OWENS ILLINOIS GROUP INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

(Mark One) FORM 10-Q

/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For Quarter Ended June 30, 2002
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Owens-Illinois Group, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 333-85690 34-1559348
- ---------------- ----------- -------------------
(State or other (Commission (IRS Employer
jurisdiction of File No.) Identification No.)
incorporation or
organization)

One SeaGate, Toledo, Ohio 43666
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(Address of principal executive offices) (Zip Code)

419-247-5000
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(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes / / No /X/

Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

Owens-Illinois Group, Inc. $.01 par value common stock - 100
shares at July 31, 2002.

Part I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The Condensed Consolidated Financial Statements presented herein are
unaudited but, in the opinion of management, reflect all adjustments
necessary to present fairly such information for the periods and at the dates
indicated. Since the following unaudited condensed consolidated financial
statements have been prepared in accordance with Article 10 of Regulation
S-X, they do not contain all information and footnotes normally contained in
annual consolidated financial statements; accordingly, they should be read in
conjunction with the Registrant's December 31, 2001 audited Consolidated
Financial Statements and notes thereto, included in the Registration
Statement on Form S-4 filed with the Securities and Exchange Commission on
April 5, 2002, as amended.

2

OWENS-ILLINOIS GROUP, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Three months ended June 30, 2002 and 2001
(Dollars in millions)

See accompanying notes.

3

OWENS-ILLINOIS GROUP, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Six months ended June 30, 2002 and 2001
(Dollars in millions)

4

OWENS-ILLINOIS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002, December 31, 2001, and June 30, 2001
(Dollars in millions)

5

CONDENSED CONSOLIDATED BALANCE SHEETS - continued

See accompanying notes.

6

OWENS-ILLINOIS GROUP, INC.
CONDENSED CONSOLIDATED CASH FLOWS
Six months ended June 30, 2002 and 2001
(Dollars in millions)

See accompanying notes.

7

OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Tabular data in millions of dollars

1. BASIS OF PRESENTATION

The Company is a wholly-owned subsidiary of Owens-Illinois, Inc. ("OI Inc.").
Although OI Inc. does not conduct any operations, it has substantial obligations
related to outstanding indebtedness, dividends for preferred stock and
asbestos-related payments. OI Inc. relies primarily on distributions from its
direct and indirect subsidiaries to meet these obligations.

2. INVENTORIES

Major classes of inventories are as follows:

3. LONG-TERM DEBT

The following table summarizes the Company's consolidated long-term debt:

At June 30, 2002, the Company's subsidiary borrowers had unused credit of $442.1
million available under the Secured Credit Agreement.

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The weighted average interest rate on borrowings outstanding under the Revolving
Credit Facility at June 30, 2002 was 3.89%. Including the effects of
cross-currency swap agreements related to Revolving Credit Facility borrowings
by the Company's Australian, U.K., and Canadian subsidiaries, the weighted
average interest rate was 5.18%.

The weighted average interest rate on borrowings outstanding under the Term Loan
at June 30, 2002 was 4.36%.

During January 2002, a subsidiary of the Company, Owens-Brockway Glass
Container Inc., completed a $1.0 billion private placement of senior secured
notes and on August 5, 2002, completed its offer to exchange those notes for
notes with the same terms and conditions that have been registered under the
Securities Act of 1933. The notes bear interest at 8 7/8% and are due
February 15, 2009. The notes are guaranteed by substantially all of the
Company's domestic subsidiaries. The assets of substantially all of the
Company's domestic subsidiaries are pledged as security for the notes. The
issuing subsidiary used the net cash proceeds from the notes to reduce the
outstanding Term Loan under the Agreement by $980.0 million. As a result, the
Company wrote off unamortized deferred financing fees in January 2002 related
to the Term Loan and recorded an extraordinary charge of $10.9 million less
applicable income taxes of $4.2 million. The indenture for the notes
restricts, among other things, the ability of the Company's subsidiaries to
borrow money, pay dividends on, or redeem or repurchase stock, make
investments, create liens, enter into certain transactions with affiliates,
and sell certain assets or merge with or into other companies.

4. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS

The following presents condensed consolidating financial information for the
Company, segregating: (1) Owens-Illinois Group, Inc. (the "Parent"); (2)
Owens-Brockway Glass Container Inc. (the "Issuer"); (3) those domestic
subsidiaries which will guarantee the 8 7/8% Senior Secured Notes of the
Issuer (the "Guarantor Subsidiaries"); and (4) all other subsidiaries (the
"Non-Guarantor Subsidiaries"). The Guarantor Subsidiaries are wholly-owned
direct and indirect subsidiaries of the Parent and their guarantees are full,
unconditional and joint and several. The Parent is also a guarantor, and its
guarantee is full, unconditional and joint and several.

Subsidiaries of the Parent and of the Issuer are presented on the equity basis
of accounting. Certain reclassifications have been made to conform all of the
financial information to the financial presentation on a consolidated basis. The
principal eliminations relate to investments in subsidiaries and inter-company
balances and transactions.

9

5. CASH FLOW INFORMATION

Interest paid in cash aggregated $166.0 million and $216.8 million for the six
months ended June 30, 2002 and 2001, respectively. Income taxes paid in cash
totaled $9.2 million and $38.8 million for the six months ended June 30, 2002
and 2001, respectively.

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6. COMPREHENSIVE INCOME

The components of comprehensive income (loss) are: (a) net earnings (loss); (b)
change in fair value of certain derivative adjustments; and, (c) foreign
currency translation adjustments. Total comprehensive income for the three month
periods ended June 30, 2002 and 2001 amounted to $166.8 million and $237.5
million, respectively. Total comprehensive income (loss) for the six month
periods ended June 30, 2002 and 2001 amounted to $(258.7) million and $178.8
million, respectively.

7. CONTINGENCIES

OI Inc. is one of a number of defendants (typically from 20 to 100 or more) in a
substantial number of lawsuits filed in numerous state and federal courts by
persons alleging bodily injury (including death) as a result of exposure to dust
from asbestos fibers. OI Inc. relies primarily on distributions from its
subsidiaries, including the Company, to fund its indemnity payments and legal
fees related to these lawsuits.

