (as to all other parties) be released, and any prosecution or enforcement
of those claims would be permanently barred.
With respect to products liability claimants choosing to resolve their
claims via the Settlement Facility mechanism, all such claims subject to the
jurisdiction of the Bankruptcy Court relating to products of the Debtor Company
against such claimants' physicians and other health care providers associated
with such claims who agree to settle their claims against the Debtor Company
("Settling Health Care Providers") would (with the exception of certain defined
medical malpractice claims) also be released, and any prosecution or
enforcement of those claims would be permanently barred.
With respect to products liability claimants choosing to resolve their
claims via the Litigation Facility mechanism, all such allowed claims subject
to the jurisdiction of the Bankruptcy Court relating to products of the Debtor
Company against those Settling Physicians and Health Care Providers who have
had the claims against them transferred to the Debtor Company's bankruptcy
proceedings as claims "related to" such proceedings would have such claims
resolved in tandem with the related claim against the Litigation Facility. To
the extent that funds would be available for this purpose at the time of claim
allowance, the claims for which the Litigation Facility and the Settling
Physician or Health Care Provider would be jointly liable would be paid by the
Litigation Facility. If, due to funding deficiencies at the time of claim
allowance, the Settling Physician or Health Care Provider would make payment of
the allowed personal injury claim for which the Litigation Facility would be
jointly liable, the Settling Physician or Health Care Provider paying the claim
would have a reimbursement claim against the Litigation Facility. The
reimbursement claim would be paid by the Litigation Facility to the Settling
Physician or Health Care Provider when funds subsequently became available.
Proposed Insurance Allocation Agreement Between Debtor Company and Dow
Chemical
A number of the Company's products liability insurance policies name the
Company and Dow Chemical as co-insureds (the "Shared Insurance Assets"). A
portion of the Shared Insurance Assets may, under certain conditions, become
payable by the Debtor Company to Dow Chemical under an insurance allocation
agreement between the Debtor Company and Dow Chemical (the "Insurance
Allocation Agreement"). Under the Insurance Allocation Agreement, twenty-five
percent of certain of the Shared Insurance Assets would be paid by the Debtor
Company to Dow Chemical subsequent to confirmation of the Joint Plan of
Reorganization. However, the amount of Shared Insurance Assets which would be
payable to Dow Chemical by the Debtor Company under the Insurance Allocation
Agreement would not exceed approximately $320.0. In addition, a portion of any
such amounts paid to Dow Chemical, to the extent not used by Dow Chemical to
pay certain products liability claims, would be paid over to the Debtor Company
after the expiration of a 17.5-year period
F-30
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
commencing on the effective date of the Joint Plan of Reorganization.
Implementation of the Insurance Allocation Agreement is dependent on approval
of the Joint Plan of Reorganization in substantially its current form by the
Bankruptcy Court (See Note 3 for additional information regarding related
charges reflected in the Company's 1998 results).
Confirmation Procedure
Confirmation of a plan of reorganization requires, among other things,
acceptance of the plan by the affirmative vote (in excess of 50% of the number
and in excess of 66 2/3% of the dollar amount of the claims) of the creditors
who vote in each class of creditors having claims that are impaired by the plan
of reorganization. On February 4, 1999, the Bankruptcy Court issued an order
(a) approving the adequacy of the Joint Disclosure Statement, (b) permitting
the distribution of the Joint Plan of Reorganization and Joint Disclosure
Statement to the Debtor Company's creditors for their consideration, and (c)
establishing a preliminary timeline for the remaining approval and confirmation
process.
Subsequently, on March 15, 1999, the Debtor Company distributed the Joint
Plan of Reorganization and Joint Disclosure Statement to the Debtor Company's
creditors and solicited acceptances of the Joint Plan of Reorganization from
its creditors from March 15, 1999, through May 14, 1999. As a result of this
process and subsequent negotiations with certain classes of creditors, all
classes of claimants represented by the Committee of Tort Claimants (with the
exception of the holders of claims related to long-term contraceptive
implants), and the class of claimants represented by the Official Physicians'
Committee, have provided the requisite acceptance of the terms of the Joint
Plan of Reorganization. In addition, the class of claimants represented by the
Committee of Unsecured Creditors and the class of claimants comprised of
various governmental entities, including the United States (the "U.S.
Government") have not provided the requisite acceptance of the terms of the
Joint Plan of Reorganization. See further discussion below under "Uncertainties
regarding implementation of the Joint Plan of Reorganization.".
On June 28, 1999, the Bankruptcy Court commenced a hearing regarding
confirmation of the Joint Plan of Reorganization (the "Confirmation Hearing").
During the Confirmation Hearing, the Debtor Company and the Committee of Tort
Claimants presented testimony and other evidence in support of confirmation of
the Joint Plan of Reorganization. In addition, opponents of the confirmation of
the Joint Plan of Reorganization presented testimony and other evidence in
opposition to confirmation of the Joint Plan of Reorganization. Specifically,
the principal concerns of these opponents include (a) the proposed treatment of
non-U.S. products liability claimants under the Joint Plan of Reorganization,
(b) the appropriate interest rate to be applied for the period from May 15,
1995, through the effective date of the Joint Plan of Reorganization on allowed
claims held by creditors represented by the Committee of Unsecured Creditors,
(c) whether the proposed discharge of any potential personal injury and related
claims against the shareholders of the Debtor Company is appropriate under the
Bankruptcy Code and other relevant law, and (d) the adequacy and propriety of
the aggregate funding limit applicable to the Litigation Facility. The
Confirmation Hearing concluded on July 30, 1999. The Debtor Company is
uncertain as to when the Bankruptcy Court will issue a ruling regarding
confirmation of the Joint Plan of Reorganization.
Following motions by the Committee of Unsecured Creditors, the Debtor
Company, and the Committee of Tort Claimants, and Bankruptcy Court hearings on
such motions, the Bankruptcy Court issued a ruling on July 14, 1999, indicating
that the appropriate interest rate to be applied for the period from May 15,
1995, through the effective date of the Joint Plan of Reorganization on allowed
claims held by creditors represented by the Committee of Unsecured Creditors is
6.28%, the United States federal judgment rate that was in effect on May 15,
1995 as specified in the Joint Plan of Reorganization.
F-31
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
The Debtor Company continues to participate in discussions with the U.S.
Government, the Committee of Unsecured Creditors, and the Official Physicians'
Committee regarding the terms of the Joint Plan of Reorganization. Absent the
requisite approvals referenced above, the Bankruptcy Court may confirm the
Joint Plan of Reorganization, or a competing plan of reorganization, under the
"cramdown" provisions of the Bankruptcy Code, assuming certain tests are met.
On May 28, 1999, the Debtor Company filed a motion with the Bankruptcy Court
requesting confirmation of the Joint Plan of Reorganization despite the absence
of approval of the Joint Plan of Reorganization by all classes of creditors.
The Bankruptcy Court has not ruled on this motion.
Uncertainties regarding implementation of Joint Plan of Reorganization
Even though management believes that the Joint Plan of Reorganization will
ultimately be implemented, uncertainties regarding such implementation continue
to exist including (a) confirmation of the Joint Plan of Reorganization by the
Bankruptcy Court, and (b) the favorable resolution of appeals, if any, of the
Bankruptcy Court's ultimate confirmation order. As discussed above, various
creditors and creditor representatives, including the Committee of Unsecured
Creditors and the Official Physicians' Committee, assert that the Bankruptcy
Court should not confirm the Joint Plan of Reorganization. Specifically, they
contend (among other things) that (a) the classes into which the Debtor
Company's claimants are grouped for voting and other purposes under the Joint
Plan of Reorganization are inappropriate, (b) the differing treatment of
domestic and foreign products liability claimants is unfair, (c) the release of
claims against Dow Chemical and Corning, the Debtor Company's subsidiaries and
other parties is impermissible, (d) the provisions of the Joint Plan of
Reorganization for the amount of interest to be paid to unsecured creditors and
the manner of payment to unsecured creditors are improper or inadequate, and
(e) the treatment of implant related claims arising from implants other than
breast implants are unfair or inadequate. These creditors and creditor
representatives contend that these issues prevent confirmation of the Joint
Plan of Reorganization. In addition, the U.S. Government has objected to
confirmation of the Joint Plan of Reorganization, asserting that the Joint Plan
of Reorganization does not provide sufficient funding to reimburse the U.S.
Government for health care expenses it incurred on behalf of breast implant
recipients. Resolution of these issues could ultimately impact whether the
Joint Plan of Reorganization will be implemented in substantially its current
form.
Debtor Company Financial Statements
The condensed financial statements of the Debtor Company are presented as
follows:
F-32
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-33
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
DOW CORNING CORPORATION
DEBTOR COMPANY CONDENSED BALANCE SHEET
(in millions of dollars)
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 68.3
Marketable securities........................................... 78.1
Accounts and notes receivable, including $400.6 receivable from
subsidiaries................................................... 554.7
Anticipated implant insurance receivable........................ 163.2
Inventories..................................................... 186.3
Other current assets--
Deferred income taxes......................................... 188.6
Other......................................................... 2.6
---------
Total current assets........................................ 1,241.8
---------
INVESTMENTS:
Equity in unconsolidated subsidiaries........................... 662.1
---------
PROPERTY, PLANT AND EQUIPMENT: 1,796.1
Less--Accumulated depreciation.................................. (1,192.4)
---------
603.7
---------
OTHER ASSETS:
Marketable securities........................................... 109.1
Anticipated implant insurance receivable........................ 729.1
Restricted insurance proceeds................................... 627.4
Implant deposit................................................. 275.0
Environmental trusts............................................ 23.4
Deferred income taxes........................................... 696.2
Receivable from subsidiaries.................................... 420.0
Other assets.................................................... 215.9
---------
3,096.1
---------
TOTAL ASSETS...................................................... $ 5,603.7
=========
</TABLE>
F-34
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
DOW CORNING CORPORATION
DEBTOR COMPANY CONDENSED BALANCE SHEET
(in millions of dollars except share data)
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................ $ 30.3
Payable to subsidiaries......................................... 95.0
Accrued interest................................................ 201.7
Other current liabilities....................................... 178.9
--------
Total current liabilities..................................... 505.9
--------
OTHER LIABILITIES................................................. 14.1
--------
LIABILITIES SUBJECT TO COMPROMISE:
Trade accounts payable.......................................... 67.3
Payable to subsidiaries......................................... 37.8
Accrued employee benefits....................................... 266.9
Accrued taxes................................................... 3.5
Implant reserve................................................. 3,229.0
Notes payable................................................... 375.0
Long-term debt.................................................. 270.0
Co-insurance payable............................................ 320.0
Other........................................................... 77.9
--------
Total liabilities subject to compromise....................... 4,647.4
--------
STOCKHOLDERS' EQUITY:
Common stock, $5 par value--2,500,000 shares authorized and out-
standing....................................................... 12.5
Retained earnings............................................... 431.2
Cumulative translation adjustment............................... 20.7
Other equity adjustment......................................... (28.1)
--------
Stockholders' equity.......................................... 436.3
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $5,603.7
========
</TABLE>
F-35
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
DOW CORNING CORPORATION
DEBTOR COMPANY CONDENSED STATEMENT OF
OPERATIONS AND RETAINED EARNINGS
(in millions of dollars)
<TABLE>
<CAPTION>
Year ended
December 31, 1998
-----------------
<S> <C>
NET SALES (includes $686.0 of sales to subsidiaries).............. $1,707.6
OPERATING COSTS AND EXPENSES:
Manufacturing cost of sales.................................. 1,200.6
Marketing and administrative expenses........................ 258.1
Implant costs................................................ 1,070.8
--------
2,529.5
--------
OPERATING INCOME (LOSS)........................................ (821.9)
OTHER INCOME (EXPENSE):
Interest income.............................................. 64.6
Interest expense............................................. (202.0)
Other, net................................................... (31.1)
--------
INCOME (LOSS) BEFORE REORGANIZATION
COSTS AND INCOME TAXES (990.4)
Reorganization costs........................................... 33.1
--------
INCOME (LOSS) BEFORE INCOME TAXES.............................. 1,023.5)
Income tax benefit (provision)................................. (366.4)
--------
NET INCOME (LOSS).............................................. $ (657.1)
========
Earnings of unconsolidated subsidiaries and related elimina-
tions......................................................... 62.1
Retained earnings at beginning of year......................... 1,026.2
--------
Retained earnings at end of year............................... $ 431.2
========
</TABLE>
F-36
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
DOW CORNING CORPORATION
DEBTOR COMPANY CONDENSED STATEMENT OF CASH FLOWS
(in millions of dollars)
<TABLE>
<CAPTION>
Year ended
December 31, 1998
-----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ (657.1)
Adjustments to reconcile net income to net cash provided by
operating activities--Depreciation and amortization..... 99.2
Deferred income taxes.................................... (448.3)
Reorganization costs..................................... 33.1
Other.................................................... (20.3)
Implant payments........................................... (13.5)
Implant insurance reimbursement............................ 98.4
Implant liability.......................................... 797.1
Co-insurance payable....................................... 320.0
Restricted insurance proceeds.............................. (89.4)
Changes in assets and liabilities--
Accounts and notes receivable............................ (91.2)
Inventories.............................................. (42.2)
Accounts payable......................................... (11.1)
Accrued taxes............................................ 26.0
Accrued interest......................................... 201.7
Receivables from subsidiaries............................ (89.9)
Other.................................................... 16.9
--------
Cash provided by operating activities.................... 129.4
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................... (135.0)
Proceeds from sales of marketable securities............... 1,130.4
Purchases of marketable securities......................... 1,161.7)
Dividends from subsidiaries................................ 51.5
Other...................................................... 39.6
--------
Cash used for investing activities....................... (75.2)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in other short-term borrowings.................. (7.9)
--------
Cash used for financing activities....................... (7.9)
--------
CASH FLOWS USED FOR REORGANIZATION COSTS..................... (33.1)
--------
CHANGES IN CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents.................. 13.2
Cash and cash equivalents at beginning of year............. 55.1
--------
Cash and cash equivalents at end of year................... $ 68.3
========
</TABLE>
The condensed financial statements of the Debtor Company reflect
transactions of the Debtor Company and transactions between the Debtor Company
and all subsidiaries of the Debtor Company. The condensed
F-37
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
statement of operations and retained earnings includes $686.0 of sales to
subsidiaries in the caption "NET SALES." These sales are conducted at prices
substantially comparable to those which would prevail in open-market
transactions between unrelated parties.
The Debtor Company has incurred and will continue to incur significant costs
associated with the Chapter 11 Proceeding. The aggregate amount of these costs,
which are being expensed as incurred, may have a material adverse impact on the
Company's results of operations in future periods. These costs are recorded
under the caption "Reorganization costs" in the condensed statement of
operations and retained earnings.
The condensed statement of operations and retained earnings reflects
interest income of $64.6 for the year ended December 31, 1998. The amount of
interest income that the Debtor Company has earned as a result of the Chapter
11 Proceeding is immaterial.
Due to the Debtor Company's status as a debtor-in-possession under Chapter
11 of the Bankruptcy Code, the Debtor Company is in default of its debt
agreements. All outstanding debt of the Debtor Company as of May 15, 1995, has
been presented under the caption "LIABILITIES SUBJECT TO COMPROMISE" in the
condensed balance sheet.
Interest on Pre-Petition Debt
While operating in the Chapter 11 Proceeding, the Debtor Company is
generally prohibited from paying interest on unsecured pre-petition debts of
the Debtor Company. Since May 15, 1995, and continuing through the third
quarter of 1998, in conformity with SOP 90-7, the Company had discontinued
accruing interest expense related to unsecured pre-petition debts of the Debtor
Company. The Debtor Company's results for 1998 reflect a charge of $201.7
($127.1 after tax) for the amount of interest payable to creditors of the
Debtor Company represented by the Committee of Unsecured Creditors pursuant to
the Joint Plan of Reorganization. This charge was taken because management has
concluded that the payment of interest to such creditors is probable. The
amount of the charge for interest payable to these creditors was determined
using the United States federal judgment rate of 6.28% that was in effect on
May 15, 1995, as specified in the Joint Plan of Reorganization. In accordance
with the provisions of Statement of Financial Accounting Standards No. 34,
"Capitalization of Interest Cost," $53.3 ($33.6 after tax), net of related
amortization, of this interest was capitalized as part of the historical cost
of acquiring certain assets. The actual amount of interest, if any, that will
ultimately be paid to commercial creditors is uncertain.
NOTE 5--FOREIGN CURRENCY
Following is an analysis of the changes in the cumulative translation
adjustment:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of year......................... $(12.4) $ 37.2 $ 67.5
Translation adjustments, including gains (losses)
from certain hedges and intercompany balances..... 35.9 (48.6) (29.2)
Income tax effect of current year activity......... (2.8) (1.0) (1.1)
------ ------ ------
Balance, end of year............................... $ 20.7 $(12.4) $ 37.2
====== ====== ======
</TABLE>
Net foreign currency losses currently recognized in income amounted to
$(0.1) in 1998, $(0.1) in 1997, and $(3.9) in 1996. The net foreign currency
loss currently recognized in income for 1998 and 1997 includes $0.7 and $1.3,
respectively, in net foreign currency gains which are included as part of the
income tax provision in the consolidated statement of operations and retained
earnings.
F-38
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
NOTE 6--RESTRICTED ASSETS
Implant Deposit
In connection with the Settlement Agreement, the Company has entered into an
agreement whereby $275.0 is restricted to use for future breast implant
settlement payments. Accordingly, this amount is included in the caption
"Implant deposit" in the consolidated balance sheets. This amount is also
subject to the provisions of a related escrow agreement which, among other
things, appointed an independent escrow agent. The escrowed funds are invested
in investment categories approved by the Bankruptcy Court. As of December 31,
1998, the marketable securities included in the caption "Implant deposit" in
the consolidated balance sheet primarily consisted of certificates of deposit,
fixed rate and floating rate federal agency and corporate notes, and commercial
paper.
Anticipated Implant Insurance Receivable and Restricted Insurance Proceeds
In addition, as of December 31, 1998, $581.2 of cash proceeds from
settlements with insurers (received since the commencement of the Chapter 11
Proceeding) and $46.2 (net of tax) of related investment income is restricted
as to its use pursuant to orders of the Bankruptcy Court. Accordingly, as of
December 31, 1998, $627.4 is included in the caption "Restricted insurance
proceeds" in the consolidated balance sheet. The "Restricted insurance
proceeds" are invested in investment categories approved by the Bankruptcy
Court. As of December 31, 1998, the marketable securities included in the
caption "Restricted insurance proceeds" consisted primarily of state and
municipal securities, money market funds, and fixed and floating rate corporate
notes.
A majority of the "Restricted insurance proceeds" and the "Anticipated
implant insurance receivable" recorded in the accompanying consolidated balance
sheets relate to the Shared Insurance Assets. The Company and/or Dow Chemical
will have rights to petition the Bankruptcy Court for distribution of the
"Restricted insurance proceeds" primarily for the purpose of making specified
indemnity payments or reimbursing specified expense payments under conditions
prescribed by the Bankruptcy Court. The Company anticipates that future
settlements of policies which name the Company as a co-insured will be subject
to the approval of the Bankruptcy Court and restricted in a manner similar to
that described above.
The Company believes that it is probable that it will have access to the
Shared Insurance Assets and other insurance proceeds in an amount sufficient to
ultimately realize the "Restricted insurance proceeds" and "Anticipated implant
insurance receivable" recorded in the consolidated balance sheets.
At December 31, 1998 and 1997, the aggregate fair market value of the
marketable securities included in the caption "Restricted insurance proceeds"
approximates carrying value. These amounts are summarized in the accompanying
balance sheet as follows (at cost):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Money Market Funds............................... $ 59.8 $ 13.9
Demand Notes, Commercial Paper and Certificates
of Deposit
Maturity in a year or less..................... 25.3 17.4
Maturity greater than one year................. -- 2.0
State and Municipal Securities
Maturity in a year or less....................... 177.5 289.7
Maturity between 1 and 5 years................. 307.4 141.0
Corporate Obligations
Maturity in a year or less..................... 38.6 53.2
Maturity between 1 and 5 years................. 18.8 --
------- -------
$ 627.4 $ 517.2
======= =======
</TABLE>
F-39
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
Other Assets--Environmental Trusts
In order to comply with certain environmental regulations, the Company has
contributed $23.4, as of December 31, 1998, to fund certain trusts in order to
provide a financial assurance for the potential payment of aggregate estimated
closure, post-closure, corrective action and potential liability costs
associated with the operation of hazardous waste storage facilities at certain
plant sites (see Note 3 for further discussion). Accordingly, this amount is
included in the caption "Environmental trusts" in the consolidated balance
sheet. As of December 31, 1998, these funds were primarily invested in money
market funds.
NOTE 7--INVENTORIES
Following is a summary of inventories by costing method at December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Raw material, work-in-process and finished goods:
Valued at LIFO............................................ $ 295.2 $ 221.9
Valued at FIFO............................................ 103.7 104.0
------- -------
$ 398.9 $ 325.9
======= =======
</TABLE>
Under the dollar value LIFO method used by the Company, it is impracticable
to separate inventory values by classifications. Inventories valued using LIFO
at December 31, 1998 and 1997, are stated at approximately $27.6 and $76.0,
respectively, less than they would have been if valued at replacement cost.
NOTE 8-- UNRESTRICTED INVESTMENTS
Excluding investments accounted for on the equity basis, the carrying
amounts for unrestricted investments at December 31, 1998 and 1997, were $359.8
and $340.3, respectively. These unrestricted investments consist principally of
obligations backed by the U. S. Government or one of its agencies and corporate
issue preferred equities; and have been classified as "available for sale" in
conformity with SFAS 115. Fair values are determined based on quoted market
prices or, if quoted market prices are not available, on market prices of
comparable instruments. For purposes of computing realized gain or loss on the
disposition of unrestricted investments, the specific identification method is
used. Unrestricted investments are included in the captions "Marketable
securities" in the current and noncurrent section of the consolidated balance
sheet.
F-40
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
As of December 31, 1998, the amortized cost, gross unrealized gains, gross
unrealized losses, and market value of the unrestricted investments consisted
of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
DEBT SECURITIES:
U.S. Government Obligations........... $ 2.0 $ -- $ -- $ 2.0
U.S. Government Agency Obligations.... 98.3 0.4 (0.1) 98.6
Mortgage Backed Securities............ 2.6 -- 2.6
Corporate Bonds....................... 232.1 0.2 (0.3) 232.0
Certificates of Deposit............... 13.0 -- -- 13.0
Commercial Paper...................... 5.4 -- -- 5.4
------ ----- ----- ------
TOTAL DEBT SECURITIES................. 353.4 0.6 (0.4) 353.6
------ ----- ----- ------
EQUITY SECURITIES:
United States......................... 2.2 -- (0.6) 1.6
Foreign............................... 4.7 0.2 (0.3) 4.6
------ ----- ----- ------
TOTAL EQUITY SECURITIES............... 6.9 0.2 (0.9) 6.2
------ ----- ----- ------
TOTAL MARKETABLE SECURITIES........... $360.3 $ 0.8 $(1.3) $359.8
====== ===== ===== ======
</TABLE>
As of December 31, 1998, the contractual maturities of the debt securities
included in unrestricted investments consisted of the following:
<TABLE>
<S> <C>
Mature in one year or less.......................................... $ 90.5
Mature after one year through five years............................ 263.1
-------
Total debt securities............................................. $ 353.6
=======
</TABLE>
At December 31, 1997, the aggregate fair value of these unrestricted
investments approximated carrying value, and there were no material unrealized
gains or losses. There were no material realized gain or losses for the year
ended December 31, 1997.
NOTE 9--NOTES PAYABLE AND CREDIT FACILITIES
Notes payable at December 31, consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
CURRENT LIABILITIES:
Other bank borrowings....................................... $ 14.0 $ 14.8
====== ======
LIABILITIES SUBJECT TO COMPROMISE:
Revolving credit agreement.................................. $375.0 $375.0
====== ======
</TABLE>
During 1993, the Debtor Company entered into a revolving credit agreement
with 16 domestic and foreign banks which provided for borrowings on a revolving
credit basis until November, 1997, of up to $400.0. Under the provisions of the
revolving credit agreement, the Debtor Company is subject to certain debt
restrictions and provisions. Due to the Debtor Company's status as a debtor-in-
possession under Chapter 11 of the Bankruptcy Code, the Debtor Company is in
default on its debt agreements, including the revolving credit agreement. At
F-41
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
May 15, 1995, the interest rate on amounts outstanding under the revolving
credit agreement was 7.13%. While operating in the Chapter 11 Proceeding, the
Debtor Company is prohibited from paying interest on unsecured pre-petition
debts including the debt incurred under the revolving credit agreement. The
Company is unable to estimate the fair value of the debt incurred under the
revolving credit agreement due to the uncertainty associated with the Debtor
Company's filing for protection under Chapter 11 of the Bankruptcy Code. See
Note 4 for additional information regarding interest on pre-petition debt.
Amounts outstanding under short-term lines of credit are liabilities of the
subsidiaries of the Debtor Company and are described as "Other bank borrowings"
in the table above. The carrying amounts of these short-term borrowings
approximate their fair value.
NOTE 10--LONG-TERM DEBT
Long-term debt at December 31, consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
LONG-TERM DEBT:
Variable-rate Notes, maturing serially 1997-1999, 6.01875% at
December 31, 1998............................................. $ 15.0 $ 19.0
Variable-rate Notes due 2001, 3.63125% at December 31, 1998.... 15.1 19.7
Variable rate long-term line of credit expiring 2002, 5.99% at
December 31, 1998............................................. 110.0 101.3
Other obligations and capital leases........................... 33.4 25.1
------ ------
173.5 165.1
Less--Payments due within one year............................. 25.6 24.2
------ ------
$147.9 $140.9
====== ======
LIABILITIES SUBJECT TO COMPROMISE:
9.375% Debentures due 2008..................................... $ 75.0 $ 75.0
8.15% Debentures due 2029...................................... 50.0 50.0
8.125%-9.5% Medium-term Notes due 1995-2001, 8.71% average rate
at December 31, 1998.......................................... 34.5 34.5
Variable-rate Notes due 1995-1998, 6.688%-7.234% at December
31, 1998...................................................... 84.8 84.8
5.55% Japanese Yen Notes due 1998.............................. 25.7 22.9
------ ------
$270.0 $267.2
====== ======
</TABLE>
Due to the Debtor Company's filing for protection under Chapter 11 of the
Bankruptcy Code (see Note 4 above), long-term debt of the Debtor Company has
been reclassified to the caption "LIABILITIES SUBJECT TO COMPROMISE" in the
table above and in the accompanying consolidated balance sheets. At December
31, 1998, the amount shown under the caption "LONG-TERM DEBT" in the table
above represents long-term debt of the subsidiaries of the Debtor Company.
At December 31, 1998, the fair value of the long-term debt of the
subsidiaries of the Debtor Company approximated the book value of $173.5. The
Company is unable to estimate the fair value of the long-term debt of the
Debtor Company at December 31, 1998, due to the uncertainty associated with the
Debtor Company's filing for protection under Chapter 11 of the Bankruptcy Code.
Due to the Debtor Company's status as a debtor-in-possession under Chapter
11 of the Bankruptcy Code, the Debtor Company is in default on its debt
agreements.
Annual aggregate maturities of the long-term debt of the subsidiaries of the
Debtor Company are: $25.6 in 1999, $1.8 in 2000, $15.6 in 2001, $110.4 in 2002,
and $20.1 thereafter.
F-42
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
While operating in the Chapter 11 Proceeding, the Debtor Company is
generally prohibited from paying interest on unsecured pre-petition debts of
the Debtor Company. See Note 4 for additional information regarding interest on
pre-petition debt. Cash paid during the year for interest was $12.6 in 1998,
$11.0 in 1997, and $7.8 in 1996.
NOTE 11--CURRENCY RATE DERIVATIVES
The Company enters into forward exchange contracts primarily to hedge
monetary assets and liabilities not denominated in functional currencies and
the tax effects attributable to this exposure. Gains and losses on these
contracts are recognized concurrent with the gains and losses from the
associated exposures.
