Document XO549XNkLrEaRBVEqxg7vzke4

Edgar Filing Reformat Document Page 1 of 31 PLAINTIFF'S EXHIBIT K-1822 ACCESSION NUMBER: CONFORMED SUBMISSION TYPE: PUBLIC DOCUMENT COUNT: CONFORMED PERIOD OF REPORT: FILED AS OF DATE: 0000024741-01-500019 10-Q 1 20010331 20010502 FILER: COMPANY DATA: . COMPANY CONFORMED NAME: CENTRAL INDEX KEY: STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: STATE OF INCORPORATION: FISCAL YEAR END: CORNING INC /NY 0000024741 TELEPHONE * TELEGRAPH APPARATUS [3661] 160393470 NY 1228 FILING VALUES: FORM TYPE: SEC ACT: SEC FILE NUMBER: FILM NUMBER: 10-Q 001-03247 1620530 BUSINESS ADDRESS: STREET 1: CITY: STATE: ZIP: BUSINESS PHONE: ONE RIVERFRONT PLAZA CORNING NY 14831 6079749000 MAIL ADDRESS: STREET 1: CITY: .STATE: ZIP: ONE RIVERFRONT PLAZA CORNING NY 14831 FORMER COMPANY: FORMER CONFORMED NAME: DATE OF NAME CHANGE: 19930713 CORNING INC /NY / SIGNING LAB SERVICES INC FORMER COMPANY: FORMER CONFORMED NAME: CORNING GLASSWORKS DATE OF NAME CHANGE: 19890512 </SEC-HEADER> <DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <FILENAME>ql011Oq.txt <DESCRIPTION>CCRNING'S FIRST QUARTER 2001 FORM 10-Q <TEXT> FORM 10-Q http ://www. shareholder, co.. ./0000024741 -01 -500019&CompanyID=glw&header=z&footer= 5/29/2001 Edgar Filing SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 ( ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-3247 CORNING INCORPORATED (Registrant) New York (State of incorporation) 16-0393470 (I.R.S. Employer Identifi:ac: :n No.) One Riverfront Plata, Corning, New York (Address of principal executive offices) 14831 (Zip Code) Registrant's telephone number, including area code: 607-974-9000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1?34 during the preceding 12 months and (2) has been subject to the filing requirements for at least the past 30 days. Yes X No Indicate the number of shares outstanding of each of the common stock, as of the latest practicable date: issuer's -lasses of 930,138,228 shares of Coming's Common Stock, $0.50 Par Value, were outstanding as of Aoril 1, 2001. <?AGE> PART I - FINANCIAL INFORMATION Page 2 of 31 http ://www. shareholder, co.. ./0000024741 -01 -500019&CompanyID=glw&header=z&footer= 5/29/2001 Edgar Filing ITEM 1. FINANCIAL STATEMENTS Index to consolidated financial statements of Subsidiary Companies filed as part of this report: Corning Incorporated and Page Consolidated Statements of Income for the three months ended March 31, 2001 and 2000 3 Consolidated Balance Sheets at March 31, 2001 and December 31, 2000 4 Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000 3 Notes to Consolidated Financial Statements : The consolidated financial statements reflect all adjustments which, :n the opinion of management, are necessary for a fair presentation of the results of operations and financial position for the interim periods presented. -.11 such adjustments are :f a .normal recurring nature. The consolidated h n: ;:al statements have been prepared pursuant to the rules and regulations :f the Securities and Exchange Commission and in accordance with generally accented accounting principles (GAAP), compiled without audit and are subject to sucn year-end adjustments as may be considered appropriate by the registrant and should be read m conjunction with Coming's Annual Report on Form 1]--' ; ': toe year ended December 31, 2000. Page 3 of 31 <?AGE> CORNING INCORPORATED AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited; in millions, except per share amounts) <TABLE> <CAP7ICN> <S> Net sales Gross margin Cperating Expenses Selling, general and administrative expenses Research, development and engineering expenses Amortization of purchased intangibles, including goodwill Per the three months endec Maron 31, 2001 000 <C> 1,921 1,112 <c> 809 CO? 2 61 162 156 200 110 13 http://www.shareholder.co.. 70000024741 -01 -500019&CompanyID=glw&header=z&footer::::: 5/29/2001 Edgar Filing Page 4 of 31 Acquisition-related charges 89 Operating income Interest income Interest expense Other income (expense), net Nonoperating gains 230 24 (34) (9) 151 16 (24 ) (13) 7 Income before taxes Taxes on income 211 108 137 55 Income before minority interest and equity earnings Minority interest in earnings of subsidiaries Equity in earnings of associated companies Impairment of equity investment Net Income Basic Earnings Per Share Diluted Earnings Per Share Dividends Declared o o 103 (5) 34 I 132 $ 0.14 3 0.14 82 (3) 34 (36) 3 11 s 0.09 5 0.0 9 5 '1.0 6 Shares used in computing per share amounts: Basic earnings per share Diluted earnings per share </TABLE> 923 937 311 932 The accompanying statements. notes are an integral part of these consolidated financial <PAGE> CORNING INCORPORATED AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (Unaudited; in millions, except per share amounts) <TABLE> <ca?t:cn> ASSETS <s> Current Assets Cash Short-term investments, at cost, which approximates market value 2001 <c> $ 126 1,023 http://www.shareholder.co.. 70000024741 -01 -500019&CompanyID=glw&header=z&footer= 5/29/2001 Edgar Filing Accounts receivable, net of doubtful accounts and allowances $47/2001; $47/year-end 2000 Inventories Deferred taxes on income and other current assets Total current assets Investments Associated companies, at equity Others, at cost or fair value Plant and equipment, at cost, net of accumulated depreciation $2,795/2001; $2,662/year-end 2000 Goodwill, net of accumulated amortization $445/2001; $303/year-end 2000 Other intangible assets, net of accumulated amortization 362/2001; 3 52-'year-end 200C Other assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Loans payable Accounts payable Other accrued liabilities Total current liabilities Long-term debt Post retirement benefits other than pensions Deferred taxes on income Other liabilities Minority interest in subsidiary companies Mandatorily redeemable convertible preferred stock Common Shareholders' Equity Common stock, including excess over par value and other capital Par value $0.50 per share; Shares authorized: 3.8 billion; Shares issued: 1.0 billion/2001 and 1.0 billion/year-end 2000 Retained earnings Less cost of 76 million/2001 and 76 million/year-end 2000 shares of ccrrjT.on stock ir. treasury Accumulated other comprehensive loss Total common shareholders' equity Total Liabilities and Shareholders * Equity Page 5 of 31 1,351 1,215 359 4,074 469 137 606 4,939 6,720 565 268 $ ll',l*T3 $ 19'7 614 82" 1,638 3,838 594 9 195 140 3 3,685 2,077 .;777; (234) 10,751 $ 17,173 http://www.shareholder. co.../0000024741-01-500019&CompanyED=glw&header=z&footer= 5/29/2001 Edgar Filing Page 6 of 31 </TABLE> The accompanying statements. notes are an integral part of these consolidated financial <PAGE> CORNING INCORPORATED AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS {Unaudited; in millions) <TABLE> <CAPTION> <S> CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operat Amortization of purchased intangibles, including goodwill Depreciation Nonoperating gains Acquisition-related charges Impairment of equity investment Equity in earnings of associated companies in excess of dividend Minority interest in earnings of subsidiaries in excess of (1ess than) dividends paid Deferred tax benefit Tax benefit on stock, options Changes in certain working capital items Other NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures Acquisitions of businesses and leased assets, net of cash acquired Net proceeds from disposition of properties and investments Net '.increase, decrease m long-term investments and ether noncurr Transaction rests re 1 atea to pooling of interests NET CASH USED IN INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt Repayments of loans Proceeds from issuance of common stock Redemption of common stock for income tax withholding Dividends paid NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES Effect; of exchange rates on cash es : Three Months 2001 : 5" 6 i S3 2 1 13 (127) (2) http,7/www.shareholder.co.../0000024741-01 -500019&CompanyID=glw&header=z&footer=: 5/29/2001 Edgar Filing Page 7 of 31 Cash used in discontinued operations Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year (9) (645) 1,794 CASH AND CASH EQUIVALENTS AT END OF QUARTER </TABLE> $ 1,149 The accompanying statements. notes are an integral part of these consolidated financial <PAGE> CORNING INCORPORATED AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Information by Operating Segment Information about the performance of Coming's three operating segments for the first quarter of 2001 and 2000 are presented below. These amounts exclude revenues, expenses and equity earnings not specifically identifiable to segments. Segment net income excludes amortization of purchased intangibles and goodwill, purchased in-process research and development (IPRD) costs, one-time acquisition costs and other nonrecurring items. This measure is not in accordance with generally accepted ac ; tur.t i ng principles GAAP! and may not be consistent with measures usee r / :tr.er companies. Corning prepared the financial results for its three operating segments cn a basis that is consistent with the manner in which Corning management internally disaggregates financial information to assist in making internal operating decisions. Corning has allocated some common expenses among segments differently than it would for stand alone financial information prepared in accordance with GAAP. During the quarter ended March 31, 2001, Corning realigned one product line from the Advanced Materials Segment into the Telecommunications Segment. Segment results for 2000 have been restated to conform to the current presentation. <TA3LE> <CA?TICN> Three months ended March 31, 2001 2000 <s> Telecommunications !