From 1948 to 1958, one of OI Inc.'s former business units commercially produced
and sold approximately $40 million of a high-temperature, calcium-silicate based
pipe and block insulation material containing asbestos. OI Inc. exited the pipe
and block insulation business in April 1958. The traditional asbestos personal
injury lawsuits and claims relating to such production and sale of asbestos
material typically allege various theories of liability, including negligence,
gross negligence and strict liability and seek compensatory and punitive damages
in various amounts (herein referred to as "asbestos claims").

As of June 30, 2002, OI Inc. has determined that it is a named defendant in
asbestos lawsuits and claims involving approximately 25,000 plaintiffs and
claimants. The total amount of relief sought by plaintiffs and claimants cannot
be determined because the amount is often not required to be stated in an
initial claim or lawsuit and because settlements are often reached before claims
and lawsuits advance to the point where such amounts would be required.

Additionally, OI Inc. has claims-handling agreements in place with many
plaintiffs' counsel throughout the country. These agreements require
evaluation and negotiation regarding whether particular claimants qualify
under the criteria established by such agreements. The criteria for such
claims include verification of a compensable illness and a reasonable
probability of exposure to a product manufactured by OI Inc.'s former
business unit during its manufacturing period ending in 1958. Some
plaintiffs' counsel have historically withheld claims under these agreements
for later presentation while focusing their attention on active litigation
in the tort system. OI Inc. believes that as of June 30, 2002 there are no
more than 20,000 of such preexisting but presently unasserted claims against
OI Inc. that are not included in the total of pending claims specified in the
preceding paragraph. OI Inc. further believes that the bankruptcies of
additional co-defendants, as discussed below, have resulted in an
acceleration of the presentation and disposition of a number these previously
withheld preexisting claims under such agreements, which claims would
otherwise have been presented and disposed of over the next several years.
This acceleration is reflected in an increased number of pending asbestos
claims and, to the extent disposed, contributes to an increase in
asbestos-related payments which is expected to continue in the near term.

OI Inc. is also a defendant in other asbestos-related lawsuits or claims
involving maritime workers, medical monitoring claimants, co-defendants and
property damage claimants. Based upon its past experience, OI Inc. believes that
these categories of lawsuits and claims will not involve any material liability
and they are not included in the above description of pending matters.

19

Since receiving its first asbestos claim, OI Inc., as of June 30, 2002, has
disposed of the asbestos claims of approximately 276,000 plaintiffs and
claimants at an average indemnity payment per claim of approximately $5,400. OI
Inc.'s indemnity payments for these claims have varied on a per claim basis, and
are expected to continue to vary considerably over time. As discussed above, a
part of OI Inc.'s objective is to achieve, where possible, resolution of
asbestos claims pursuant to claims-handling agreements. Under such agreements,
qualification by meeting certain illness and exposure criteria has tended to
reduce the number of claims presented to OI Inc. that would ultimately be
dismissed or rejected due to the absence of impairment or product exposure
evidence. OI Inc. expects that as a result, although aggregate spending may be
lower, there may be an increase in the per claim average indemnity payment
involved in such resolution. In this regard, although the average of such
payments has been somewhat higher following the implementation of the
claims-handling agreements in the mid-1990s, the annual average amount has not
varied materially from year to year.

OI Inc. believes that its ultimate asbestos-related contingent liability (i.e.,
its indemnity or other claim disposition costs plus related legal fees) cannot
be estimated with certainty. In 1993, OI Inc. established a liability of $975
million to cover indemnity payments and legal fees associated with the
resolution of outstanding and expected future asbestos lawsuits and claims. In
1998, an additional liability of $250 million was established. During the third
quarter of 2000, OI Inc. established an additional liability of $550 million to
cover OI Inc.'s estimated indemnity payments and legal fees arising from
outstanding asbestos personal injury lawsuits and claims and asbestos personal
injury lawsuits and claims expected to be filed in the ensuing several years. OI
Inc.'s ability to reasonably estimate its liability has been significantly
affected by the volatility of asbestos-related litigation in the United States,
the expanding list of non-traditional defendants that have been sued in this
litigation and found liable for substantial damage awards, the continued use of
litigation screenings to generate new lawsuits, the large number of claims
asserted or filed by parties who claim prior exposure to asbestos materials but
have no present physical impairment as a result of such exposure, and the
growing number of co-defendants that have filed for bankruptcy. Since the
beginning of 2000, A. P. Green Industries, Inc., Armstrong World Industries,
Babcock & Wilcox, Federal-Mogul Corporation, Fibreboard Corporation, G-I
Holdings (GAF), Harbison-Walker Refractories Group, Kaiser Aluminum Corporation,
North American Refractories Co., Owens Corning, Pittsburgh-Corning, Plibrico
Company, Porter Hayden Company, USG Corporation, W. R. Grace & Co. and several
other smaller companies have sought protection under Chapter 11 of the
Bankruptcy Code.

OI Inc. has continued to monitor trends which may affect its ultimate
liability and has continued to analyze the developments and variables
affecting or likely to affect the resolution of pending and future asbestos
claims against OI Inc. OI Inc. expects that the gross amount of total
asbestos-related payments will be moderately lower in 2002 compared to 2001
and will continue to decline thereafter as the preexisting but presently
unasserted claims withheld under the claims handling agreements are presented
to OI Inc., and as the number of potential future claimants continues to
decrease. However, the trend toward lower aggregate annual payments has not
occurred as soon as had been anticipated when the additional liability was
established in 2000. In addition, the number of claims and lawsuits filed
against OI Inc. has exceeded the number anticipated at that time. In early
March 2002, OI Inc. initiated a comprehensive review to determine whether
further adjustment of asbestos-related liabilities was appropriate. At the
conclusion of this review in April, OI Inc. determined that an additional
charge of $475 million would be appropriate to adjust the reserve for
estimated future asbestos-related costs. The material components of OI Inc.'s
accrual, including this additional accrued amount, are the following: (i) OI
Inc.'s estimate at that date of the reasonably probable contingent liability
for asbestos claims already asserted against OI Inc., (ii) OI Inc.'s estimate
at that date of the contingent liability for preexisting but unasserted
asbestos claims for prior periods arising under its administrative
claims-handling agreements

20

with various plaintiffs' counsel, (iii) OI Inc.'s estimate at that time of the
contingent liability for asbestos claims not yet asserted against OI Inc., but
which OI Inc. believes it is reasonably probable will be asserted in the future,
to the degree that such an estimation as to future claims is possible, and (iv)
OI Inc.'s estimate of legal defense costs likely to be incurred in connection
with the foregoing types of claims.