NOTE 11--CURRENCY RATE DERIVATIVES (Continued)
Forward exchange contracts are shown in the following table:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------- ---------------------
Book Contract Book Contract
Value Amount Value Amount
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Forward exchange contracts:
--to buy Belgian Francs / US
Dollars........................ $ -- $ 0.1 $ (0.1) $ 15.7
--to sell Belgian Francs / US
Dollars........................ -- 0.7 0.1 3.9
--to buy Belgian Francs / ECU... 0.1 12.9 -- --
--to sell Belgian Francs / ECU.. (0.1) 12.9 0.1 68.8
--to buy British Pounds / US
Dollars........................ (0.1) 18.7 -- --
--to sell British Pounds / US
Dollars........................ .1 46.6 1.5 61.7
--to buy British Pounds / ECU... (11.1) 244.9 3.9 190.8
--to sell British Pounds / ECU.. 15.8 244.9 -- --
--to buy ECU / US Dollars....... (1.0) 116.7 -- --
--to sell ECU / US Dollars...... 8.8 497.0 7.1 267.8
--to buy German Marks / US Dol-
lars........................... 0.1 283.9 -- --
--to sell German Marks / US Dol-
lars........................... 0.1 3.1 0.1 7.3
--to buy German Marks / ECU..... 0.6 64.6 0.1 38.4
--to sell German Marks / ECU.... (0.1) 31.0 -- 4.5
--to buy Japanese Yen / US Dol-
lars........................... (0.1) 8.6 (0.1) 2.0
--to sell Japanese Yen / US Dol-
lars........................... 0.1 166.6 0.4 8.2
--to buy Korean Won / US Dol-
lars........................... -- -- (4.9) 17.3
--to sell Korean Won / US Dol-
lars........................... (0.8) 15.8 6.2 24.0
--to buy Brazilian Real / US
Dollars........................ (0.5) 7.5 -- --
--to sell Brazilian Real / US
Dollars........................ 0.4 6.6 (0.2) 7.8
--to buy other currencies / US
Dollars........................ -- 2.4 (0.2) 7.9
--to sell other currencies / US
Dollars........................ (0.2) 80.2 1.6 82.6
</TABLE>
The fair market values of forward exchange contracts are estimated by
obtaining quotes from brokers. The book values of these instruments approximate
fair values. The weighted average maturity for all outstanding forward exchange
contracts at December 31, 1998 and 1997 was less than one year.
NOTE 12--POST EMPLOYMENT BENEFITS
The Company maintains defined benefit employee retirement plans covering
most domestic and certain non-U.S. employees. The Company also has various
defined contribution and savings plans covering certain
F-43
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
employees. The components of pension expense for the Company's domestic and
international plans are set forth below:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Defined benefit plans:
Service cost (benefits earned during the period).. $ 28.8 $ 22.9 $ 24.3
Interest cost on projected benefit obligations.... 58.0 54.2 51.3
Actual return on plan assets...................... 12.5 (152.8) (56.4)
Net amortization.................................. (84.1) 92.0 4.0
Difference between actual and expected return on
plan assets...................................... 17.8 13.8 11.3
------ ------ ------
33.0 30.1 34.5
------ ------ ------
Defined contribution and savings plans.............. 17.1 14.2 13.7
------ ------ ------
Total pension expense............................. $ 50.1 $ 44.3 $ 48.2
====== ====== ======
</TABLE>
The following table presents reconciliations of defined benefit plans'
funded status with amounts recognized in the Company's consolidated balance
sheets as part of other assets, other long-term liabilities, and liabilities
subject to compromise:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- -------
<S> <C> <C>
Accumulated benefit obligation........................... $ 856.4 $ 667.7
Provision for future salary increases.................... 152.8 143.8
-------- -------
Projected benefit obligation............................. 1,009.2 811.5
Plan assets at fair value................................ 758.1 780.7
-------- -------
Plan assets less projected benefit obligation............ (251.1) (30.8)
Unrecognized net loss (gain)............................. 143.0 (48.0)
Unrecognized prior service costs......................... 40.0 28.9
Unrecognized net transition obligation................... 6.7 5.5
Contribution between measurement date and fiscal year
end..................................................... 0.4 0.4
Additional minimum liability............................. (74.8) (6.4)
-------- -------
(Accrued) pension cost................................... $ (135.8) $ (50.4)
======== =======
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for defined benefit plans with accumulated benefit
obligations in excess of plan assets were $814.4, $691.9, and $542.8,
respectively, as of December 31, 1998, and $55.9, $46.0, and $6.3,
respectively, as of December 31, 1997.
F-44
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
The following table provides a reconciliation of beginning and ending
balances of the projected benefit obligation:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- -------
<S> <C> <C>
Projected benefit obligation, beginning of year........... $ 811.5 $ 711.9
Service cost.............................................. 28.8 22.9
Interest cost............................................. 58.0 54.2
Actuarial losses.......................................... 132.3 58.1
Foreign currency exchange rate changes.................... 17.0 (4.8)
Benefits paid............................................. (40.6) (32.4)
Other..................................................... 2.2 1.6
-------- -------
Projected benefit obligation, end of year................. $1,009.2 $ 811.5
======== =======
</TABLE>
The following table provides a reconciliation of the beginning and ending
balances of the fair value of plan assets:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Fair value of plan assets, beginning of year............... $ 780.7 $ 642.8
Actual return on plan assets............................... (12.5) 152.8
Foreign currency exchange rate changes..................... 14.1 (2.2)
Contributions by the employer.............................. 15.4 18.2
Contributions by plan participants......................... 1.6 1.5
Benefits paid.............................................. (40.6) (32.4)
Other...................................................... (0.6) --
------- -------
Fair value of plan assets, end of year..................... $ 758.1 $ 780.7
======= =======
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation for defined benefit plans was 6.6% in
1998 and 7.6% in 1997. The weighted average rate of increase in future
compensation levels was determined using an age specific salary scale and was
5.1% in 1998 and 5.6% in 1997. The weighted average expected long-term rate of
return on plan assets was 8.0% in 1998 and 8.5% in 1997.
In addition to providing pension benefits, the Company, primarily in the
United States, provides certain health care and life insurance benefits for
most retired employees. The cost of providing these benefits to retirees
outside the United States is not significant. Net periodic postretirement
benefit cost includes the following components:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- ------
<S> <C> <C> <C>
Service cost.......................................... $ 4.8 $ 3.7 $ 3.6
Interest cost......................................... 11.6 10.9 10.1
Amortization of negative prior service cost........... (9.7) (14.1) (14.1)
----- ----- ------
$ 6.7 $ 0.5 $ (0.4)
===== ===== ======
</TABLE>
F-45
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
The following table presents a reconciliation of the beginning and ending
balances of the accumulated postretirement benefit obligation, as well as, the
accrued postretirement benefit cost recognized in the Company's consolidated
balance sheets as part of liabilities subject to compromise:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Accrued postretirement benefit obligation at beginning of
year.................................................... $ 157.8 $ 137.7
Service cost............................................. 4.8 3.7
Interest cost............................................ 11.6 10.9
Actuarial loss........................................... 33.6 11.7
Benefits paid............................................ (6.7) (6.2)
------- -------
Accrued postretirement benefit obligation at end of
year.................................................... 201.1 157.8
------- -------
Unrecognized prior service cost.......................... 14.7 24.4
Unrecognized net loss.................................... (45.4) (11.7)
------- -------
Accrued postretirement benefit cost...................... $ 170.4 $ 170.5
======= =======
</TABLE>
In 1992, the Company amended its retiree health care benefit plan to require
that, beginning in 1994, employees must have a certain number of years of
service to be eligible for any retiree health care benefit. This amendment
resulted in the Company recording an unrecognized negative prior service cost,
which is being amortized in the consolidated statement of operations and
retained earnings. The retiree health care plan provides for certain cost-
sharing changes which limit the Company's share of retiree health care costs.
The Company continues to fund benefit costs on a pay-as-you-go basis with the
retiree paying a portion of the costs.
The health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 7.86% in 1998 and was assumed to decrease
gradually to 5.0% in 2004 and remain at that level thereafter. For retirees
under age 65, plan features limit the health care cost trend rate assumption to
a maximum of 8.0% for years 1994 and later. The health care cost trend rate
assumption has a significant effect on the amounts reported. Increasing the
assumed health care cost trend rate by one percentage point in each year would
increase the accumulated postretirement benefit obligation by 7.3% and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1998 by 9.5%. Decreasing the assumed health
care cost trend rates by one percentage point in each year would decrease the
accumulated postretirement benefit obligation by 6.7% and the aggregate of the
service and interest cost components of net periodic postretirement benefit
cost for 1998 by 5.2%.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.0% at December 31, 1998 and 7.5% at December 31, 1997.
NOTE 13--RELATED PARTY TRANSACTIONS
The Company purchased raw materials and services totaling $63.7 in 1998,
$59.5 in 1997, and $51.1 in 1996 from Dow Chemical and its affiliates. The
Company believes the costs of such purchases were competitive with alternative
sources of supply. Other transactions between the Company and related parties
were not material.
F-46
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
NOTE 14--INCOME TAXES
The components of income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
U.S. companies...................................... $(928.7) $ 385.4 $ 387.9
Non-U.S. companies.................................. (5.5) 41.9 21.1
------- ------- -------
$(934.2) $ 427.3 $ 409.0
======= ======= =======
</TABLE>
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Current
U.S. .............................................. $ 113.9 $ 93.7 $ 96.7
Non-U.S. .......................................... 22.0 35.2 35.0
-------- ------ ------
135.9 128.9 131.7
-------- ------ ------
Deferred
U.S. .............................................. (467.7) 28.7 35.5
Non-U.S. .......................................... (16.0) 11.2 1.7
-------- ------ ------
(483.7) 39.9 37.2
-------- ------ ------
$ (347.8) $168.8 $168.9
======== ====== ======
</TABLE>
The tax effects of the principal temporary differences giving rise to
deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Implant costs...................................... $ 748.6 $ 387.2
Accruals deductible for tax purposes when paid..... 140.2 42.5
Postemployment benefits............................ 90.2 72.1
Basis in inventories............................... 30.5 30.4
Tax credit and net operating loss carryforwards.... 88.6 66.8
Other.............................................. 40.6 40.2
--------- -------
1,138.7 639.2
Valuation allowance................................ (2.9) (0.4)
--------- -------
1,135.8 638.8
--------- -------
Long-term debt..................................... 8.1 (45.3)
Property, plant and equipment...................... (136.1) (81.3)
--------- -------
(128.0) (126.6)
--------- -------
Net deferred tax asset............................. $ 1,007.8 $ 512.2
========= =======
</TABLE>
Management believes that it is more likely than not that the net deferred
tax asset will be realized. This belief is based on criteria established in
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
F-47
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
At December 31, 1998, income and remittance taxes have not been recorded on
$198.3 of undistributed earnings of international subsidiaries, either because
any taxes on dividends would be offset substantially by foreign tax credits or
because the Company intends to indefinitely reinvest those earnings. Cash paid
during the year for income taxes, net of refunds received, was $103.3 in 1998,
$108.8 in 1997, and $142.0 in 1996.
The income tax provision at the effective rate differs from the income tax
provision at the U.S. federal statutory tax rate in effect during those years
for the following reasons:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Income tax provision at statutory rate........... $ (327.0) $ 149.5 $ 143.1
Foreign taxes, net............................. 8.6 14.1 14.0
Foreign sales corporation...................... (7.0) (9.9) (8.6)
State income taxes............................. (18.2) 6.7 5.6
Accrued expenses............................... 2.6 13.6 14.6
Tax exempt interest............................ (7.5) (6.0) (1.5)
Other, net..................................... 0.7 0.8 1.7
-------- ------- -------
Income tax provision at effective rate........... $ (347.8) $ 168.8 $ 168.9
======== ======= =======
</TABLE>
NOTE 15--COMMON STOCK
The outstanding shares of the Company's common stock are held in equal
portions by Corning Incorporated and Dow Holdings Inc., a wholly-owned
subsidiary of Dow Chemical. There were no changes in outstanding shares during
1998, 1997, or 1996. Per share data is based upon 2,500,000 shares outstanding
for all periods.
NOTE 16--COMMITMENTS AND GUARANTEES
The Company leases certain real and personal property under agreements which
generally require the Company to pay for maintenance, insurance and taxes.
Rental expense was $59.6 in 1998, $49.4 in 1997, and $46.3 in 1996. The minimum
future rental payments required under noncancellable operating leases at
December 31, 1998, in the aggregate are $362.3 including the following amounts
due in each of the next five years: 1999--$52.2, 2000--$47.5, 2001--$28.7,
2002--$24.9, and 2003--$24.3.
At December 31, 1998, the Company had entered into various take or pay
agreements for steam, electrical power, and materials used in the normal course
of business for terms extending from one to fifteen years at prices not in
excess of current market prices.
The Company has not issued any guarantees of a material nature as of
December 31, 1998.
NOTE 17--OPERATING SEGMENTS AND INTERNATIONAL OPERATIONS
Dow Corning Corporation (the "Company") has three geographical operating
segments: Americas, Europe, and Asia. The accounting policies of the segments
are the same as those described in the Summary of Significant Accounting
Policies (Note 1) except that the Company evaluates performance based on
operating profit or loss from operations excluding interest income, interest
expense, royalty income, royalty expense, currency gains and losses, certain
nonrecurring gains and losses, Chapter 11 reorganization expenses, income
taxes, and minority interests' share in income. These costs and expenses are
not allocated to the operating segments. Revenue is based on sales to external
customers only. Inventory transfers between operating
F-48
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
segments are accounted for at cost. However, during 1998 the Company changed
the valuation method used for inventory transfers between operating segments
from a variable cost basis (used in 1996 and 1997) to a fully absorbed cost
basis. Restatement of segment operating profit for 1996 and 1997 to conform to
1998 is impracticable.
The Company makes asset investment decisions primarily on a global basis
while considering all operating segments. Capital expenditures on a Company
wide basis were $399.8 and $425.2 for December 31, 1998 and 1997, respectively.
Depreciation and amortization expense is allocated to the individual segments.
Unallocated expenses include implant costs, certain research and development
costs and corporate administrative personnel and facilities costs not
specifically identified with a geographic segment. Identifiable assets are
those operating assets identified with the operations in each geographic
segment. Unallocated assets are principally cash and cash equivalents,
marketable securities, restricted insurance proceeds, anticipated implant
insurance receivables, certain deferred income tax assets, intangible assets,
investments accounted for on the equity basis and corporate facilities.
<TABLE>
<CAPTION>
Year ended December 31, 1998 Americas Europe Asia Unallocated Consolidated
---------------------------- --------- ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers............... $ 1,300.6 $ 619.5 $ 647.9 $ -- $ 2,568.0
Depreciation and amorti-
zation.................. 115.9 33.9 21.7 16.6 188.1
Segment operating prof-
it...................... 350.7 70.6 68.2 (177.4) 312.1
</TABLE>
The Company's consolidated statement of operations and retained earnings for
the year ended December 31, 1998, includes thirteen months of activity for the
Asia geographic operating segment. As a result, net sales in the consolidated
statement of operations and retained earnings for the year ended December 31,
1998, were increased by approximately $ 43.9 to reflect the additional month of
activity. The impact of the additional month of activity on the Company's
consolidated net income for the year ended December 31, 1998, was not material.
<TABLE>
<CAPTION>
Year ended December 31, 1997 Americas Europe Asia Unallocated Consolidated
---------------------------- --------- ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers............... $ 1,315.8 $ 608.7 $ 718.9 $ -- $ 2,643.4
Depreciation and amorti-
zation.................. 118.5 28.4 23.2 15.4 185.5
Segment operating prof-
it...................... 303.8 80.5 178.3 (194.7) 367.9
<CAPTION>
Year ended December 31, 1996 Americas Europe Asia Unallocated Consolidated
---------------------------- --------- ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers............... $ 1,225.2 $ 610.1 $ 697.0 $ -- $ 2,532.3
Depreciation & amortiza-
tion.................... 113.0 34.1 26.9 14.9 188.9
Segment operating prof-
it...................... 307.7 86.5 165.2 (196.7) 362.7
</TABLE>
The following revenues are attributed to countries based on the location of
customers:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
United States........... $ 1,001.3 $ 1,166.9 $ 1,094.3
Japan................... 432.8 353.1 367.3
Germany................. 139.6 134.7 153.6
United Kingdom.......... 138.9 142.4 130.2
Other foreign coun-
tries.................. 855.4 846.3 786.9
--------- --------- ---------
Total revenues.......... $ 2,568.0 $ 2,643.4 $ 2,532.3
========= ========= =========
</TABLE>
F-49
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Total profit or loss for
reportable segments.... $ 312.1 $ 367.9 $ 362.7
Interest revenue...... 78.3 70.4 54.1
Interest expense...... (12.5) (11.0) (7.8)
Other, Net............ (1,312.1) -- --
-------- ------- -------
Income before income
taxes.................. $ (934.2) $ 427.3 $ 409.0
======== ======= =======
Unallocated amounts:
Minority Interest..... $ 8.6 $ 20.9 $ 18.4
======== ======= =======
</TABLE>
The Company's long-lived assets are distributed based upon geographic
segment as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Americas................ $ 1,582.3 $ 1,780.7 $ 1,802.3
Europe.................. 707.6 462.1 358.3
Asia.................... 225.6 226.4 239.2
--------- --------- ---------
Total long-lived as-
sets................. $ 2,515.5 $ 2,469.2 $ 2,399.8
========= ========= =========
</TABLE>
NOTE 18--GLOBAL RESTRUCTURING
In 1998, the Company announced a global restructuring of its operations
designed to improve operating efficiencies and to enable the Company to better
meet customers' expectations. Principal actions of the global restructuring
that were commenced or implemented during 1998 include reorganization and
relocation of commercial and manufacturing activities within Europe, Asia and
the Americas, which will lead to the elimination of approximately 275
positions. The Company's restructuring efforts will be ongoing through 1999 and
2000. When fully implemented, the restructuring will include closure of certain
manufacturing, marketing and research facilities and the consolidation of
activities formerly carried on at the closed facilities.
During the fourth quarter of 1998 the Company recognized a charge of $28.1
($17.7 after tax) to reflect the costs incurred or to be incurred to implement
the actions announced to date. Specifically, the Company incurred costs of
approximately $8.0 associated with the global restructuring. The principal
components of the costs incurred during 1998 include $1.9 for severance and
other employee-related costs, and $6.1 for fixed asset writedowns and other
costs. In addition, the Company recorded a reserve of $ 20.1 relating to costs
that will be incurred to complete implementation of the actions announced to
date. The principal components of the reserve include $7.7 relating to
severance and other employee-related costs, $1.9 relating to leasehold
termination payments, $10.5 related to fixed asset writedowns and other
anticipated costs.
The Company expects that additional global restructuring actions will be
announced during 1999. As the Company's restructuring activities proceed,
additional financial provisions may be necessary in future periods.
F-50
<PAGE>
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
SUPPLEMENTARY DATA--QUARTERLY FINANCIAL INFORMATION
YEARS ENDED DECEMBER 31, 1998 AND 1997 (Unaudited)
(in millions of dollars except share data)
<TABLE>
<CAPTION>
Quarter Ended: March 31 June 30 September 30 December 31
- -------------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1998:
Net Sales........................... $ 649.1 $ 630.9 $ 648.2 $ 639.8
Gross Profit........................ 214.7 183.1 202.4 203.4
Net income.......................... 54.9 45.9 57.5 (753.3)
Net income per share................ 21.96 18.36 23.00 (301.32)
1997:
Net Sales........................... $ 632.7 $ 664.7 $ 677.8 $ 668.3
Gross Profit........................ 216.2 218.3 216.8 196.3
Net income.......................... 53.4 58.6 64.1 61.5
Net income per share................ 21.36 23.44 25.64 24.60
</TABLE>
The Notes to consolidated financial statements are an integral part of these
financial statements.
F-51
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Dow Corning Corporation
We have reviewed the accompanying consolidated balance sheets of Dow Corning
Corporation and its subsidiaries as of June 30, 1999 and 1998, and the
consolidated statements of operations and retained earnings and of cash flows
for the three- and six-month periods then ended. This financial information is
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial information for it to be in
conformity with generally accepted accounting principles.
The accompanying financial information has been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial information, on May 15, 1995, Dow Corning Corporation voluntarily
filed for protection under Chapter 11 of the United States Bankruptcy Code.
This action, which was taken primarily as a result of breast implant litigation
as discussed in Note 6 to the financial information, raises substantial doubt
about the Company's ability to continue as a going concern in its present form.
Management's plans in regard to these matters are also described in Notes 6 and
7. The accompanying financial information does not include any adjustments that
might result from the outcome of this uncertainty.
We previously audited in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1998, and the
related consolidated statements of operations and retained earnings, of
comprehensive income, and of cash flows for the year then ended (not presented
herein); and in our report dated January 20, 1999, except for Notes 3, 4, 14,
and 17 which are as of July 30, 1999, we expressed an opinion on those
consolidated financial statements, which included an explanatory paragraph
related to the Company's ability to continue as a going concern due to its
filing under Chapter 11, primarily as a result of breast implant litigation. In
our opinion, the information set forth in the consolidated balance sheet as of
December 31, 1998, included in the accompanying financial information, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
August 25, 1999
F-52
<PAGE>
DOW CORNING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions of dollars except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 204.5 $ 193.4
Marketable securities................................ 135.8 95.3
Accounts and notes receivable (less allowance for
doubtful accounts of $14.2 in 1999 and $13.5 in
1998)............................................... 513.6 512.4
Anticipated implant insurance receivable............. 16.8 163.2
Inventories.......................................... 386.4 398.9
Deferred income taxes................................ 163.2 164.2
Other current assets................................. 31.4 28.2
--------- ---------
Total current assets............................... 1,451.7 1,555.6
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost................. 3,847.1 3,874.5
Less--Accumulated depreciation....................... (2,204.6) (2,164.5)
--------- ---------
1,642.5 1,710.0
--------- ---------
OTHER ASSETS:
Marketable securities................................ 247.9 264.5
Anticipated implant insurance receivable............. 729.1 729.1
Restricted insurance proceeds........................ 781.1 627.4
Implant deposit...................................... 275.0 275.0
Deferred income taxes................................ 843.4 846.8
Environmental trusts................................. 23.4 23.4
Other assets......................................... 137.1 134.5
--------- ---------
3,037.0 2,900.7
--------- ---------
$ 6,131.2 $ 6,166.3
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings................................ $ 12.5 $ 39.6
Accounts payable..................................... 152.1 163.9
Accrued interest..................................... 232.9 201.7
Other current liabilities............................ 313.7 324.0
--------- ---------
Total current liabilities.......................... 711.2 729.2
--------- ---------
LONG-TERM DEBT......................................... 123.8 147.9
--------- ---------
OTHER LIABILITIES...................................... 135.6 106.9
--------- ---------
LIABILITIES SUBJECT TO COMPROMISE:
Accounts payable..................................... 67.3 67.3
Accrued employee benefits............................ 273.3 266.9
Accrued taxes........................................ 3.6 3.5
Implant reserve...................................... 3,223.4 3,229.0
Co-insurance payable................................. 320.0 320.0
Notes payable........................................ 375.0 375.0
Long-term debt....................................... 269.1 270.0
Other................................................ 84.1 77.9
--------- ---------
4,615.8 4,609.6
--------- ---------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES......... 133.1 136.4
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $5 par value (2,500,000 shares autho-
rized and outstanding).............................. 12.5 12.5
Retained earnings.................................... 478.5 431.2
Cumulative translation adjustment and other.......... (79.3) (7.4)
--------- ---------
Stockholders' equity............................... 411.7 436.3
========= =========
$ 6,131.2 $ 6,166.3
========= =========
</TABLE>
F-53
<PAGE>
DOW CORNING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(in millions of dollars except share data)
<TABLE>
<CAPTION>
Three months
ended June 30,
----------------
1999 1998
------ --------
<S> <C> <C>
NET SALES..................................................... $648.1 $ 630.9
OPERATING COSTS AND EXPENSES:
Manufacturing cost of sales................................. 446.5 436.4
Marketing and administrative expenses....................... 131.6 127.4
Restructuring costs......................................... 7.6 --
------ --------
585.7 563.8
------ --------
OPERATING INCOME.............................................. 62.4 67.1
OTHER INCOME (EXPENSE):
Interest income............................................. 20.2 18.5
Interest expense............................................ (24.5) (3.0)
Other, net.................................................. (4.7) 0.9
------ --------
INCOME BEFORE REORGANIZATION COSTS AND INCOME TAXES........... 53.4 83.5
Reorganization costs.......................................... 20.4 9.5
------ --------
INCOME BEFORE INCOME TAXES.................................... 33.0 74.0
Income tax provision.......................................... 12.6 28.2
Minority interests' share in income........................... 0.4 (0.1)
------ --------
NET INCOME (1999--$8.00 per share; 1998--$18.36 per share).... 20.0 45.9
Retained earnings at beginning of period...................... 458.5 1,081.1
------ --------
Retained earnings at end of period............................ $478.5 $1,127.0
====== ========
</TABLE>
F-54
<PAGE>
DOW CORNING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(in millions of dollars except share data)
<TABLE>
<CAPTION>
Six months
ended June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
NET SALES.................................................. $1,281.7 $1,280.0
OPERATING COSTS AND EXPENSES:
Manufacturing cost of sales.............................. 884.3 859.5
Marketing and administrative expenses.................... 259.3 251.9
Restructuring costs...................................... 8.6 --
-------- --------
1,152.2 1,111.4
-------- --------
OPERATING INCOME........................................... 129.5 168.6
OTHER INCOME (EXPENSE):
Interest income.......................................... 38.8 36.6
Interest expense......................................... (42.4) (6.0)
Other, net............................................... (10.5) (6.4)
-------- --------
INCOME BEFORE REORGANIZATION COSTS AND INCOME TAXES........ 115.4 192.8
Reorganization costs....................................... 37.2 16.9
-------- --------
INCOME BEFORE INCOME TAXES................................. 78.2 175.9
Income tax provision....................................... 29.9 69.5
Minority interests' share in income........................ 1.0 5.6
-------- --------
NET INCOME (1999--$18.92 per share; 1998--$40.32 per
share).................................................... 47.3 100.8
Retained earnings at beginning of period................... 431.2 1,026.2
-------- --------
Retained earnings at end of period......................... $ 478.5 $1,127.0
======== ========
</TABLE>
F-55
<PAGE>
DOW CORNING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of dollars)
<TABLE>
<CAPTION>
Six months
ended June 30,
------------------
1999 1998
------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 47.3 $ 100.8
Depreciation and amortization............................. 95.8 89.7
Reorganization costs...................................... 37.3 16.9
Other, net................................................ 49.3 (17.0)
Changes in operating assets and liabilities............... 6.3 (45.3)
Implant payments.......................................... (6.3) --
Restricted insurance proceeds............................. (153.7) (45.2)
Implant insurance reimbursement........................... 146.5 38.3
------- ---------
Cash provided by operating activities................... 222.5 138.2
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (98.5) (186.6)
Proceeds from sales of marketable securities.............. 827.5 2,189.2
Purchases of marketable securities........................ (852.7) (2,245.9)
Other, net................................................ (2.1) 11.2
------- ---------
Cash used for investing activities...................... (125.8) (232.1)
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings........................................ -- 12.8
Payments on long-term debt.................................. (40.1) (9.5)
Net change in short-term borrowings......................... (6.8) (6.4)
------- ---------
Cash used for financing activities...................... (46.9) (3.1)
------- ---------
CASH FLOWS USED FOR REORGANIZATION COSTS.................... (37.2) (16.9)
------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (1.5) (3.0)
------- ---------
CHANGES IN CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash equivalents...... 11.1 (116.9)
Cash and cash equivalents at beginning of period.......... 193.4 253.1
------- ---------
Cash and cash equivalents at end of period.............. $ 204.5 $ 136.2
======= =========
</TABLE>
F-56
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of dollars except where noted)
NOTE 1--Business And Basis Of Presentation
Dow Corning Corporation was incorporated in 1943 by Corning Glass Works, now
Corning Incorporated ("Corning") and The Dow Chemical Company ("Dow Chemical")
for the purpose of developing and producing polymers and other materials based
on silicon chemistry. Dow Corning Corporation operates in various countries
around the world through numerous wholly-owned or majority-owned subsidiary
corporations (hereinafter, the consolidated operations of Dow Corning
Corporation and its subsidiaries will be referred to as the "Company"). Most of
the Company's products are based on polymers known as silicones which have a
silicon-oxygen-silicon backbone. Through various chemical processes, the
Company manufactures silicones that have an extremely wide variety of
characteristics, in forms ranging from fluids, gels, greases and elastomeric
materials to resins and other rigid materials. Silicones combine the
temperature and chemical resistance of glass and the versatility of plastics
and, regardless of form or application, generally possess such qualities as
electrical resistance, resistance to extreme temperatures, resistance to
deterioration from aging, water repellency, lubricating characteristics,
relative chemical and physiological inertness and resistance to ultraviolet
radiation. The Company currently manufactures over 10,000 products and serves
approximately 50,000 customers worldwide, with no single customer accounting
for more than three percent of the Company's sales in 1998. Principal United
States manufacturing plants are located in Kentucky and Michigan. Principal
international manufacturing plants are located in Belgium, Germany, Japan and
the United Kingdom. The Company also owns and operates research and development
facilities in the United States, Belgium, Germany, Japan and the United
Kingdom. Dow Corning's average employment for 1998 was approximately 9,400
persons.