<t sales Research, development and engineering expenses Interest expense Segment earnings before minority interest and equity earnings Minority interest in losses of subsidiaries Equity in earnings of associated companies <C> 3 1 ,433 $ 124 $ 25 $ 186 3 <C> 3 905 3 78 3 15 3 112 3 http://www.shareholder.co.. 70000024741 -01 -50001 O&CompanylD^glw&header^z&footer^ 5/29/2001 Edgar Filing Segment net income Advanced Materials Net sales Research, development and engineering expenses Interest expense Segment earnings before equity earnings Equity in earnings of associated companies Segment net income Information Display Net sales Research, development and engineering expenses Interest expense Segment earnings before minority interest and equity earnings Minority interest in earnings of subsidiaries Equity in earnings of associated companies Segment net income Total segments Net sales Research, development and engineering expenses Interest expense Segment earnings before minority interest and equity earnings Minority interest in earnings of subsidiaries Equity in earnings of associated companies Segment net income </TABLE> <PAGE> Page 8 of 31 $ 189 $ 115 s 282 $ 28 $5 s 26 6 $ 32 $ 252 $ 26 $6 $ 17 6 3 23 s 201 3 10 $4 $ 21 (5) 25 $ 41 $ 188 36 33 3 20 (6) 27 $ 41 $ 1, 916 3 162 5 34 3 233 (5) 34 3 262 3 1, 34 5 3 11 0 $ 24 3 14 9 (3| 33 3 179 A reconciliation of the totals reported for the operating segments to the apoiicable line items m the consolidated financial statements is as follows: <TABLE> <CAPTION> Three months ended March 31, sales Total segment net sales Non-segment net sales (a) 2001 <C> 3 1,916 5 2000 <c> 3 1,34 5 6 Total net sales 3 1,921 $ 1,351 _________ http ://www. shareholder, co.. ./0000024741 -01 -500019&CompanyID=glw&header=z&footer= 5/29/2001 tiagar v uing Fage 9ot 31 Net income Total segment income (b) Unallocated items: Non-segment loss and other (a) Amortization of purchased intangibles and goodwill (c) Acquisition-related charges Interest income (d) Nonoperating gain Income tax (e) Equity in earnings of associated companies (a) Impairment of equity investment s 262 (1) (156) 24 3 Net income $ 132 (a) (b) (c> (d) (el </TABLE> Includes amounts derived from corporate investments. Includes royalty, interest and dividend income. Amortization of purchased intangibles and goodwill relates primarily to the Telecommunications segment. Corporate interest income is not allocated to reportable setr.er.ts. Includes tax associated with unallocated items. (2) Business Combinations The transaction listed below was accounted for under the purchase met:*.:: t f accounting. Management is responsible for estimating the fair value -f the assets and liabilities acquired. Management has made estimates end assumptions that affect the reported amounts of assets, liabilities and expenses resulting from such acquisitions. T ropel On March 16, 2001, Corning completed the acquisition of Tropel Corporation, a manufacturer of precision optics and metrology instruments for the semiconductor and other industries, for approximately $66 million in rash and 1.95 million shares of Corning common stock. Based upon the average closing price of Corning common stock for a range of days surrounding the announcement and adjusted for a discount commensurate with restrictions on the shares issued, the recorded purchase price approximated $160 million. The excess of the purchase price over the estimated fair value of tangible assets acquired was allocated to goodwill. Goodwill of approximately 3155 million is being amortized on a straight-line basis over 15 years. <PAGE> $ 179 (2) (13) (89) 15 7 15 i (36) $ 77 (3) Earnings Per Common Share A reconciliation of the basic and diluted earnings per share competitions for the first quarter of 2001 and 2000 are as follows (in millions, except per share amounts]: <TABLE> <CAPTI0N> For the three months ended March 2001 http ://www. shareholder, co.. ./0000024741 -01 -500019&CompanyID=glw&header=z&footer= 5/29/2001 Edgar Filing Page 10 of 31 <s> Basic earnings per share Income Weighted Average Shares Per share Amount <C> 3 132 <C> 923 <C> 3 0.14 Effect of Dilutive Securities Options Mandatorily redeemable convertible preferred stock 13 1 Diluted earnings per share $ 132 93^ S 0.14 </TABLE> At March 31, 2001, approximately 29 million convertible shares from the subordinated notes and the zero coupon convertible debentures were not included in the calculation of diluted earnings per share due to the anti-dilutive effect they would have had if converted. Also, tne 2001 computation of diluted earnings per share excluded 36 million prtential common shares since the option exercise price was greater than tne average market price of the common shares for the period. At Marcn 31, 2000, approximately eight million convertible shares frcrr. the preferred steer. and the subordinated notes were not induceIn the calculation of diluted earnings per share due to the anti-dilutive afreet they would have had if converted. Common dividends of $56 million were declared in the first quarter cf 2001 compared with $50 million for the same period in 2000. Dividends cer snare were $0.06 in each period. !4) Taxes on Income Coming's effective income tax rate for the first quarter ended Marcn 31, 2001 was 51.1%, an increase over the 2000 rate of 40.1%. The increase was primarily due to the large amounts of non-tax deductible purchased intangibles and goodwill acquired from acquisitions arising i r. 2000. Excluding the impact of the amortization of purchased intangibles and goodwill, purchased IPRD costs, one-time acquisition costs and other nonrecurring items, the effective income tax rate was approximately 32.5% for the quarters ended March 31, 2001 and 2000. t 5 3 Supplementary Balance Sheet Data Inventories shown on the accompanying following (in millions): <TABLE> <CAPTI0N> balance sheets were comprise: of the <s> Finished goods Work in process Raw materials and accessories Supplies and packing materials March 31, 2001 <c> 3 418 290 402 105 December 31, 2000 <c> S 300 263 377 100 Income Av <C> 3^ $ 77 http ://www. shareholder, co.. ./0000024741 -01 -500019&CompanyID-glw&header=z&footer= 5/29/2001 Edgar Filing Total inventories </TABLE> <PAGE> $ 1,215 $ 1,040 Page 11 of 31 (6) Supplementary Statement of Cash Flows Data Supplemental disclosure of cash flow information is as follows: <TABLE> <CAPTION> <S> Changes in certain working capital items: Accounts receivable Inventories Other current assets Accounts payable and other current liabi Total ::c the three months ended March 2001 <c> 2000 <c> 3 117 (178) 53 (263) 3 (56) (82) ! 22 ) (214 ) 3 (271) $ (374) Cash paia for interest and income taxes is as follows: Interest Income taxes </TA3LE> 2 45 1 35 $ 37 $ 10 ( 7i Comprehensive Income Comprehensive income, net of tax, for the first quarter of 2001 anc :'00 is as follows (in millions): <TABLE> <CAPTION> For the three months ended Ma 2001 200' <S> Net income Other comprehensive income: Foreign currency translation adjustment Unrealized (loss) gain on marketable securities Realized gains on securities Cumulative effect cf adoption of FAS 133 Unrealized derivative losses on cash flow hedges Reclassification adjustments on cash flow hedges <C> 132 (81) (28) 3 (3) 2 Total comprehensive income S </TABLE> The after-tax components of other comprehensive losses accumulated in 25 3 10 http://www.shareholder.co.. ./0000024741 -01 -50001 O&CompanylD^glw&header^z&footer^ 5/29/2001 Edgar Filing Page 12 of 31 shareholders' equity are as follows (in millions): <TABLE> <CAPTION> Foreign Currency Translation Adj ustment <S> December 31, 2000 Foreign currency translation adjustment Unrealized loss on marketable securities (net of tax of $18) Cumulative effect of adoption of FAS 133 Unrealized derivative losses on cash flow hedges (net of tax of $2) Reclassification adjustments on cash flow hedges (net of tax of $2) <C> $ (168) (81) Unrealized Cains (Losses) on Marketable Securities <C> 3 41 (28) Unrealized Gains (Losse. on Cash Flo1 Hedges <C> 3 (3) 2 March 31, 2001 </TABLE> $ (249) 13 9 <PAGE> (8) Dow Corning Corporation Corning and The Dow Chemical Company 'Dow Chemical) each own f ; :: the common stock of Dow Corning Corporation (Dew Corning), a manufa';c >: cf si1icones. On May 15, 1995, Dow Corning sought protection under the reorganization provisions of Chapter 11 of the United States Bankruptcy Code. At tnat time, Corning management believed it was impossible to predict if ar.z when Dow Corning would successfully emerge from Chapter 11 proceedings. As a result. Corning recorded an after tax charge of $366 million to fully reserve its investment in Dow Corning and discontinued recognition of equity earnings from Dow Corning in 1995. The bankruptcy proceeding is sending in the United States Bankruptcy Court for the Eastern D:?":-. of Michigan, Northern Division (Bay City, Michigan). The bankrupt',"/ filing stayed the prosecution against Dow Corning of approximately 13,000 breast-implant product liability lawsuits, including 45 class aotims. In the period from December 1996 through February 1998, Dow Corning filed a plan of reorganization and two amended plans, each of which was