The significant assumptions underlying the material components of OI Inc.'s
accrual are:

a) the extent to which settlements are limited to claimants who were
exposed to OI Inc.'s asbestos-containing insulation prior to its exit
from that business in 1958;

b) the extent to which claims are resolved under OI Inc.'s
administrative claims agreements or on terms comparable to those set
forth in those agreements;

c) the extent of reduction in the inventory of pending serious disease
cases;

d) the extent to which OI Inc. is able to successfully defend itself at
trial;

e) the extent of actions by courts to eliminate or reduce the diversion
of financial resources for unimpaired claimants and so-called forum
shopping;

f) the extent to which additional defendants with substantial resources
and assets are required to participate significantly in the resolution
of future asbestos cases and claims;

g) the number and timing of co-defendant bankruptcies; and

h) the extent to which the resolution of co-defendant bankruptcies
divert resources to unimpaired claimants.

OI Inc. believes that any possible loss or range of loss in addition to the
foregoing charge cannot be reasonably estimated. While OI Inc. cannot reasonably
estimate the precise timing of payment, OI Inc. believes that its liabilities
for the next several years will not exceed the amount accrued based on its
expectation of moderate declines in annual spending for asbestos-related costs.

OI Inc. has previously pursued recovery of its losses from third parties,
particularly its insurance carriers, and has largely resolved all of its
significant coverage claims. OI Inc. expects some further recovery from deferred
payment provisions of existing settlement agreements and from pursuing certain
additional reimbursement claims. However, OI Inc. does not expect to recover
additional material amounts in excess of the recorded receivable of $22.5
million at June 30, 2002.

Other litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are nonroutine and involve compensatory,
punitive or treble damage claims as well as other types of relief.

The ultimate amount of distributions which may be required to be made by the
Company and other subsidiaries of OI Inc. to fund OI Inc.'s asbestos-related
payments cannot be estimated with certainty. OI Inc.'s reported results of
operations for 2002 have been materially affected by the $475 million first
quarter charge and asbestos-related payments continue to be substantial.

21

Any possible future additional accrual would likewise materially affect OI
Inc.'s results of operations in the period in which it might be recorded. Also,
the continued use of significant amounts of cash for asbestos-related costs has
affected and will continue to affect the Company's cost of borrowing and its
ability to pursue global or domestic acquisitions. However, the Company believes
that its operating cash flows and other sources of liquidity will be sufficient
to make distributions to OI Inc. for asbestos-related costs and to fund its
working capital and capital expenditure requirements on a short-term and
long-term basis.

8. SEGMENT INFORMATION

The Company operates in the rigid packaging industry. The Company has two
reportable product segments within the rigid packaging industry: (1) Glass
Containers and (2) Plastics Packaging. The Plastics Packaging segment consists
of two business units - consumer products (plastic containers and closures) and
prescription products. The Other segment consisted of the Company's labels and
carriers products business unit, substantially all of which was divested in
early 2001.

The Company evaluates performance and allocates resources based on earnings
before interest income, interest expense, provision for income taxes, minority
share owners' interests in earnings of subsidiaries, and extraordinary charges,
(collectively "EBIT") excluding unusual items. EBIT for product segments
includes an allocation of corporate expenses based on both a percentage of sales
and direct billings based on the costs of specific services provided.

Financial information for the three-month periods ended June 30, 2002 and 2001
regarding the Company's product segments is as follows (certain amounts from
prior year have been reclassified to conform to current year presentation based
on changes in internal management reporting):

22

23

The reconciliation of EBIT to earnings before income taxes and minority share
owners' interests in earnings of subsidiaries for the three-month periods ended
June 30, 2002 and 2001 is as follows:

24

Financial information for the six-month periods ended June 30, 2002 and 2001
regarding the Company's product segments is as follows (certain amounts from
prior year have been reclassified to conform to current year presentation based
on changes in internal management reporting):

25

The reconciliation of EBIT to earnings before income taxes and minority share
owners' interests in earnings of subsidiaries for the six-month periods ended
June 30, 2002 and 2001 is as follows:

9. NEW ACCOUNTING STANDARDS

FAS 142. On January 1, 2002, the Company adopted Financial Accounting Standards
("FAS") No. 142, "Goodwill and Other Intangible Assets". As required by FAS No.
142, the Company is no longer amortizing goodwill, but will be reviewing
goodwill annually (or more frequently if impairment indicators arise) for
impairment.

During the first quarter of 2002, the Company completed an impairment test under
FAS No. 142 using the business enterprise value ("BEV") of each reporting unit.
BEV's were calculated as of the measurement date, January 1, 2002, by
determining the present value of debt-free, after-tax future cash flows,
discounted at the weighted average cost of capital of a hypothetical third party
buyer. The BEV of each reporting unit was then compared to the book value of
each reporting unit as of the measurement date to assess whether an impairment
existed under FAS 142. Based on this comparison, the Company determined that an
impairment existed in its consumer products reporting unit of the Plastics
Packaging segment. The consumer products reporting unit operates in a highly
competitive and fragmented industry. Excess capacity in this industry had
created downward pricing pressure. The Company lowered its earnings and cash
flow projections for this unit for several years following the measurement date
which resulted in a lower BEV. Following a review of the valuation of the assets
of the consumer products reporting unit, the Company recorded an impairment
charge of $460.0 million to reduce the reported value of its goodwill. As
required by FAS No. 142, the transitional impairment loss has been recognized as
the cumulative effect of a change in method of accounting.

