COMMITMENTS AND CONTINGENT LIABILITIES
In January 1994, Dow Corning Corporation (Dow Corning), in which the Company
is a 50 percent shareholder, announced a pretax charge of $640 million
($415 million after tax) for the fourth quarter of 1993. In January 1995, Dow
Corning announced a pretax charge of $241 million ($152 million after tax) for
the fourth quarter of 1994. These charges included Dow Corning's best estimate
of its potential liability for breast implant litigation based on a global
Breast Implant Litigation Settlement Agreement (the Settlement Agreement);
litigation and claims outside of the Settlement Agreement; and provisions for
legal, administrative and research costs related to breast implants. The charges
for 1993 and 1994 included pretax amounts of $1,240 million and $441 million
less expected insurance recoveries of $600 million and $200 million,
respectively. The 1993 amounts reported by Dow Corning were determined on a
present value basis. On an undiscounted basis, the estimated liability noted
above for 1993 was $2,300 million less expected insurance recoveries of
$1,200 million.
As a result of the Dow Corning actions, the Company recorded its 50 percent
share of the charges, net of tax benefits available to Dow. The impact on net
income was a charge of $192 million for 1993 and $70 million for 1994.
Dow Corning reported an after-tax net loss of $167 million for the second
quarter of 1995 as a result of a $221 million after-tax charge taken to reflect
a change in accounting method from the present value basis noted above to an
undiscounted basis resulting from the uncertainties associated with its
voluntary filing for protection under Chapter 11 of the U.S. Bankruptcy Code on
May 15, 1995. As a result of such loss and Chapter 11 filing, the Company
recognized a pretax charge against income of $330 million for the second quarter
of 1995, fully reserved its investment in Dow Corning, and is presently
reserving its 50 percent share of equity earnings.
On September 1, 1994, Judge Sam C. Pointer, Jr. of the U.S. District Court
for the Northern District of Alabama approved the Settlement Agreement, pursuant
to which plaintiffs choosing to participate in the Settlement Agreement released
the Company from liability. The Company was not a participant in the Settlement
Agreement nor was it required to contribute to the settlement. On October 7,
1995, Judge Pointer issued an order which concluded that the Settlement
Agreement was not workable in its then-current form because the funds committed
to it by industry participants were inadequate. The order provided that
plaintiffs who had previously agreed to participate in the Settlement Agreement
could opt out after November 30, 1995.
The Company's maximum exposure for breast implant product liability claims
against Dow Corning is limited to its investment in Dow Corning which, after the
second quarter of 1995 charge noted above, is zero. As a result, any future
charges by Dow Corning related to such claims or as a result of the Chapter 11
proceeding would not have an adverse impact on the Company's consolidated
financial statements.
The Company is separately named as a defendant in more than 14,000 breast
implant product liability cases, of which approximately 4,000 state cases are
the subject of summary judgments in favor of the Company. In these situations,
plaintiffs have alleged that the Company should be liable for Dow Corning's
alleged torts based on the Company's 50 percent stock ownership in Dow Corning
and that the Company should be liable by virtue of alleged "direct
participation" by the Company or its agents in Dow Corning's breast implant
business. These latter, direct participation claims include counts sounding in
strict liability, fraud, aiding and abetting, conspiracy, concert of action and
negligence.
Judge Pointer was appointed by the Federal Judicial Panel on Multidistrict
Litigation to oversee all of the product liability cases involving silicone
breast implants filed in the U.S. federal courts. Initially, in a ruling issued
on December 1, 1993, Judge Pointer granted the Company's motion for summary
judgment, finding that there was no basis on which a jury could conclude that
the Company was liable for any claimed defects in the breast implants
manufactured by Dow Corning. In an interlocutory
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opinion issued on April 25, 1995, Judge Pointer affirmed his earlier ruling as
to plaintiffs' corporate control claims but vacated that ruling as to
plaintiffs' direct participation claims.
On July 7, 1998, Dow Corning, the Company and Corning Incorporated
(Corning), on the one hand, and the Tort Claimants' Committee in Dow Corning's
bankruptcy on the other, agreed on a binding Term Sheet to resolve all tort
claims involving Dow Corning's silicone medical products, including the claims
against Corning and the Company (collectively, the Shareholders). The agreement
set forth in the Term Sheet was memorialized in a Joint Plan of Reorganization
(the Joint Plan) filed by Dow Corning and the Tort Claimants' Committee
(collectively, the Proponents) on November 9, 1998. On February 4, 1999, the
Bankruptcy Court approved the disclosure statement describing the Joint Plan.
Before the Joint Plan could become effective, however, it was subject to a vote
by the claimants, a confirmation hearing and all relevant provisions of the
Bankruptcy Code. Voting was completed on May 14, 1999 and the confirmation
hearing concluded on July 30, 1999.