cpccsef by creditor representatives. In 1998, Dow Corning and the Tort Claimants Committee engaged in extended negotiations and reached certain compromises. On November 8, 1998, Dow Corning and the Tort Claimants Committee jointly filed a revised Plan of Reorganization (Joint Plan). The Joint Plan ar.d related disclosure materials were mailed to claimants for their approval. Following a favorable vote from all but four classes of creditors, a hearing to confirm the Joint Plan was held in mid 1999. On November 30, 1999, the Bankruptcy Court entered an order confirming the Joint Plan and indicated that certain written opinions would follow. On December 21, 1999, the Bankruptcy Court issued an opinion that approved the principal elements of the Joint Plan with respect to tort claimants, but http://www.shareholder.co.. ./0000024741 -01 -500019&CompanyID=glw&header=z&footer:= 5/29/2001 Edgar Filing construed the Joint Plan as providing releases for third parties (including Corning and Dow Chemical as shareholders) only with respect to tort claimants who voted in favor of the Joint Plan. A number of parties opposing the Joint Plan filed appeals on a variety of grounds to the United States District Court for the Eastern District of Michigan. Dow Corning and the Tort Claimants Committee filed a notice of appeal seeking review of the ruling limiting the scope of the shareholder releases. Corning ar.d Dow Chemical filed separate notices of appeal on this issue. On November 13, 2000, the District Court entered an Order affirming the Bankruptcy Court's November 30, 1999 Order confirming the Joint Amended Plan and reversing the Bankruptcy Court's December 21, 1999 Opinion on the release and injunction provisions. On February 5, 2001, the District Court denied a Motion for Reconsideration, confirming that the Litigation Facility under the Joint Plan is the defendant in place of Dow Corning, Corning and Dow iremicai, and that Corning and Dow Chemical are not named defendants for direct claims. Approximately 20 appeals from the District Court's Crier are pending in the Sixth Circuit Court of Appeals, which is expected to rule in late 2001. After all appeals are exhausted, if the Joint Plan is upr.ei i but the shareholder releases are effective only for those voting in favir of the Joint Plan, Corning would expect to defend any remaining claims against it on the same grounds that led to a series of orders and ;oilments dismissing all claims against Corning in the federal courts and rn~ state courts as described under the heading Implant Tort Lawsuits i r. ? :" II, Item 1, Legal Proceedings. With respect to the possibility of additional direct or indirect claims against Corning if the full releases are not reinstated in the Joint Plan, management believes that such claims lark merit and that the breast implant litigation against Corning 1 be resolved without material impact on Coming's financial statements. Under the terms of the Joint Plan, Dow Corning would be require i to establish a Settlement Trust and a Litigation Facility to provide = --earns for tort claimants to settle or litigate tneir claims. Dow Cor:..:. : v:uld have the obligation to fund the Trust and the Facility, over a pen.: . ip to 16 years, in an amount up to approximately $3.3 billion, subject - the limitations, terms and conditions stated in the Joint Plan. Dow Cming proposes to provide the required funding over the 16 year period through a combination of cash, proceeds from insurance, and cash flow from operations. Corning and Dow Chemical have each agreed to provice a credit facility to Dow Corning of up to $150 million ($300 million ir. the aggregate), subject to the terms and conditions stated in the Joint Flan. The Joint Plan also provides for Dow Corning to make full payment, through cash and the issuance of senior notes, to its commercial creditors. If and when Dow Corning emerges from bankruptcy, Corning will likely to recognize equity earnings from Dow Corning. Corning does not expect to receive dividends from Dow Corning in the foreseeable future. <PAGE> Page 13 of 31 (9; Pittsburgh Corning Corporation Corning and PPG Industries, Inc. each own 50% cf the capital stc:< of Pittsburgh Corning Corporation (PCC). PCC and several other defendants have beer, named in numerous lawsuits involving claims alleging personal ir.lury from exposure to asbestos. By the first quarter of 2000, PCC incurred adverse verdicts in five trials involving 19 claimants. On April 16, 2000, PCC filed for Chapter 11 reorganization in the United States Bankruptcy Court for the Western District of Pennsylvania. As of the bankruptcy filing, PCC had in excess of 240,000 open claims. At the time of its http ://www. shareholder, co.. ./0000024741 -01 -500019&CompanyID=glw&header=z&footer= 5/29/2001 tagar tiling Chapter 11 filing, PCC sought and obtained a temporary restraining order and filed a motion for a preliminary injunction against the prosecution of asbestos actions against its two shareholders. On April 4, 2001, the Bankruptcy Court extended the period for PCC to file a plan of reorganization until July 9, 2001. The preliminary injunction has been extended by court order to August 23, 2001 to enable the parties to negotiate a plan of reorganization for PCC. Upon expiration ;f the injunction, PCC, PPG Industries and Corning will have 90 days to seek removal and transfer of stayed cases that have not been resolved t.nrtigh a plan of reorganization. As a result of PCC's bankruptcy filing, Corning recorded an after tax charge of $36 million in the first quarter of 2000 to impair its entire investment in PCC and discontinued recognition of equity earnings. At the time PCC filed for bankruptcy protection, there were approximately 12,400 claims pending against Corning alleging various theories of liability based on exposure to PCC's asbestos products, all of which are stayed pursuant to the injunction of the bankruptcy court. Before PCC filed for bankruptcy protection, Corning was dismissed fr:r j.nlar claims as cases against PCC proceeded to trial. The Chapter 11 film: may lead to additional claims against Corning with related costs of lefer.se, charges and expenses. Although the outcome of litigation and the bankruptcy case is uncertain, management believes that the separate corporate status of PCC will continue to be upheld. Management is continuing to ir.v-m. _ sate Coming's options for defending claims against it, which might m:_ :se vigorously defending itself on all fronts or exploring a global settlement through the bankruptcy process. It is probable that there will be irter.sive negotiations throughout the second quarter of 2001 concerning terms of PCC's plan of reorganization, including whether or not Corn::-.: may participate by making a contribution in exchange for a release. Marrecent cannot estimate the probability that Corning will be able to secure .or. a release upon terms and conditions satisfactory to Corning. The rar.se of cost for these options (net of insurance) cannot be estimated at turn ":me, aitr.ough management believes these matters will be resolved wm: :t a materially adverse impact on Coming's financial position. (10) Adoption of New Accounting Standard - Derivative Financial Instruments - FAS 133 Effective January 1, 2001, Corning adopted Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," (FAS 133) as amended by FAS No. 137 and FAS No. 138. FAS 133 requires that all derivative financial instruments be recognizee ir. the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized periodically in net earnings or shareholders' equity, as a component of other comprehensive : .:.:me, depending on wnether the derivative is being used to hedge changes fair value or cash flows. Changes in fair value of ineffective porti:r.s of hedges are recognized in earnings in the current period. The adoption of FAS 133 as of January 1, 2001, resulted in a cumulative after-tax cre:it to comprehensive income of $3 million. For the three months ended Marc.n 31, 2001, an after-tax charge of $3 million was recorded in other income (expense), net for the ineffective portion of cash flew hedges. Foreign Currency Risk Corning operates and conducts business in many foreign countr ies. As a result, there is exposure to potentially adverse movement in foreign currency rate changes. Corning selectively enters into foreign exchange forward and option contracts with durations generally 12 months or less to reduce its exposure to exchange rate risk on foreign source income and purchases. The objective of these contracts is to neutralize the impact of ttage 14 ot 31 http ://www.shareholder.co.. 70000024741 -01 -500019&CompanyID-glw&header=z&footer= 5/29/2001 fcagar tiling foreign currency exchange rate movements on Coming's operating results. <PAGE> The derivative contracts require Corning to exchange, or give Corning the action to exchange currencies at rates agreed upon at the inception of the contract. The hedge contracts reduce the exposure to fluctuations in exchange rate movements because the gains and losses associated with foreign currency balances and transactions are generally offset with the gains and losses of the hedge contracts. Because the impact of movements in foreign exchange rates on the hedge contracts offsets the relates impact on the underlying items being hedged, these financial instruments help alleviate the risk that might otherwise result from change in currency exchange rate