The following earnings and earnings per share data for 2001 have been presented
on an adjusted basis to eliminate goodwill amortization of $23.1 and $46.2
million for the three and six months ended June 30, 2001, respectively, as
required by FAS No. 142. The earnings data for 2002 has been presented to
provide comparative data to the 2001 adjusted earnings data.

26

FAS 143. In June 2001, the Financial Accounting Standards Board ("FASB") issued
FAS No. 143, "Accounting for Asset Retirement Obligations". FAS 143 establishes
accounting standards for recognition and measurement of a liability for an asset
retirement obligation and the associated asset retirement cost. FAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002 and will be adopted by the Company on January 1, 2003. The Company
believes that the adoption of FAS 143 will not have an impact on the reported
results of operations or financial position of the Company.

FAS 144. In August 2001, the FASB issued FAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets". FAS 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. FAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and was
adopted by the Company on January 1, 2002. The adoption of FAS 144 did not have
an impact on the reported results of operations or financial position of the
Company.

FAS 145. In April 2002, the FASB issued FAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". Among other things, FAS 145 requires gains and losses from early
extinguishment of debt to be included in income from continuing operations
instead of being classified as extraordinary items as previously required by
generally accepted accounting principles. FAS 145 is effective for fiscal years
beginning after May 15, 2002 and will be adopted by the Company on January 1,
2003. Any gain or loss on early extinguishment of debt that was classified as an
extraordinary item in periods prior to adoption must be reclassified into income
from continuing operations. The adoption of FAS 145 will require the $6.7
million and $4.1 million of extraordinary charges for the six months ended June
30, 2002 and 2001, respectively, to be reclassified to interest expense and the
provision for income taxes.

10. RESTRUCTURING ACCRUALS

During the second quarter of 2001, the Company recorded charges of $79.9 million
for a restructuring program and impairment at certain of the Company's
international and domestic operations. The charge includes the impairment of

27

assets at the Company's affiliate in Puerto Rico and the consolidation of
manufacturing capacity and the closing of a facility in Venezuela. The
program also includes consolidation of capacity at certain other
international and domestic facilities in response to decisions about pricing
and market strategy. The total planned reduction in workforce will involve
approximately 400 employees. The Company expects its actions related to these
restructuring and impairment charges to be completed during the next several
quarters. During the fourth quarter of 2001, the Company recorded additional
restructuring charges of $7.4 million, as well as reversing $5.2 million of
second quarter charges. Also during the fourth quarter of 2001, the company
recorded a charge of $7.9 million related to restructuring capacity in the
medical devices business.

The Company also has remaining restructuring accruals related to a capacity
realignment program initiated in 2000. The program principally involved the
closing of three U.S. glass container plants. The Company expects that it will
continue to make cash payments over the next several quarters for on-going costs
related to the closing of these facilities.

Selected information relating to the above restructuring accruals follows:

Remaining accruals as of March 31, 2002 $ 23.1

Write-down of assets to net realizable value (4.1)

Net cash paid (4.1)
------
Remaining accruals as of June 30, 2002 $ 14.9
======

11. DERIVATIVE INSTRUMENTS

Under the terms of the April 2001 Secured Credit Agreement, international
affiliates are only permitted to borrow in U.S. dollars. In order to manage the
international affiliates' exposure to fluctuating foreign exchange rates, the
Company's affiliates in Australia and the United Kingdom have entered into
currency swaps for the principal portion of their initial borrowings under the
Agreement and for their interest payments due under the Agreement.

As of June 30, 2002, the Company's affiliate in Australia has swapped $650.0
million of borrowings into $1,275.0 million Australian dollars. This swap
matures on March 31, 2003, with interest resets every 90 days. The interest
reset terms of the swap approximate the terms of the U.S. dollar borrowings.
This derivative instrument swaps both the interest and principal from U.S.
dollars to Australian dollars and also swaps the interest rate from a U.S.-based
rate to an Australian-based rate. The Company's affiliate in the United Kingdom
has swapped $200.0 million of borrowings into 139.0 million British pounds. This
swap also matures on March 31, 2003, with interest resets every 90 days. This
derivative instrument swaps both the interest and principal from U.S. dollars to
British pounds and also swaps the interest rate from a U.S.-based rate to a
British-based rate.

On October 1, 2001, the Company completed the acquisition of the Canadian glass
container assets of Consumers Packaging Inc. for a purchase price of
approximately $150 million. The Company financed this purchase through
borrowings under the Secured Credit Agreement, of which $100 million was
transferred to Canada through intercompany loans in U.S. dollars with the
remaining $50 million being transferred as equity. The Company's affiliate in
Canada has entered into swap transactions to manage the affiliate's exposure to
fluctuating foreign exchange rates by swapping the principal and interest

28

portion of the intercompany loan. At June 30, 2002, the Canadian affiliate
has swapped $90.0 million of borrowings into $142.0 million Canadian dollars.
This swap matures on October 1, 2003. This derivative instrument swaps both
the interest and principal from U.S. dollars to Canadian dollars and also
swaps the interest rate from a U.S.-based rate to a Canadian-based rate. The
affiliate has also entered in forward hedges which effectively swap $10.0
million of borrowings into $16.0 million Canadian dollars. These exchange
contracts swap both the interest and principal from U.S. dollars to Canadian
dollars and mature monthly.

The Company recognizes the above derivatives on the balance sheet at fair value.
The Company accounts for the above swaps as fair value hedges. As such, the
changes in the value of the swaps are included in other expense and are expected
to substantially offset any exchange rate gains or losses on the related U.S.
dollar borrowings. For the six months ended June 30, 2002, the amount not offset
was immaterial.

The Company also uses commodity futures contracts related to forecasted natural
gas requirements. The objective of these futures contracts is to limit the
fluctuations in prices paid and the potential volatility in earnings or cash
flows from future market price movements. The Company has entered into commodity
futures contracts for approximately 50% of its domestic natural gas usage
(approximately 800 million BTUs) through the end of 2002.

The Company accounts for the above futures contracts on the balance sheet at
fair value. The effective portion of changes in the fair value of a derivative
that is designated as and meets the required criteria for a cash flow hedge is
recorded in accumulated other comprehensive income ("OCI") and reclassified into
earnings in the same period or periods during which the underlying hedged item
affects earnings. The ineffective portion of the change in the fair value of a
derivative designated as a cash flow hedge is recognized in current earnings.