On May 15, 1995, Dow Corning Corporation, excluding its subsidiaries (the
"Debtor Company"), voluntarily filed for protection under Chapter 11 of the
U.S. Bankruptcy Code (the "Bankruptcy Code") with the U.S. Bankruptcy Court for
the Eastern District of Michigan, Northern Division, in Bay City, Michigan (the
"Bankruptcy Court"). The Debtor Company consists of a majority of the Company's
United States operations and certain international branches. The Debtor
Company's Chapter 11 proceeding (the "Chapter 11 Proceeding") does not include
any subsidiaries of the Debtor Company. See Note 7 below for further discussion
of this matter.
The consolidated financial statements of the Company have been prepared on a
"going-concern" basis, which contemplates the realization of assets and the
liquidation of liabilities in the ordinary course of business. However, as a
result of the Chapter 11 Proceeding of the Debtor Company, such realization of
assets and liquidation of liabilities is subject to significant uncertainties
including the approval of a plan of reorganization by the Bankruptcy Court.
Also, the ability of the Company to continue as a going concern (including its
ability to meet post-petition obligations of the Debtor Company and to meet
obligations of the subsidiaries of the Debtor Company) is dependent primarily
on (a) the ability of the Company to maintain adequate cash on hand, the
ability of the Company to generate cash from operations and the ability of the
subsidiaries of the Debtor Company to obtain necessary financing and (b) if
required, the availability of a debtor-in-possession credit facility.
Management believes that conditions (a) and (b) will be satisfied.
The Company's financial statements as of March 31, 1999, have been presented
in conformity with the American Institute of Certified Public Accountants'
Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," issued November 19, 1990. SOP 90-7
requires a segregation of liabilities subject to compromise by the Bankruptcy
Court as of the bankruptcy filing date (May 15, 1995) and identification of all
transactions and events that are directly associated with the reorganization of
the Debtor Company.
NOTE 2--Income Taxes
The provision for income taxes reflects the Company's estimated annual
effective tax rate.
F-57
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
NOTE 3--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 4--Per Share Computations
Per share computations are based on 2,500,000 shares outstanding during all
periods.
NOTE 5--Restricted Assets
Implant Deposit
In connection with the Settlement Agreement (as defined and described in
Note 6 below), the Company has entered into an agreement whereby $275.0 is
restricted to use for future breast implant settlement payments. Accordingly,
this amount is included in the caption "Implant deposit" in the consolidated
balance sheets. This amount is also subject to the provisions of a related
escrow agreement which, among other things, appointed an independent escrow
agent. The escrowed funds are invested in investment categories approved by the
Bankruptcy Court. As of June 30, 1999, the marketable securities included in
the caption "Implant deposit" in the consolidated balance sheet primarily
consisted of certificates of deposit, fixed rate and floating rate federal
agency and corporate notes, and commercial paper.
Restricted Insurance Proceeds and Anticipated Implant Insurance Receivable
In addition, as of June 30, 1999, $723.8 of cash proceeds from settlements
with insurers (received since the commencement of the Chapter 11 Proceeding)
and $57.4 (net of tax) of related investment income is restricted as to its use
pursuant to orders of the Bankruptcy Court. Accordingly, as of June 30, 1999,
$781.2 is included in the caption "Restricted insurance proceeds" in the
consolidated balance sheet. The "Restricted insurance proceeds" are invested in
investment categories approved by the Bankruptcy Court. As of June 30, 1998,
the marketable securities included in the caption "Restricted insurance
proceeds" consisted primarily of state and municipal securities, money market
funds, and fixed and floating rate corporate notes.
A majority of the "Restricted insurance proceeds" and the "Anticipated
implant insurance receivable" recorded in the consolidated balance sheets
relate to the Shared Insurance Assets. The Company and/or Dow Chemical will
have rights to petition the Bankruptcy Court for distribution of the
"Restricted insurance proceeds" primarily for the purpose of making specified
indemnity payments or reimbursing specified expense payments under conditions
prescribed by the Bankruptcy Court. The Company anticipates that future
settlements of policies which name the Company as a co-insured will be subject
to the approval of the Bankruptcy Court and restricted in a manner similar to
that described above. The term "Shared Insurance Assets" is defined and
discussed in Note 7 below.
The Company believes that it is probable that it will have access to the
Shared Insurance Assets and other insurance proceeds in an amount sufficient to
ultimately realize the "Restricted insurance proceeds" and "Anticipated implant
insurance receivable" recorded in the accompanying consolidated balance sheets.
(see Note 6 for further discussion of insurance matters).
Other Assets--Environmental Trusts
In order to comply with certain environmental regulations, the Company has
contributed $23.4 to fund certain trusts in order to provide a financial
assurance for the potential payment of aggregate estimated closure, post-
closure, corrective action and potential liability costs associated with the
operation of hazardous waste storage facilities at certain plant sites (see
Note 6 for further discussion). Accordingly, this amount is included
F-58
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
in the caption "Environmental trusts" in the consolidated balance sheet. As of
June 30, 1999, these funds were primarily invested in money market funds.
NOTE 6--Contingencies
Breast Implant Litigation and Claims--Background
Prior to 1992, the Company was engaged in the manufacture and sale of
silicone gel breast implants and the raw material components of those products.
In January, 1992, the United States Food and Drug Administration ("FDA") asked
breast implant producers to voluntarily halt the sale of silicone gel breast
implants pending the FDA's further review of the safety and effectiveness of
such devices, and the Company complied with the FDA's request. Subsequently,
the Company announced that it would not resume the production or sale of breast
implants.
Between 1991 and 1995, the Company experienced a substantial increase in the
number of lawsuits against the Company relating to breast implants. As of
August 25, 1999, the Company has been named, often together with other
defendants, in approximately 19,000 pending breast implant products liability
lawsuits filed in the United States by, or on behalf of, individuals who claim
to have, or have had, breast implants. Many of these cases involve multiple
plaintiffs. In addition, there are 46 breast implant products liability class
action lawsuits which have been filed in the United States against the Company
as of August 25, 1999; however, only three of these class actions have been
certified. The Company has sometimes been named as the manufacturer of breast
implants, and other times the Company is named as the supplier of silicone raw
materials to other breast implant manufacturers. Since the commencement of the
Debtor Company's Chapter 11 Proceeding, the Debtor Company has been dismissed
from a number of breast implant lawsuits in which the Debtor Company was named
as a supplier of silicone raw material to other breast implant manufacturers.
However, other breast implant manufacturers which purchased silicone raw
materials from the Debtor Company, and other defendants in breast implant
litigation, have filed claims for indemnity and contribution against the Debtor
Company in the Debtor Company's Chapter 11 Proceeding (see Note 7 for further
discussion).
The typical alleged factual bases for these lawsuits primarily include
allegations that the plaintiffs' breast implants (a) caused specific,
recognized autoimmune diseases including scleroderma, systemic lupus
erythematosus, and multiple sclerosis, (b) caused a vague combination of
symptoms, including chronic fatigue and joint pain, alleged to be a new disease
not generally recognized in the medical community and variously described by
terms such as "human adjuvant disease," "siliconosis," "atypical connective
tissue disease," and "atypical neurological disease," (c) have or may have
ruptured, (d) caused other local complications, and/or (e) caused
disfigurement. The Company vigorously asserts, among other defenses, that there
is no causal connection between silicone breast implants and the ailments
alleged by the plaintiffs in these cases. A substantial number of breast
implant lawsuits were consolidated for pretrial purposes in the U.S. District
Court for the Northern District of Alabama (the "Court"), and in various state
courts. Further information related to the jurisdictional status of these cases
is described in Note 7 below.
The Debtor Company's filing for protection under Chapter 11 of the
Bankruptcy Code has resulted in a stay of this litigation in the United States.
However, claims prosecuted against the Debtor Company in non-U.S. jurisdictions
and against subsidiaries of the Debtor Company are not stayed by the Chapter 11
Proceeding. In addition to the 19,000 U.S. breast implant lawsuits referred to
above, approximately 6,000 individual claims had been filed in non-U.S.
jurisdictions, primarily in Australia. Of these claims, approximately 400 have
been served and are in a position to proceed under the legal systems of their
relevant jurisdictions, 3,400 have been effectively terminated or otherwise
settled as to the Company under the Australian court system, and 2,200 are
F-59
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
inactive. The Company believes that many of the non-U.S. lawsuit claims are
duplicative of proofs of claim filed by such non-U.S. claimants in the Debtor
Company's Chapter 11 Proceeding. Approximately 5,700 non-U.S. plaintiffs have
filed lawsuits in the United States (included in the 19,000 lawsuits referenced
above); however, these lawsuits are stayed by the Debtor Company's Chapter 11
Proceeding. In addition to the 46 U.S. class action lawsuits referred to above,
five class action lawsuits are pending in non-U.S. jurisdictions. Two of these
non-U.S. class actions have not been served and none of the non-U.S. class
actions are stayed by the Chapter 11 Proceeding.
In April 1998, the Company announced tentative settlements of two of the
non-U.S. class actions in the provinces of Ontario and Quebec, Canada, which
would resolve approximately 10,000 claims filed in the Debtor Company's Chapter
11 Proceeding. The amounts of these settlements, as subsequently amended, are
approximately $37.0 for Quebec claimants and $18.0 for Ontario claimants. Each
of these tentative settlements has been approved by the appropriate Provincial
Court. In September 1998, the Company announced a $25.1 tentative settlement of
a third non-U.S. class action in the province of British Columbia, Canada,
which would resolve approximately 4,100 claims filed in the Debtor Company's
Chapter 11 Proceeding. Some Canadian claimants in provinces other than Ontario,
Quebec, or British Columbia have also chosen to resolve their claims via the
British Columbia settlement, which was approved by the British Columbia
Provincial Court on February 11, 1999. All three Canadian class action
settlements are also subject to the approval of the Bankruptcy Court, and if
approved would be administered pursuant to the Company's ultimate plan of
reorganization.
In January 1999, the Company announced a tentative settlement of between
$21.0 and $36.0 to resolve approximately 2,400 to 4,500 claims filed in the
Debtor Company's Chapter 11 Proceeding originating in Australia. This
settlement supersedes a previously announced tentative settlement of claims
originating in Australia and New Zealand; this settlement does not resolve
claims originating in New Zealand. If less than 2,400 Australian claimants
choose to participate in this settlement, the Company may terminate it. This
settlement is subject to approval of the Bankruptcy Court. Payments under the
tentative settlement would be provided for in the Company's ultimate plan of
reorganization but would be administered and made in Australia (see Note 7 for
definitions and discussions regarding the Debtor Company's Chapter 11
Proceeding).
Breast Implant Litigation and Claims--Settlement Agreement
In 1994, the Company, along with other defendants and representatives of
breast implant litigation plaintiffs, entered into a settlement agreement under
the supervision of the Court (the "Settlement Agreement"). Under the Settlement
Agreement, certain industry participants originally agreed to contribute up to
$4.2 billion, of which the Company agreed to contribute up to $2.02 billion,
over a period of more than thirty years. Although the Settlement Agreement was
designed to cover claims of most breast implant recipients brought in the
courts of U.S. federal and state jurisdictions, approximately 7,000 U.S. and
non-U.S. potential claimants elected not to settle their claims by way of the
Settlement Agreement and elected to pursue their individual breast implant
litigation against the Company. In 1995, the Court concluded the total amount
of claims likely to be approved for payment would result in substantially lower
payments to claimants than anticipated under the Settlement Agreement, and the
Court requested that the parties negotiate possible modifications to the
Settlement Agreement. The Company did not actively participate in the
subsequent negotiations and is not a party to the resulting revision to the
Settlement Agreement (the "Revised Settlement Agreement"). The Company has not
exercised its option to withdraw from, and the Company has not been released
from, the Settlement Agreement. In addition, the Company has not been
officially excluded from participating in the Revised Settlement Agreement. The
Company anticipates breast implant litigation and claims pending against it
will be resolved in the Debtor Company's Chapter 11 Proceeding (see Note 7
below for further discussion).
F-60
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
Breast Implant Litigation and Claims--Insurance Matters
The Company has a substantial amount of unexhausted claims-made, occurrence
and occurrence-noticed products liability insurance coverage with respect to
breast implant lawsuits and claims commencing in 1986 and thereafter. For
breast implant lawsuits and claims involving implant dates prior to 1986,
substantial coverage exists under a number of primary and excess occurrence and
occurrence-noticed policies having various limits. For breast implant lawsuits
and claims filed after 1985 in cases with implant dates prior to 1986,
potential coverage exists under all of the above referenced policies. Because
defense costs and disposition of particular breast implant lawsuits and claims
may be covered, in whole or in part, both by the coverage issued from and after
1986, and one or more of the policies issued prior to 1986, the ultimate
determination of aggregate insurance coverage depends on, among other things,
how defense and indemnity costs are allocated among the various policy periods.
Depending on policy language, applicable law and agreements with insurers,
damages which may be awarded pursuant to breast implant lawsuits may or may not
be covered, in whole or in part, by insurance.
A substantial number of the Company's insurers 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. Since 1993, the Company has been involved in litigation against
certain insurance companies which issued occurrence based products liability
insurance policies to the Company from 1962 through 1985 ("Occurrence
Insurers"). This litigation resulted from an inability of the Occurrence
Insurers to reach an agreement with the Company on a formula for the allocation
among the Occurrence Insurers of payments of defense and indemnity expenses
submitted by the Company related to breast implant products liability lawsuits.
The Company sought a judicial enforcement of the obligations of the Occurrence
Insurers under the relevant insurance policies. Following certain initial
procedural steps, this litigation was conducted in the Wayne County, Michigan
Circuit Court (the "Michigan Court"). A number of the Occurrence Insurers have
been dismissed from this litigation pursuant to settlements reached with the
Company.
During 1994, the Michigan Court (a) ruled that certain of the Company's
primary Occurrence Insurers have a duty to defend the Company with respect to
breast implant products liability lawsuits, (b) directed these insurers to
reimburse the Company for certain defense costs previously incurred, and (c)
ruled in favor of the Company on allocation of defense costs.
During 1995, the Michigan Court ruled in favor of the Company on allocation
of indemnity costs, ordering 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 periods and for all cases involving unknown
implant dates; once implant dates become known, the appropriate insurer becomes
responsible for relevant defense costs. The Michigan Court also ruled that
relevant insurance contracts afford coverage for punitive damages except where
specific policy provisions expressly exclude coverage for such damages. In
addition, a trial on the merits of the claims in this litigation commenced.
During 1996, a Michigan Court jury found the remaining Occurrence Insurers
liable for coverage including costs of defense and settlement of the Company's
breast implant lawsuits in the United States and in other countries. The
Michigan Court also ruled that the Company is entitled to recover substantially
all defense, settlement and judgment costs previously incurred. Certain of the
Occurrence Insurers have appealed the results of this litigation to the
Michigan Court of Appeals. The Company is uncertain as to when these appeals
will be resolved. In the interim, the Company is continuing settlement
negotiations with the Occurrence Insurers as well as other insurers that are
not involved in the litigation. Furthermore, the Company is pursuing resolution
of a significant portion of currently unresolved insurance coverage provided by
solvent non-Occurrence Insurers
F-61
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
through arbitration proceedings. The Company is also pursuing recovery from
insolvent insurance carriers via settlement discussions.
Based on the status of this litigation, management continues to believe it
is probable 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.
This belief is further supported by the fact that the Company received
insurance recoveries of $875.7 from September 1, 1994, through August 25, 1999
(see Note 5 for further discussion), and entered into settlements with certain
insurers for future reimbursement.
Breast Implant Litigation and Claims--Financial Provisions
The Company has taken steps in the past to reflect the anticipated financial
consequences to the Company of the breast implant situation. Prior to 1995, the
Company recorded aggregate pre-tax charges of $1.981 billion and related
insurance receivables of $1.006 billion to reflect (a) the Company's best
estimate, at the time, of its potential liability under the Settlement
Agreement, (b) the Company's best estimate, at the time, of additional costs to
resolve breast implant litigation outside of the Settlement Agreement, and (c)
legal, administrative, and research costs related to the breast implant
controversy. The portion of the pre-1995 charges related to the Settlement
Agreement and related to the anticipated implant insurance receivable were
recorded on a present value basis. In 1995, the Company recorded a pre-tax
charge of $784.0 and related insurance receivable of $432.9 to abandon this
present value treatment. Since May 15, 1995, the Company's implant reserve has
been reduced only as a result of payments made by the Debtor Company for
certain legal, administrative, and research costs related to the breast implant
controversy that were taken into consideration when the reserve was originally
recorded.
As previously reported, the Company's results for 1998 reflect a pretax
charge of $1,272.5 ($801.7 after tax) representing its best estimate of
anticipated financial consequences to the Company to resolve all claims
(including interest payable to creditors of the Debtor Company represented by
the Committee of Unsecured Creditors) arising from the Debtor Company's Chapter
11 Proceeding and from the breast implant controversy. This charge was taken
because management has concluded that implementation of the Joint Plan of
Reorganization is probable. The term "Joint Plan of Reorganization" is defined
and discussed in Note 7 below.
In addition, the Company's results for the three months ended June 30, 1999,
reflect additional interest expense of $15.8 ($10.0 after tax) for the amount
of interest payable to creditors of the Debtor Company represented by the
Committee of Unsecured Creditors pursuant to the Joint Plan of Reorganization.
The amount of this additional interest expense recorded for the six months
ended June 30, 1999 was $31.2 ($19.7 after tax). These amounts were determined
using the United States federal judgment rate of 6.28% that was in effect on
May 15, 1995 as specified in the Joint Plan of Reorganization. The amount of
the 1998 charge for this interest payable (which was recorded in the fourth
quarter of 1998) relating to the three months and six months ended June 30,
1998 was $14.9 ($9.4 after tax) and $29.3 ($18.5 after tax), respectively. The
actual amount of interest that will ultimately be paid to these creditors is
uncertain. The terms "Committee of Unsecured Creditors" and "Joint Plan of
Reorganization" are defined and discussed in Note 7 below.
Also, the Company's consolidated statements of operations and retained
earnings for the three month and six month periods ending on June 30, 1999,
reflect additional expenses for the amount of the Initial Payment Supplement
for such period, which is associated with the Debtor Company's funding
obligations pursuant to the Funding Payment Agreement. Under the Funding
Payment Agreement, the first payment required to be made by the Debtor Company
when the Joint Plan of Reorganization becomes effective would equal the Initial
Payment plus the Initial Payment Supplement. The amount of the Initial Payment
Supplement (reflected under the caption "Interest expense" in the consolidated
statements of operations and retained earnings) for the
F-62
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
period commencing on May 1, 1999, and ending on June 30, 1999 was $6.2. The
Initial Payment Supplement increases the Debtor Company's obligations under the
Joint Plan of Reorganization. The terms "Initial Payment Supplement," "Funding
Payment Agreement," "Debtor Company," "Joint Plan of Reorganization," and
"Initial Payment," are defined and discussed in Note 7 below.
The Company anticipates that the ultimate cost to resolve implant litigation
and claims and related issues will be estimated for purposes of determining the
feasibility of any plan of reorganization during the Debtor Company's Chapter
11 Proceeding (see Note 7 below). Notwithstanding the inherent uncertainties
associated with estimating the ultimate cost of resolving implant litigation
and claims and related issues, management believes it has accrued amounts
required under generally accepted accounting principles. As additional facts
and circumstances develop, it is at least reasonably possible that amounts
recorded in the Company's consolidated financial statements may be revised in
the near term to reflect any material developments relating to the resolution
of implant litigation and claims and related issues. Future revisions, if
required, could have a material effect on the Company's financial position or
results of operations in the period or periods in which such revisions are
recorded.
The "Anticipated implant insurance receivable" recorded in the consolidated
balance sheets is the result of the provisions described above; a substantial
portion of this "Anticipated implant insurance receivable" relates to amounts
expected to be recovered from the Occurrence Insurers. The principal
uncertainties which exist with respect to the realization of this asset include
the ultimate cost of resolving implant litigation and claims, the results of
litigation against and settlement negotiations with insurers, and the extent to
which insurers may become insolvent in the future. The Company took these
factors into account when estimating the amount of insurance recovery to record
in the financial statements. As additional facts and circumstances develop, it
is at least reasonably possible that the estimate may be revised in the near
term to reflect any material developments relating to insurance matters. Future
revisions, if required, could have a material effect on the Company's financial
position or results of operations in the period or periods in which such
revisions are recorded. Notwithstanding the above, the Company believes it is
probable that the "Anticipated implant insurance receivable" recorded in the
consolidated balance sheet as of June 30, 1999, will ultimately be realized.
Securities Laws Class Action Lawsuits
As previously reported, in 1992 the Company and certain of its former and
present directors and officers were named, as defendants with others, in two
securities laws class action lawsuits filed by purchasers of stock of Corning
and Dow Chemical. These cases were originally filed as several separate cases
in the Federal District Court for the Southern District of New York; they were
subsequently consolidated 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.
The Debtor Company's filing for protection under Chapter 11 of the
Bankruptcy Code has resulted in a stay of this litigation with respect to the
Debtor Company. These cases have been dismissed without prejudice with respect
to directors, officers and other individuals originally named as defendants.
Corning and Dow Chemical continue as defendants in this litigation.
Tax Matters
In January, 1997, the Company received a Statutory Notice of Deficiency (a
"Notice") from the United States Internal Revenue Service ("IRS"). This Notice
asserted tax deficiencies totaling approximately $105.3
F-63
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
related to the Company's consolidated federal income tax returns for the 1992,
1993 and 1994 calendar years. Subsequently, the Company reached a tentative
settlement with the IRS which would resolve the issues raised in this Notice.
The tentative settlement is subject to the approval of the Joint Committee of
Taxation of the Congress of the United States (the "Joint Committee"). If the
tentative settlement is ultimately approved by the Joint Committee, the Company
would receive a refund of approximately $5.0. The Company anticipates that the
Joint Committee will approve the tentative settlement.
In May, 1999, the Company received a second Notice from the IRS. This Notice
asserts tax deficiencies totaling approximately $65.3 relating to the Company's
consolidated federal income tax returns for the 1995 and 1996 calendar years.
The Company believes that the deficiencies asserted by the IRS are excessive
and is vigorously contesting the IRS' claims. The Company anticipates that this
matter will be resolved either in the Debtor Company's Chapter 11 Proceeding or
through procedures provided by the Internal Revenue Code, and that such
resolution will not have a material adverse impact on the Company's
consolidated financial position or results of operations. The Company is
currently engaged in discussions with the IRS in an effort to resolve this
matter.
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 sites. Management currently believes that
there are 9 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 those sites at which management currently believes
the Company may have more than a de minimis liability is $19.8. Management
cannot currently estimate the aggregate liability for all PRPs at all 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 as of June 30, 1999,
was $5.4. In addition, receivables of $3.3 for probable third-party recoveries
have been recorded related to these environmental matters.
As additional facts and circumstances develop, it is at least reasonably
possible that either the accrued liability or the recorded receivable related
to environmental matters may be revised in the near term. While there are a
number of uncertainties with respect to the Company's estimate of its ultimate
liability for cleanup costs at these hazardous waste disposal sites, the
Company believes that any costs incurred in excess of those accrued will not
have a material adverse impact on the Company's consolidated financial position
or results of operations. This opinion is based upon the number of identified
PRPs at each site, the number of such PRPs that are believed by management to
be 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.
As a result of financial provisions recorded with respect to breast implant
liabilities, the Company has been unable to meet certain federal and state
environmental statutory financial ratio tests. Consequently, in order for the
Debtor Company to continue to operate hazardous waste storage facilities at
certain plant sites, the states involved have required the Debtor Company to
establish trusts to provide for aggregate estimated
F-64
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
closure, post-closure, corrective action and potential liability costs of $23.4
associated with these hazardous waste storage facilities; the Debtor Company
has fully funded these trusts as of June 30, 1999 and August 25, 1999. Interest
on the funds held in trust will be available to the Debtor Company under
certain circumstances, and the amount required to be held in trust may vary
annually. At such time as the Company satisfies the above referenced financial
ratio tests, or the Debtor Company no longer needs or closes the permitted
facilities, the funds then remaining in these trusts will revert to the Debtor
Company. The establishment and funding of these trusts is subject to the
continuing jurisdiction of the Bankruptcy Court.
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. 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 believes that any
damages resulting from these lawsuits would be covered by substantial insurance
or certain indemnity arrangements. This belief is supported in part by the fact
that the indemnitors under these arrangements have been honoring their
indemnity commitments. The Company has followed a practice of aggressively
defending all products liability claims asserted against it, and 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. The prosecution of lawsuits and claims against the Debtor Company
has been stayed in the United States as a result of the Debtor Company's filing
for protection under Chapter 11 of the Bankruptcy Code. However, lawsuits
prosecuted against the Debtor Company in non-U.S. jurisdictions and against
subsidiaries of the Debtor Company are not stayed by the Chapter 11 Proceeding.
The Company is currently unable to estimate its potential liability for these
lawsuits; however, the Company believes that any damages resulting from these
products liability lawsuits and claims will not have a material adverse effect
on the Company's consolidated results of operations or financial condition. The
Company anticipates that the cost to resolve a substantial portion of these
lawsuits and claims will ultimately be determined during the Debtor Company's
Chapter 11 Proceeding (see Note 7 below).
NOTE 7--Proceeding Under Chapter 11
Filing for Chapter 11 Protection
On May 15, 1995, the Debtor Company voluntarily filed for protection under
Chapter 11 of the Bankruptcy Code. The Debtor Company consists of a majority of
the Company's U.S. operations and certain international branches. The Debtor
Company's Chapter 11 Proceeding does not include any subsidiaries of the Debtor
Company. This action was taken because (a) the Debtor Company was not satisfied
with the rate of progress toward resolving breast implant litigation outside of
the Settlement Agreement, (b) the Debtor Company was not satisfied with the
rate of progress toward achieving commitments from certain of the Company's
insurers relative to insurance recovery, and (c) the Debtor Company was
concerned by the uncertainty associated with the conclusions of the Court
relative to the Settlement Agreement (see Note 6 above for further discussion).
The Debtor Company is operating as a debtor-in-possession under the
supervision of the Bankruptcy Court. As a debtor-in-possession, the Debtor
Company is authorized to operate its business but may not engage
F-65
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
in transactions outside the ordinary course of its business without the
approval of the Bankruptcy Court. Under the Bankruptcy Code, any creditor
actions to obtain possession of property from the Debtor Company are stayed by
the Chapter 11 Proceeding. As a result, the creditors of the Debtor Company are
precluded from collecting pre-petition debts without the approval of the
Bankruptcy Court. Certain pre-petition liabilities, including wages and
benefits of employees and obligations to certain international vendors, have
been paid after obtaining the approval of the Bankruptcy Court. Also, in 1996,
the Bankruptcy Court granted the Debtor Company's motion to allow for the
offset of certain receivables and payables between the Debtor Company and its
subsidiaries existing as of May 15, 1995.
Subject to certain exceptions under the Bankruptcy Code, the Debtor
Company's Chapter 11 filing automatically stayed the continuation of any
judicial or administrative proceedings against the Debtor Company. The Debtor
Company filed notices to remove certain lawsuits filed by plaintiffs from state
courts to federal courts. The Debtor Company also filed transfer motions
seeking to transfer certain lawsuits filed by plaintiffs from various federal
courts to the federal district court having jurisdiction over the Debtor
Company's Chapter 11 Proceeding (the U.S. District Court for the Eastern
District of Michigan, the "U.S. District Court in Michigan"). The purpose of
these transfer motions was to lay a foundation for the eventual consolidation
of these lawsuits in connection with a threshold "common issues" trial on the
core issue, among others, of whether silicone gel implants cause the diseases
claimed by those who filed such lawsuits.