fluctuations. The forward and option contracts are designated as cash flow hedges and accordingly, when effective, any changes in fair value on these contracts are reported in other comprehensive income. Realized gains and losses for the effective portion are recognized in earnings when the underlying r.eiiged transaction affects earnings. <?AGE> Fage id ot J i Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net sales totaled $1.9 billion for the first quarter of 2001, an increase of 42% over sales of $1.35 billion in the prior year quarter. Excluding the impact of acquisitions, net sales increased 26% over the first quarter of 2000. Sales growth in the first quarter was most pronounced in the Telecommunications Segment, where the impact of acquisitions and demand for Coming's premium fiber and carle and photonics products drove quarter over quarter segment sales growth c f 13%. Coming's net income totaled $132 million in the first quarter of 2 mil, an increase of "?1% from the prior year quarter. Diluted earnings ce: share increased 55% to 30.14 per share in the first quarter of 2001 compare;: to the prior year quarter. The percentage increase in earnings per share is less than the percentage increase in net income due to the issuance of common stock for acquisitions and related financing transactions in 2000. Coming's results for the first quarter of 2001 did not include any material nonrecurring items, however 2000's first quarter results were impacted by several nonrecurring items: a nonoperating gain of $7 million ($4 million after tax), an in-process research and development (IPRD) charge of $42 million ($26 million after tax), a charge for acquisition costs related to the merger of Oak Industries of http://www.shareholder.co.../0000024741 -01 -500019&CompanyID=glw&header=z&footer=: 5/29/2001 Edgar Filing Page 16 of 31 $47 million ($43 million after tax), and an after-tax charge of $36 million to impair Pittsburgh Corning Corporation. Coming's investment in Amortization of purchased intangibles and goodwill totaled $156 million ($145 million after tax) in first quarter 2001 compared to $13 million ($10 million after tax) in first quarter 2000. This increase primarily relates to purchase business combinations in the Telecommunications Segment completed in 2000. Corning believes comparing its operating results on a pro forma basis excluding amortization of purchased intangibles and goodwill and nonrecurring items provides a better understanding of the changes in its operating results. This measure is not in accordance with, or an alternative for, generally accepted accounting principles (GAAP) and may not be consistent with measures used by other companies. Pro forma net income is calculated millions): <TABLE> <CAPTION> from net income as follows (after t3x sr.j in Three Months Ended March 31, 2001 2000 <S> Net income Amortization of purchased intangibles, including goodwill In-process research and development charges Other acquisition-related charges Nonoperating gains Impairment of equity investment '"O'- 132 145 <c> $ 71 10 26 43 (4) 36 Pro forma net income $ 277 $ 188 Pro forma diluted earnings per share </TABLE> $ 0.29 $ 0.23 <PAGE> The first quarter 2001 pro forma results reflect double-digit growth ir. the Telecommunications and Advanced Materials Segment while the Information Display Segment remained relatively flat. Outlook Over the course of the first quarter, Coming's outlook has oeolinea significantly due to a substantial reduction in capital spending in the telecommunications industry and the general softening of the U.S. economy. As a result of these factors, Corning now expects revenue growth of 9% to 12% compared to previous expectations of 20% to 25% and expects pro forma earnings per share to decrease 20% to 25% from 2000. As a result of lower revenue expectations, Corning has taken the following actions to adjust its cost http ://www. shareholder, co.. 70000024741 -01 -500019&Companyro=glw&header=z&footer= 5/29/2001 Edgar Filing structure: Through the end of the first quarter, Corning reduced its workforce by approximately 3,300 permanent and temporary employees, primarily in the photonic technologies and hardware and equipment businesses. These workforce reductions comprised mostly hourly production workers and resulted in minimal severance charges. In April, Corning announced an additional workforce reduction of approximately 1,000 positions in photonic technologies, including both hourly and salaried employees. . Corning is decreasing its capital spending forecast for 2001 from S2.5 billion to approximately $2 billion, delaying some capital expansion to 2002. Coming's research and development spending in 2001 will be approximately $650 million to $675 million, a decrease from an anticipated $700 million, but substantially over 2000's $540 million. Corning will continue to review its internal cost structure and mcr.it.r me industry trends throughout 2001, which may result in additional cost improvement measures and targeted workforce reductions. As a result of actions taker. the second quarter, Corning may record a restructuring charge in the second quarter. Corning is still committed to invest in new product development, targeted capacity expansion and external growth. Business Combinations On March 16, 2001, Corning completed the acquisition of Tropel Corporation for approximately $66 million in cash and 1.95 million shares of Corning ommon stock for a total purchase price of approximately $160 million. The acquisition was accounted for as a purchase and is reported in the semiconductor materials business in the Advanced Materials Segment. Operating Segments Corning groups its proaucts into three operating segments: Telecommur.i cat _ or.s, Advanced Materials and Information Display. Corning includes the earnings of equity affiliates that are closely associated with Coming's operating segments in segment net income. Information about the performance of Coming's three operating segments for the first quarter of 2001 and 2000 is presented below. These amounts do not include revenues, expenses and equity earnings not specifically identifiable to segments. Segment net income excludes amortization of purchased intangibles and goodwill, acquisition costs, and other nonrecurring purchased IPRD costs, one-time items. Note 1 to the consolidated financial statements includes a reconciliation of segment results to Coming's net income. This measure is not in accordance with GAAP and may r. :t be consistent with measures used by other companies. Corning prepared the financial results for its three operating segments on a basis that is consistent with the manner in which Corning management internally disaggregates financial information to assist in making internal operating decisions. Corning has allocated some common expenses among segments differently than it would for stand alone financial information prepared in accordance with GAAP. During the quarter ended March 31, 2001, Corning realigned me proouct line from the Advanced Materials Segment into the Telecommunications Segment. Segment results for 2000 have been restated to conform to the current presentation. <?AGE> Page 17 of 31 http://www.shareholder.co.. 70000024741 -01 -500019&CompanyID=glw&header=z&footer= 5/29/2001 Edgar Filing <TABLE> <CAPTION> Page 18 of 31 Telecommunications (In millions) <S> Net sales Research, development and engineering expenses Interest expense Segment earnings before minority interest and equity earnings Minority interest in losses of subsidiaries Equity in earnings of associated companies Segment net income Three Months Ended 2001 March 31, 2000 <c> 3 1,433 $ 124 3 "1 C. S 136 <c> $ s $ 905 78 15 3 112 3 $ 139 $ 115 Segment earnings before minority interest and equity earnings as a percentage of segment sales Segment net income as a percentage of segment sales 13.0% 13.2% </TABLE> The Telecommunications Segment produces optical fiber and cable, optical hardware and equipment and photonic modules and components for tr.e worldwide te1ecommunications industry. first quarter Sales in the Telecommunications Segment increased 58% over the first quarter of 2000 to approximately $1.4 billion compared to $905 million in the prior year quarter. Excluding acquisitions, sales growth for the same period ir. 2101 was 35%. The sales growth in the segment was led primarily by volume gains in the optical fiber and cable, hardware and equipment and photonic technologies businesses. Segment net income rose 64% to $189 million in first quarter 2001 compared to $115 million in first quarter 2000. The increase in segment net income was primarily due to improved gross margins in the fiber ar.d cable business that more than offset a margin decline in photonic technologies. Sales m the fiber and cable business improved 83% in the first quarter of 2001 to $875 million compared with $4*79 million in the prior year quarter. The increase in sales resulted primarily from the impact of acquisitions ar.d strong volume gains. Approximately $143 million of the increase in optical fiber and cable sales resulted from the acquisition of the remaining 50% interest in Siecor GmbH and the cabling business previously owned by Siemens in the first quarter of 2000. Excluding the impact of these acquisitions, sales in the fiber and cable business increased 53% for the quarter due to volume gains of 30%, reflecting continued strong demand for Coming's premium