The above futures contracts are accounted for as cash flow hedges at June 30,
2002. Hedge accounting is only applied when the derivative is deemed to be
highly effective at offsetting anticipated cash flows of the hedged
transactions. For hedged forecasted transactions, hedge accounting will be
discontinued if the forecasted transaction is no longer probable to occur, and
any previously deferred gains or losses will be recorded to earnings
immediately.

At June 30, 2002, an unrealized net gain of $1.8 million, after tax of $1.0
million, related to these commodity futures contracts was included in OCI. There
was no ineffectiveness recognized during the six months ended June 30, 2002.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS - SECOND QUARTER 2002 COMPARED WITH SECOND QUARTER 2001

The Company recorded net earnings of $96.9 million for the second quarter of
2002 compared to earnings before extraordinary items of $247.6 million for the
second quarter of 2001. Net earnings for the second quarter of 2001 of $243.5
million reflect $4.1 million of an extraordinary charge from the early
extinguishment of debt. The Company's second quarter 2002 net earnings of $96.9
million increased $13.2 million, or 15.8% from 2001 second quarter earnings,
excluding extraordinary, unusual and other largely one-time items and goodwill
amortization, of $83.7 million. Consolidated EBIT for the second quarter of 2002
was $249.6 million, an increase of $14.0 million, or 5.9%, compared to second
quarter 2001 EBIT, excluding unusual and other largely one-time items and
goodwill amortization, of $235.6 million. The increase was principally due to
higher EBIT for the Glass Containers segment, partially offset by lower EBIT of
the Plastics Packaging segment and from lower EBIT from other retained items, as
further discussed below. Interest expense, net of interest income and the 2001
unusual expense of $4.0 million, decreased $6.7 million from the 2001 period.
The effects of lower short-term variable interest rates and slightly lower
average debt levels were partially offset by the January 2002 issuance of $1.0
billion principal amount of 8-7/8% Senior Secured Notes due 2009. Proceeds from
the Senior Secured Notes were used to reduce a variable-rate term loan under the
Secured Credit Agreement.

Capsule segment results (in millions of dollars) for the second quarter of 2002
and 2001 were as follows:

(a) EBIT consists of consolidated earnings before interest income, interest
expense, provision for income taxes, and minority share owners' interests
in earnings of subsidiaries.

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(b) Amount for the three months ended June 30, 2001 included a net gain of
$338.0 million related to the following: (1) a gain of $457.3 million
related to the sale of the Company's Harbor Capital business; (2) charges
of $79.9 million related to restructuring and impairment charges at certain
of the Company's international glass operations, principally Venezuela and
Puerto Rico, as well as certain other domestic and international
operations; (3) charges of $30.9 million related to special employee
benefit programs; and (4) a charge of $8.5 million for certain
contingencies.

Such charges (gains) are included as follows in consolidated EBIT for the
three months ended June 30, 2001:

Glass Containers $ 71.9
Plastics Packaging 27.6
-------

Total Product Segments 99.5
Eliminations and other
retained items (437.5)
-------

Consolidated Totals $(338.0)
=======

(c) In accordance with FAS No. 142, goodwill is no longer amortized beginning
in 2002. In order to facilitate comparisons, goodwill amortization for 2001
has been reclassified out of the Glass Containers and Plastics Packaging
segments and reported separately.

Consolidated net sales for the second quarter of 2002 increased $107.5 million,
or 7.7%, over the prior year. Net sales of the Glass Containers segment
increased $126.6 million, or 14.1%, over 2001. In North America, the additional
sales from the October 2001 acquisition of the Canadian glass container
operations were partially offset by decreased shipments of containers for beer
in the U.S. The combined U.S. dollar sales of the segment's other foreign
affiliates increased from the prior year. Increased shipments in Australia,
Venezuela, China, and Italy and the effects of a weaker U.S. dollar were
partially offset by lower shipments in portions of Europe and South America and
the absence of the glass container operations in India. The effect of changing
foreign currency exchange rates increased U.S. dollar sales of the segment's
foreign affiliates by approximately $18 million. Net sales of the Plastics
Packaging segment decreased $19.1 million, or 3.9%, from 2001. Increased
shipments of plastic containers for food, bottled water, and health and personal
care and closures for juice and other beverages and favorable foreign currency
translation rates, were more than offset by lower unit pricing in some product
lines, and the effects of lower resin costs on pass-through arrangements with
customers. The effects of lower resin cost pass-throughs decreased sales
approximately $13 million compared to the second quarter of 2001.

Excluding the effects of the 2001 unusual items, consolidated EBIT for the
second quarter of 2002 increased $14.0 million, or 5.9%, to $249.6 million from
the 2001 adjusted EBIT of $235.6 million, adjusted to exclude goodwill
amortization. EBIT of the Glass Containers segment increased $28.0 million to
$192.9 million, compared to adjusted EBIT of $164.9 million in 2001. The
combined U.S. dollar EBIT of the segment's foreign affiliates increased from
prior year. Increased shipments in Australia, Venezuela, China, and Italy, lower
energy cost worldwide, and moderately improved pricing in Europe were partially
offset by lower shipments in Europe and South America. In North America, Glass
Container EBIT increased over 2001 principally as a result of lower costs for
energy, moderately improved pricing, and the addition of the Canadian glass
container operations in the fourth quarter of 2001, partially offset by lower

31

shipments of containers for beer in the U.S. and the conversion of certain food
and beverage containers to plastic packaging. EBIT of the Plastics Packaging
segment decreased $1.3 million, or 1.6%, to $78.2 million compared to adjusted
EBIT of $79.5 million in 2001. Increased shipments of plastic containers for
food and health and personal care and closures for juice and other beverages
were more than offset by lower shipments of containers for household products
and sports drinks and closures for food as well as lower unit pricing in some
product lines. EBIT from eliminations and other retained items, excluding the
2001 unusual items, decreased $12.7 million from 2001 reflecting lower net
financial services income due to the sale of the Company's Harbor Capital
Advisors business in the second quarter of 2001.