In September, 1995, the U.S. District Court in Michigan granted the Debtor
Company's transfer motion to transfer certain lawsuits filed by plaintiffs to
the U.S. District Court in Michigan. This court also indicated that if trials
ultimately proceed, they should be conducted in either the U.S. District Court
in Michigan or the U.S. district court for the district in which the claim
underlying the lawsuit arose. In the interim, the U.S. District Court for the
Northern District of Alabama has been assigned jurisdiction over these cases
for pretrial purposes. The U.S. District Court in Michigan also suggested that
a "common issues" trial could proceed, if needed, in connection with the
Bankruptcy Court's estimation of products liability claims against the Debtor
Company during the Debtor Company's Chapter 11 Proceeding.
The U.S. Trustee appointed a "Committee of Unsecured Creditors," a
"Committee of Tort Claimants" and an "Official Physicians' Committee"
(collectively, the "Creditor Committees") in the Chapter 11 Proceeding. In
accordance with the provisions of the Bankruptcy Code, the Creditor Committees
have been appointed to represent the diversity of interests of the entire
constituency that each committee is designated to serve, and the Creditor
Committees have the right to be heard with respect to transactions outside the
ordinary course of business and other matters arising in the Chapter 11
Proceeding.
Bar Date and Creditors' Claims
In June, 1996, the Bankruptcy Court established bar dates, deadlines for
creditors to file claims against the Debtor Company, of January 15, 1997, for
all claims against the Debtor Company arising out of the United States and its
territories, and of February 14, 1997, for all claims against the Debtor
Company arising out of non-U.S. jurisdictions. Creditors who are required to
file claims but fail to meet the bar dates generally were prohibited from
voting upon the Joint Plan of Reorganization (as defined below) and may be
prohibited from receiving distributions under any plan of reorganization.
As of August 25, 1999, approximately 905,000 proofs of claim have been filed
by creditors of the Debtor Company with the Bankruptcy Court. Of these proofs
of claim, approximately 644,000 are Implant Primary Claims (claims by implant
recipients), approximately 207,000 are Implant Supplemental Claims (claims by
persons related to implant recipients) and approximately 54,000 are General
Claims (claims by lenders, holders of public debt securities, vendors and other
miscellaneous parties, including claims for contribution and
F-66
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
indemnity). Because the cataloging of filed proofs of claim is ongoing, the
ultimate number of claims is not precisely determinable at this time.
The Bankruptcy Court and the Debtor Company continue to assess the validity
and accuracy of the information contained in or submitted with the filed proofs
of claim. In addition, the Debtor Company believes that a significant number of
the filed proofs of claim are duplicative. As of August 25, 1999, the
Bankruptcy Court had disallowed approximately 138,000 of these duplicate
claims. The process of identifying possible duplicate claims is ongoing. The
Debtor Company anticipates that all duplicate claims will ultimately be
disallowed. In addition, a number of these proofs of claim were received
subsequent to the bar date and may be disallowed on that basis. Other than as
described above, there has been no determination of allowability of the filed
proofs of claim by either the Bankruptcy Court or the Debtor Company.
In addition to the proofs of claim filed by creditors of the Debtor Company
with the Bankruptcy Court as described above, Dow Chemical has, pursuant to
certain rules promulgated under the U.S. Bankruptcy Code, filed a proof of
claim against the Debtor Company with the Bankruptcy Court on behalf of
claimants who had not previously filed their own individual proofs of claim
against the Debtor Company with the Bankruptcy Court. The purpose of this
filing by Dow Chemical was to ensure that all breast implant claims against the
Debtor Company's shareholders are resolved consistently and contemporaneously
with claims against the Debtor Company through the Chapter 11 Proceeding.
In April 1997, the Debtor Company filed (a) an omnibus objection with the
Bankruptcy Court challenging all claims alleging that silicone breast implants
caused disease, and (b) a motion for summary judgment requesting that the
Bankruptcy Court dismiss all such claims on the basis that there is no
scientifically valid evidence sufficient to support such claims. Also in April
1997, the Debtor Company filed a motion with the Chief Judge of the U.S. Court
of Appeals for the Sixth Circuit requesting that, to the extent that a U.S.
District Judge is required to decide the Debtor Company's motion for summary
judgment or to decide issues related to disease claims which might survive the
motion for summary judgment, such issues be referred to U.S. District Judge Sam
C. Pointer, Jr. (of the U.S. District Court for the Northern District of
Alabama) due to his experience as the federal multi-district litigation judge
for breast implant litigation. As a result, the Chief Justice of the United
States granted his approval of this request in June, 1997. Judge Pointer has
been temporarily assigned to the U.S. District Court in Michigan to preside
over any proceedings regarding claims arising from implanted medical devices,
including breast implant claims, against the Debtor Company and its
shareholders.
In December, 1997, the Bankruptcy Court recommended that, although it has
the authority to decide the issues presented in the Debtor Company's omnibus
objection and motion for summary judgment described above, the U.S. District
Court in Michigan should take responsibility for ruling on such matters. The
U.S. District Court in Michigan has indicated that it will take such
responsibility with the participation of Judge Pointer. In addition, the U.S.
District Court in Michigan indicated that the report issued on November 30,
1998, by Judge Pointer's National Science Panel, established in the U.S.
District Court for the Northern District of Alabama under the U.S. Federal
Rules of Civil Procedure, may be used in connection with resolving the issue of
whether silicone gel implants cause the diseases claimed by those who assert
such claims. The report concluded that the weight of scientific evidence does
not indicate a link between silicone breast implants and systemic diseases,
such as connective tissue diseases, related signs and symptoms and immune
system dysfunction.
In August, 1997, the Committee of Tort Claimants filed a motion with the
Bankruptcy Court requesting that issues regarding estimation or liquidation of
products liability claims in the Debtor Company's Chapter 11
F-67
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
Proceeding, including issues relating to confirmation of a plan of
reorganization, be removed from the Bankruptcy Court to the U.S. District Court
in Michigan. This motion will be adjudicated by the U.S. District Court in
Michigan. In September, 1997, the U.S. District Court in Michigan conducted a
hearing on this motion, but no decision has yet been rendered.
Exclusivity Periods and Related Matters
Under applicable provisions of the Bankruptcy Code, a debtor in Chapter 11
has certain periods of exclusivity during which it has the exclusive right to
file and seek acceptances of its reorganization plan. After the expiration of
such periods, as may be extended from time to time, any creditor or shareholder
has the right to file a plan of reorganization with the Bankruptcy Court.
The Debtor Company had the exclusive right to file a plan of reorganization
for 120 days after its Chapter 11 filing (the "Plan Exclusivity Period").
During the course of the Chapter 11 Proceeding, the Bankruptcy Court has
extended the Plan Exclusivity Period from time to time. The Plan Exclusivity
Period has continued due to the Debtor Company's filing of the Initial Plan,
the First Amended Plan, the Second Amended Plan, and the Joint Plan of
Reorganization (as defined and discussed below), and the terms of relevant
Bankruptcy Court orders. In May, 1996, the Bankruptcy Court extended the Debtor
Company's exclusive statutory 60-day period for soliciting acceptances of its
plan of reorganization (the "Solicitation Exclusivity Period") for an
indefinite period, subject to further order of the Bankruptcy Court. The Plan
Exclusivity Period and the Solicitation Exclusivity Period shall be referred to
collectively as the "Exclusivity Periods."
Plans of Reorganization and Disclosure Statements
In December, 1996, the Debtor Company filed its initial plan of
reorganization (the "Initial Plan") and related initial disclosure statement
with the Bankruptcy Court. Under the Initial Plan, the Debtor Company would
have committed up to $3.0 billion to satisfy the claims of its creditors. In
August, 1997, the Initial Plan was superseded by the Debtor Company's filing of
its first amended plan of reorganization (the "First Amended Plan") and a
related first amended disclosure statement (the "First Amended Disclosure
Statement"). Under the First Amended Plan, the Debtor Company would have
committed up to $3.7 billion to satisfy the claims of its creditors. In
November, 1997, the Bankruptcy Court indicated that the Debtor Company's First
Amended Disclosure Statement would not be approved and expressed concerns about
certain provisions of the First Amended Plan. In February, 1998, the Debtor
Company filed its second amended plan of reorganization (the "Second Amended
Plan") and related second amended disclosure statement (the "Second Amended
Disclosure Statement"). Under the Second Amended Plan, the Debtor Company would
have committed up to $4.4 billion to satisfy the claims of its creditors,
including $3.0 billion to resolve products liability claims through several
settlement options or through litigation. On November 9, 1998, the Second
Amended Plan was superseded by the Debtor Company's filing of a third amended
plan of reorganization, which was subsequently amended in 1999 (the "Joint Plan
of Reorganization") and related third amended disclosure statement, which was
subsequently amended in 1999 (the "Joint Disclosure Statement"). The Joint Plan
of Reorganization and the Joint Disclosure Statement are discussed below.
In an effort to encourage resolution of key issues between the Debtor
Company and the Creditor Committees, the Bankruptcy Court had appointed a
mediator in November, 1997. On July 2, 1998, following unsuccessful attempts by
the Debtor Company and the Committee of Tort Claimants to reach an agreement
regarding the resolution of products liability claims, the mediator presented
the Debtor Company, the Committee of Tort Claimants, Dow Chemical, and Corning
with a proposal to settle such claims (the "Mediator's Proposal"). On July 7,
1998, all four parties advised the Bankruptcy Court that they would accept the
Mediator's Proposal. The Mediator's Proposal did not address issues between the
Debtor Company and
F-68
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
other parties to the Chapter 11 Proceeding, including the Committee of
Unsecured Creditors and the Official Physicians' Committee.
Subsequently, the mediator assisted the Debtor Company, the Committee of
Tort Claimants, Dow Chemical, and Corning in the conversion of the Mediator's
Proposal into a plan of reorganization, related disclosure statement, and other
necessary supporting documents. As a result of this process, on November 9,
1998, the Debtor Company, along with the Committee of Tort Claimants, filed the
Joint Plan of Reorganization and the Joint Disclosure Statement with the
Bankruptcy Court.
The Joint Plan of Reorganization would provide breast implant claimants with
a range of settlement options essentially replicating the options provided by
the Revised Settlement Agreement (see Note 6 above). Under certain
circumstances, breast implant claimants would be able to qualify for more than
one settlement option. Payments similar to the amounts provided for in the
Revised Settlement Agreement (the "Base Payments") would be made to most
settling breast implant claimants. Under certain circumstances, breast implant
claimants might qualify for payments in excess of the Base Payments (the
"Premium Payments"), if funds are available. The Joint Plan of Reorganization
would also provide a mechanism for the resolution of products liability claims
other than breast implant claims.
The Joint Plan of Reorganization would provide up to $4.5 billion to satisfy
claims of the Debtor Company's creditors. Specifically, under the Joint Plan of
Reorganization, the Debtor Company would commit up to $3.172 billion to resolve
products liability claims through several settlement options or through
litigation. Products liability claims to be resolved by settlement would be
administered by a settlement facility (the "Settlement Facility"), and product
liability claims to be resolved by litigation would be administered by a
litigation facility (the "Litigation Facility"). Payments made by the Debtor
Company would be placed in a trust and withdrawn by the Settlement Facility to
pay eligible settling claimants and to cover the Settlement Facility's
operating expenses. Amounts would also be withdrawn from the trust as necessary
to fund the resolution of claims via the Litigation Facility. In addition, the
Joint Plan of Reorganization would provide $1.3 billion to satisfy commercial
claims which would be paid in full, including interest accrued at a rate of
6.28%, compounded annually. The Joint Plan of Reorganization would provide that
ten-year senior notes of the Debtor Company would be issued to satisfy
approximately 75% of the amount of allowed unsecured commercial creditor
claims; the remaining amount of allowed unsecured commercial creditor claims
would be satisfied by cash payments.
Under the Joint Plan of Reorganization, the Settlement Facility would allow
breast implant claimants who choose to settle their claims against the Debtor
Company and who meet certain documentation and eligibility criteria to combine
up to three settlement options, which would result in Base Payments ranging
from $2,000.00 to more than $250,000.00. The settlement options available under
the Joint Plan of Reorganization are: (a) an expedited payment option,
available for three years after the effective date of the Joint Plan of
Reorganization, which would pay $2,000.00 to qualifying breast implant
claimants who want to settle their claims immediately and do not intend to file
a disease claim (the "Expedited Release Payment Option"), (b) a rupture
settlement option which would pay $20,000.00 to qualifying breast implant
claimants who have undergone or will have undergone surgery no later than two
years after the effective date of the Joint Plan of Reorganization to remove a
ruptured breast implant manufactured by the Debtor Company (the "Rupture
Payment Option"), (c) an explantation payment option which would pay $5,000.00
for removal (on or after December 31, 1990, but no later than ten years after
the effective date of the Joint Plan of Reorganization) of breast implants
manufactured by the Debtor Company (the "Explantation Payment Option"), and (d)
a disease payment option which would pay between $10,000.00 and $250,000.00 to
breast implant claimants who file a claim within 15 years of the effective date
of the Joint Plan of Reorganization if they have or have had certain
F-69
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
specified symptoms or medical conditions which are adequately documented and
evaluated (the "Disease Payment Option").
Claimants qualifying for either the Expedited Release Payment Option or the
Disease Payment Option may, under certain circumstances, also qualify for the
Rupture Payment Option and the Explantation Payment Option. In addition,
claimants qualifying for the Disease Payment Option may be eligible for a
Premium Payment of up to 20% of the Disease Payment Option amounts specified
above if sufficient funds are ultimately available. Claimants qualifying for
the Rupture Payment Option may be eligible for a Premium Payment of $5,000.00
if sufficient funds are ultimately available.
The Joint Plan of Reorganization also would provide that claimants who are
eligible for payments under the Disease Payment Option may qualify for
additional compensation if their medical condition changes. For certain
claimants, amounts otherwise payable under the Disease Payment Option would be
reduced by one-half for breast implant claimants who have had breast implants
manufactured by the Debtor Company and also have had breast implants produced
by another manufacturer. Settlement amounts payable to breast implant claimants
who have had breast implants produced by another manufacturer using raw
materials supplied by the Debtor Company would be determined after review and
evaluation and paid from a fixed fund; payments could amount to a maximum of
40% of amounts payable under the Expedited Release Payment Option or the
Disease Payment Option.
Settlement payments to non-U.S. breast implant claimants under the Joint
Plan of Reorganization would be equal to either 35% or 60% of similar payments
made to U.S. breast implant claimants, depending on the country of residence of
the non-U.S. breast implant claimant receiving settlement payments. These
reduced amounts are designed to account for differing local economic and legal
system factors. Furthermore, the Joint Plan of Reorganization incorporates the
terms and conditions of three Canadian class action settlements in the
provinces of Ontario, Quebec, and British Columbia, Canada and a settlement of
Australia breast implant litigation (see Note 6 for further discussion.) In
addition, in response to concerns raised by representatives of claimants in
several foreign countries regarding difficulties in obtaining the necessary
documentation to demonstrate product identification to the Settlement Facility,
modifications were made to the Joint Plan of Reorganization to, among other
things, provide additional settlement options with relaxed product
identification requirements and reduced payment amounts.
Under the Joint Plan of Reorganization, non-breast implant products
liability claimants who choose to settle their claims through the Settlement
Facility mechanism would be able to choose (a) the Expedited Release Payment
Option under which such claimants would be paid $600.00, or (b) the Disease
Payment Option under which such claimants would receive settlement payments of
between $2,500.00 and $7,500.00 depending on the type of product used and the
severity of particular claimants' injuries.
If the Joint Plan of Reorganization is approved and confirmed, qualified
claims will be processed under the supervision of an independent claims
administrator using the claims processing facility established under the
Revised Settlement Agreement.
Under the Joint Plan of Reorganization, products liability claimants
choosing to litigate their claims would be required to pursue their claims
through litigation against the Litigation Facility, including a mandated pre-
trial mediation program. As contemplated by the Debtor Company, this process
would also include certain common issues procedures (the "Common Issues
Procedures") to resolve, among other things, the core issue of whether silicone
implants cause certain diseases as alleged by products liability claimants (see
Note 6 for further discussion). The U.S. District Court in Michigan would
ultimately determine whether the Common
F-70
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
Issues Procedures will be implemented. The result of implementing the Common
Issues Procedures would not affect those claimants who choose to resolve their
claims through the Settlement Facility.
If use of the Common Issues Procedures would result in a conclusion that
silicone implants do not cause disease, some or all disease claims against the
Litigation Facility would be disallowed and some or all products liability
claimants choosing to resolve their disease claims by litigation may not
receive any distribution from the Litigation Facility. If use of the Common
Issues Procedures would result in a conclusion that silicone implants do cause
disease, individual claims that remain against the Litigation Facility would be
resolved through further litigation or settlement. In any event, non-disease
claims (for example, those claims related to mechanical failure and/or local
complications) could continue to proceed against the Litigation Facility. The
Joint Plan of Reorganization also contemplates that other common issue
procedures may be requested by the Litigation Facility, including trials to
determine, for example, the application of bulk-supplier defenses to raw
material claims and other issues. Claimants who choose to pursue their claim
against the Debtor Company through the Litigation Facility would forgo any
right to receive benefits under the various settlement options provided through
the Settlement Facility.
The Debtor Company would fund the Settlement Facility and the Litigation
Facility (collectively, the "Facilities") pursuant to a funding payment
agreement (the "Funding Payment Agreement"). The Debtor Company would fund the
Facilities over a 16-year period. The Debtor Company anticipates that it would
be able to meet its payment obligations to the Facilities utilizing cash flow
from operations, insurance proceeds, cash on hand and/or prospective
borrowings. Under certain circumstances, the Debtor Company would also have
access to a ten-year unsecured revolving credit commitment, established by Dow
Chemical and Corning, to assist in the timely funding of the Facilities. During
the first five years of this revolving credit commitment, the maximum aggregate
amount available to the Debtor Company would be $300.0. Beginning in the sixth
year following the effective date of the Joint Plan of Reorganization, the
maximum aggregate amount available to the Debtor Company would decrease by
$50.0 per year.
Pursuant to the Funding Payment Agreement, funds will be paid by the
reorganized Debtor Company (a) to the Settlement Facility with respect to
products liability claims, as such claims are processed and allowed by the
Settlement Facility, and (b) via the Settlement Facility with respect to
products liability claims allowed through the Litigation Facility, as such
claims are resolved. The amounts of funds to be paid by the reorganized Debtor
Company to the Settlement Facility and the Litigation Facility, respectively,
are subject to annual and aggregate funding limits provided in the Funding
Payment Agreement.
The first payment required under the Funding Payment Agreement, to be made
when the Joint Plan of Reorganization becomes effective, would equal $985.0
(the "Initial Payment") plus any amounts earned after April 30, 1999, on $905.0
of the Initial Payment. The actual amount earned on $905.0 of the Initial
Payment after April 30, 1999 (the "Initial Payment Supplement") for the period
commencing on May 1, 1999, and ending on June 30, 1999 was $6.2. The Initial
Payment Supplement for the three months ended June 30, 1999, and for the six
months ended June 30, 1999, is reflected under the caption "Interest expense"
in the consolidated statement of operations and retained earnings. The amount
of the Initial Payment Supplement is added to amounts otherwise payable by the
Debtor Company under the Joint Plan of Reorganization and the Funding Payment
Agreement.
During the five years after the effective date of the Joint Plan of
Reorganization, the maximum annual amounts to be paid by the Debtor Company
under the Funding Payment Agreement are $47.0 in the first year, $103.0 in the
second year, $374.0 in the third year, $204.0 in the fourth year and $205.0 in
the fifth year. Thereafter, the maximum aggregate amount to be paid by the
Debtor Company would be $1,254.0 during the
F-71
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
ensuing eleven year period. The timing of the actual amounts payable by the
Debtor Company under the Funding Payment Agreement would be affected by the
rate at which claims are resolved by the Facilities and the rate at which
insurance proceeds are received by the Debtor Company from its insurers (see
Note 6 for additional information relating to insurance matters).
The Joint Plan of Reorganization provides that punitive damage claims will
not be allowed.
Under the Joint Plan of Reorganization, products liability claims relating
to long-term contraceptive implants would be channeled to the Litigation
Facility for administrative purposes and would be resolved as to the Debtor
Company by indemnification from and/or litigation against the ultimate
manufacturers of these implants.
Releases of Debtor Company and Other Parties
If the Joint Plan of Reorganization is confirmed, personal injury claims,
and certain related claims, would be transferred to the Settlement Facility and
the Litigation Facility for handling and payment. In addition, all claims
subject to the jurisdiction of the Bankruptcy Court against (a) the Debtor
Company, its subsidiaries and affiliates, (b) Dow Chemical, Corning and their
respective subsidiaries and affiliates, (c) certain of the Debtor Company's
insurers who have settled coverage issues with the Debtor Company relating to
products liability claims and (d) all of the officers, directors, employees and
representatives of these parties would (as to the Debtor Company) be discharged
and (as to all other parties) be released, and any prosecution or enforcement
of those claims would be permanently barred.
With respect to products liability claimants choosing to resolve their
claims via the Settlement Facility mechanism, all such claims subject to the
jurisdiction of the Bankruptcy Court relating to products of the Debtor Company
against such claimants' physicians and other health care providers associated
with such claims who agree to settle their claims against the Debtor Company
("Settling Health Care Providers") would (with the exception of certain defined
medical malpractice claims) also be released, and any prosecution or
enforcement of those claims would be permanently barred.
With respect to products liability claimants choosing to resolve their
claims via the Litigation Facility mechanism, all such allowed claims subject
to the jurisdiction of the Bankruptcy Court relating to products of the Debtor
Company against those Settling Physicians and Health Care Providers who have
had the claims against them transferred to the Debtor Company's bankruptcy
proceedings as claims "related to" such proceedings would have such claims
resolved in tandem with the related claim against the Litigation Facility. To
the extent that funds would be available for this purpose at the time of claim
allowance, the claims for which the Litigation Facility and the Settling
Physician or Health Care Provider would be jointly liable would be paid by the
Litigation Facility. If, due to funding deficiencies at the time of claim
allowance, the Settling Physician or Health Care Provider would make payment of
the allowed personal injury claim for which the Litigation Facility would be
jointly liable, the Settling Physician or Health Care Provider paying the claim
would have a reimbursement claim against the Litigation Facility. The
reimbursement claim would be paid by the Litigation Facility to the Settling
Physician or Health Care Provider when funds subsequently became available.
Proposed Insurance Allocation Agreement Between Debtor Company and Dow
Chemical
A number of the Company's products liability insurance policies name the
Company and Dow Chemical as co-insureds (the "Shared Insurance Assets"). A
portion of the Shared Insurance Assets may, under certain conditions, become
payable by the Debtor Company to Dow Chemical under an insurance allocation
agreement
F-72
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
between the Debtor Company and Dow Chemical (the "Insurance Allocation
Agreement"). Under the Insurance Allocation Agreement, twenty-five percent of
certain of the Shared Insurance Assets would be paid by the Debtor Company to
Dow Chemical subsequent to confirmation of the Joint Plan of Reorganization.
However, the amount of Shared Insurance Assets which would be payable to Dow
Chemical by the Debtor Company under the Insurance Allocation Agreement would
not exceed approximately $320.0. In addition, a portion of any such amounts
paid to Dow Chemical, to the extent not used by Dow Chemical to pay certain
products liability claims, would be paid over to the Debtor Company after the
expiration of a 17.5-year period commencing on the effective date of the Joint
Plan of Reorganization. Implementation of the Insurance Allocation Agreement is
dependent on approval of the Joint Plan of Reorganization in substantially its
current form by the Bankruptcy Court. As previously reported, the Company's
results for 1998 reflect a pre-tax charge of $320.0 for an estimate of amounts
of insurance proceeds payable or to be paid to Dow Chemical pursuant to the
Insurance Allocation Agreement.
Confirmation Procedure
Confirmation of a plan of reorganization requires, among other things,
acceptance of the plan by the affirmative vote (in excess of 50% of the number
and in excess of 66 2/3% of the dollar amount of the claims) of the creditors
who vote in each class of creditors having claims that are impaired by the plan
of reorganization. On February 4, 1999, the Bankruptcy Court issued an order
(a) approving the adequacy of the Joint Disclosure Statement, (b) permitting
the distribution of the Joint Plan of Reorganization and Joint Disclosure
Statement to the Debtor Company's creditors for their consideration, and (c)
establishing a preliminary timeline for the remaining approval and confirmation
process.
Subsequently, on March 15, 1999, the Debtor Company distributed the Joint
Plan of Reorganization and Joint Disclosure Statement to the Debtor Company's
creditors and solicited acceptances of the Joint Plan of Reorganization from
its creditors from March 15, 1999, through May 14, 1999. As a result of this
process and subsequent negotiations with certain classes of creditors, all
classes of claimants represented by the Committee of Tort Claimants (with the
exception of the holders of claims related to long-term contraceptive
implants), and the class of claimants represented by the Official Physicians'
Committee, have provided the requisite acceptance of the terms of the Joint
Plan of Reorganization. In addition, the class of claimants represented by the
Committee of Unsecured Creditors and the class of claimants comprised of
various governmental entities, including the United States (the "U.S.
Government") have not provided the requisite acceptance of the terms of the
Joint Plan of Reorganization. See further discussion below under "Uncertainties
regarding implementation of the Joint Plan of Reorganization."
On June 28, 1999, the Bankruptcy Court commenced a hearing regarding
confirmation of the Joint Plan of Reorganization (the "Confirmation Hearing").
During the Confirmation Hearing, the Debtor Company and the Committee of Tort
Claimants presented testimony and other evidence in support of confirmation of
the Joint Plan of Reorganization. In addition, opponents of the confirmation of
the Joint Plan of Reorganization presented testimony and other evidence in
opposition to confirmation of the Joint Plan of Reorganization. Specifically,
the principal concerns of these opponents include (a) the proposed treatment of
non-U.S. products liability claimants under the Joint Plan of Reorganization,
(b) the appropriate interest rate to be applied for the period from May 15,
1995, through the effective date of the Joint Plan of Reorganization on allowed
claims held by creditors represented by the Committee of Unsecured Creditors,
(c) whether the proposed discharge of any potential personal injury and related
claims against the shareholders of the Debtor Company is appropriate under the
Bankruptcy Code and other relevant law, and (d) the adequacy and propriety of
the aggregate funding limit applicable to the Litigation Facility. The
Confirmation Hearing concluded on July 30, 1999. The Debtor Company is
uncertain as to when the Bankruptcy Court will issue a ruling regarding
confirmation of the Joint Plan of Reorganization.
F-73
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
Following motions by the Committee of Unsecured Creditors, the Debtor
Company, and the Committee of Tort Claimants, and Bankruptcy Court hearings on
such motions, the Bankruptcy Court issued a ruling on July 14, 1999, indicating
that the appropriate interest rate to be applied for the period from May 15,
1995, through the effective date of the Joint Plan of Reorganization on allowed
claims held by creditors represented by the Committee of Unsecured Creditors is
6.28%, the United States federal judgment rate that was in effect on May 15,
1995 as specified in the Joint Plan of Reorganization.
The Debtor Company continues to participate in discussions with the U.S.
Government, the Committee of Unsecured Creditors, and the Official Physicians'
Committee regarding the terms of the Joint Plan of Reorganization. Absent the
requisite approvals referenced above, the Bankruptcy Court may confirm the
Joint Plan of Reorganization, or a competing plan of reorganization, under the
"cramdown" provisions of the Bankruptcy Code, assuming certain tests are met.
On May 28, 1999, the Debtor Company filed a motion with the Bankruptcy Court
requesting confirmation of the Joint Plan of Reorganization despite the absence
of approval of the Joint Plan of Reorganization by all classes of creditors.
The Bankruptcy Court has not ruled on this motion.