fiber products. Volume of premium fiber and cable products, including Coming's LEAF (R) and MetroCor(TM) optical fiber, increased almost 50% over the prior year quarter. The average price for Coming's optical fiber and cable products increased in comparison with last year's first quarter due to both the mix of customers and a higher mix of 12.4% 12. "7% http://www.shareholder.co.. ./0000024741 -01 -500019&CompanyID=glw&header=z&footer= 5/29/2001 txigar limg premium products, Corning does not expect this trend to continue throughout 2001 as premium fiber as a percentage of total fiber demand will decrease from approximately 35% in the first quarter to 25% for the entire year of 2001. Net income from the fiber and cable business more than doubled in the first quarter of 2001 compared to the prior year quarter. The strong performance was due to volume growth m both high-data rate and single mode products and the continued shift to a higher premium product mix. <PAGE> rage iy or ii Sales in the telecommunications hardware and equipment business increase: 35% in the first quarter of 2001 to approximately $248 million compared with $133 million in the prior year quarter. Excluding acquisitions, first quarter 5001 sales increased 9% compared to the prior year quarter. The modest imrease resulted primarily from higher volume of existing products including table assemblies, fiber optic hardware and high speed internet connections, offset in part by price declines and a 47% decrease in revenues at Gilbert Engineering due to growing weakness in cable television industry spending. Overall, net mrome decreased slightly compared to the prior year quarter, primarily due to ": less of volume at Gilbert Engineering. The business has reduced its hourly wcr.*::orce by approximately 1,175 employees to date. Sales in the photonic technologies business increased approximately _r the first quarter of 5001 to approximately $236 million compared to appr at-ly $186 million in the prior year quarter. Excluding acquisitions, sales imrmsed 20% over the prior year quarter. Although sales were up compared to tr.e first quarter of 2000, sales declined 30% from the fourth quarter of 2C5'. : le to significant declines in orders from maior customers caused by the decrease in capital spending in the telecommunications segment. The business inc.-rrer an operating loss in the first quarter as a result of excess capacity ar. 3 a : :her fixed cost structure compared to the first quarter of last year. Corning now expects revenues in photonic technologies to be about even wirr. 2000 versus original expectations that revenues would increase significantly due to growth in demand for photonic technology devices. Corning is new making significant cost and workforce reductions to reflect the lower re/enue expectations. The business reduced its workforce through April 30, 2201 by approximately 2,500 employees this year which includes hourly, salaried and temporary positions. As a result of the sudden decline in orders for this business, rr :: ;r,ic technologies' inventories increased approximately 35% during the quarter. Management has taken action to significantly curtail production am r-muce inventories over the course of the year. Although management believes i rv~:.tory is currently realizable, further changes in anticipated customer craer rates and/or changes in customer sped f ications could increase Coming's exposure to obsolescence in the future. Corning has also significantly reduced its capital expansion plans m this business. Construction of a new manufacturing facility in Nashua, NH will be completed and then mothballed until increased demand resumes. Other previously announced capacity expansions in the business will be delayed, or postponed until business conditions improve. The optical networking devices business, which is developing wavelength management products and optical switch modules, began making shipments of its http://www.shareholder.co.. 70000024741 -01 -500019&CompanyID=glw&header=z&footer= 5/29/2001 hdgar t lling wavelength management products to customers in the third quarter of 2000. The business had sales of $14 million in the first quarter of 2001. This business is also seeing some softening in expected demand for its products. Corning is investing significant research and development spending in this business. Sales in the controls and connectors business increased 5% to $60 million in the first quarter of 2001 compared to $5*7 million in the prior year quarter. The modest increase was primarily due to weak customer demand, particularly in :J.S. markets. Net income from these businesses improved slightly, moving from a break-even position in the first quarter of 2000 to moderate profitability in the first quarter of 2001. The business reduced its workforce by approximately 525 employees this year in response to current revenue forecasts. Outlook: Sales in the Telecommunications Segment are now expected trend upward by approximately 9% to 12% primarily based upon the continued demar.i for Coming's cabled fiber products. Excluding the impact of acquisitions, sales are expected to increase 5% to 7%. Segment net income is expected to decrease 25% to '30% for the year primarily hue to decreased volumes of amplifiers in photonic technologies and a lower mix of premium products in the fiber and cable business. <PAGE> <TABLE> Page 20 ot 31 Advanced Materials (In millions) <S> Net sales Research, development and engineering expenses Interest expense Segment earnings before equity earnings Equity in earnings cf associated companies Segment net income Three Months Ena* March 31, 001 <C> $ 282 $28 $5 $26 < $ $ $ $ Segment earnings before equity earnings as a percentage of segment sales Segment net income as a percentage of segment sales </TABLE> The Advanced Materials Segment manufactures specialized products with inique applications utilizing glass, glass ceramic ana polymer technologies. The largest businesses in this segment are environmental technologies and life sciences . First quarter Sales in the Advanced Materials Segment increased 12% in the first quarter of 9 . 2% 11.3% http://www.shareholder.co.../0000024741-01-500019&CompanyID=glw&header=z&footer=: 5/29/2001 Edgar Filing Page 21 of 31 2001 to $282 million compared to $252 million in the prior year quarter, primarily due to strong growth in the semiconductor materials business. Segment net income increased 39% in the first quarter of 2001 compared to the prior year quarter as improved operating performance more than offset an increase in research and development spending, flat equity earnings and spending to launch new products in life sciences. Sales in the environmental technologies business for first quarter 2001 :f $108 million exceeded first quarter 2000 sales of $103 million by 5%, primarily due to continued strong demand for Coming's thin wall products, particularly in Asia. Earnings in this business for the first quarter of 2001 remained relatively flat compared to the prior year quarter, primarily due to start-up costs in South Africa and China, lower sales volumes in the U.S. automotive market and manufacturing inefficiencies related to the introduction of new ultra thin wall products. Sales in the life sciences business of $70 million in the first quarter of 2001 increased 11% compared to first quarter 2000 sales of $63 million primarily due to increased volume of microplates. Earnings in this business were breakeven for the 2001 quarter and flat compared to first quarter 2000 as the business continues to incur start-up costs for Coming's microarray technology products that offset gains achieved from cost structure improvements in tr.e case business. Sales in Coming's other Advanced Materials businesses increased 21% free. first quarter 2000 to $104 million in the first quarter of 2001 compared to $96 million in the prior year quarter. Excluding the impact of the divestiture zt Quanterra in the first quarter of 2000, sales improved 30%. This increase was led by higher sales of high purity fused silica products in the semi rrr.ourtor materials business. Earnings from these businesses in first quarter 20C1 more than tripled over first quarter 2000 primarily due to increased vcL;me and despite a decrease in equity earnings from Eurokera, a French based mart:a ;turer of glass ceramic cooktops. Outlook: The 2001 outlook for this operating segment remains relatively unchanged from that included in Coming's Form 10-K. Corning expects segment sales in 2001 to increase 8% to 10% despite signs of softness in the semiconductor market. Life science products, particularly the new microarray products, are also expected to continue to grow. Segment net income is expected to increase in 2001 reflecting these sales gains, aggressive cost reaction initiatives and the wind-down of startup costs in environmental technologies offset in part Dy the continued investment in research and development spending on advanced life science products and diesel substrates. <?AGE> <TAELE> CCAPTION> Information Display (In millions) <s> Net sales Research, development and engineering expenses Interest expense 200 Mcnths Ended March 31, 2000 <C> $ $ $ 201 10 4 <c> $ $ 3 188 6 3 http://www.shareholder.co.. ./0000024741 -01 -500019&CompanyID=glw&header=z&footer= 5/29/2001 Edgar Filing Page 22 of 31 Segment earnings before minority interest and equity earnings Minority interest in earnings of subsidiaries Equity in earnings of associated companies Segment net income 21 (5)' 25 $ 20 (6) 27 41 Segment earnings before minority interest and equity earnings as a percentage of segment sales Segment net income as a percentage of segment sales 1 C , i *i 20.4% </TABLE> The Information Display Segment manufactures glass panels and funnels for televisions and CRTs (conventional video components), liquid crystal i: splay glass for flat panel display (display technologies) and precis::.