The second quarter of 2001 earnings before extraordinary items included the
following unusual and other largely one-time items: (1) a gain of $457.3 million
($284.4 million after tax) related to the sale of the Company's Harbor Capital
Advisors business; (2) charges of $79.9 million ($63.9 million after tax and
minority share owners' interests) related to restructuring and impairment
charges at certain of the Company's international glass operations, principally
Venezuela and Puerto Rico, as well as certain other domestic and international
operations; (3) charges of $30.9 million ($19.4 million after tax) related to
special employee benefit programs; (4) a charge of $8.5 million ($5.3 million
after tax) for certain contingencies; (5) a $6.0 million charge to adjust tax
liabilities in Italy as a result of recent legislation; and (6) a net interest
charge of $4.0 million ($2.8 million after tax) related to interest on the
resolution of the transfer of pension assets and liabilities for a previous
acquisition and divestiture.

FIRST SIX MONTHS 2002 COMPARED WITH FIRST SIX MONTHS 2001

The Company recorded earnings before extraordinary items and cumulative effect
of accounting change of $167.1 million for the first six months of 2002 compared
to earnings before extraordinary items of $296.5 million for the first six
months of 2001. The net loss for the first six months of 2002 of $299.6 million
reflects $6.7 million of an extraordinary charge from the early extinguishment
of debt and $460.0 million from the cumulative effect the change in accounting
for goodwill. Net earnings of $292.4 million for 2001 reflect $4.1 million of an
extraordinary charge from the early extinguishment of debt. Excluding the
effects of the 2002 extraordinary item and cumulative effect of accounting
change, the Company's first six months of 2002 net earnings of $167.1 million
increased $23.4 million, or 16.3% from the first six months of 2001 earnings,
excluding extraordinary, unusual and other largely one-time items and goodwill
amortization, of $143.7 million. Consolidated EBIT for the first six months of
2002 was $454.4 million, an increase of $20.8 million, or 4.8%, compared to the
first six months of 2001 EBIT, excluding unusual and other largely one-time
items and goodwill amortization, of $433.6 million. The increase is principally
due to higher EBIT for the Glass Containers segment, partially offset by lower
EBIT of the Plastics Packaging segment, and lower EBIT from eliminations and
other retained items, as further discussed below. Interest expense, net of
interest income and the 2001 unusual expense of $4.0 million, decreased $16.3
million from the 2001 period. The effects of lower short-term variable interest
rates and slightly lower average debt levels were partially offset by the
January 2002 issuance of $1.0 billion principal amount of 8-7/8% Senior Secured
Notes due 2009. Proceeds from the Senior Secured Notes were used to reduce a
variable-rate term loan under the Secured Credit Agreement. The Company's
estimated effective tax rate for the first six months of 2002 was 31.6%. This
compares with a rate of 30.5% for the first six months of 2001, and 30.3% for
the full year of 2001, adjusted to exclude the effects of goodwill amortization
and unusual items. The increase in the 2002 estimated rate compared to the full
year of 2001 is primarily the result of decreased international and domestic tax
benefits and credits and a shift in estimated international earnings toward
countries with higher effective tax rates.

32

Capsule segment results (in millions of dollars) for the first six months of
2002 and 2001 were as follows:

(a) EBIT consists of consolidated earnings before interest income, interest
expense, provision for income taxes, and minority share owners' interests
in earnings of subsidiaries.

(b) Amount for the six months ended June 30, 2001 included a net gain of $351.1
million related to the following: (1) a gain of $457.3 million related to
the sale of the Company's Harbor Capital business; (2) charges of $79.9
million related to restructuring and impairment charges at certain of the
Company's international glass operations, principally Venezuela and Puerto
Rico, as well as certain other domestic and international operations; (3)
charges of $30.9 million related to special employee benefit programs; (4)
a charge of $8.5 million for certain contingencies; (5) a gain of $10.3
million from the sale of a minerals business in Australia; and (6) a gain
of $2.8 million from the sale of the Company's labels business.

Such charges (gains) are included as follows in consolidated EBIT for the
six months ended June 30, 2001:

Glass Containers $ 61.6
Plastics Packaging 27.6
Other (2.8)
---------

Total Product Segments 86.4
Eliminations and other
retained items (437.5)
---------

Consolidated Totals $ (351.1)
=========

33

(c) In accordance with FAS No. 142, goodwill is no longer amortized beginning
in 2002. In order to facilitate comparisons, goodwill amortization for 2001
has been reclassified out of the Glass Containers and Plastics Packaging
segments and reported separately.

Consolidated net sales for the first six months of 2002 increased $112.3
million, or 4.2%, over the prior year. Net sales of the Glass Containers segment
increased $154.9 million, or 8.9%, over 2001. In North America, the additional
sales from the October 2001 acquisition of the Canadian glass container
operations were partially offset by decreased shipments of containers for beer
in the U.S. The combined U.S. dollar sales of the segment's other foreign
affiliates increased from the prior year. Increased shipments in Australia,
Venezuela, and China were partially offset by lower shipments in much of Europe
and portions of South America as well as the absence of the glass container
operations in India. Net sales of the Plastics Packaging segment decreased $38.1
million, or 4.0%, from 2001. Increased shipments of plastic containers for food,
bottled water, and health care and closures for juice and other beverages, were
more than offset by lower shipments of containers for household products and
sports drinks, closures for food, and the effects of lower resin costs on
pass-through arrangements with customers. The effects of lower resin cost
pass-throughs decreased sales approximately $20 million compared to the first
six months of 2001.