On November 30, 1999, the Bankruptcy Court issued an Order confirming the
Joint Plan, but then issued an Opinion on December 21, 1999 that, in the view of
the Proponents and the Shareholders, improperly interpreted or attempted to
modify certain provisions of the Joint Plan affecting the resolution of tort
claims involving Dow Corning's silicone medical products against various
entities, including the Shareholders. Many of the parties in interest, including
the Shareholders, filed various motions and appeals seeking, among other things,
a clarification of the December 21, 1999 Opinion. The effectiveness of the Joint
Plan remains subject to the resolution of these motions and appeals, which were
heard by U. S. District Court Judge Denise Page Hood on April 12 and 13, 2000,
but upon which she has not yet ruled. Accordingly, there can be no assurance at
this time that the Joint Plan will become effective.
It is the opinion of the Company's management that the possibility is remote
that plaintiffs will prevail on the theory that the Company should be liable in
the breast implant litigation because of its shareholder relationship with Dow
Corning. The Company's management believes that there is no merit to plaintiffs'
claims that the Company is liable for alleged defects in Dow Corning's silicone
products because of the Company's alleged direct participation in the
development of those products, and the Company intends to contest those claims
vigorously. Management believes that the possibility is remote that a resolution
of plaintiffs' direct participation claims, including the vigorous defense
against those claims, would have a material adverse impact on the Company's
financial position or cash flows. Nevertheless, in light of Judge Pointer's
April 25, 1995 ruling, it is possible that a resolution of plaintiffs' direct
participation claims, including the vigorous defense against those claims, could
have a material adverse impact on the Company's net income for a particular
period, although it is impossible at this time to estimate the range or amount
of any such impact.
Numerous lawsuits have been brought against the Company and other chemical
companies alleging that the manufacture, distribution or use of pesticides
containing dibromochloropropane (DBCP) has caused, among other things, property
damage, including contamination of groundwater. To date, there have been no
verdicts or judgments against the Company in connection with these allegations.
It is the opinion of the Company's management that the possibility is remote
that the resolution of such lawsuits will have a material adverse impact on the
Company's consolidated financial statements.
Accruals for environmental matters are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated, based on current law and existing technologies. The Company had
accrued obligations of $314 million at September 30, 2000 for environmental
matters, including $11 million for the remediation of Superfund sites. This is
management's best estimate of the costs for remediation and restoration with
respect to environmental matters for which the Company has accrued liabilities,
although the ultimate cost with respect to these particular matters could range
up to twice that amount. Inherent uncertainties exist in these estimates
primarily due to unknown conditions, changing governmental regulations and legal
standards regarding
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liability, and evolving technologies for handling site remediation and
restoration. It is the opinion of the Company's management that the possibility
is remote that costs in excess of those accrued or disclosed will have a
material adverse impact on the Company's consolidated financial statements.
In addition to the breast implant, DBCP and environmental remediation
matters, the Company is party to a number of other claims and lawsuits arising
out of the normal course of business with respect to commercial matters,
including product liability, governmental regulation and other actions. Certain
of these actions purport to be class actions and seek damages in very large
amounts. All such claims are being contested.
Dow has an active risk management program consisting of numerous insurance
policies secured from many carriers at various times. These policies provide
coverage that will be utilized to minimize the impact, if any, of the
contingencies described above.
Except for the possible effect on the Company's net income for breast
implant litigation described above, it is the opinion of the Company's
management that the possibility is remote that the aggregate of all claims and
lawsuits will have a material adverse impact on the Company's consolidated
financial statements.
A Canadian subsidiary entered into two 20-year agreements, one that expired
in 1998 and one that expires in 2004, to purchase ethylene. The purchase price
is determined on a cost-of-service basis which, in addition to covering all
operating expenses and debt service costs, provides the owner of the
manufacturing plants with a specified return on capital. Total purchases under
the agreements were $92 million in 1999, $221 million in 1998 and $199 million
in 1997.
At December 31, 1999, the Company had various outstanding commitments for
take or pay and throughput agreements, including the Canadian subsidiary's
ethylene contract, for terms extending from one to 20 years. In general, such
commitments were at prices not in excess of current market prices.
Fixed and Determinable Portion of Take or Pay and
Throughput Obligations at December 31, 1999 (in millions)
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2000 $ 309
2001 296
2002 300
2003 281
2004 256
2005 through expiration of contracts 1,890
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Total $ 3,332
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In addition to the take or pay obligations at December 31, 1999, the Company
had outstanding purchase commitments which range from one to 18 years for steam,
electrical power, materials, property and other items used in the normal course
of business of approximately $98 million. In general, such commitments were at
prices not in excess of current market prices. The Company also had outstanding
direct and indirect commitments for construction performance and lease payment
guarantees and other obligations of $253 million. The Company is also committed
to lease manufacturing facilities under construction in Argentina and the
Netherlands.
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