Uncertainties regarding implementation of Joint Plan of Reorganization
Even though management believes that the Joint Plan of Reorganization will
ultimately be implemented, uncertainties regarding such implementation continue
to exist including (a) confirmation of the Joint Plan of Reorganization by the
Bankruptcy Court, and (b) the favorable resolution of appeals, if any, of the
Bankruptcy Court's ultimate confirmation order. As discussed above, various
creditors and creditor representatives, including the Committee of Unsecured
Creditors and the Official Physicians' Committee, assert that the Bankruptcy
Court should not confirm the Joint Plan of Reorganization. Specifically, they
contend (among other things) that (a) the classes into which the Debtor
Company's claimants are grouped for voting and other purposes under the Joint
Plan of Reorganization are inappropriate, (b) the differing treatment of
domestic and foreign products liability claimants is unfair, (c) the release of
claims against Dow Chemical and Corning, the Debtor Company's subsidiaries and
other parties is impermissible, (d) the provisions of the Joint Plan of
Reorganization for the amount of interest to be paid to unsecured creditors and
the manner of payment to unsecured creditors are improper or inadequate, and
(e) the treatment of implant related claims arising from implants other than
breast implants are unfair or inadequate. These creditors and creditor
representatives contend that these issues prevent confirmation of the Joint
Plan of Reorganization. In addition, the U.S. Government has objected to
confirmation of the Joint Plan of Reorganization, asserting that the Joint Plan
of Reorganization does not provide sufficient funding to reimburse the U.S.
Government for health care expenses it incurred on behalf of breast implant
recipients. Resolution of these issues could ultimately impact whether the
Joint Plan of Reorganization will be implemented in substantially its current
form.
F-74
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
Debtor Company Financial Statements
The condensed financial statements of the Debtor Company are presented as
follows:
DOW CORNING CORPORATION
DEBTOR COMPANY CONDENSED BALANCE SHEET
(in millions of dollars)
<TABLE>
<CAPTION>
June 30,
1999
---------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 112.9
Marketable securities............................................. 109.4
Accounts and notes receivable, including $613.7 receivable from
subsidiaries..................................................... 791.1
Anticipated implant insurance receivable.......................... 16.8
Inventories....................................................... 189.0
Other current assets--
Deferred income taxes........................................... 190.0
Other........................................................... 12.1
---------
Total current assets.......................................... 1,421.3
---------
INVESTMENTS:
Equity in unconsolidated subsidiaries............................. 586.6
PROPERTY, PLANT AND EQUIPMENT: 1,848.6
Less--Accumulated depreciation.................................... (1,238.1)
---------
610.5
---------
OTHER ASSETS:
Marketable securities............................................. 63.4
Anticipated implant insurance receivable.......................... 729.1
Restricted insurance proceeds..................................... 781.1
Implant deposit................................................... 275.0
Environmental trusts.............................................. 23.4
Deferred income taxes............................................. 694.9
Receivable from subsidiaries...................................... 399.4
Other assets...................................................... 218.4
---------
3,184.7
---------
$ 5,803.1
=========
</TABLE>
F-75
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
DOW CORNING CORPORATION
DEBTOR COMPANY CONDENSED BALANCE SHEET
(in millions of dollars)
<TABLE>
<CAPTION>
June 30,
1999
--------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES:
Accounts payable................................................... $ 38.0
Payable to subsidiaries............................................ 202.0
Accrued interest................................................... 232.9
Other current liabilities.......................................... 221.4
--------
Total current liabilities........................................ 694.3
--------
OTHER LIABILITIES.................................................... 43.5
LIABILITIES SUBJECT TO COMPROMISE:
Trade accounts payable............................................. 67.3
Payable to subsidiaries............................................ 37.8
Accrued employee benefits.......................................... 273.3
Accrued taxes...................................................... 3.6
Implant reserve.................................................... 3,223.4
Notes payable...................................................... 375.0
Long-term debt..................................................... 269.1
Co-insurance payable............................................... 320.0
Other.............................................................. 84.1
--------
4,653.6
--------
STOCKHOLDERS' EQUITY:
Common stock, $5 par value--2,500,000 shares authorized and out-
standing.......................................................... 12.5
Retained earnings.................................................. 478.5
Cumulative translation adjustment and Other........................ (79.3)
--------
Stockholders' equity............................................. 411.7
--------
$5,803.1
========
</TABLE>
F-76
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
DOW CORNING CORPORATION
DEBTOR COMPANY CONDENSED STATEMENT OF
OPERATIONS AND RETAINED EARNINGS
(in millions of dollars)
<TABLE>
<CAPTION>
Six months ended
June 30, 1999
----------------
<S> <C>
NET SALES (includes $367.7 of sales to subsidiaries).......... $897.8
OPERATING COSTS AND EXPENSES:
Manufacturing cost of sales................................. 610.8
Marketing and administrative expenses....................... 113.9
------
724.7
------
OPERATING INCOME.............................................. 173.1
OTHER INCOME:
Interest income............................................. 29.6
Interest expense............................................ (37.4)
Other, net.................................................. (39.1)
------
INCOME BEFORE REORGANIZATION.................................. 126.2
COSTS AND INCOME TAXES
Reorganization costs.......................................... 37.2
------
INCOME BEFORE INCOME TAXES.................................... 89.0
------
Income tax provision.......................................... 46.7
------
NET INCOME.................................................... $ 42.3
======
Earnings of unconsolidated subsidiaries and related elimina-
tions........................................................ 5.0
Retained earnings at beginning of year........................ 431.2
------
Retained earnings at end of year.............................. $478.5
======
</TABLE>
The financial statements presented above reflect transactions of the Debtor
Company including transactions with all subsidiaries of the Debtor Company. The
Debtor Company condensed statement of operations and retained earnings includes
$367.7 of sales to subsidiaries in the caption "NET SALES." These sales are
conducted at prices substantially comparable to those which would prevail in
open-market transactions between unrelated parties.
The Debtor Company has incurred and will continue to incur significant costs
associated with the Chapter 11 Proceeding. The aggregate amount of these costs,
which are being expensed as incurred, may have a material adverse impact on the
Company's results of operations in future periods. These costs are recorded
under the caption "Reorganization costs" in the accompanying statements of
operations and retained earnings.
Due to the Debtor Company's status as a debtor-in-possession under Chapter
11 of the Bankruptcy Code, the Debtor Company is in default of its debt
agreements. All outstanding debt of the Debtor Company as of May 15, 1995, has
been presented under the caption "LIABILITIES SUBJECT TO COMPROMISE" in the
accompanying balance sheets.
Interest on Pre-Petition Debt
As previously reported, the Debtor Company's results for 1998 reflect a
charge of $201.7 ($127.1 after tax) for the amount of interest payable to
creditors of the Debtor Company represented by the Committee of
F-77
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
Unsecured Creditors pursuant to the Joint Plan of Reorganization. This charge
was taken in the fourth quarter of 1998 because management had concluded that
the payment of interest to such creditors is probable. In addition, the
Company's results for the three months ended June 30, 1999, reflect additional
interest expense of $15.8 ($10.0 after tax) for the amount of interest payable
to creditors of the Debtor Company represented by the Committee of Unsecured
Creditors pursuant to the Joint Plan of Reorganization. The amount of this
additional interest expense reflected in the Company's results for the six
months ended June 30, 1999, is $31.2 ($19.7 after tax). The amount of the 1998
charge relating to interest and the amount of the additional interest expense
reflected in the Company's results for the three months and six months ended
June 30, 1999 were determined using the United States federal judgment rate of
6.28% that was in effect on May 15, 1995 as specified in the Joint Plan of
Reorganization. The amount of the 1998 charge for this interest payable
relating to the three months and six months ended June 30, 1998 was $14.9
($9.4 after tax) and $29.3 ($18.5 after tax), respectively. The actual amount
of interest that will ultimately be paid to these creditors is uncertain.
NOTE 8--Comprehensive Income
Effective for periods ending after December 15, 1997, the Company has
adopted the provisions of Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements, and for reporting a total for
comprehensive income in condensed financial statements of interim periods.
Comprehensive income (defined in Financial Accounting Standards Board
Statement of Financial Accounting Concept No. 6) equals the change in equity
of a business enterprise during a period from transactions and other
circumstances from nonowner sources, including all changes in equity during a
period except those resulting from investments by owners and distributions to
owners.
Total comprehensive income (loss) of the Company for the three month
periods ended June 30, 1999 and 1998, amounted to $3.9 and $58.1,
respectively. Total comprehensive income (loss) of the Company for the six
month periods ended June 30, 1999 and 1998, amounted to $(24.6) and $103.6,
respectively.
NOTE 9--Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to the presentation adopted in 1999.
NOTE 10--Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
reported amounts of revenues and expenses during the reporting period and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
NOTE 11--Operating Segments and International Operations
Dow Corning Corporation has three geographical operating segments:
Americas, Europe, and Asia. The accounting policies of the segments are the
same as those described in the Summary of Significant Accounting Policies
(Note 1) except that the Company evaluates performance based on operating
profit or loss from operations excluding interest income, interest expense,
royalty income, royalty expense, currency gains and losses, certain
nonrecurring gains and losses, Chapter 11 reorganization expenses, income
taxes, and minority interests' share in income. These costs and expenses are
not allocated to the operating segments. Revenue is based on sales to external
customers only. Inventory transfers between operating segments are accounted
for at cost. However, beginning on July 1, 1998, the Company changed the
valuation method used for inventory ransfers between operating segments from a
variable cost basis (used prior to July 1, 1998) to a fully absorbed cost
basis. Restatement of segment operating profit for the six months ended June
30, 1998 to conform to the method used for the six months ended June 30, 1999
is impracticable.
F-78
<PAGE>
DOW CORNING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in millions of dollars except where noted)
Unallocated expenses include implant costs, certain research and development
costs and corporate administrative personnel and facilities costs not
specifically identified with a geographic segment. Identifiable assets are
those operating assets identified with the operations in each geographic
segment. Unallocated assets are principally cash and cash equivalents,
marketable securities, restricted insurance proceeds, anticipated implant
insurance receivables, certain deferred income tax assets, intangible assets,
investments accounted for on the equity basis and corporate facilities.
<TABLE>
<CAPTION>
Six months ended June 30, 1999 Americas Europe Asia Unallocated Consolidated
- ------------------------------ -------- ------ ------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from external custom-
ers........................... $642.1 $307.4 $332.2 -- $1,281.7
Depreciation and amortization.. 64.3 15.6 10.6 5.3 95.8
Segment operating profit....... 142.7 54.9 51.5 (135.3) 113.8
<CAPTION>
Six months ended June 30, 1998 Americas Europe Asia Unallocated Consolidated
- ------------------------------ -------- ------ ------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from external custom-
ers........................... $664.5 $320.5 $295.0 -- $1,280.0
Depreciation and amortization.. 58.1 14.5 9.1 8.0 89.7
Segment operating profit....... 115.1 71.0 65.4 (86.1) 165.4
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Total profit or loss for reportable segments........ $113.8 $165.4
Interest revenue................................... 38.8 36.6
Interest expense................................... (42.4) (6.0)
Other, Net......................................... (32.0) (20.1)
------ ------
Income before income taxes.......................... $ 78.2 $175.9
====== ======
Unallocated amounts:
Minority Interest................................... $ 1.0 $ 5.6
====== ======
</TABLE>
NOTE 12--Global Restructuring
As previously reported, in 1998, the Company announced a global
restructuring of its operations designed to improve operating efficiencies and
to enable the Company to better meet customers' expectations. Principal actions
of the global restructuring that were commenced or implemented during 1998
include reorganization and relocation of commercial and manufacturing
activities within Europe, Asia and the Americas. The Company's restructuring
efforts will be ongoing through 1999 and 2000. When fully implemented, the
restructuring will include closure of certain manufacturing, marketing and
research facilities and the consolidation of activities formerly carried on at
the closed facilities.
<TABLE>
<CAPTION>
Reserve First Second 1999 Activity Reserve
at 12/31/98 Quarter Quarter Cash Non-cash at 6/30/99
----------- ------- ------- ----- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Severance and other re-
lated costs............ $ 7.7 $ -- $5.8 $(6.8) -- $ 6.7
Lease termination pay-
ments.................. 1.9 -- -- (0.3) -- 1.6
Fixed asset writedowns
and other costs........ 10.5 1.0 1.8 (2.8) (3.1) 7.4
----- ----- ---- ----- ----- -----
$20.1 $ 1.0 $7.6 $(9.9) $(3.1) $15.7
===== ===== ==== ===== ===== =====
</TABLE>
The Company expects that additional global restructuring actions will be
announced during 1999. As the Company's restructuring activities proceed,
additional financial provisions may be necessary in future periods.
The consolidated interim financial statements should be read in conjunction
with the consolidated financial statements as of and for the year ended
December 31, 1998.
F-79
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Midland,
Michigan, on September 10, 1999.
Dow Corning Corporation
(Registrant)
By: /s/ Gary E. Anderson
___________________________________
Gary E. Anderson
President, Chief Executive Officer
and Director
Gary E. Anderson, whose signature appears below, hereby constitutes and
appoints Richard A. Hazleton, Gifford E. Brown and James R. Jenkins, and each
of them, his true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) and additions to this Registration Statement, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, and hereby grants to
such attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or his substitutes
may lawfully do or cause to be done by virtue hereof.
/s/ Gary E. Anderson
_____________________________________
Gary E. Anderson
President and Chief Executive
Officer
Dow Corning Corporation
<PAGE>
EXHIBIT INDEX TO FORM 10 REGISTRATION STATEMENT
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S> <C>
2.1 Final Amended Joint Disclosure Statement with respect to
Amended Joint Plan of Reorganization of Dow Corning
Corporation, dated as of February 4, 1999 (incorporated by
reference to Exhibit T3E to our Registration Statement on Form
T-3, as amended, originally filed with the Commission on March
12, 1999, Commission File No. 022-22423)
3.1 Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit T3A to our Registration
Statement on Form T-3, as amended, Commission File No. 022-
22423)
3.2 Bylaws of the Company (incorporated by reference to Exhibit
T3B to our Registration Statement on Form T-3, as amended,
Commission File No. 022-22423)
4.1 Form of Indenture governing the Senior Notes Due 2009
(incorporated by reference to Exhibit T3C-1 to our
Registration Statement on Form T-3, as amended, Commission
File No. 022-22423)
4.2 Form of First Supplemental Indenture (incorporated by
reference to Exhibit T3C-2 to our Registration Statement on
Form T-3, as amended, Commission File No. 022-22423)
4.3+ Form of Initial Notes
10.1 1998 Dow Corning Executive Compensation Plan
10.2 First Amendment to the Dow Corning Executive Compensation Plan
10.3 Dow Corning Corporation Employee's Severance Pay Plan
10.4 Dow Corning Corporation Restated Supplemental Benefit Plan
10.5 Form of Dow Corning Corporation Phantom Stock Appreciation
Rights (StARs) Plan Participation Agreement for executive
officers
10.6 Form of Dow Corning Corporation Phantom Stock Appreciation
Rights (StARs) Plan Participation Agreement, dated as of April
1, 1998, between the Company and each of Richard A. Hazleton
and Gary E. Anderson
12.1 Statement Regarding Computation of Ratios
15.1 Letter regarding Unaudited Interim Financial Information
21.1 List of Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney of the Company (contained on the signature
page of this Registration Statement)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
</TABLE>
- --------
+To be filed by amendment.
X-1
<PAGE>
EXHIBIT 10.1
DOW CORNING CORPORATION
EXECUTIVE COMPENSATION PLAN
Prepared by:
Kelly M. Hayes
Keywell and Rosenfeld
2301 W. Big Beaver Road, Suite 600
Troy, Michigan 48084
(810) 649-3200
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I
PURPOSE............................................................... 1
- -------
ARTICLE II
DEFINITIONS........................................................... 2
- -----------
ARTICLE III
ELIGIBILITY AND PARTICIPATION......................................... 4
- -----------------------------
3.1 Eligibility............................................... 4
3.2 Commencement of Participation............................. 4
3.3 Termination of Participation.............................. 4
ARTICLE IV
BENEFITS OFFERED UNDER THIS PLAN...................................... 5
- --------------------------------
ARTICLE V
FUNDING............................................................... 6
- -------
5.1 Funding from General Assets............................... 6
5.2 Participant Accounts...................................... 6
ARTICLE VI
DISTRIBUTION PROCEDURES............................................... 7
- -----------------------
ARTICLE VII
DEFERRAL ELECTIONS.................................................... 8
- ------------------
7.1 Election Procedure........................................ 8
7.2 Earnings on Deferred Amounts.............................. 8
ARTICLE VIII
VESTING............................................................... 9
- -------
ARTICLE IX
ADMINISTRATION........................................................ 10
- --------------
9.1 Plan Administration........................................ 10
9.2 Discretionary Authority of Plan Administrator.............. 10
9.3 Employment of Advisors..................................... 11
9.4 Delegation to Officers or Employees........................ 11
ARTICLE X
CLAIMS AND APPEALS.................................................... 12
- ------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE XI
AMENDMENT............................................................. 14
- ---------
ARTICLE XII
MISCELLANEOUS PROVISIONS.............................................. 15
- ------------------------
12.1 Indemnification for Liability............................. 15
12.2 Not an Employment Contract................................ 16
12.3 No liability for Elections................................ 16
12.4 Construction of Plan...................................... 16
12.5 Severability.............................................. 16
12.6 Fiscal Records and Reports................................ 16
12.7 Headings.................................................. 17
12.8 No Vested Interest........................................ 17
12.9 Limit on Liability........................................ 17
12.10 Anti-Alienation........................................... 17
</TABLE>
<PAGE>
DOW CORNING CORPORATION
EXECUTIVE COMPENSATION PLAN
---------------------------
ARTICLE I
PURPOSE
-------
Dow Corning Corporation hereby establishes this Executive Compensation
Plan for the benefit of its Eligible Employees. The purpose of this Plan is to
provide Eligible Employees with an annual variable pay component based on
individual and corporate performance measures which the Participant can
influence.
<PAGE>
ARTICLE II
DEFINITIONS
-----------
The following words and phrases as used herein shall have the
following meanings, unless a different meaning is plainly required by the
context. Pronouns shall be interpreted so that the masculine pronoun shall
include in the feminine and the singular shall include the plural:
2.0 "Adjusted Profit After Tax" means the Employer's profit after tax
adjusted for material and publicly disclosed gains or losses as a result of
accounting rule changes, acquisitions and divestitures, and other significant
special charges.
2.1 "Board" means the Board of Directors of Dow Corning Corporation.
2.2 "Corporation" means Dow Corning Corporation and any other
business organization which succeeds to its business and elects to continue this
Plan, or any other related entity which adopts this Plan with the consent of the
Board.
2.3 "Effective Date" means January 1, 1994.
2.4 "Eligible Employee" means any Employee who meets the requirements
of Section 3.1.
2.5 "Employee" means any person engaged by the Corporation to perform
personal services in an Employer/Employee relationship who received compensation
from the Corporation. The term "Employee" shall not include the following:
a. All leased Employees;
2
<PAGE>
b. Any person represented by a labor organization having a
Collective Bargaining Agreement with the Employer; and
c. Any person participating in a student employment program, or
coop program, as those terms are defined in the Corporation's personnel policies
or any person who is on leave or vacation from another Employer.
2.6 "ERISA" means the Employee Retirement Income Security Act of 1974
and all amendments thereto.
2.7 "Participant" means any Eligible Employee who has met the
conditions for participation set forth in Article III.
2.8 "Plan" means the Dow Corning Corporation Executive Compensation
Plan as set forth herein, together with any and all amendments and supplements
hereto.
2.9 "Plan Administrator" means the Corporation or any individual or
entity designated by the Corporation.
2.10 "Plan Year" means each twelve (12) month period commencing on
January 1st and ending on the following December 31st.
3
<PAGE>
ARTICLE III
ELIGIBILITY AND PARTICIPATION
-----------------------------
3.1 Eligibility. Only those Employees who occupy executive level
management positions and are selected annually by approval of the Board (or a
committee designated by the Board) shall be allowed to participate in this Plan.
3.2 Commencement of Participation. Participants are notified by the
Chief Executive Officer of the Corporation in December of the year prior to the
first day of the Plan Year in which they will participate.
3.3 Termination of Participation. A Participant will cease
participation in this Plan as of the earlier of the following dates:
a. The termination of the Plan;
b. The termination of Participant's employment with the
Corporation; or
c. When the Participant is transferred out of a participating
position. If the Participant's termination of participation occurs as a result
of this subparagraph c, the Participant will cease participating in the Plan at
the end of the Plan Year in which the Participant is transferred out of his
participating position.
4
<PAGE>
ARTICLE IV
BENEFITS OFFERED UNDER THIS PLAN
--------------------------------
The benefits offered under this Plan are those listed on Schedule A
attached hereto and incorporated herein by reference. The Corporation reserves
the right to amend Schedule A at any time.
5
<PAGE>
ARTICLE V
FUNDING
-------
5.1 Funding from General Assets. All contributions to this Plan shall
be from the general assets of the Corporation. Funds invested hereunder shall
continue for all purposes to be part of the general funds of the Corporation,
and no person other than the Corporation shall, by virtue of the provisions of
this Plan, have any interest in such funds. To the extent that any person
acquires a right to receive payments from the Corporation under this Plan, such
right shall be no greater than the right of any unsecured general creditor of
the Corporation.
5.2 Participant Accounts. The establishment of Accounts for
Participants are for the recordkeeping convenience of the Corporation. Such
Accounts shall not result in any amounts being made available to the Participant
or otherwise set aside for the Participant in a funded Plan within the meaning
of Part 3 of ERISA. The Corporation, in its sole discretion, may establish a
Grantor Trust or other form of escrow for purposes of setting aside such
amounts. Provided, however, such amounts shall continue to represent the general
assets of the Corporation and shall be subject to the claims of the
Corporation's general creditors.
6
<PAGE>
ARTICLE VI
DISTRIBUTION PROCEDURES
-----------------------
The distribution of benefits under this Plan shall be pursuant to the
provisions set forth on Schedule B attached hereto and incorporated herein by
reference. The Corporation reserves the right to amend Schedule B at any time.
7
<PAGE>
ARTICLE VII
DEFERRAL ELECTIONS
------------------
7.1 Election Procedure. Each Participant shall be entitled to make an
irrevocable election to defer receipt of any whole percentage of the amount that
would otherwise be awarded and payable by the Corporation to the Participant for
any particular Plan Year. Said election must be made prior to January 1st of the
Plan Year in which the services are performed by the Participant which result in
the benefit accruing under this Plan. Said election shall also indicate the
future year in which the deferred amount will be payable to the Participant.
7.2 Earnings on Deferred Amounts. Any amounts deferred pursuant to
Section 7.1 shall be increased quarterly at a rate coinciding with the rate of
three month commercial paper (See Business Week, "Money Market Rates" Section)
effective as of the first week of each calendar quarter. At the end of the
deferral period noted above, the deferred amount and any interest earned thereon
shall be paid to the Participant. In the event of the Participants separation
from service with the Corporation (not including retirement), or the death of
the Participant during the deferral period noted above, the deferred amount and
interest earned thereon shall be paid as soon as administratively feasible to
the Participant or to the Participant's designated beneficiary.
8
<PAGE>
ARTICLE VIII
VESTING
-------
There are no vesting provisions under this Plan.
9
<PAGE>
ARTICLE IX
ADMINISTRATION
--------------
9.1 Plan Administration. The Plan Administrator shall have the
authority to control and manage the operation and administration of the Plan and
to construe and interpret its terms. The Plan Administrator shall decide all
questions of eligibility to participate under the Plan and shall determine the
amount, manner and time of payment of any benefit under the Plan and, in the
exercise of its discretion hereunder, the decisions of the Plan Administrator
shall be final and binding on all parties. The Plan Administrator may delegate
responsibilities for the operation and administration of the Plan. The Plan
Administrator shall have the authority to determine the Plan's policies.
9.2 Discretionary Authority of Plan Administrator. The Plan
Administrator shall have any and all power and authority (including discretion
with respect to the exercise of that power and authority) which shall be
necessary, properly advisable, desirable or convenient to enable it to carry out
its duties under the Plan. By way of illustration and not limitation, the Plan
Administrator is empowered and authorized to make rules and regulations in
respect of the Plan not inconsistent with the Plan, the Code or ERISA; to
determine, consistently therewith, all questions that may arise as to the
eligibility, benefits, status and right of any person claiming benefits under
the Plan, including (without limitation) Participants, former Participants,
surviving spouses of Participants and beneficiaries; and subject to and
consistent with ERISA, to construe and interpret the Plan and correct any
defect, supply any omissions or reconcile any inconsistencies in the Plan, such
action to be final and conclusive on all persons claiming benefits under the
Plan.
9.3 Employment of Advisors. The Corporation shall have the authority
10
<PAGE>
to employ such legal, accounting, and financial counsel and advisers, as it
shall deem necessary in connection with the performance of its duties under the
Plan, and to act in accordance with the advice of such counsel and advisers.
Except as otherwise provided in the Plan, the fees and expenses of such counsel
and advisers shall be paid by the Corporation.
9.4 Delegation to Officers or Employees. The Corporation shall have
the power to delegate its duties under this Plan to officers or employees of the
Corporation and to other persons, all of whom, if employees of the Corporation,
shall serve without compensation other than their regular renumeration from the
Corporation.
11
<PAGE>
ARTICLE X
CLAIMS AND APPEALS
------------------
If any Participant shall dispute the correctness or applicability to
such Participant of a calculation of the Participants benefits under this Plan
or the applicability of any rule, procedure or regulation as applied to such
Participant, or if any Employee shall dispute or question a determination
concerning such Employee's right to participate under the Plan, such person
shall be entitled to make a written claim for review and determination of such
questions to the Plan Administrator. If a claim is wholly or partially denied,
the Plan Administrator shall, within a reasonable period of time, but not later
than ninety (90) days after receipt of the claim, provide to the claimant
written notice setting forth in a manner calculated to be understood by the
claimant:
(a) The specific reason or reasons for denial;
(b) Specific reference to the pertinent Plan provisions on which
the denial is based;
(c) A description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of why such
material or information is necessary; and
(d) An explanation of the Plan's claim review procedure.
A Participant whose claim for benefits under the Plan has been denied,
or his duly authorized representative, may request a review upon written
application to the Plan Administrator, may review pertinent documents, and may
submit issues and comments in writing. The claimant's written request for review
must be submitted to the Plan Administrator within sixty (60) days after receipt
by the claimant of written notification of the
12
<PAGE>
denial of a claim. A decision by the Plan Administrator shall be made promptly,
and not later than sixty (60) days after the Plan Administrator's receipt of a
request for review, unless special circumstances require an extension of time
for proceeding, in which case a decision shall be rendered as soon as possible,
but not later than one hundred twenty (120) days after receipt of the request
for review. The decision on review shall be in writing and shall include
specific reasons for the decision, specific reference to the pertinent Plan
provision on which the decision is based, and be written in a manner calculated
to be understood by the claimant.
13
<PAGE>
ARTICLE XI
AMENDMENT
---------
The Corporation reserves the right to amend, modify or terminate this
Plan. This Plan may also be amended by an individual or individuals designated
by the Board as having authority to amend this Plan. This Plan may be terminated
at any time by the Corporation. The Corporation makes no promise to continue
this Plan in the future.
14
<PAGE>
ARTICLE XII
MISCELLANEOUS PROVISIONS
------------------------
12.1 Indemnification for Liability. The Corporation shall, to the
full extent permitted by applicable state and federal law, indemnify any board
member, officer or employee of the Corporation who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or investigative)
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner which he
reasonably believed to be solely in the interest of the Participants and
beneficiaries of the Plan, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful;
provided further that:
(a) A person who discharges his duties with respect to the
Plan in a manner which he believes to be solely in the interest of its
Participants and beneficiaries shall be deemed to have acted in a manner which
he reasonably believes to be in (or not opposed to) the best interest of the
Corporation;
(b) This indemnification shall continue as to a person who has
ceased to be a director, officer, or employee and shall inure to the benefit of
the heirs, executors and administrators of such person;
(c) The Corp oration may retain such accountants, counsel or
other specialists as it deems necessary or desirable in connection with the
administration of the Plan and any beneficiary of this indemnity shall be
entitled to rely conclusively upon, and shall be fully protected and indemnified
in any action taken in good faith reliance upon any
15
<PAGE>
opinions or reports furnished to it in writing by such accountants, counsel or
other specialists.
12.2 Not an Employment Contract. The establishment of the Plan, the
creation of any account, or the payment of any benefit does not create in any
Employee, Participant or other party a right to continuing employment with the
Corporation.
12.3 No liability for Elections. The Corporation shall not be liable
for any Participant's election under the Plan, nor shall the Corporation be
deemed to have made any representations as to the value with respect to any
Participant of any benefit offered under the Plan.