Excluding the effects of the 2001 unusual items, consolidated EBIT for the first
six months of 2002 increased $20.8 million, or 4.8%, to $454.4 million from the
2001 adjusted EBIT of $455.6 million, adjusted to exclude goodwill amortization.
EBIT of the Glass Containers segment increased $47.0 million to $344.0 million,
compared to adjusted EBIT of $297.0 million in 2001. The combined U.S. dollar
EBIT of the segment's foreign affiliates increased from prior year. Increased
shipments in Australia, Venezuela, and China, lower energy costs worldwide, and
moderately improved pricing in some regions were partially offset by lower
shipments in much of Europe and portions of South America and the Asia Pacific
region, as well as weakness in certain South American currencies. Recent
economic and political developments in some South American countries could have
an adverse effect on operating results going forward for this segment. In North
America, Glass Container EBIT increased over 2001 principally as a result of
lower costs for energy and the addition of the Canadian glass container
operations in the fourth quarter of 2001, partially offset by lower shipments of
containers for beer in the U. S. and the conversion of certain food and beverage
containers to plastic packaging. EBIT of the Plastics Packaging segment
decreased $5.4 million, or 3.4%, to $153.0 million compared to adjusted EBIT of
$158.4 million in 2001. Increased shipments of plastic containers for food,
bottled water, and health care and closures for juice and other beverages as
well as improved manufacturing performance, were more than offset by lower
shipments of containers for household products and sports drinks, and closures
for food as well as lower unit pricing in some product lines. EBIT from
eliminations and other retained items, excluding the 2001 unusual items,
decreased $20.6 million from 2001 reflecting lower net financial services income
due to the sale of the Company's Harbor Capital Advisors business in the second
quarter of 2001.

Earnings before extraordinary items for the first six months of 2001 included
the following unusual and other largely one-time items: (1) a gain of $457.3
million ($284.4 million after tax) related to the sale of the Company's Harbor
Capital Advisors business; (2) pretax gains totaling $13.1 million ($12.0
million after tax) related to the sale of the Company's label business and the
sale of a minerals business in Australia; (3) charges of $79.9 million ($63.9
million after tax and minority share owners' interests) related to restructuring
and impairment charges at certain of the Company's international glass
operations, principally Venezuela and Puerto Rico, as well as certain other
domestic and international operations; (4) charges of $30.9 million ($19.4

34

million after tax) related to special employee benefit programs; (5) a charge of
$8.5 million ($5.3 million after tax) for certain contingencies; (6) a $6.0
million charge to adjust tax liabilities in Italy as a result of recent
legislation; and (7) a net interest charge of $4.0 million ($2.8 million after
tax) related to interest on the resolution of the transfer of pension assets and
liabilities for a previous acquisition and divestiture.

RESTRUCTURING AND IMPAIRMENT CHARGES

The second quarter of 2001 operating results included pretax charges of $79.9
million, principally related to a restructuring program and impairment at
certain of the international and domestic operations. The charge included the
impairment of assets at the Company's affiliate in Puerto Rico and the
consolidation of manufacturing capacity and the closing of a facility in
Venezuela. The program also included consolidation of capacity at certain other
international and domestic facilities in response to decisions about pricing and
market strategy. The Company expects its actions related to these restructuring
and impairment charges to be completed during the next several quarters. The
cost savings resulting from the 2001 restructuring are not expected to be
material on an annual basis.

CAPITAL RESOURCES AND LIQUIDITY

The Company's total debt at June 30, 2002 was $5.46 billion, compared to $5.40
billion at December 31, 2001 and $5.34 billion at June 30, 2001.

During April 2001, certain of the Company's subsidiaries entered into the
Secured Credit Agreement (the "Agreement") with a group of banks, which expires
on March 31, 2004. The Agreement provides for a $3.0 billion revolving credit
facility and a $65 million term loan (initially $1.5 billion). The borrowers
under the term loan used the proceeds therefrom to repay intercompany amounts
owed to OI Inc., which in turn used the proceeds from the repayment of such
intercompany amounts to repay amounts outstanding under, and terminate, its
existing credit agreement.

At June 30, 2002, the Company had available credit totaling $3.065 billion under
the Agreement, of which $442.1 million had not been utilized. At June 30, 2001,
the Company had $602.8 million of credit which had not been utilized under the
Agreement. The decrease is due in large part to the $150 million purchase of the
Canadian glass container assets of Consumers Packaging Inc. in October 2001.
Cash provided by operating activities was $337.4 million for the first six
months 2002 compared to $84.5 million for the first six months of 2001.

During January 2002, a subsidiary of the Company completed a $1.0 billion
private placement of senior secured notes. The notes bear interest at 8 7/8% and
are due February 15, 2009. The notes are guaranteed by substantially all of the
Company's domestic subsidiaries. The assets of substantially all of the
Company's domestic subsidiaries are pledged as security for the notes. The
issuing subsidiary used the net cash proceeds from the notes to reduce the
outstanding term loan under the Agreement by $980 million. As such, the Company
wrote off unamortized deferred financing fees in January 2002 related to the
term loan and recorded an extraordinary charge totaling $10.9 million less
applicable income taxes of $4.2 million. The indenture for the notes restricts,
among other things, the ability of the Company's and its subsidiaries to borrow
money, pay dividends on, or redeem or repurchase stock, make investments, create
liens, enter into certain transactions with affiliates, and sell certain assets
or merge with or into other companies.

35

OI Inc. has substantial obligations related to semiannual interest payments on
$1.7 billion of outstanding public debt securities. In addition, OI Inc. pays
aggregate annual dividends of $21.5 million on 9,050,000 share of its $2.375
convertible preferred stock. OI Inc. also makes, and expects in the future to
make, substantial indemnity payments and payments for legal fees and expenses in
connection with asbestos-related lawsuits and claims. OI Inc.'s asbestos-related
payments for the six months ended June 30, 2002 were $111.7 million down from
$125.4 million for the first six months of 2002. OI Inc. expects that the gross
amount of total asbestos-related payments will be moderately lower in 2002
compared to 2001. OI Inc. relies primarily on distributions from the Company to
meet these obligations. Based on OI Inc.'s expectations regarding future
payments for lawsuits and claims, and also based on the Company's expected
operating cash flow, the Company believes that the payments to OI Inc. for any
deferred amounts of previously settled or otherwise determined lawsuits and
claims, and the resolution of presently pending and anticipated future lawsuits
and claims associated with asbestos, will not have a material adverse effect
upon the Company's liquidity on a short-term or long-term basis.