-. lens assemblies for projection video systems. First quarter Sales in the Information Display Segment increased 7% in first quarter 1!!1 to $201 million compared to $188 million in first quarter 2000, primarily : :e to strong growth in the precision lens business offset by flat perforrr.ar. res m display technologies and the conventional video components businesses. Segment net income in the first quarter of 2001 also remained flat compare! vitr. the prior year quarter primarily due to lower equity earnings. Sales in the conventional video components business increased 4% to $80 -rill ion in first quarter 2001 compared to $83 million in first quarter 2000. Ear:::r,:s in this business for the quarter improved slightly over first quarter 200 1 :~cpite flat equity earnings from Samsung Corning Company Ltd., a manufacturer :: class panels and funnels for televisions and display monitors. Sales in the display technologies business in first quarter 2001 were flat at $62 million compared to first quarter 2000 sales of $61 million. Volume increases of 20% were lower than recent quarters due to an inventory correction in the industry and were offset by the impact of the weak yen on translated sales. Earnings in this business for the quarter were down slightly compared to the same quarter in 2000 primarily due to flat sales and lower equity earnings from Samsung Corning Precision, a Korean manufacturer of liquid crystal display glass, due to the divestment of Samsung Coming's 40% interest in Samsung Corning Precision m late 2000. Sales m the precision lens business increased 21% to $53 million ir. first quarter 2001 compared to $44 million in first quarter 2000 as a result of continued strong volume growth for projection televisions driven by a err. a nc for larger size televisions m the entertainment market sector. Earnings m tr.is business for the quarter were relatively flat in 2001 compared to first quarter 2000, primarily due to volume gains offset by increased spending for the expansion expected to come on-line in the second half of 2001. Outlook: Sales in the Information Display Segment are expected to increase approximately 10% to 15% in 2001 and segment net income is also expected tr grow 10% to 15%. Both sales and net income outlooks are being negatively impacted by the translation rate of the yen which is offsetting expected sales volume gains. 10.6% 21.8% <PAGE> http://www.shareholder.co..70000024741-01 -500019&CompanyID=glw&header=z&footer= 5/29/2001 Edgar Filing Page 23 of 31 Taxes on Income Coming's effective income tax rate for the first quarter ended March 31, 2001 was 51.1%, an increase over the 2000 rate of 40.1%. The increase was primarily due to the large amounts of non-tax deductible purchased intangibles and goodwill acquired from acquisitions arising in 2000. Excluding the impart :f the amortization of purchased intangibles and goodwill, purchased IPPD costs, one-time acquisition costs and other nonrecurring items, the effective income tax rate for the quarters ended March 31, 2001 and 2000 was approximately 32.5%. Liquidity and Capital Resources In March 2001, Corning filed a universal shelf registration statement with the Securities and Exchange Commission that became effective in the first quarter. The shelf permits the issuance of up to $5 billion of various debt arc equity securities. Coming's working capital decreased from $2,685 million at December 31, 2000 to $2,436 million at March 31, 2001. The ratio of current assets to current liabilities was 2.5 at March 31, 2001 compared to a current ratio ;f 2.4 at December 31, 2000. The decrease in working capital is due primarily zz capital spending, partially offset by a reduction in accounts payable and an increase in inventories. Coming's long-term debt as a percentage of total capital tezreased slightly from 27% at December 31, 2000 to 26% at March 31, 2001. Cash Plows Cash and short-term investments at March 31, 2001 decreased from Dezerr.bet 31, 2000 by 3645 million. This decrease is the result of investing activiz.ez *\hizh used cash of $633 million and financing activities which used zazr. $127 million, offset by operating activities which generated cash of $176 . Net cash provided by operating activities was $176 million during tne three months ended March 31, 2001 compared with cash used of $52 million for the prior year period. This trend is primarily due to increased operating results adjusted for higher depreciation and amortization of purchased intangibles and goodwill. Cash used in working capital was lower in 2001. Net cash used in investing activities amounted to $683 million during the three months ended March 31, 2001 compared with $1,299 million in the prior year period. The decrease in cash used was primarily related to the high vzlume of acquisitions in first quarter 2000 offset in part oy higher capital spending in Corning continues to invest significant cash m capacity expansions to support growth in operations. Capital spending for the three months ended Marzr. 31, 2001 totaled $576 million compared to $213 million in the prior year period. Corning revised its capital spending plan due to a decrease in forecasted revenues and profits for 2001. Corning currently expects its capital spending fzr the full year to be in the range of $2 billion. Net cash used in financing activities was $127 million during the three months ended March 31, 2001 compared with cash provided of $2,387 million in the prior year period. The substantial decrease is due primarily to the timing of financing transactions in 2000 that included the equity offering which generated cash proceeds of $2.2 billion and the euro-debt offering which provided an additional $485 million in 2000. http ://www. shareholder, co.. ./0000024741 -01 -50001 O&CompanylD^glw&header^z&footer^ 5/29/2001 Edgar Filing Dividends paid to common shareholders for the first quarter totaled $56 million compared with $50 million in the same period of 2000. Page 24 of 31 <PAGE> "Safe Harbor" 1995 Statement under the Private Securities Litigation Reform Act of The statements in this Form 10-Q which are not historical facts or information are forward-looking statements. These forward-looking statements involve risks and uncertainties that may cause the outcome to be materially different. Such risks and uncertainties include, but are not limited to: global economic conditions, currency fluctuations, product demand and industry capacity, competitive products and pricing, sufficiency of manufacturing capacity and efficiencies, cost reductions, availability ana costs of critical materials, new product development and commercialization, attracting and retaining key personnel, facility expansions and new plant start-up costs, the effect of regulatory and legal developments, capital resource and cash flow activities, capital spending, equity company activities, interest costs, acquisition and divestiture activity, the rate of technology change, the ability to enforce patents, stock price fluctuations, and other risks detailed in Coming's Securities and Exchange Commission fi *:ngs. <PAGE> Part II - Other Information ITEM 1. LEGAL PROCEEDINGS There are no pending legal proceedings to which Corning or any of its subsidiaries is a party or of which any of their property is the subject which are material in relation tc the consolidated financial statements. Environmental Litigation. Corning has been named by the Environmental Protection Agency under the Superfund Act, or by state governments under similar state laws, as a potentially responsible party at 11 active hazardous waste sites. Under the Superfund Act, all parties who may have contributed any waste to a hazardous waste site, identified by such Agency, are jointly and severally liable for the cost of cleanup unless the Agency agrees otherwise. It is Coming's policy to accrue for its estimated liability related to Superfund sites and other environmental liabilities related to property owned by Corning http://www.shareholder.co.. 70000024741 -01 -500019&CompanyID=glw&header=z&footer= 5/29/2001 Edgar Filing based on expert analysis and continual monitoring by both internal and external consultants. Corning has accrued approximately $18 million for its estimated liability for environmental cleanup and litigation at March 31, 2001. Based upon the information developed to date, management believes that the accrued reserve is a reasonable estimate of the Company's estimated liability and that the risk of an additional loss in an amount materially higher than that accrued is remote. Dow Corning Bankruptcy. Corning and The Dow Chemical Company each own 50% of the common stock of Dow Corning Corporation. On May 15, 1995, Dow Corning sought protection under the reorganization provisions of Chapter 11 of the United States Bankruptcy Code. The bankruptcy proceeding is pending in the United States Bankruptcy Court for the Eastern District of Michigan, Northern Division (Bay City, Michigan). The bankruptcy