12.4 Construction of Plan. This Plan shall be construed,
administered and governed in all respects under applicable federal law, and to
the extent that federal law is inapplicable, under the laws of the State of
Michigan.
12.5 Severability. Should any part of the Plan subsequently be
invalidated by a court of competent jurisdiction, the remainder thereof shall be
given effect to the maximum extent possible.
12.6 Fiscal Records and Reports. The fiscal records of the Plan are
to be maintained on the basis of the Plan Year. The Plan Administrator shall
exercise such authority and responsibility as it deems appropriate in order to
comply with the terms of the Plan relating to Participant records which are
maintained under this Plan.
12.7 Headings. The headings contained in the Plan are for reference
only, and they do not in any manner limit or expand the terms and provisions of
the Plan.
12.8 No Vested Interest. Except for the right to receive any benefit
payable under the Plan, no person shall have any right, title or interest in or
to the assets
16
<PAGE>
of the Corporation because of the Plan.
12.9 Limit on Liability. Nothing contained in the Plan shall impose
on the Corporation, or any board members, officers or employees of the
Corporation any liability for the payment of benefits under this Plan other than
liabilities resulting from willful neglect or fraud. The liability of the
Corporation for benefits shall be limited to the benefits provided under the
Plan. Persons entitled to benefits under the Plan shall look only to the
Corporation for payment.
12.10 Anti-Alienation. To the extent permitted by law, the right of
any Participant or any beneficiary to any benefit or to any payment hereunder
shall not be subject in any manner to attachment or other legal process for the
debts of such Participant or beneficiary; and any such benefit or payment shall
not be subject to anticipation, alienation, sale, transfer, assignment, or
encumbrance.
IN WITNESS WHEREOF, the Corporation has caused this Plan to be
executed in its name and behalf effective January 1, 1994.
DOW CORNING CORPORATION
______________________________
By: Richard A. Hazleton
Its: Chairman of the Board and
Chief Executive Officer
17
<PAGE>
DOW CORNING CORPORATION
EXECUTIVE COMPENSATION PLAN
---------------------------
SCHEDULE A (1994)
PROGRAM DESIGN
Target award levels are established as a percent of base salary to provide
competitive pay opportunities based on the Employer's performance. The 1994 ECP
is structured with two components:
Corporate Component (A)
-----------------------
A corporate component which rewards for profit growth. For each 1 percent
of growth over 1993 Adjusted Profit After Tax, the Participant will receive
4 percent of the target award level.
Individual Component (B)
------------------------
An individual component which rewards for achievement of established goals.
The actual payout is determined by the Participant's manager and can be up
to an additional 25% of the target award level.
The total earned under this Plan for the 1994 Plan Year is the sum of A + B.
DEFERRAL OPTION
A Participant may elect to defer all or a portion of the ECP payout. The
election to defer must be made by December 31, 1993 and is irrevocable. The
deferred compensation will be a general liability of the Employer and will earn
interest quarterly at money market rates as of the first week of each calendar
quarter.
<PAGE>
DOW CORNING CORPORATION
EXECUTIVE COMPENSATION PLAN
---------------------------
SCHEDULE A (1995)
PROGRAM DESIGN
Target award levels are established as a percent of base salary to provide
competitive pay opportunities based on the Employer's performance. The 1995 ECP
is structured with two components:
Corporate Component (A)
-----------------------
A corporate component which rewards for profit growth. For each 1 percent
of growth over 1994 Adjusted Profit After Tax, the Participant will receive
5.5 percent of the target award level.
Individual Component (B)
------------------------
An individual component which rewards for achievement of established goals.
The actual payout is determined by the Participant's manager and can be up
to an additional 25% of the target award level.
The total earned under this Plan for the 1995 Plan Year is the sum of A + B.
DEFERRAL OPTION
A Participant may elect to defer all or a portion of the ECP payout. The
election to defer must be made by December 31, 1994 and is irrevocable. The
deferred compensation will be a general liability of the Employer and will earn
interest quarterly at money market rates as of the first week of each calendar
quarter.
<PAGE>
DOW CORNING CORPORATION
EXECUTIVE COMPENSATION PLAN
---------------------------
SCHEDULE B
All distributions under this Plan shall be in cash and shall occur by the end of
the first quarter of the following Plan Year. Said distributions shall be based
on the Participant's earnings under this Plan for the prior Plan Year, plus any
deferred amounts that become due and payable, less any amounts from the prior
Plan Year that the Participant has elected to defer until future years.
<PAGE>
EXHIBIT A
1998 Executive Compensation Plan (ECP)
PURPOSE
The purpose of the Executive Compensation Plan (ECP) is to provide an annual
variable pay component based on individual, team, and corporate performance
measures which the executive can influence.
PARTICIPANTS
Participation is limited to a select group of executives who have significant
impact on corporate performance. Participants are selected annually by the
Chairman and Chief Executive Officer and approved by the Executive Committee of
the Board of Directors.
PLAN DESIGN
Target award levels are established as a percent of base salary to provide
competitive pay opportunities based on company performance. The 1998 ECP is
structured not only to reward for Adjusted PAT growth and individual
performance, but also for a successful SAP implementation.
. If SAP software implementation is successful:
- For each 1% growth in Adjusted PAT for the first 6% of growth, the
participant will earn 13% of the Corporate Performance Target Award.
- For each 1% growth in Adjusted PAT over 6%, the participant will earn an
additional 10% of the Corporate Performance Target Award.
. If SAP software implementation is NOT successful:
- For each 1% growth in Adjusted PAT, the participant will earn 10% of the
Corporate Performance Target Award.
. The individual performance component rewards for achievement of established
goals.
The actual payout is determined by the participant's manager.
INDIVIDUAL GOAL SETTING PROCESS
. Goals should be set according to principles of the performance improvement
process (PIP) and be aligned with team and corporate goals.
. Goals will be mutually agreed to by the participant and manager. The next
level manager will review goals and results for alignment and consistency.
. Goals should be accomplished by the participant within a specified time
period.
. Goals should impact area and global operating results.
10
<PAGE>
EXHIBIT A
DEFERRAL OPTION
A USD-paid participant may elect to defer all or a portion of the ECP payout.
The election to defer must be made by December 31, 1997 and is irrevocable. The
deferred compensation will be a general liability of the corporation and will
earn interest quarterly at money market rates as of the first week of each
calendar quarter.
GSP Participants: Please reference GSP pamphlet regarding the Annual Bonus
- ----------------
Deferral.
11
<PAGE>
EXHIBIT A
1998 ECP Corporate Performance Structure
If SAP Software Implementation is successful:
- ---------------------------------------------
For the first 6% of Adjusted PAT growth:
. For each 1% growth in Adjusted PAT, the participant will earn 13% of the
Corporate Performance Target Award.
If the Adjusted PAT growth exceeds 6%:
. For each 1% growth in Adjusted PAT over 6%, the participant will earn an
additional 10% of the Corporate performance Target Award.
If SAP Software Implementation is NOT successful
. For each 1% growth in Adjusted PAT, the participant will earn 10% of the
Corporate Performance Target Award.
12
<PAGE>
EXHIBIT A
ECP Payout Calculation
The formula for calculating the ECP payout is:
CORPORATE SPECIFIED
PAT X PROFIT GROWTH = A
GROWTH FACTOR(s)
CORPORATE
A X PERFORMANCE = B
B + INDIVIDUAL PERFORMANCE = C
ACTUAL
C X BASE = ECP PAYOUT
----------
EARNINGS
13
<PAGE>
EXHIBIT 10.2
FIRST AMENDMENT TO THE DOW CORNING CORPORATION
EXECUTIVE COMPENSATION PLAN
Prepared by:
Kelly M. Hayes
SIEGEL, GREENFIELD, HAYES & GROSS, P.L.C.
2000 Town Center, Suite 2700
Southfield, MI 48075
248-386-5900
FIRST AMENDMENT TO THE DOW CORNING CORPORATION
EXECUTIVE COMPENSATION PLAN
---------------------------
July 27, 1999
<PAGE>
This FIRST AMENDMENT to the DOW CORNING CORPORATION EXECUTIVE COMPENSATION
PLAN is adopted, effective the 1/st/ day of January, 1999.
R E C I T A L S
WHEREAS, DOW CORNING CORPORATION (the "Corporation") adopted an Executive
Compensation Plan, effective January 1, 1994; and
WHEREAS, the Corporation now desires to amend said Plan to reflect certain
changes to be made by the Corporation to the Plan.
NOW, THEREFORE, the Corporation hereby adopts this First Amendment to the
Plan, effective January 1, 1999.
1. Article I is hereby amended in its entirety to read as follows:
ARTICLE I
PURPOSE
Dow Corning Corporation hereby establishes this Executive Compensation Plan
for the benefit of its Eligible Employees. The purpose of this Plan is to
provide an annual variable pay component based on individual, team, and
corporate performance measures which the Participant can influence.
2. Article II is hereby amended by the addition of new Sections
2.11, 2.12 and 2.13 to read as follows:
2.11 "EBIT" -- "Earnings Before Interest and Taxes" -- means sales revenue,
--------------------------------------------
less all product and non-product costs, and excluding or adjusting for the
following: (i) the expenses directly related to the Corporation's case entered
in the United States Bankruptcy Court for the Eastern District of Michigan on
May 15, 1995, case number 95-20572; (ii) net interest expense; (iii)
<PAGE>
adjustments for material gains or losses as the result of accounting rule
changes, acquisitions and divestitures, and other significant special charges.
2.12 "Global Savings Plan" ("GSP") means the Dow Corning Corporation
--------------------------
Global Savings Plan.
2.13 "Leave of Absence" means a period of time when a Participant is not
----------------
actively at work, is not on vacation or is not utilizing personal time, but said
Participant is still deemed to be an employee of the Corporation.
3. Article III, Section 3.1 is amended to read as follows:
3.1 Eligibility. Only those Employees who occupy executive or management
-----------
positions and are selected annually by the Chairman and Chief Executive Officer,
with approval of the Board (or a Committee designated by the Board), shall be
allowed to participate in this Plan.
4. Article IV is hereby amended in its entirety to read as follows:
ARTICLE IV
BENEFITS OFFERED UNDER THIS PLAN
4.1 Benefits. The benefits to be offered under the Plan for any Plan
--------
Year shall be those as listed on Schedule A, attached hereto and incorporated
herein by reference. The Corporation reserves the right to amend Schedule A at
any time.
4.2 Leave of Absence. If a Participant takes a Leave Of Absence during
----------------
a Plan Year and returns to active employment with the Corporation within six (6)
months of the first day of the Leave Of Absence, the calculation of the Plan
Benefits shall be pursuant to Section 4.1, based on the base salary received by
the Participant during the portion of the Plan Year that the Participant was not
on the Leave of Absence.
If the Leave Of Absence exceeds six (6) months, the Participant will not be
eligible for a benefit
2
<PAGE>
under this Plan for the Plan Year in which the Leave Of Absence began, and any
subsequent Plan Years in which the Leave of Absence occurs. If, however, a
Participant is taking a Leave Of Absence to accompany a spouse who also works
for the Corporation, the Participant's benefit shall be calculated pursuant to
Section 4.1.
4.3 Retirement. If a Participant retires from active employment during a
----------
Plan Year, the benefits payable under the Plan shall be pursuant to Section 4.1.
4.4 Termination of Employment. If a Participant terminates employment
-------------------------
during a Plan Year, the Participant shall neither accrue nor receive a benefit
for that Plan Year.
5. Article VII, Section 7.1, is hereby amended in its entirety to
read as follows:
7.1 Election Procedure. Each Participant who is paid in U.S. dollars shall
------------------
be entitled to make an irrevocable election to defer receipt of any whole
percentage of the amount that would otherwise be awarded and payable by the
Corporation to the Participant for any particular Plan Year. Said election must
be made prior to January 1 of the Plan Year in which the services are performed
by the Participant which result in the benefits accruing under this Plan. Said
election shall also indicate the future year in which the deferred amount will
be payable to the Participant.
6. Article VII is hereby amended by the addition of a new paragraph
7.3 to read as follows:
7.3 Deferral to Global Savings Plan. If a Participant of this Plan is also
-------------------------------
a Participant of the Global Savings Plan, the Participant shall be entitled to
make an irrevocable election to defer receipt of any whole percentage of the
amount that would otherwise be awarded and payable by the Corporation to the
Participant for any particular Plan Year, to the Participant's Global Savings
Plan Account. Said deferral amount shall be invested pursuant to the
Participant's instructions with respect to his Global Savings Plan account.
Said election must be made prior to January 1 of the Plan
3
<PAGE>
Year in which the services are performed by the Participant which result in the
benefit accruing under this Plan. Any amount deferred to the Global Savings Plan
shall be subject to the distribution provisions of the Global Savings Plan.
All other provisions of the Plan not herein amended, are hereby ratified
and reaffirmed.
IN WITNESS WHEREOF, the Corporation has caused this First Amendment to the
Plan to be adopted, effective January 1, 1999.
WITNESSES: DOW CORNING CORPORATION
______________________________
by__________________________________
______________________________ RICHARD A. HAZLETON
Its Chairman of the Board and Chief
Executive Officer
4
<PAGE>
EXHIBIT 10.3
DOW CORNING CORPORATION
EMPLOYEES' SEVERANCE PAY PLAN
Effective: August 11, 1995
Prepared by:
Kelly M. Hayes
Keywell and Rosenfeld
2301 West Big Beaver Road, Suite 600
Troy, Michigan 48084
(810) 649-3200
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I PURPOSE............................................... 1
ARTICLE II DEFINITIONS........................................... 2
ARTICLE III PARTICIPATION......................................... 5
3.1 Participation................................... 6
3.2 Exclusions...................................... 6
3.3 Good Reason..................................... 7
ARTICLE IV SEVERANCE PAY BENEFITS PROVIDED
UNDER THIS PLAN....................................... 9
4.1 Involuntary Termination......................... 9
4.2 Involuntary Termination following
Change in Control............................... 9
ARTICLE V FUNDING............................................... 10
ARTICLE VI DISTRIBUTION PROCEDURES............................... 11
6.1 Lump-Sum Distributions.......................... 11
6.2 Change in Control Distributions................. 11
ARTICLE VII ADMINISTRATION AND FIDUCIARIES........................ 13
7.1 Plan Administration............................. 13
7.2 Discretionary Authority of Plan
Administrator................................... 13
7.3 Fiduciaries..................................... 14
7.4 Employment of Advisors.......................... 14
7.5 Delegation to Officers or Employees............. 14
ARTICLE VIII CLAIMS AND APPEALS.................................... 15
8.1 Claims and Appeals.............................. 15
8.2 Arbitration..................................... 16
ARTICLE IX AMENDMENT OR TERMINATION.............................. 17
ARTICLE X MISCELLANEOUS PROVISIONS.............................. 18
10.1 Indemnification for Liability................... 18
10.2 Not an Employment Contract...................... 19
10.3 Construction of Plan............................ 19
10.4 Severability.................................... 19
10.5 Fiscal Records and Reports...................... 19
10.6 Headings........................................ 20
10.7 No Vested Interest.............................. 20
10.8 Limit on Liability.............................. 20
10.9 Anti-Alienation................................. 20
</TABLE>
<PAGE>
DOW CORNING CORPORATION
EMPLOYEES' SEVERANCE PAY PLAN
-----------------------------
ARTICLE I
PURPOSE
-------
The purpose of this Plan is to provide salary/income continuance
benefits to certain employees of Dow Corning Corporation.
<PAGE>
ARTICLE II
DEFINITIONS
-----------
The following words and phrases as used herein shall have the
following meanings, unless a different meaning is plainly required by the
context. Pronouns shall be interpreted so that the masculine pronouns shall
include the feminine and the singular shall include the plural:
2.1 "Board" means the Board of Directors of Dow Corning Corporation.
2.2 "Case" means the Chapter 11 Case commenced by the Employer on May
15, 1995 in the United States Bankruptcy Court for the Eastern District of
Michigan, Northern Division, Case no. 95-20512.
2.3 "Code" means the Internal Revenue Code of 1986, as amended.
2.4 "Change in Control" means an event which results in The Dow
Chemical Company and Corning Incorporated collectively owning less than 51% of
the issued and outstanding voting common stock of Dow Corning Corporation.
2.5 "ECP" means the Executive Compensation Plan, an incentive
deferred compensation plan sponsored by Dow Corning Corporation.
2.6 "Effective Date" means August 11, 1995.
2.7 "Eligible Employee" means any Employee who meets one (1) of the
following requirements:
a. an Employee who is employed by the Employer within the
confines of the United States, and is on the United States payroll of the
Employer; or
2
<PAGE>
b. an Employee who is a citizen of the United States, but who
is assigned overseas by the Employer on an expatriate assignment.
2.8 "Employee" means any person engaged by the Employer to perform
personal services in an Employer/Employee relationship who receives compensation
from the Employer other than a retirement benefit, severance pay, retainer or
fee under contract. The term "Employee" shall not include:
a. Any leased employees;
b. Any person represented by a labor organization having a
collective bargaining agreement with the Employer;
c. Any person participating in a student employment program, or
Co-op program, as those terms are defined in the Employer's personnel policies
or any person who is on leave or vacation from another employer; and
d. Any person who is not employed by the Employer, but rather,
is employed by a subsidiary or entity related to the Employer.
2.9 "Employer" means Dow Corning Corporation and any other business
organization which succeeds to its business, but not any subsidiary or affiliate
of Dow Corning Corporation.
2.10 "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
2.11 "MIP" means the Management Incentive Plan, an incentive
compensation plan sponsored by Dow Corning Corporation.
2.12 "Participant" means any Eligible Employee who has met the
conditions for participation set forth in Article III.
3
<PAGE>
2.13 "Plan" means the Dow Corning Corporation Employees' Severance Pay
Plan as set forth herein, together with any and all amendments and supplements
hereto.
2.14 "Plan Administrator" means the Employer or any individual or
entity designated by the Employer.
2.15 "Plan Year" means each twelve (12) month period commencing on
January 1st and ending on the following December 31st. The first Plan Year
shall commence on the Effective Date and end on December 31, 1995.
2.16 "VCP" means the Variable Compensation Plan, an incentive
compensation plan sponsored by Dow Corning Corporation.
2.17 "Year of Service" means a Plan Year (or a calendar year, for the
period of time prior to the Effective Date of this Plan) in which an Eligible
Employee works or is deemed to have worked at least 1,950 hours for the
Employer. An Eligible Employee shall be credited during each Plan Year with
one-tenth of a Year of Service for each 195 hours the Eligible Employee works,
or is deemed to have worked for the Employer. In no event shall an Eligible
Employee be credited with more than one Year of Service in any single Plan Year.
Employment with a subsidiary of the Employer, or with The Dow Chemical Company
or Corning, Inc., including employment prior to the Effective Date, shall be
included in the determination of Years of Service under this Plan.
4
<PAGE>
ARTICLE III
PARTICIPATION
-------------
3.1 Participation. The Eligible Employees who shall be allowed to
participate in this Plan shall be those Eligible Employees:
a. whose employment with the Employer is involuntarily
terminated, as provided in this Article III; and
b. who agree to execute a document in a form substantially
similar to Schedule C (for those Eligible Employees who have attained age 40) or
Schedule D (for all other Eligible Employees) releasing the Employer from any
and all actions, suits, proceedings, claims, and demands related to the
termination of employment.
3.2 Exclusions. Although an Eligible Employee's employment may be
involuntarily terminated, said Eligible Employee shall, nevertheless, not become
a Participant in the Plan if one (1) of the following occurs:
a. the Eligible Employee resigns (except for those Eligible
Employees who resign for "good reason" as that term is defined in Section 3.3,
and they meet the requirements of Section 3.3);
b. the Eligible Employee is terminated "for cause." Cause for
termination includes, but is not limited to, theft, dishonesty, fraudulent,
criminal, or illegal conduct that is material in nature or material violations
of the Dow Corning Corporation Code of Conduct or other personnel policies of
the Employer;
c. the Eligible Employee breaches the terms of any written
employment agreement with the Employer;
5
<PAGE>
d. the Eligible Employee is involuntarily terminated by the
Employer due to a sale of all or part of the Employer's assets or business, or
the sale of a particular division, but the acquiring or purchasing entity offers
employment to such Eligible Employee at a compensation and benefits level which
is comparable to the compensation and benefits level of such Eligible Employee
immediately prior to such involuntarily termination. The determination of
comparability shall be made by an independent third-party employee benefits
consulting firm selected by the Employer;
e. the Eligible Employee becomes "totally and permanently
disabled" as that term is defined in the Employer's long-term disability plans;
or
f. the Eligible Employee is an inpatriate who is returned to
the non-U.S. affiliate or branch of the Employer in the country from which the
Eligible Employee was originally transferred.
3.3 Good Reason. If an Eligible Employee who is a participant in
either the ECP or the MIP resigns for good reason, said resignation shall be
considered an involuntary termination for purposes of this Article III. Good
Reason shall mean:
(i) If within eighteen months of a Change of Control an Eligible
Employee's base salary is reduced below the higher of (x) the amount in effect
immediately prior to the Change of Control and (y) the highest amount in effect
at any time thereafter, the Eligible Employee may resign his employment within
90 days of the occurrence of such reduction, and such resignation shall be
considered an involuntary termination.
(ii) If within eighteen months of a Change of Control, an
Eligible Employee's duties and responsibilities or the program of benefits
offered to an Eligible Employee are materially and adversely diminished in
comparison to the duties and
6
<PAGE>
responsibilities or the program of benefits enjoyed by the Eligible Employee
immediately prior to the Change of Control, the Eligible Employee may resign his
employment within 90 days of the occurrence of such reduction and such
resignation shall be considered an involuntary termination.
(iii) If within eighteen months of a Change of Control an
Eligible Employee is required to be based at a location more than 50 miles from
the location where the Eligible Employee was based and performed services
immediately prior to the Change of Control, the Eligible Employee may resign his
employment within 90 days of such relocation and such resignation shall be
considered an involuntary termination.
7
<PAGE>
ARTICLE IV
SEVERANCE PAY BENEFITS PROVIDED UNDER THIS PLAN
-----------------------------------------------
4.1 Involuntary Termination. Those Participants whose employment is
terminated by the Employer shall be entitled to receive the severance pay
benefits set forth on Schedule A, which is attached hereto and incorporated
herein by reference. Provided, however, those Participants who are eligible to
receive severance pay benefits pursuant to Paragraph 4.2 herein shall not also
be eligible to receive the severance pay benefits under this Paragraph 4.1. The
Employer shall have discretion to enhance the Schedule A severance benefits in
its business judgment in order to make the Plan competitive.
4.2 Involuntary Termination following Change in Control. Those
Participants whose employment is involuntarily terminated within twelve months
for VCP participants or eighteen months for MIP or ECP participants after a
Change in Control shall be entitled to receive the severance pay benefits set
forth on Schedule B, which is attached hereto and incorporated herein by
reference. The Employer shall have discretion to provide MIP severance benefits
to VCP participants as set forth in Schedule B when determined in its reasonable
business judgment to be necessary and appropriate.
8
<PAGE>
ARTICLE V
FUNDING
-------
Funding from General Assets. All contributions to this Plan shall be
from the general assets of the Employer. Funds invested hereunder shall continue
for all purposes to be part of the general funds of the Employer, and no person
other than the Employer shall, by virtue of the provisions of this Plan, have
any interest in such funds. To the extent that any person acquires a right to
receive payment from the Employer under paragraph 4.1 of this Plan during the
Case, such rights shall constitute an administrative priority claim in the Case.
To the extent that any person acquires a right to receive payments from the
Employer under this Plan, after consummation of a plan of reorganization in the
Case, such rights shall be no greater than the right of any unsecured general
creditor of the Employer.
9
<PAGE>
ARTICLE VI
DISTRIBUTION PROCEDURES
-----------------------
6.1 Lump-Sum Distributions. Except as provided in Paragraph 6.2, the
Employer shall distribute applicable severance pay benefits to Participants in a
single lump sum payment, less any withholdings required by law. Severance pay
benefits shall be distributed by the Employer as soon as administratively
feasible, but no later than 60 days after the date of involuntary termination.
6.2 Change in Control Distributions. Those Participants who are
eligible to receive an enhanced severance benefit as a result of their
participation in the ECP shall have the option of either receiving a lump sum
cash payment of the 18 months salary plus target bonus as set forth on Schedule
B or receiving a lump sum cash payment of 50% of the Participant's salary plus
target bonus, for a 21-month period, with the balance of the 21 months salary
plus target bonus being paid in 11 equal monthly installments, commencing 11
months after the date of involuntary termination.
Any lump sum payments made pursuant to this Paragraph 6.2 shall be
made as soon as is administratively feasible, but no later than 60 days after
the date of involuntary termination.
In the event of the death of a Participant prior to the completion of
severance payments hereunder, the balance owed to the Participant shall be paid
to the Participant's estate in a lump sum payment within 60 days of the date of
death of the Participant.
10
<PAGE>
Any monthly installments payable pursuant to this Paragraph 6.2 shall
be reduced by the amount of any monthly salary or wages actually received by the
Participant through alternative employment during the period of the monthly
severance payments.
11
<PAGE>
ARTICLE VII
ADMINISTRATION AND FIDUCIARIES
------------------------------
7.1 Plan Administration. The Plan Administrator shall have the
authority to control and manage the operation and administration of the Plan and
to construe and interpret its terms. The Plan Administrator shall decide all
questions of eligibility to participate under the Plan and shall determine the
amount, manner and time of payment of any benefit under the Plan and, in the
exercise of its discretion hereunder, the decisions of the Plan Administrator
shall be final and binding on all parties. The Plan Administrator may delegate
responsibilities for the operation and administration of the Plan. The Plan
Administrator shall have the authority to determine the Plan's policies, to
appoint and remove fiduciaries, fix their compensation, if any, and exercise
general supervisory authority over them.
7.2 Discretionary Authority of Plan Administrator. The Plan
Administrator shall have any and all power and authority (including discretion
with respect to the exercise of that power and authority) which shall be
necessary, properly advisable, desirable or convenient to enable it to carry out
its duties under the Plan. By way of illustration and not limitation, the Plan
Administrator is empowered and authorized to make rules and regulations in
respect of the Plan not inconsistent with the Plan, the Code or ERISA; to
determine, consistently therewith, all questions that may arise as to the
eligibility, benefits, status and right of any person claiming benefits under
the Plan, including (without limitation) Participants, former Participants,
surviving spouses of Participants and
12
<PAGE>
beneficiaries; and subject to and consistent with ERISA, to construe and
interpret the Plan and correct any defect, supply any omissions or reconcile any
inconsistencies in the Plan, such action to be final and conclusive on all
persons claiming benefits under the Plan.
7.3 Fiduciaries. The Employer shall be the named fiduciary of this
Plan, which is an "employee welfare benefit plan," as said term is defined in
ERISA. The Employer shall have only those duties, responsibilities, and
obligations (referred to collectively as "fiduciary duties") as specifically are
given it under this Plan or as otherwise are imposed by applicable law. The
Employer may allocate its fiduciary duties under this Plan to other Plan
fiduciaries by written agreement between the Employer and such other fiduciary.
7.4 Employment of Advisors. The Employer shall have the authority to
employ such legal, accounting, and financial counsel and advisers, as it shall
deem necessary in connection with the performance of its duties under the Plan,
and to act in accordance with the advice of such counsel and advisers. Except as
otherwise provided in the Plan, the fees and expenses of such counsel and
advisers shall be paid by the Employer.
7.5 Delegation to Officers or Employees. The Employer shall have the
power to delegate its fiduciary duties under this Plan to officers or employees
of the Employer and to other persons, all of whom, if employees of the Employer,
shall serve without compensation other than their regular remuneration from the
Employer.
13
<PAGE>
ARTICLE VIII
CLAIMS AND APPEALS
------------------
8.1 Claims and Appeals. If any Participant shall dispute the
correctness or applicability to such Participant of a benefit elected or deemed
to be elected by the Participant pursuant to the Plan or the applicability of
any rule, procedure or regulation as applied to such Participant, or if any
Employee shall dispute or question a determination concerning such Employee's
right to participate under the Plan, such person shall be entitled to make a
written claim for review and determination of such questions to the Plan
Administrator. If a claim is wholly or partially denied, the Plan Administrator
shall, within a reasonable period of time, but not later than ninety (90) days
after receipt of the claim, provide to the claimant written notice setting forth
in a manner calculated to be understood by the claimant:
(a) The specific reason or reasons for denial;
(b) Specific reference to the pertinent Plan provisions on which
the denial is based;
(c) A description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of why such
material or information is necessary; and
(d) An explanation of the Plan's claim review procedure.