The Company anticipates that cash flow from its operations and from utilization
of credit available through March 2004 under the Agreement will be sufficient to
fund its operating and seasonal working capital needs, debt service and other
obligations including payments to OI Inc. described above.

CRITICAL ACCOUNTING ESTIMATES

The Company's analysis and discussion of its financial condition and results of
operations are based upon its consolidated financial statements that have been
prepared in accordance with accounting principles generally accepted in the
United States (U.S. GAAP). The preparation of financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, and the
disclosure of contingent assets and liabilities. The Company evaluates these
estimates and assumptions on an ongoing basis, including but not limited to
those related to pension benefit plans and goodwill. Estimates and assumptions
are based on historical and other factors believed to be reasonable under the
circumstances. The results of these estimates may form the basis of the carrying
value of certain assets and liabilities and may not be readily apparent from
other sources. Actual results, under conditions and circumstances different from
those assumed, may differ from estimates. The impact and any associated risks
related to estimates and assumptions are discussed within Management's
Discussion and Analysis of Financial Condition and Results of Operations, as
well as in the Notes to Condensed Consolidated Financial Statements, if
applicable, where estimates and assumptions affect the Company's reported and
expected financial results.

The Company believes that accounting for pension benefit plans and goodwill
involves the more significant judgments and estimates used in the preparation of
its consolidated financial statements:

Pension Benefit Plans Funded Status

Because of their funded status, the Company's principal pension benefit plans
contributed pretax credits to earnings of approximately $41.8 million for the
first six months of 2002 and approximately $48.5 million for the first six
months of 2001. The Company expects that the amount of such credits for the full
year 2002 will be approximately 15% lower than the full year of 2001. The 2002
decrease in pretax pension credits is attributed to lower expected return on

36

assets and the addition of certain pension plans from the acquisition of the
Canadian glass container assets of Consumers Packaging Inc. A one-half
percentage point change in the actuarial assumption regarding the expected
return on assets would result in a change of approximately $15 million in pretax
pension credits for the full year. The funded status of the plans provides
assurance of benefits for participating employees, but future effects on
operating results depend on economic conditions and investment performance.

Goodwill

Beginning in 2002, the Company will evaluate goodwill annually (or more
frequently if impairment indicators arise) for impairment. Goodwill impairment
testing is performed using the business enterprise value ("BEV") of each
reporting unit which is calculated as of a measurement date, by determining the
present value of debt-free, after tax future cash flows, discounted at the
weighted average cost of capital of a hypothetical third party buyer. This BEV
is then compared to the book value of each reporting unit as of the measurement
date to assess whether an impairment exists under FAS 142. If certain
assumptions in the BEV change, such as EBIT projections, cash flow projections,
or risk adjusted cost of capital, goodwill may have to be written down.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

All borrowings under the April 2001 Secured Credit Agreement, including
borrowings by foreign subsidiaries, are denominated in U.S. dollars. As
described in Note 11 to the financial statements, certain amounts borrowed under
the agreement by foreign subsidiaries have been swapped into the subsidiaries'
functional currencies.

During January 2002, a subsidiary of the Company completed a $1.0 billion
private placement of senior secured notes. The notes bear interest at 8 7/8% and
are due February 15, 2009. The issuing subsidiary used the net cash proceeds
from the notes to reduce the outstanding term loan under the Secured Credit
Agreement by $980 million. As a result, the Company's exposure to variable
interest rates was reduced and the maturity of a significant portion of its debt
was extended by five years. However, the higher interest rate on the notes will
cause the Company to incur higher interest expense.

FORWARD LOOKING STATEMENTS

This document may contain "forward looking" statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933. Forward looking statements reflect the Company's best
assessment at the time, and thus involve uncertainty and risk. It is possible
the Company's future financial performance may differ from expectations due to a
variety of factors including, but not limited to the following: (1) foreign
currency fluctuations relative to the U.S. dollar, (2) change in capital
availability or cost, including interest rate fluctuations, (3) the general
political, economic and competitive conditions in markets and countries where
the company has operations, including competitive pricing pressures, inflation
or deflation, and changes in tax rates, (4) consumer preferences for alternative
forms of packaging, (5) fluctuations in raw material and labor costs, (6)
availability of raw materials, (7) costs and availability of energy, (8)
transportation costs, (9) consolidation among competitors and customers, (10)
the ability of the company to integrate operations of acquired businesses, (11)
the performance by customers of their obligations under purchase agreements, and
(12) the timing and occurrence of events which are beyond the control of the
company. It is not possible to foresee or identify all such factors. Any forward
looking

37

statements in this document are based on certain assumptions and analyses made
by the company in light of its experience and perception of historical trends,
current conditions, expected future developments, and other factors it believes
are appropriate in the circumstances. Forward looking statements are not a
guarantee of future performance and actual results or developments may differ
materially from expectations. While the company continually reviews trends and
uncertainties affecting the company's results of operations and financial
condition, the company does not intend to update any particular forward looking
statements contained in this document.

38

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Owens-Illinois Group, Inc.

In August 1998, the Company received a Notice of Violation from the United
States Environmental Protection Agency regarding alleged opacity violations at
its Oakland, California glass container plant from the period of 1994 through
1997. Certain furnaces at the plant are equipped with monitors that continuously
monitor opacity. During this period, these furnaces had occasional upset and
breakdown conditions that caused opacity excursions that were reported to the
local air quality management district. This action by the EPA involves the same
incidents that were resolved with the local air quality management district.
During the second quarter of 2002, the Company settled this issue and paid a
fine of $200,000.

Owens-Illinois, Inc.

For further information on legal proceedings, see Note 7 to the Condensed
Consolidated Financial Statements, "Contingencies," that is included in Part I
of this Report and is incorporated herein by reference.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

Exhibit 12 Computation of Ratio of Earnings to Fixed Charges

39

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

OWENS-ILLINOIS GROUP, INC.

Date August 9, 2002 By /s/ Edward C. White
---------------------------------------
Edward C. White,
Controller and Chief Accounting Officer
(Principal Accounting Officer)

40

INDEX TO EXHIBITS

EXHIBITS

12 Computation of Ratio of Earnings to Fixed Charges

41