filing stayed the prosecution against Dow Corning of approximately 19,000 breast-implant product liability lawsuits, including 45 class actions. In the period from December 1996 through "ecr:ary 1998, Dow Corning filed a plan of reorganization and two amended plans, each of which was opposed by creditor representatives. In 1998, Dow Corning and t.te Tort Claimants Committee engaged in extended negotiations and reached :er:a:n compromises. On November 8, 1998, Dow Corning and the Tort Claimants Committee jointly filed a revised Plan of Reorganization (Joint Plan). The Joint Plan and related disclosure materials were mailed to claimants for their approval. Following a favorable vote from all but four classes of creditors, a hear;:.: to confirm the Joint Plan was held in mid 1999. On November 30, 1999, the Bankruptcy Court entered an order confirming the Joint Plan and indicated that certain written opinions would follow. On December 21, 1999, the Bankruptcy Court issued an opinion that approved the principal elements of the Joint Flan with respect to tort -claimants, but construed the Joint Plan as pru. lime releases for third parties (including Corning and Dow Chemical as sharerd ;ers i only with respect to tort claimants who voted in favor of the Joint Phr,. A number of parties opposing the Joint Plan filed appeals on a variety of criunds to the United States District Court for the Eastern District of Michigan. Dow Corning and the Tort Claimants Committee filed a notice of appeal seekir.c review of the ruling limiting the scope of the shareholder releases. Cornin'! a.u : Dew Chemical filed separate notices of appeal on this issue. On November 13, 3900, the District Court entered an Order affirming the Bankruptcy Court's November 30, 1999 Order confirming the Joint Amended Plan and reversing the Bankruptcy Court's December 21, 1999 Opinion on the release and injunction provisions. On February 5, 2001, the District Court denied a Motion for Reconsideration, confirming that the Litigation Facility under the Joint Plan is the defendant m place of Dow Corning, Corning and Dow Chemical, and that Corning ar.d Dow Chemical are not named defendants for direct claims. Approximately 20 appeals from the District Court's Order are pending in the Sixth Circuit Court of Appeals, which is expected to rule in late 2001. After all appeals are exhausted, if the Joint Plan is upheld but the shareholder releases are effective only for these voting in favor of the Joint Plan, Corning wcuiu expect to defend any remaining claims against it on the same grounds that leu to a series of orders and judgments dismissing all claims against Corning in. the federal courts and the state courts as described under the heading Implant Tort Lawsuits immediately hereafter. With respect to the possibility of additional direct or indirect claims against Corning if the full releases are not reinstated in the Joint Plan, management believes that such claims lacy, merit and that the breast implant litigation against Corning will be resolved without material impact on Coming's financial statements. Under the terms of the Joint Plan, Dow Corning would be required to establish a Settlement Trust and a Litigation Facility to provide a means for tort claimants to settle or litigate their claims. Dow Corning would have the obligation to fund the Trust and the Facility, over a period of up to 16 years, in an amount up to approximately $3.3 billion, subject to the limitations, terms and Page 25 of 31 http://www.shareholder.co.. ./0000024741 -01 -500019&CompanyID=glw&header=z&footer:::= 5/29/2001 Edgar Filing conditions stated in the Joint Plan. Dow Corning proposes to provide the required funding over the 16 year period through a combination of cash, proceeds from insurance, and cash flow from operations. Corning and Dow Chemical have each agreed to provide a credit facility to Dow Corning of up to $150 million ($300 million in the aggregate), subject to the terms and conditions stated in the Joint Plan. The Joint Plan also provides for Dow Corning to make full payment, through cash and the issuance of senior notes, to its commercial creditors. If and when Dow Corning emerges from bankruptcy, Corning will likely begin to recognize equity earnings from Dow Corning. Corning does not expect to receive dividends from Dow Corning in the foreseeable future. Implant Tort Lawsuits. Corning and Dow Chemical, the shareholders of Dow Corning Corporation, have been named in a number of state and federal tort lawsuits alleging injuries arising from Dow Coming's implant products. The claims against the shareholders allege a variety of direct or indirect theories of liability. From 1991 through March 31, 2001, Corning was named in approximately 11,470 state and federal tort lawsuits, some of which were filed as class actions or on behalf of multiple claimants. In 1992, the federal breast implants cases were coordinated for pretrial purposes in the United States District Court, Northern District of Alabama (Judge Sam C. Pointer, Jr.). In 1993, Corning obtained an interlocutory order for summary judgment, which was made final in April 1995, dismissing Corning from over 4,000 federal court cases. On March 12, 1936, the U.5. Court of Appeals for the Eleventh Circuit cismissea the plaintiffs' appeal from that judgement. The District Court entered several orders directing that Corning be dismissed from each case pending ir. or later transferred to the Northern District of Alabama after Dow Corning filed for bankruptcy protection. In state court legislation, Corning was awarded summary judgment in California, Connecticut, Illinois, Indiana, Michigan, Mississippi, New Jersey, New York, Pennsylvania, Tennessee, and Dallas, Harris ar.j Travis Counties in Texas, thereby dismissing approximately 7,000 state cases. On July 30, 1397r the judgment in California became final when the Supreme 'nr: of California dismissed further review as to Corning. In Louisiana, Somme was awarded summary judgment dismissing all claims by plaintiffs and a moss-claim by Dow Chemical on February 21, 1997. On February 11, 1998, tne intermediate appeals court in Louisiana vacated this judgment as premature. The Louisiana cases were transferred to the United States District Court for the Eastern District of Michigan, Southern District (Michigan Federal Court; to which substantially all breast implant cases were transferred in 1997. In the Michigan Federal Court, Corning is named as a defendant in approximately 70 pending cases (including some cases with multiple claimants), in addition to the transferred Louisiana cases. In the fourth quarter of 1997, Corning moved for summary judgment in the Michigan Federal Court to dismiss these remaining cases by plaintiffs as well as the third party complaint and all cross-claims by Dow Chemical. The Michigan Federal Court heard Coming's motion for summary ; u d gmer.t on February 21, 1998, but has deferred its ruling in light of the proceedings in the Bankruptcy Court. Based upon the information developed to late and recognizing that the outcome of complex litigation is uncertain, management believes that the risk of a materially adverse result in the implant litigation against Corning is remote and believes the implant litigation against Corning will be resolved without material impact on Coming's financial statements. Federal securities case. A federal securities class action lawsuit was filed in 1392 against Corning and certain individual defendants by a class zz purchasers of Corning stock who allege misrepresentations and omissions of material facts relative to the silicone gel breast implant business conducted by Dow Corning. This action is pending in the United States District Court for the Southern District of New York. The class consists of those purchasers of Corning stock in the period from June 14, 1989 to January 13, 1992 who allegedly purchased at inflated prices due to the non-disclosure or concealment of material information and were damaged when Coming's stock price declined in January 1 992 after the Page 26 of 31 http://www.shareholder, co.. ./0000024741 -01 -500019&CompanyED=glw&header=z&footer= 5/29/2001 Edgar Filing Food and Drug Administration (FDA) requested a moratorium on Dow Coming's sale of silicone gel inplants. No amount of damages is specified in the complaint. In 1997, the Court dismissed the individual defendants from the case. In December 1998/ Corning filed a motion for summary judgment requesting that all claims against it be dismissed. Plaintiffs requested the opportunity to, take depositions before responding to the motion for summary judgment. The Court permitted limited additional discovery of certain Dow Corning, Corning and Dow Chemical officers and directors. These depositions were completed in the second quarter of 1999. On September 23, 1999, the Court granted in part the request by plaintiffs for certain additional documentary discovery. In April 2000, the District Court ordered two additional depositions, one of which would be that of Dow Coming's former General Counsel. Because it believes the deposition will necessarily impinge on privileged information, Dow Corning filed a petition with the United States Court of Appeals for the Second Circuit seeking inmediate relief. The Second Circuit ruling is expected in the first half of 2001. The discovery process is continuing and the Court has set no schedule to adir-rio the still pending summary