A Participant whose claim for benefits under the Plan has been denied,
or his duly authorized representative, may request a review upon written
application to the Plan Administrator, may review pertinent documents, and may
submit issues and comments in
14
<PAGE>
writing. The claimant's written request for review must be submitted to the Plan
Administrator within sixty (60) days after receipt by the claimant of written
notification of the denial of a claim. A decision by the Plan Administrator
shall be made promptly, and not later than sixty (60) days after the Plan
Administrator's receipt of a request for review, unless special circumstances
require an extension of time for proceeding, in which case a decision shall be
rendered as soon as possible, but not later than one hundred twenty (120) days
after receipt of the request for review. The decision on review shall be in
writing and shall include specific reasons for the decision, specific reference
to the pertinent Plan provision on which the decision is based, and be written
in a manner calculated to be understood by the claimant.
8.2 Arbitration. Unless an arbitration proceeding is unenforceable
due to federal or state law, any controversy arising out of or relating to this
Plan shall be settled by arbitration in accordance with the rules and
regulations then applicable under the American Arbitration Association in the
State of Michigan, and the judgment upon the award rendered may be entered in
any court having jurisdiction thereof and shall be binding and conclusive.
15
<PAGE>
ARTICLE IX
AMENDMENT OR TERMINATION
------------------------
This Plan may only be amended, modified, or terminated by resolution
of the Employer's Board. Provided, however, this Plan may not be terminated
until two years after the consummation of a plan of reorganization in the Case.
The Employer makes no promise to continue the Plan in the future other
than the statement made in the preceding paragraph.
16
<PAGE>
ARTICLE X
MISCELLANEOUS PROVISIONS
------------------------
10.1 Indemnification for Liability. The Employer shall, to the full
extent permitted by applicable state and federal law, or a court of competent
jurisdiction, indemnify any board member, officer or employee of the Employer
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (whether civil, criminal,
administrative or investigative) and who is (or who is alleged to be) a
fiduciary with respect to the Plan against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner which he reasonably believed to be solely in the interest
of the Participants and beneficiaries of the Plan, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful; provided further that:
(a) A person who discharges his duties with respect to the Plan
in a manner which he believes to be solely in the interest of its Participants
and beneficiaries shall be deemed to have acted in a manner which he reasonably
believes to be in (or not opposed to) the best interest of the Employer;
(b) This indemnification shall continue as to a person who has
ceased to be a director, officer, or employee and shall inure to the benefit of
the heirs, executors and administrators of such person;
(c) The Employer may retain such accountants, counsel or other
specialists as it deems necessary or desirable in connection with the
administration of the
17
<PAGE>
Plan and any beneficiary of this indemnity shall be entitled to rely
conclusively upon, and shall be fully protected and indemnified in any action
taken in good faith reliance upon any opinions or reports furnished to it in
writing by such accountants, counsel or other specialists.
10.2 Not an Employment Contract. The establishment of the Plan, the
creation of any account, or the payment of any benefit does not create in any
Employee, Participant or other party a right to continuing employment with
Employer nor does it alter any of the Employer's existing personnel policies.
10.3 Construction of Plan. This Plan shall be construed, administered
and governed in all respects under applicable federal law, and to the extent
that federal law is inapplicable, under the laws of the State of Michigan.
10.4 Severability. Should any part of the Plan subsequently be
invalidated by a court of competent jurisdiction, the remainder thereof shall be
given effect to the maximum extent possible.
10.5 Fiscal Records and Reports. The fiscal records of the Plan are to
be maintained on the basis of the Plan Year. The Plan Administrator shall
exercise such authority and responsibility as it deems appropriate in order to
comply with the terms of the Plan relating to Participant records which are
maintained under this Plan. The Plan Administrator shall be responsible for
complying with all reporting, filing and disclosure requirements established by
the Internal Revenue Service.
10.6 Headings. The headings contained in the Plan are for reference
only, and they do not in any manner limit or expand the terms and provisions of
the Plan.
18
<PAGE>
10.7 No Vested Interest. Except for the right to receive any benefit
payable under the Plan, no person shall have any right, title or interest in or
to the assets of the Employer because of the Plan.
10.8 Limit on Liability. Except as provided herein, nothing contained
in the Plan shall impose on the Employer, or any board members, officers or
employees of the Employer any liability for the payment of benefits under this
Plan other than liabilities resulting from willful neglect or fraud. The
liability of the Employer for benefits shall be limited to the benefits provided
under the Plan.
10.9 Anti-Alienation. To the extent permitted by law, the right of any
Participant or any beneficiary to any benefit or to any payment hereunder shall
not be subject in any manner to attachment or other legal process for the debts
of such Participant or beneficiary; and any such benefit or payment shall not be
subject to anticipation, alienation, sale, transfer, assignment, or encumbrance.
IN WITNESS WHEREOF, the Employer has caused this Plan to be executed
in its name and behalf effective August 11, 1995.
DOW CORNING CORPORATION
_________________________________________
By: Richard A. Hazleton
Its: Chairman of the Board and
Chief Executive Officer
<PAGE>
Dow Corning Corporation
Employees' Severance Pay Plan
Schedule A
Severance Pay Benefits Provided Upon Involuntary Termination
------------------------------------------------------------
YEARS OF SERVICE SEVERANCE BENEFIT
- ---------------- -----------------
Up to 2 years 1 Months Salary
2-5 years 2 Months Salary
5-10 years 3 Months Salary
10-15 years 4 Months Salary
15-20 years 5 Months Salary
20 years and over 6 Months Salary
<PAGE>
Dow Corning Corporation
Employees' Severance Pay Plan
Schedule B
Severance Pay Benefits Provided Upon Involuntary Termination When
-----------------------------------------------------------------
Such Involuntary Termination Occurs After A Change In Control
- -------------------------------------------------------------
I. Participants in the Dow Corning Corporation Variable Compensation Plan will
receive the following severance pay benefits if they are involuntarily
terminated within 12 months after a Change in Control:
YEARS OF SERVICE SEVERANCE BENEFIT
- ---------------- -----------------
Up to 2 years 3 Months Salary
2-5 years 6 Months Salary
5-10 years 9 Months Salary
10-15 years 12 Months Salary
15-20 years 15 Months Salary
20 years and over 18 Months Salary
II. Participants in the Dow Corning Corporation Management Incentive Plan will
receive the following severance pay benefits if they are involuntary
terminated within 18 months after a Change in Control:
Eighteen (18) months salary plus annual target bonus
III. Participants in the Dow Corning Corporation Executive Compensation Plan
will receive the following severance pay benefits if they are involuntarily
terminated within 18 months after a Change in Control:
Eighteen (18) months salary plus annual target bonus, except those ECP
Participants who elect the alternate distribution option contained in
Paragraph 6.2.
<PAGE>
EXHIBIT 10.4
DOW CORNING CORPORATION
RESTATED SUPPLEMENTAL BENEFIT PLAN
Prepared by:
Kelly M. Hayes
Keywell and Rosenfeld
2301 W. Big Beaver Road, Suite 600
Troy, Michigan 48084
(810) 649-3200
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I
BACKGROUND AND PURPOSE.......................................... 1
- ----------------------
1.1 Background............................................ 1
1.2 Purpose............................................... 1
ARTICLE II
DEFINITIONS..................................................... 2
- -----------
ARTICLE III
ELIGIBILITY AND PARTICIPATION................................... 4
- -----------------------------
ARTICLE IV
BENEFITS OFFERED UNDER THIS PLAN................................ 5
- --------------------------------
ARTICLE V
FUNDING......................................................... 6
- -------
5.1 Funding from General Assets........................... 6
5.2 Trust or Escrow Arrangement........................... 6
ARTICLE VI
DISTRIBUTION PROCEDURES......................................... 7
- --------------
ARTICLE VII
VESTING......................................................... 8
- -------
7.1 General Vesting....................................... 8
7.2 Discretionary Vesting................................. 8
ARTICLE VIII
ADMINISTRATION.................................................. 9
- --------------
8.1 Plan Administration................................... 9
8.2 Discretionary Authority of Plan Administrator......... 9
8.3 Employment of Advisors................................ 10
8.4 Delegation to Officers or Employees................... 10
ARTICLE IX
CLAIMS AND APPEALS.............................................. 11
- ------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE X
AMENDMENT....................................................... 13
- ---------
ARTICLE XI
MISCELLANEOUS PROVISIONS........................................ 14
- ------------
11.1 Indemnification for Liability......................... 14
11.2 Not an Employment Contract............................ 15
11.4 Construction of Plan.................................. 15
11.5 Severability.......................................... 15
11.6 Fiscal Records and Reports............................ 15
11.7 Headings.............................................. 16
11.8 No Vested Interest.................................... 16
11.9 Limit on Liability.................................... 16
11.10 Anti-Alienation....................................... 16
</TABLE>
<PAGE>
DOW CORNING CORPORATION
RESTATED SUPPLEMENTAL BENEFIT PLAN
----------------------------------
ARTICLE I
BACKGROUND AND PURPOSE
----------------------
1.1 Background. On April 1, 1983, Dow Corning Corporation established
this Supplemental Benefit Plan. As a result of changes in the Internal Revenue
Code and the Employee Retirement Income Security Act of 1974, Dow Corning
Corporation now finds it necessary to amend and restate this Plan. Dow Corning
Corporation hereby adopts this First Amendment and Restatement to the
Supplemental Benefit Plan effective as indicated herein.
1.2 Purpose. The purpose of this Plan is to provide additional
retirement income to certain Eligible Employees whose benefit under the Dow
Corning Corporation Employees' Retirement Plan is limited as a result of Section
401(a)(17) or Section 415 of the Internal Revenue Code of 1986. In addition,
each Plan is designed to provide additional retirement income to those Employees
who receive compensation which is not included in the definition of compensation
for calculation of a retirement benefit under the Dow Corning Corporation
Employees' Retirement Plan.
<PAGE>
ARTICLE II
DEFINITIONS
-----------
The following words and phrases as used herein shall have the
following meanings, unless a different meaning is plainly required by the
context. Pronouns shall be interpreted so that the masculine pronoun shall
include in the feminine and the singular shall include the plural:
2.1 "Board" means the Board of Directors of Dow Corning Corporation.
2.2 "Code" means the Internal Revenue Code of 1986, as amended.
2.3 "Corporation" means Dow Corning Corporation and any other
business organization which succeeds to its business and elects to continue this
Plan, or any other related entity which adopts this Plan with the consent of the
Board.
2.4 "Effective Date" means April 1, 1983.
2.5 "Restatement Effective Date" means January 1, 1989.
2.6 "Eligible Employee" means any Employee who meets the requirements
of Section 3.1.
2.7 "Employee" means any person who meets the definition of
"Employee" contained in the ERP.
2.8 "ERISA" means the Employee Retirement Income Security Act of 1974
and all amendments thereto.
2.9 "ERP" means the Dow Corning Corporation Employees' Retirement
Plan, together with any and all amendments and supplements thereto.
2.10 "Participant" means any Eligible Employee who has met the
2
<PAGE>
conditions for participation set forth in Article III.
2.11 "Plan" means the Dow Corning Corporation Restated Supplemental
Benefit Plan as set forth herein, together with any and all amendments and
supplements hereto.
2.12 "Plan Administrator" means the Corporation or any individual or
entity designated by the Corporation.
2.13 "Plan Year" means each twelve (12) month period commencing on
January 1st and ending on the following December 31st.
3
<PAGE>
ARTICLE III
ELIGIBILITY AND PARTICIPATION
-----------------------------
Eligibility and Participation. The following Employees shall
participate in this Plan:
a. For the period from April 1, 1983 to December 31, 1988, all
Employees whose benefit under the ERP is limited by the provisions of Section
415 of the Code or whose retirement benefit is less than the retirement benefit
they should receive because certain compensation they received is not included
in the definition of compensation for the calculation of a retirement benefit
contained in the ERP;
b. For the period after December 31, 1988, all Employees whose
benefit under the ERP is limited by the provisions of Section 401(a)(17) or
Section 415 of the Code, as well as those Employees whose retirement benefit is
less than the retirement benefit they should receive because certain
compensation they received is not included in the definition of compensation for
the calculation of a retirement benefit contained in the ERP;
c. Those Employees designated by the Corporation to receive
additional benefits as part of an early retirement agreement, or some other type
of retirement agreement.
4
<PAGE>
ARTICLE IV
BENEFITS OFFERED UNDER THIS PLAN
--------------------------------
The benefits offered under this Plan are those listed on Schedule A
attached hereto and incorporated herein by reference. The Corporation reserves
the right to amend Schedule A at any time.
5
<PAGE>
ARTICLE V
FUNDING
-------
5.1 Funding from General Assets. All contributions to this Plan
shall be from the general assets of the Corporation. Funds invested hereunder
shall continue for all purposes to be part of the general funds of the
Corporation, and no person other than the Corporation shall, by virtue of the
provisions of this Plan, have any interest in such funds. To the extent that
any person acquires a right to receive payments from the Corporation under this
Plan, such right shall be no greater than the right of any unsecured general
creditor of the Corporation.
5.2 Trust or Escrow Arrangement. The Corporation, in its sole
discretion, may establish a Grantor Trust or other form of escrow for purposes
of setting aside amounts for Participants under this Plan. Establishment of a
Grantor Trust shall not result in any amounts being made available to the
Participant or otherwise set aside for the Participant in a funded plan within
the meaning of Part 3 of ERISA. Such amounts shall continue to represent the
general assets of the Corporation and shall be subject to the claims of the
Corporation's general creditors.
6
<PAGE>
ARTICLE VI
DISTRIBUTION PROCEDURES
-----------------------
The distribution of benefits under this Plan shall be pursuant to the
provisions set forth on Schedule B attached hereto and incorporated herein by
reference. The Corporation reserves the right to amend Schedule B at any time.
7
<PAGE>
ARTICLE VII
VESTING
-------
7.1 General Vesting. The vesting provisions for each Participant
under this Plan shall be identical to those vesting provisions applicable to
said Participant under the ERP.
7.2 Discretionary Vesting. The Corporation, by its Board, or any
person or persons to whom the Board may delegate authority, may change the
vesting requirements for this Plan as they pertain to individual Participants,
on a case by case basis.
8
<PAGE>
ARTICLE VIII
ADMINISTRATION
--------------
8.1 Plan Administration. The Plan Administrator shall have the
authority to control and manage the operation and administration of the Plan and
to construe and interpret its terms. The Plan Administrator shall decide all
questions of eligibility to participate under the Plan and shall determine the
amount, manner and time of payment of any benefit under the Plan and, in the
exercise of its discretion hereunder, the decisions of the Plan Administrator
shall be final and binding on all parties. The Plan Administrator may delegate
responsibilities for the operation and administration of the Plan. The Plan
Administrator shall have the authority to determine the Plan's policies.
8.2 Discretionary Authority of Plan Administrator. The Plan
Administrator shall have any and all power and authority (including discretion
with respect to the exercise of that power and authority) which shall be
necessary, properly advisable, desirable or convenient to enable it to carry out
its duties under the Plan. By way of illustration and not limitation, the Plan
Administrator is empowered and authorized to make rules and regulations in
respect of the Plan not inconsistent with the Plan, the Code or ERISA; to
determine, consistently therewith, all questions that may arise as to the
eligibility, benefits, status and right of any person claiming benefits under
the Plan, including (without limitation) Participants, former Participants,
surviving spouses of Participants and beneficiaries; and subject to and
consistent with ERISA, to construe and interpret the Plan and correct any
defect, supply any omissions or reconcile any inconsistencies in the Plan, such
action to be final and conclusive on all persons claiming benefits under the
Plan.
8.3 Employment of Advisors. The Corporation shall have the authority
9
<PAGE>
to employ such legal, accounting, and financial counsel and advisers, as it
shall deem necessary in connection with the performance of its duties under the
Plan, and to act in accordance with the advice of such counsel and advisers.
Except as otherwise provided in the Plan, the fees and expenses of such counsel
and advisers shall be paid by the Corporation.
8.4 Delegation to Officers or Employees. The Corporation shall have
the power to delegate its duties under this Plan to officers or employees of the
Corporation and to other persons, all of whom, if employees of the Corporation,
shall serve without compensation other than their regular renumeration from the
Corporation.
10
<PAGE>
ARTICLE IX
CLAIMS AND APPEALS
------------------
If any Participant shall dispute the correctness or applicability to
such Participant of a calculation of the Participants benefits under this Plan
or the applicability of any rule, procedure or regulation as applied to such
Participant, or if any Employee shall dispute or question a determination
concerning such Employee's right to participate under the Plan, such person
shall be entitled to make a written claim for review and determination of such
questions to the Plan Administrator. If a claim is wholly or partially denied,
the Plan Administrator shall, within a reasonable period of time, but not later
than ninety (90) days after receipt of the claim, provide to the claimant
written notice setting forth in a manner calculated to be understood by the
claimant:
(a) The specific reason or reasons for denial;
(b) Specific reference to the pertinent Plan provisions on which
the denial is based;
(c) A description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of why such
material or information is necessary; and
(d) An explanation of the Plan's claim review procedure.
A Participant whose claim for benefits under the Plan has been denied,
or his duly authorized representative, may request a review upon written
application to the Plan Administrator, may review pertinent documents, and may
submit issues and comments in writing. The claimant's written request for
review must be submitted to the Plan Administrator within sixty (60) days after
receipt by the claimant of written notification of the
11
<PAGE>
denial of a claim. A decision by the Plan Administrator shall be made promptly,
and not later than sixty (60) days after the Plan Administrator's receipt of a
request for review, unless special circumstances require an extension of time
for proceeding, in which case a decision shall be rendered as soon as possible,
but not later than one hundred twenty (120) days after receipt of the request
for review. The decision on review shall be in writing and shall include
specific reasons for the decision, specific reference to the pertinent Plan
provision on which the decision is based, and be written in a manner calculated
to be understood by the claimant.
12
<PAGE>
ARTICLE X
AMENDMENT
---------
The Corporation reserves the right to amend, modify or terminate this
Plan. This Plan may also be amended by an individual or individuals designated
by the Board as having authority to amend this Plan. This Plan may be
terminated at any time by the Corporation. The Corporation makes no promise to
continue the Plan in the future.
13
<PAGE>
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
11.1 Indemnification for Liability. The Corporation shall, to the full
extent permitted by applicable state and federal law, indemnify any board
member, officer or employee of the Corporation who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or investigative)
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner which he
reasonably believed to be solely in the interest of the Participants and
beneficiaries of the Plan, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful;
provided further that:
(a) A person who discharges his duties with respect to the Plan
in a manner which he believes to be solely in the interest of its Participants
and beneficiaries shall be deemed to have acted in a manner which he reasonably
believes to be in (or not opposed to) the best interest of the Corporation;
(b) This indemnification shall continue as to a person who has
ceased to be a director, officer, or employee and shall inure to the benefit of
the heirs, executors and administrators of such person;
(c) The Corporation may retain such accountants, counsel or
other specialists as it deems necessary or desirable in connection with the
administration of the Plan and any beneficiary of this indemnity shall be
entitled to rely conclusively upon, and shall be fully protected and indemnified
in any action taken in good faith reliance upon any
14
<PAGE>
opinions or reports furnished to it in writing by such accountants, counsel or
other specialists.
11.2 Not an Employment Contract. The establishment of the Plan, the
creation of any account, or the payment of any benefit does not create in any
Employee, Participant or other party a right to continuing employment with the
Corporation.
11.3 No Liability for Elections. The Corporation shall not be liable
for any Participant's election under the Plan, nor shall the Corporation be
deemed to have made any representations as to the value with respect to any
Participant of any benefits offered under the Plan.
11.4 Construction of Plan. This Plan shall be construed, administered
and governed in all respects under applicable federal law, and to the extent
that federal law is inapplicable, under the laws of the State of Michigan.
11.5 Severability. Should any part of the Plan subsequently be
invalidated by a court of competent jurisdiction, the remainder thereof shall be
given effect to the maximum extent possible.
11.6 Fiscal Records and Reports. The fiscal records of the Plan are to
be maintained on the basis of the Plan Year. The Plan Administrator shall
exercise such authority and responsibility as it deems appropriate in order to
comply with the terms of the Plan relating to Participant records which are
maintained under this Plan.
11.7 Headings. The headings contained in the Plan are for reference
only, and they do not in any manner limit or expand the terms and provisions of
the Plan.
11.8 No Vested Interest. Except for the right to receive any benefit
payable under the Plan, no person shall have any right, title or interest in or
to the assets of the Corporation because of the Plan.
15
<PAGE>
11.9 Limit on Liability. Nothing contained in the Plan shall impose
on the Corporation, or any board members, officers or employees of the
Corporation any liability for the payment of benefits under this Plan other than
liabilities resulting from willful neglect or fraud. The liability of the
Corporation for benefits shall be limited to the benefits provided under the
Plan. Persons entitled to benefits under the Plan shall look only to the
Corporation for payment.
11.10 Anti-Alienation. To the extent permitted by law, the right of
any Participant or any beneficiary to any benefit or to any payment hereunder
shall not be subject in any manner to attachment or other legal process for the
debts of such Participant or beneficiary; and any such benefit or payment shall
not be subject to anticipation, alienation, sale, transfer, assignment, or
encumbrance.
IN WITNESS WHEREOF, the Corporation has caused this First Amendment
and Restatement of this Plan to be executed in its name and behalf effective
January 1, 1989.
DOW CORNING CORPORATION
______________________________
By: Richard A. Hazleton
Its: Chairman of the Board and
Chief Executive Officer
16
<PAGE>
DOW CORNING CORPORATION
RESTATED SUPPLEMENTAL BENEFIT PLAN
----------------------------------
SCHEDULE A
The benefits payable under this Plan shall equal the total retirement
benefit calculated for each Participant by the Corporation, less the amount of
the retirement benefit the Participant is eligible to receive under the ERP.
The calculation of the total retirement benefit payable to a Participant shall
include, but not be limited to, the following factors:
a. The Participant's target bonus as compared to the target bonus
for said Participant which is included in the calculation of the ERP benefit;
b. The actual compensation of a Participant as compared to the
maximum compensation for calculation of a retirement benefit set forth in
Section 401(a)(17) of the Code;
c. The total retirement benefit otherwise payable to a Participant
under the ERP as opposed to the maximum retirement benefit allowed by Section
415 (b) of the Code; and
d. The amount of any additional retirement benefits determined by
the Corporation to be payable to a Participant as a result of any early
retirement, or other type retirement incentive plan which cannot be paid out of
the ERP.
<PAGE>
DOW CORNING CORPORATION
RESTATED SUPPLEMENTAL BENEFIT PLAN
----------------------------------
SCHEDULE B
The options and modes of distribution offered under this Plan shall be
identical to those offered under the ERP. Participant's selection of option or
mode of payment under this Plan must be identical to the option or mode the
Participant selected under the ERP.
<PAGE>
Exhibit 10.5
DOW CORNING CORPORATION
PHANTOM STOCK APPRECIATION RIGHTS (StARs) PLAN PARTICIPATION AGREEMENT
THIS AGREEMENT is made and effective as of April 1, 1998 between DOW
CORNING CORPORATION, a Michigan corporation, having its executive office at
Midland, MI ("Dow Corning") and (FIRSTNM) (MI) (LASTNM) of (PO) (STREET),
(CITY), (State_Zip) ("Participant"). Defined terms used herein are specified in
the related document entitled "Definition of Terms" attached as Exhibit A.
IN CONSIDERATION OF SERVICES TO BE RENDERED BY PARTICIPANT, DOW CORNING
HEREBY AGREES TO ENROLL PARTICIPANT IN THE 1998 PHANTOM STOCK APPRECIATION
RIGHTS PLAN ("THE PLAN") ON THE FOLLOWING TERMS AND CONDITIONS:
(1) Participant is granted (StARs_98_Units) Phantom Stock Appreciation
Rights Units ("StARs Units") as of the effective date of this Agreement.
(2) The value of each StARs Unit at any time will be equal to the
hypothetical average market value of a share of Dow Corning common stock at such
time less its price at the time it was granted to Participant. The initial grant
price for the 1998 Phantom Stock Appreciation Rights Plan will be $701.71 per
StARs Unit.
(3) The hypothetical average market value will be determined using the
following formula:
2 Year Average Earnings Per Share x 2 Year Average Return On
Assets
* where 2 year Average Earnings are determined by dividing the sum of the
Adjusted Profit After Tax ("PAT") from the eight most recently completed fiscal
quarters by 2 (to annualize); then 2 year Average Earnings Per Share is
determined by dividing by the number of shares Dow Corning stock outstanding on
the date of this agreement, and
* where Return On Assets is determined by dividing 2 year Average Earnings by 2
year Average Beginning Operating Assets, and
* where 2 year Average Beginning Operating Assets are the total of Inventory +
Trade Accts Receivable - Trade Accts Payable + Original
Page 1
<PAGE>
Value of Property, Plant & Equipment for the two most recently completed fiscal
years.
(4) Except as provided below in the event of Participant's death (in which
event Section 9(c) or Section 11 hereof shall apply) or retirement (in which
event Section 9 hereof shall apply), no StARs Units will be convertible to cash
until the end of the Vesting Period, March 31, 2001 ("Vesting Date"). So long as
Participant remains employed by Dow Corning, Participant may elect in any one
calendar year after the Vesting Date to convert up to 50% ((UNITS50)) of
Participant's StARs Units granted pursuant hereto to a cash payment by properly
notifying Dow Corning of Participant's intent to convert StARs Units to a cash
payment; provided, however, in the event that Participant elects to convert
StARs Units to a cash payment in any such calendar year, Participant shall
convert at least 20% ((UNITS20)) of Participant's StARs Units granted pursuant
hereto to a cash payment. Only after retirement shall Participant be allowed to
cash out 100% of StARs Units in any single year. Notification of intent can be
given to Dow Corning in writing at any time after the end of the Vesting Period;
payment will then be made within 45 days of notification date. Exercise Price
will be determined at date of notification based on performance of the eight
most recently completed fiscal quarters of Dow Corning. In no case will
Participant be allowed to cash out more StARs Units in any year than would
permit Participant's total cash compensation in that year (including the StARs
Unit cashout payment) to be deducted by Dow Corning in determining its taxable
income (as defined by the Internal Revenue Code for the fiscal year of Dow
Corning in which such payment is made).
(5) Participant may elect, while remaining employed by or while
Page 2
<PAGE>
retired from Dow Corning, to convert a portion of the StARs Units (in the
proportions described in paragraph (4) above) into a cash payment in any year(s)
after the Vesting Date, and prior to the end of the Exercise Period, March 31,
2008. If no election to exercise a cash payment is received by May 15, 2006, Dow
Corning will convert 50% of the StARs Units to cash and make payment to
Participant within 45 days, subject to the limitations contained in Section 6
below. Remaining StARs Units will be converted to cash and paid within 45 days
after the end of the exercise period, March 31, 2008.
(6) During the Exercise Period, Participant may not exercise Participant's
StARs Units granted hereunder in any Fiscal Year of the Exercise Period
immediately following a calendar year for which Dow Corning did not earn
positive Economic Profit (to be defined by Dow Corning subsequent to the date of
this agreement) (EP). If Dow Corning did not earn positive EP in the calendar
year prior to the end of the last Fiscal Year of the Exercise Period, all rights
of Participant to receive and all obligations of Dow Corning to make payments
under the Plan shall terminate and cease.
(7) If Participant terminates employment with Dow Corning, other than by
retirement, on or prior to the Vesting Date, all rights of Participant to
receive and all obligations of Dow Corning to make payments under the Plan shall
terminate and cease. The Executive Committee of the Board of Directors may,
however, except a Participant from such rule where, in the sole judgment and
discretion of the Committee, the circumstances warrant such an exception on a
non-arbitrary and non-discriminating basis.
(8) If Participant terminates employment with Dow Corning, other than by
retirement or death, after the Vesting Date, any remaining StARs Units standing
to the credit of Participant will be valued as of the Participant's employment
termination date, and an amount equal to the termination date value of
Participant's StARs Units will be paid to
Page 3
<PAGE>
Participant within 45 days.
(9) (a) If Participant retires on or prior to the Vesting Date, the number
of StARs Units granted pursuant to this Agreement will be prorated.
The Participant will receive StARs Units in accordance with the following
formula based on months of active service during the Vesting Period:
A = B x C
----
36
Where:
A = Prorated StARs Units
B = Number of StARs Units granted on April 1, 1998
C = Months of active service since April 1, 1998
(b) If Participant retires during the Vesting Period or Exercise
Period, Participant shall not be able to exercise Participant's Prorated StARs
units until after the Vesting Date specified in Section 4. Notwithstanding the
preceding sentence, Participant shall have three years and fifteen days from
date of retirement to exercise and receive cash payment of all remaining
Prorated StARs Units (prorated pursuant to section 9(a) above). If no election
to exercise a cash payment is received by such date, Dow Corning will convert
the remaining StARs Units as prorated pursuant to section 9(a) above to cash and
make payment to Participant within 45 days.
(c) If retired Participant dies prior to receiving cash payment of all
remaining StARs Units as prorated pursuant to section 9(a) above, beneficiary
will be paid greater of: (a) target award value of prorated StARs Units less any
previous cash payments made from the plan, or (b) the value of any remaining
StARs Units standing to the credit of the Participant as of the Participant's
date of death. Payment will be made to Participant's Beneficiary within 45 days
of notification date.
Page 4
<PAGE>
(10) If Participant is discharged from employment with Dow Corning or any
subsidiary after the Vesting Date because of repeated neglect or misconduct in
the performance of the obligations or duties of Participant's employment or has
willfully engaged in an act which in the judgment of the Chairman and Chief
Executive Officer of Dow Corning is materially inimical to the best interests of
Dow Corning, all Participant's rights and all Dow Corning's obligations under
the Plan and the Agreement will terminate and cease immediately upon such
discharge.
(11) If Participant dies prior to March 31, 2008, while in service as a Dow
Corning employee, Participant's Beneficiary will be paid the greater of:
(a)((StARs98Targetv_)) less any previous cash payments made from the plan, or
(b) the value of any remaining StARs Units standing to the credit of Participant
as of the Participant's date of death. Payment will be made to Participant's
Beneficiary within 45 days of notification date.
(12) If after terminating employment with Dow Corning under circumstances
which entitle Participant to receive payments under the Plan, Participant
competes directly or indirectly with Dow Corning or any of its subsidiaries,
Participant's rights and all Dow Corning's obligations under the Plan and the
Agreement will terminate and cease immediately.
(13) The Dow Corning Board of Directors, as represented by the Executive
Committee, will have the exclusive right to call all outstanding StARs Units at
the current value as of the date on which that call decision is effective if it
is deemed in the best interest of Dow Corning to do so. In the event of any
inquiry or dispute concerning the Plan, the decision of the Executive Committee
shall be final.
(14) Nothing in this Agreement will confer or be deemed to confer upon
Participant any right with respect to continuance of employment by Dow
Page 5
<PAGE>
Corning.
The parties hereby execute this Agreement as of April 1, 1998.
DOW CORNING CORPORATION
By:
__________________________________
Richard A. Hazleton
Chairman & Chief Executive Officer
((FIRSTNM)) ((MI)) ((Lastnm)) - ((Empno))
_________________________________
Participant's Signature
_________________________________
Name of Participant's Beneficiary
Page 6
<PAGE>
Definition of Terms
Exhibit A
Adjusted PAT Profit After Tax adjusted for significant and material items
consistent with relevant legal & financial accounting reporting requirements,
such as: accounting rule changes, acquisitions and divestitures, and other
significant special charges.
Appreciated Value - Difference between the unit value (exercise price) and
grant price.
Average Earnings Per Share - Sum of 8 most recently completed fiscal
quarters Adjusted PAT divided by 2; then divided by 2.5 million shares of Dow
Corning stock outstanding.
Beginning Operating Assets - Total of: Inventory + Trade Accounts
Receivable - Trade Accounts Payable + Original Value of Property, Plant
and Equipment Beginning Operating Assets are equal to previous calendar year-end
value as published in Dow Corning's annual consolidated financial statements.
Exercise Period Seven-year period beginning at end of vesting period during
which Participant may elect to receive cash payment for the appreciated value of
a percent of granted StARs units.
Exercise Price Unit Value at time Participant notifies Dow Corning of
intent to exercise StARs units.
Economic Profit Sales - Operating expenses (including taxes) - Capital
charge (Cost of Capital X Net Assets Employed)
Fiscal Year of the Exercise Period - Any twelve month period within the
Exercise Period commencing on April 1 of a calendar year and ending on March 31
of the following calendar year.
Grant Price Unit Value at beginning of plan from which appreciated value
will be determined.
Hypothetical Average Market Value - 2 year average Earnings Per Share X 2
year average Return On Assets.
Return on Assets (ROA) 2 year average Adjusted PAT divided by average
Beginning Operating Assets of 2 most recently completed fiscal years.
StARs Unit - Phantom Stock Appreciation Rights unit.
Unit Value - 2 year average Earnings Per Share x 2 year average Return On
Assets. This calculation represents the average hypothetical market value.
Vesting Date - The date at which StARs units have value and the participant
may elect to receive cash payment for a percent of granted StARs units.
Vesting Period - Three year period at beginning of plan during which
participant is not able to exercise cashout rights.
Page 7
<PAGE>
Exhibit 10.6
DOW CORNING CORPORATION
PHANTOM STOCK APPRECIATION RIGHTS (StARs) PLAN PARTICIPATION AGREEMENT
THIS AGREEMENT is made and effective as of April 1, 1998 between DOW
CORNING CORPORATION, a Michigan corporation, having its executive office at
Midland, MI ("Dow Corning") and of ,
("Participant"). Defined terms used herein are specified in the related
document entitled "Definition of Terms" attached as Exhibit A.
IN CONSIDERATION OF SERVICES TO BE RENDERED BY PARTICIPANT, DOW CORNING
HEREBY AGREES TO ENROLL PARTICIPANT IN THE 1998 PHANTOM STOCK APPRECIATION
RIGHTS PLAN ("THE PLAN") ON THE FOLLOWING TERMS AND CONDITIONS:
(1) (a) Participant is granted Phantom Stock Appreciation Rights
Units ("Granted StARs Units") as of the effective date of this
Agreement.
(b) In addition to the Granted StARs Units noted above in Section 1(a)
Participant may be granted up to Phantom Stock Appreciation
Rights Units ("Contingent StARs Units") on or prior to December 31,
1998. The number of Contingent StARs Units granted shall be determined
by the Executive Committee of the Board of Directors of Dow Corning
(excluding the Chairman of the Board and the Chief Executive Officer),
based upon certain criteria set by the Executive Committee of the
Board of Directors of Dow Corning (excluding the Chairman of the Board
and the Chief Executive Officer). Said criteria will be communicated
to Participant in January, 1998. On or after December 31, 1998, the
Executive Committee of the Board of Directors of Dow Corning
(excluding the Chairman of the Board and the Chief Executive Officer)
shall, in its sole discretion, determine whether or not the criteria
have been met, and, based on that assessment, the number of Contingent
StARs Units to be granted. Any Contingent StARs Units granted shall
have an effective date of April 1, 1998.
(c) For purposes of this Agreement, Granted StARs Units and Contingent
StARs Units shall sometimes be collectively referred to as "StARs
Units".
(2) The value of each StARs Unit at any time will be equal to the
hypothetical average market value of a share of Dow Corning common
stock at such time less its price at the time it was granted to
Participant. The initial grant price for the 1998 Phantom Stock
Appreciation Rights Plan will be $701.71 per StARs Unit.
(3) The hypothetical average market value will be determined using the
following formula:
2 Year Average Earnings Per Share x 2 Year Average Return On Assets
. where 2 year Average Earnings are determined by dividing the sum of
the Adjusted Profit After Tax ("PAT") from the eight most recently
completed fiscal quarters by 2 (to annualize); then 2 year Average
Earnings Per Share is determined by dividing by the number of
shares of Dow Corning stock outstanding on the date of this
agreement, and
. where Return On Assets is determined by dividing 2 year Average
Earnings by 2 year Average Beginning Operating Assets, and
. where 2 year Average Beginning Operating Assets are the total of
Inventory + Trade Accts Receivable - Trade Accts Payable + Original
Value of Property, Plant & Equipment for the two most recently
completed fiscal years.
<PAGE>
(4) Except as provided below in the event of Participant's death (in which
event Section 9 (c) or Section 11 hereof shall apply) or retirement
(in which event Section 9 hereof shall apply), no StARs Units will be
convertible to cash until the end of the Vesting Period, March 31,
2001 ("Vesting Date"). So long as Participant remains employed by Dow
Corning, Participant may elect in any one calendar year after the
Vesting Date to convert up to 50% ( ) of Participant's StARs Units
granted pursuant hereto to a cash payment by properly notifying Dow
Corning of Participant's intent to convert StARs Units to a cash
payment; provided, however, in the event that Participant elects to
convert StARs Units to a cash payment in any such calendar year,
Participant shall convert at least 20% ( ) of Participant's StARs
Units granted pursuant hereto to a cash payment. Only after retirement
shall Participant be allowed to cash out 100% of StARs Units in any
single year. Notification of intent can be given to Dow Corning in
writing at any time after the end of the Vesting Period; payment will
then be made within 45 days of notification date. Exercise Price will
be determined at date of notification based on performance of the
eight most recently completed fiscal quarters of Dow Corning. In no
case will Participant be allowed to cash out more StARs Units in any
year than would permit Participant's total cash compensation in that
year (including the StARs Unit cashout payment) to be deducted by Dow
Corning in determining its taxable income (as defined by the Internal
Revenue Code for the fiscal year of Dow Corning in which such payment
is made).
(5) Participant may elect, while remaining employed by or while retired
from Dow Corning, to convert a portion of the StARs Units (in the
proportions described in paragraph (4) above) into a cash payment in
any year(s) after the Vesting Date, and prior to the end of the
Exercise Period, March 31, 2008. If no election to exercise a cash
payment is received by May 15, 2006, Dow Corning will convert 50% of
the StARs Units to cash and make payment to Participant within 45
days, subject to the limitations contained in Section 6 below.
Remaining StARs Units will be converted to cash and paid within 45
days after the end of the exercise period, March 31, 2008.
(6) During the Exercise Period, Participant may not exercise Participant's
StARs Units granted hereunder in any Fiscal Year of the Exercise
Period immediately following a calendar year for which Dow Corning did
not earn positive Economic Profit (to be defined by Dow Corning
subsequent to the date of this agreement) (EP). If Dow Corning did not
earn positive EP in the calendar year prior to the end of the last
Fiscal Year of the Exercise Period, all rights of Participant to
receive and all obligations of Dow Corning to make payments under the
Plan shall terminate and cease.
(7) If Participant terminates employment with Dow Corning, other than by
retirement, on or prior to the Vesting Date, all rights of Participant
to receive and all obligations of Dow Corning to make payments under
the Plan shall terminate and cease. The Executive Committee of the
Board of Directors of Dow Corning (excluding the Chairman of the Board
and the Chief Executive Officer) may, however, except a Participant
from such rule where, in the sole judgment and discretion of the
Committee, the circumstances warrant such an exception on a non-
arbitrary and non-discriminating basis.
(8) If Participant terminates employment with Dow Corning, other than by
retirement or death, after the Vesting Date, any remaining StARs Units
standing to the credit of Participant will be valued as of the
Participant's employment termination date, and an amount equal to the
termination date value of Participant's StARs Units will be paid to
Participant within 45 days.
<PAGE>
(9) (a) If Participant retires on or prior to the Vesting Date, the
number of StARs Units granted pursuant to this Agreement will be
prorated. The Participant will receive StARs Units in accordance with
the following formula based on months of active service during the
Vesting Period:
C
A = B x -----
36
Where:
A = Prorated StARs Units
B = Number of StARs Units granted on April 1, 1998
C = Months of active service since April 1, 1998
(b) If Participant retires during the Vesting Period or Exercise
Period, Participant shall not be able to exercise Participant's
Prorated StARs units until after the Vesting Date specified in Section
4. Notwithstanding the preceding sentence, Participant shall have
three years and fifteen days from date of retirement to exercise and
receive cash payment of all remaining Prorated StARs Units (prorated
pursuant to section 9(a) above). If no election to exercise a cash
payment is received by such date, Dow Corning will convert the
remaining StARs Units as prorated pursuant to section 9(a) above to
cash and make payment to Participant within 45 days.
(c) If retired Participant dies prior to receiving cash payment of
all remaining StARs Units as prorated pursuant to section 9(a) above,
beneficiary will be paid greater of: (a) target award value of
prorated StARs Units less any previous cash payments made from the
plan, or (b) the value of any remaining StARs Units standing to the
credit of the Participant as of the Participant's date of death.
Payment will be made to Participant's Beneficiary within 45 days of
notification date.
(10) If Participant is discharged from employment with Dow Corning or any
subsidiary after the Vesting Date because of repeated neglect or
misconduct in the performance of the obligations or duties of
Participant's employment or has willfully engaged in an act which in
the judgment of the Executive Committee of the board of Directors of
Dow Corning (excluding the Chairman of the Board and Chief Executive
Officer) is materially inimical to the best interests of Dow Corning,
all Participant's rights and all Dow Corning's obligations under the
Plan and the Agreement will terminate and cease immediately upon such
discharge.
(11) (a) If Participant dies prior to March 31, 2008, while in service as
a Dow Corning employee, Participant's Beneficiary will be paid the
greater of: (a) $ less any previous cash payments made
from the plan, or (b) the value of any remaining StARs Units standing
to the credit of Participant as of the Participant's date of death.
Payment will be made to Participant's Beneficiary within 45 days of
notification date.
(b) If participant dies prior to December 31, 1998, while in service
as a Dow Corning employee, then the maximum number of Contingent StARs
Units set forth in Section 1(b) shall be deemed granted to
Participant, effective April 1, 1998.
(12) If after terminating employment with Dow Corning under circumstances
which entitle Participant to receive payments under the Plan,
Participant competes directly or indirectly with Dow Corning or any of
its subsidiaries, Participant's rights and all Dow Corning's
obligations under the Plan and the Agreement will terminate and cease
immediately.
<PAGE>
(13) The Dow Corning Board of Directors, as represented by the Executive
Committee of the Board of Directors of Dow Corning (excluding the
Chairman of the Board and Chief Executive Officer), will have the
exclusive right to call all outstanding StARs Units at the current
value as of the date on which that call decision is effective if it is
deemed in the best interest of Dow Corning to do so. In the event of
any inquiry or dispute concerning the Plan, the decision of the
Executive Committee of the Board of Directors of Dow Corning
(excluding the Chairman of the Board and Chief Executive Officer)
shall be final.
(14) Nothing in this Agreement will confer or be deemed to confer upon
Participant any right with respect to continuance of employment by Dow
Corning.
The parties hereby execute this Agreement as of April 1, 1998.
DOW CORNING CORPORATION
By:
_____________________________________________________
Gifford E. Brown
Vice President & Executive Director of Human Resources
__________________________________________
Participant's Signature
__________________________________________
Name of Participant's Beneficiary
<PAGE>
Definition of Terms Exhibit A
Adjusted PAT Profit After Tax adjusted for significant and material
items consistent with relevant legal & financial
accounting reporting requirements, such as: accounting
rule changes, acquisitions and divestitures, and other
significant special charges.
Appreciated Value Difference between the unit value (exercise price) and
grant price.
Average Earnings Sum of 8 most recently completed fiscal quarters Adjusted
Per Share PAT divided by 2; then divided by 2.5 million shares of
Dow Corning stock outstanding.
Beginning Total of:
Operating Assets Inventory
+ Trade Accounts Receivable
- Trade Accounts Payable
+ Original Value of Property, Plant and Equipment
Beginning Operating Assets are equal to previous calendar
year-end value as published in Dow Corning's annual
consolidated financial statements.
Exercise Period Seven-year period beginning at end of vesting period
during which participant may elect to receive cash payment
for the appreciated value of a percent of granted StARs
units.
Exercise Price Unit Value at time participant notifies Dow Corning of
intent to exercise StARs units.
Economic Profit Sales
- Operating Expenses (including taxes)
- Capital Charge (Cost of Capital X Net Assets
Employed)
Fiscal Year of the Any twelve month period within the Exercise Period
Exercise Period commencing on April 1 of a calendar year and ending on
March 31 of the following calendar year.
Grant Unit Value at beginning of plan from which appreciated
Price value will be determined.
Hypothetical 2 year average Earnings Per Share x 2 year average Return
Average Market On Assets.
Value
Return on Assets 2 year average Adjusted PAT divided by average Beginning
(ROA) Operating Assets of 2 most recently completed fiscal
years.
StARs Unit Phantom Stock Appreciation Rights Unit.
Unit Value 2 year average Earnings Per Share x 2 year average Return
On Assets. This calculation represents the average
hypothetical market value.
Vesting The date at which StARs units have value and the
Date participant may elect to receive cash payment for a
percent of granted StARs units.
Vesting Period Three year period at beginning of plan during which
participant is not able to exercise cashout rights.
<PAGE>
Exhibit 12.1
Dow Corning Corporation
Computation of Ratio of Earnings to Fixed Charges
(in millions of dollars)
<TABLE>
<CAPTION>
Year ended December 31, Six months ended June 30,
----------------------- -------------------------
1998 1997 1996 1995 1994 1999 1998
-------- ------- ------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) from continuing operations
before income taxes, minority interest
and cumulative effects of changes in
accounting principles (934.2) 427.3 409.0 (22.9) 14.6 78.2 175.9
Less:
Equity in earnings (losses) of
less than 50%-owned companies
in excess of distributed income (0.3) (0.6) (0.4) (0.7) (0.8) (0.3) (0.7)
Add:
Fixed charges 90.3 27.5 23.2 65.8 100.5 63.1 15.1
Amortization of capitalized interest 11.0 7.7 9.1 11.4 8.8 6.1 3.3
Deduct:
Interest capitalized during the period 57.8 - - 3.3 14.3 11.3 -
-------- ------- ------- ------ ------- -------- --------
Earnings (losses) for computation purposes (890.4) 463.1 441.7 51.7 110.4 136.4 195.0
======== ======= ======= ====== ======= ======== ========
Fixed charges:
Interest, expensed or capitalized 70.4 11.0 7.8 49.6 84.6(B) 53.7 6.0
Amortization of debt expense - - - 0.2 0.7 - -
Portion of rents representative of
the interest factor. 19.9 16.5 15.4 16.0 15.2 9.4 9.1
-------- ------ ------- ------- ------ ------- -------
Fixed charges for computation purposes 90.3 27.5 23.2 65.8 100.5 63.1 15.1
======== ====== ====== ====== ======= ======== =======
-------- ------ ------- ------ ------- -------- -------
Ratio of earnings to fixed charges (A) 16.9 19.0 0.8 1.1 2.2 12.9
======== ====== ======= ====== ======= ======== =======
</TABLE>
(A) Earnings are inadequate to cover fixed charges. The amount of the coverage
deficiency for the year ended December 31, 1998 was $980.7
(B) Interest on indebtedness, expensed or capitalized, includes $28.3 in
imputed interest recognized on the net discounted implant liability.
<PAGE>
Exhibit 15.1
- --------------------------------------------------------------------------------
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
September 10, 1999
Commissioners:
We are aware that our report dated August 25, 1999 on our review of interim
financial information of Dow Corning Corporation (the "Company") as of and for
the period ended June 30, 1999 is included in the Company's Form 10 dated
September 10, 1999.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES/1/
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
OWNERSHIP
GOVERNING INTEREST OF
NAME JURISDICTION THE COMPANY
- --------------------------------------------------------------------------------------
<S> <C> <C>
Bay Asset Funding Corporation Delaware 100%
- --------------------------------------------------------------------------------------
DC Belgium Pension Fund (ASBL) Belgium 100%
- --------------------------------------------------------------------------------------
DC Krafft S.A. Spain 65%
- --------------------------------------------------------------------------------------
DC Liquid System Technologies, Inc. Delaware 100%
- --------------------------------------------------------------------------------------
DC STI S.A. France 100%
- --------------------------------------------------------------------------------------
Devonshire Underwriters Ltd. Bermuda 100%
- --------------------------------------------------------------------------------------
Dow Corning de Argentina S.A.I.C./2/ Argentina 95%
- --------------------------------------------------------------------------------------
Dow Corning Asia Ltd. Japan 100%
- --------------------------------------------------------------------------------------
Dow Corning Australia Pty, Ltd. Australia 100%
- --------------------------------------------------------------------------------------
Dow Corning Do Brazil Limitada /2/ Brazil 99.9%
SIL Trade Industria E Commercio Ltda. Brazil 49%
- --------------------------------------------------------------------------------------
Dow Corning Canada, Inc. Canada 100%
- --------------------------------------------------------------------------------------
Dow Corning Chile S.A./2/ Chile 60%
- --------------------------------------------------------------------------------------
Dow Corning China Limited Hong Kong 100%
- --------------------------------------------------------------------------------------
Dow Corning de Colombia, S.A./3/ Colombia 60%
- --------------------------------------------------------------------------------------
Dow Corning Construction S.A. France 100%
- --------------------------------------------------------------------------------------
Dow Corning Enterprises Inc. Delaware 100%
Dow Corning Polska Sp.zo. Poland 100%
Universal Silicones and Lubricants Ltd. India 49.9%
Dow Corning (Shanghai) Co., Ltd. China 100%
- --------------------------------------------------------------------------------------
Dow Corning Foreign Sales Corporation /5/ U.S. Virgin Islands 50%
- --------------------------------------------------------------------------------------
Dow Corning France S.A. France 100%
- --------------------------------------------------------------------------------------
Dow Corning GesmbH (Austria) Austria 100%
- --------------------------------------------------------------------------------------
Dow Corning GmbH (Weisbaden) Germany 100%
- --------------------------------------------------------------------------------------
Dow Corning Iberica S.A. Spain 100%
- --------------------------------------------------------------------------------------
Dow Corning Investment S.A. Belgium 100%
Dow Corning Coordination Center S.A. Belgium 100%
- --------------------------------------------------------------------------------------
Dow Corning Korea Ltd. South Korea 100%
- --------------------------------------------------------------------------------------
Dow Corning Limited United Kingdom 100%
Dow Corning Hansil, Ltd./4/ England 99.9%
Dow Corning STI Limited England 100%
- --------------------------------------------------------------------------------------
Dow Corning Malaysia Sdn. Bhd. Malaysia 100%
- --------------------------------------------------------------------------------------
</TABLE>
E-21.1
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
OWNERSHIP
GOVERNING INTEREST OF
NAME JURISDICTION THE COMPANY
- --------------------------------------------------------------------------------------
<S> <C> <C>
Dow Corning de Mexico S.A. de C.V./2/ Mexico 99.9%
- --------------------------------------------------------------------------------------
Dow Corning New Zealand Ltd. New Zealand 100%
- --------------------------------------------------------------------------------------
Dow Corning Nordic AB Sweden 100%
- --------------------------------------------------------------------------------------
Dow Corning Puerto Rico, Inc. Puerto Rico 100%
- --------------------------------------------------------------------------------------
Dow Corning S.A. Belgium 100%
- --------------------------------------------------------------------------------------
Dow Corning Silicon Energy Systems, Inc. Delaware 100%
- --------------------------------------------------------------------------------------
Dow Corning Singapore Pte. Ltd. Singapore 100%
- --------------------------------------------------------------------------------------
Dow Corning S.p.A. Italy 100%
- --------------------------------------------------------------------------------------
Dow Corning STI, Inc. Delaware 100%
- --------------------------------------------------------------------------------------
Dow Corning Taiwan Inc. Taiwan 100%
- --------------------------------------------------------------------------------------
Dow Corning (Thailand) Ltd. Thailand 100%
- --------------------------------------------------------------------------------------
Dow Corning Toray Silicone Co., Ltd. Japan 65%
- --------------------------------------------------------------------------------------
Dow Corning de Venezuela S.A./2/ Venezuela 99.9%
- --------------------------------------------------------------------------------------
Hemlock Semiconductor Corporation Michigan 63.25%
- --------------------------------------------------------------------------------------
SDC Technologies, Inc. Delaware 50%
SDC Coatings, Inc. Delaware 50%
Applied Hardcoating Technologies, Inc. Delaware 50%
- --------------------------------------------------------------------------------------
Site Services, Inc. Delaware 100%
- --------------------------------------------------------------------------------------
Wickhen Products of Delaware, Inc. Delaware 100%
Recon Associates Inc. Delaware 100%
Wickhen Products, Inc. Wisconsin 100%
Agron, Inc. Delaware 100%
- --------------------------------------------------------------------------------------
</TABLE>
______________
1. Entities the names of which are indented are owned by the subsidiary
or joint venture company named at the margin; ownership interest
indicated is the indirect ownership interest of the Company.
2. Remaining ownership interest held by Dow Corning Canada, Inc.
3. Each of Dow Corning Do Brazil Limitada, Dow Corning de Argentina
S.A.I.C., Dow Corning Canada, Inc. and Dow Corning de Mexico S.A. de
C.V. hold a 10% ownership interest.
4. Remaining ownership interest held by an individual nominated by the
Company.
5. 50% ownership interest held by Hemlock Semiconductor Corporation.
E-21.2
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Form 10 of our report dated January 20,
1999, except for Notes 3, 4, 14 and 17 which are as of July 30, 1999 relating to
the financial statements of Dow Corning Corporation, which appear in such Form
10. We also consent to the reference to us under the heading "Selected Financial
Data" in this Form 10.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Detroit, Michigan
September 10, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS AND CONSOLIDATED
BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 205 136
<SECURITIES> 136 158
<RECEIVABLES> 528 494
<ALLOWANCES> (14) (12)
<INVENTORY> 386 359
<CURRENT-ASSETS> 1,452 1,366
<PP&E> 3,847 3,608
<DEPRECIATION> (2,205) (2,055)
<TOTAL-ASSETS> 6,131 5,423
<CURRENT-LIABILITIES> 711 490
<BONDS> 124 140
0 0
0 0
<COMMON> 13 13
<OTHER-SE> 399 1,117
<TOTAL-LIABILITY-AND-EQUITY> 6,131 5,423
<SALES> 1,282 1,280
<TOTAL-REVENUES> 1,282 1,280
<CGS> 884 882
<TOTAL-COSTS> 884 882
<OTHER-EXPENSES> 268 229
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 42 6
<INCOME-PRETAX> 78 176
<INCOME-TAX> 30 70
<INCOME-CONTINUING> 47 101
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 47 101
<EPS-BASIC> 18.92 40.32
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS AND CONSOLIDATED
BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 193 253
<SECURITIES> 95 97
<RECEIVABLES> 445 436
<ALLOWANCES> (14) (12)
<INVENTORY> 399 326
<CURRENT-ASSETS> 1,556 1,379
<PP&E> 3,875 3,501
<DEPRECIATION> (2,165) (2,021)
<TOTAL-ASSETS> 6,166 5,319
<CURRENT-LIABILITIES> 729 490
<BONDS> 148 141
0 0
0 0
<COMMON> 13 13
<OTHER-SE> 424 1,014
<TOTAL-LIABILITY-AND-EQUITY> 6,166 5,319
<SALES> 2,568 2,644
<TOTAL-REVENUES> 2,568 2,644
<CGS> 1,771 1,796
<TOTAL-COSTS> 1,771 1,796
<OTHER-EXPENSES> 1,570 467
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 214 11
<INCOME-PRETAX> (934) 427
<INCOME-TAX> (348) 169
<INCOME-CONTINUING> (595) 238
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (595) 238
<EPS-BASIC> (238.00) 95.04
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS AND CONSOLIDATED
BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 344
<SECURITIES> 184
<RECEIVABLES> 433
<ALLOWANCES> (12)
<INVENTORY> 298
<CURRENT-ASSETS> 1,525
<PP&E> 3,298
<DEPRECIATION> (1,992)
<TOTAL-ASSETS> 5,114
<CURRENT-LIABILITIES> 481
<BONDS> 103
0
0
<COMMON> 13
<OTHER-SE> 826
<TOTAL-LIABILITY-AND-EQUITY> 5,114
<SALES> 2,532
<TOTAL-REVENUES> 2,532
<CGS> 1,674
<TOTAL-COSTS> 1,674
<OTHER-EXPENSES> 462
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> 409
<INCOME-TAX> 169
<INCOME-CONTINUING> 222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 222
<EPS-BASIC> 88.68
<EPS-DILUTED> 0
</TABLE>