judgment motion. Corning intends to continue to defend this action vigorously. Based upon the information developed to date and recognizing that the outcome of litigation is uncertain, management believes that the possibility of a materially adverse verdict is remote. <PAGE> Page 27 of 31 Shin Etsu Quartz Products Company. In July 1999 and February 2000, Stir. Etsu Quartz Products Company filed two patent suits in Japan against Cor:.::, r for alleged patent infringement of two patents relating to the properties of fused silica materials used in the optical components of stepper machines. The suits request damages and an injunction preventing sales of infringing pmijrts m Japan. Corning has denied infringement, has argued that the patents are 'tvalid or unenforceable, and has filed a separate action to invalidate the :?e ~::.2 ^f the two patents. Corning intends to defend these suits vigorously. While recognizing that litigation is inherently uncertain, based upon the information, developed to date, management believes that Corning has good defenses to Shin Etsu's claims. Sumitomo Electric Industries, Inc. In December 2000, Sumitomo Electric Industries, Inc. served a patent infringement complaint in the U.S. district Court in North Carolina which asserts that Corning has infringed four Sumitomo U.S. patents relating to optical fiber. The complaint also asserts tnat a Corning patent relating to optical fiber was invalid. The suit seeks damages in an unspecified amount for the alleged infringement ot the Sumitomo patents, an injunction restraining infringement, and a declaration that the Comma patent is invalid. Since filing the complaint. Corning has met with Sumitomo. I r. an effort to reach an amicable resolution, these discussions continue. Management believes that the four Sumitomo patents are either not infringed or are invalid and there is no basis for a holding that the Corning patent is invalid. Management is prepared to defend this action vigorously and, recognizing that the outcome of litigation is uncertain, believes it has strong defenses to Sumitomo 1s claims. Pittsburgh Corning Corporation. Corning and PPG Industries, Inc. each own IZS of the capital stock of Pittsburgh Corning Corporation (PCC). PCC and several other defendants have been named in numerous lawsuits involving claims alleging personal injury from exposure to asbestos. By the first quarter of 2000, PCC incurred adverse verdicts in five trials involving 19 claimants. On April 16, 2000, PCC filed for Chapter 11 reorganization in the United States Bankruptcy Court for the Western District of Pennsylvania. As of the bankruptcy filing, PCC http://www.shareholder.co.. ./0000024741 -01 -500019&CompanyID=glw&;header=z&footer=: 5/29/2001 Edgar Filing had in excess of 240,000 open claims. At the time of its Chapter 11 filing, PCC sought and obtained a temporary restraining order and filed a motion for a preliminary injunction against the prosecution of asbestos actions against its two shareholders. On April 4, 2001, the Bankruptcy Court extended the period for PCC to file a plan of reorganization until July 9, 2001. The preliminary injunction has been extended by court order to August 23, 2001 to enable the parties to negotiate a plan of reorganization for PCC. Upon expiration of the injunction, PCC, PPG Industries and Corning will have 90 days to seek removal and transfer of stayedcases that have not been resolved through a plan of reorganization. As a result of PCC's bankruptcy filing, Corning recorded an after tax charge of $36 million in the first quarterof 2000 to impair its entire investment in PCC and discontinued recognition of equity earnings. At the time PCC filed for bankruptcy protection, there were approximately 12,417 claims pending against Corning alleging various theories of liability based on exposure to PCC's asbestos products, all of which are stayed pursuant to the injunction of the bankruptcy court. Before PCC filed for bankruptcy protection, Corning was dismissed from similar claims as cases against PCC proceeded to trial. The Chapter 11 filing may lead to additional claims against Corning wit.n related costs of defense, charges and expenses. Although the outcome of litigate::', and the bankruptcy case is uncertain, management believes that the separate corporate status of PCC will continue to be upheld. Management is continuing to investigate Coming's options for defending claims against it, w.t; cr. might include vigorously defending itself on all fronts or exploring a global settlement through the bankruptcy process. It is probable that there will be intensive negotiations throughout the second quarter of 2001 concerning terms of PCC's plan of reorganization, including whether or not Corning may part: urate by making a contribution in exchange for a release. Management cannot estimate the probability that Corning will be able to secure such a release :r r. "erms and 'conditions satisfactory to Corning. The range of cost for these optima net of insurance) cannot be estimated at this time, although management relieves these matters will be resolved without a materially adverse impact or. nine's financial position. Astrium. In December of 2000, Astrium, SAS and Astrium, Ltd. filed a oi.mrlairt for negligence in the United States District Court for the Central District cf California against TRW, Inc., Pilkington Optronics Inc., Corning NetOptix, Inc., OFC Corporation and Optical Filter Corporation claiming damages m excess of $150 million. The complaint alleges that certain cover glasses for solar arrays used to generate electricity from solar energy on satellites sold by Astrium's corporate successor were negligently coated by NetOptix or its subsidiaries (prior to Coming's acquisition of NetOptix) in such a way that the amount of electricity the satellite can produce and their effective life were materially reduced. Corning has denied that the coatings produced by NetOptix :: its subsidiaries caused the damage alleged in the complaint or that it is _-:aily liable for any damages which Astrium may have experienced. Formal discovery r.as just begun, no depositions have been taken, and it is too early tc firm a definitive opinion about the outcome of the litigation. Based upon the information developed to date and recognizing that the outcome of liticatim is uncertain, management believes that there are good defenses to these claims and believes they will be resolved without material impact on Coming's financial statements. <PAGE> Page 28 of 31 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits http://www.shareholder.co.. ./0000024741 -01 -500019&CompanyrD=glw&header=z&footer= 5/29/2001 Edgar Filing See the Exhibit Index which is located on page 26. (b) Reports on Form 8-K A report on Form 8-K dated January 24, 2001, connection with the registrant's 2000 results. was filed in A report on Form 8-K/A connection with the Technologies USA. dated December 12, 2000, registrant's acquisition was filed in of Optical A report on Form 8-K dated March 19, 2001, was filet connection with the registrant's 2001 earnings guidance. m Other items under Part II are not applicable. < PAGE > SIGNATURES Pursuant to the requirements of the Securities registrant has duly caused this report to be undersigned thereunto duly authorized. and Exchange Act of '34, the signed on its behalf y the Page 29 of 31 CORNING INCORPORATED !Regist rant} May 2, 2001 Date lsi JAMES B. FLAWS James B. Flaws Executive Vice President and Chief Financial Officer May 2, 2001 Date Is/ KATHERINE A. ASBECK Katherine A. Asbeck Senior Vice President and Controller http ://www.shareholder, co.. ./0000024741 -01 -500019&CompanyID=glw&header=z&footer= 5/29/2001 tagar t mng rage ju or i i <PAG> CORNING INCORPORATED EXHIBIT INDEX This exhibit is numbered in accordance with Exhibit Table I of Item 601 of Regulation S-K Exhibit # Description Page r.uncer in manually signed ;r:::nal 12 Computation of ratio of earnings to combined fixed oharges and preferred dividends <PAGE> COFNING INCORPORATED AND SUBSIDIARY COMPANIES COMPUTATION CP RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS (Dollars in millions, except ratios) <TA3LE> <CAPTION> 412 <S> Income before taxes on income Adjustments: Distributed income of equity investees Amortization of capitalized interest Fixec oharges net of capitalized interest Earnings before taxes and fixed charges as adjusted Fixed c.narges: Interest incurred Portion of rent expense which represents interest factor Amortization of debt costs Total fixed charges Three Months Ende< March 31, 2001 <C> 3 3 3? $ 43 4 1 53 http://www.shareholder.co.. ./0000024741 -01 -500019&CompanyED=glw&header=z&footer= 5/29/2001 Edgar Filing Capitalized interest Total fixed charges net of capitalized interest Preferred dividenes: Preferred dividend requirements Ratio of pre-tax income to income before minority interest and equity earnings Pre-tax preferred dividend requirement Total fixed charges Fixed charges and pre-tax preferred dividend requirement Ratio of earnings to combined fixed charges and preferred dividends </TABLE> </TEXT> </DOCUMENT> </SEC-DCCUMNT> Page 31 of 31 (14) $ 39 $ 2 53 $ 53 4.8x corning.com | discovery center | our businesses | products + services | investor relations | careers [ inside corning Copyright 2000 Corning Incorporated. All rights reserved. | Legal http ://www. shareholder, co.. 70000024741 -01 -500019&CompanyID=glw&header=z&footer= 5/29/2001