SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 1
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2002
Commission File No. 1-3660
Owens Corning
One Owens Corning Parkway
Toledo, Ohio 43659
Area Code (419)248-8000
A Delaware Corporation
I.R.S. Employer Identification No. 34-4323452
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange on | ||
| Which Registered | |||
| Common Stock - $.10 Par Value | New York Stock Exchange | ||
| (Removed from Listing and Registration | |||
| effective January 30, 2003) |
Securities registered pursuant to Section 12(g) of the Act:None
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 / X / No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes / / No / X /
On June 28, 2002, the last business day of Registrant’s most recently completed second fiscal quarter, the aggregate market value of Registrant’s $.10 par value common stock (Registrant’s voting stock) held by non-affiliates was $65,658,647 (assuming for purposes of this computation only that the Registrant had no affiliates).
At February 28, 2003, there were outstanding 55,278,821 shares of Registrant’s $.10 par value common stock.
Explanatory Note
This Amendment No. 1 to the Registrant's annual report on Form 10-K for the year ended December 31, 2002 is being filed (1) to replace the Report of Independent Accountants appearing at pages 53-54 of the Registrant's annual report on Form 10-K filed on March 28, 2003 in order to correct a typographical error in the date of the Report of Independent Accountants and (2) to correct typographical errors in the tables appearing on pages 119 and 130 of such annual report filed on March 28, 2003. These pages comprise part of Item 8, "Financial Statements and Supplementary Data". In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the complete text of Item 8, as so amended (including pages 53-133 of the annual report on Form 10-K, which are incorporated by reference into such Item 8), is set forth below. In addition, in connection with the filing of this Form 10-K/A and pursuant to Rule 12b-15, the Registrant is including certain currently dated certifications and an updated consent of independent accountants. The remainder of the annual report on Form 10-K filed on March 28, 2003 remains unchanged.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 53 through 133 hereof are incorporated here by reference.
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| PricewaterhouseCoopers LLP Suite 1800 One SeaGate Toledo OH 43604-1574 Telephone (419) 254 2500 Facsimile (419) 254 2550 |
Report of Independent Accountants
To the Board of Directors and Stockholders of Owens Corning:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income (loss), stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of Owens Corning and its subsidiaries at December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The consolidated financial statements of Owens Corning and its subsidiaries as of December 31, 2001, and for each of the two years in the period ended December 31, 2001, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated January 23, 2002, before the revisions described in Notes 2 and 22.
As discussed in Note 22 of the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), which was adopted by the Company as of January 1, 2002.
As discussed above, the consolidated financial statements of Owens Corning and its subsidiaries as of December 31, 2001, and for each of the two years in the period ended December 31, 2001, were audited by other independent accountants who have ceased operations. As described in Notes 2 and 22, these financial statements have been revised to include the transitional disclosures required by SFAS 142, which was adopted by the Company as of January 1, 2002 and to restate the disclosures required by Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” resulting from a change in the composition of the Company’s reportable segments. We audited the transitional disclosures described in Note 22 and the restated disclosures described in Note 2. In our opinion, the transitional disclosures in Note 22 and the restated disclosures in Note 2 for 2001 and 2000 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 or 2000 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 or 2000 consolidated financial statements taken as a whole.
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To the Board of Directors and Stockholders of Owens Corning:
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company voluntarily filed for Chapter 11 bankruptcy protection on October 5, 2000. This action, which was taken primarily as a result of asbestos litigation as discussed in Note 19 to the consolidated financial statements, raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
February 6, 2003
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THIS REPORT IS A COPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN LLP REPORT AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP
The financial statements to which this report relates have been modified since the date that Arthur Andersen issued its report. The modifications relate to the transitional disclosures required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, which was adopted by the Company as of January 1, 2002 and to restate disclosures required by Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” resulting from a change in the composition of the Company’s reportable segments. The modifications, which were audited by PricewaterhouseCoopers LLP, are not covered by the copy of the Arthur Andersen report. The footnotes shown below were not part of the Arthur Andersen report.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Owens Corning:
We have audited the accompanying consolidated balance sheet of OWENS CORNING (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2001, and 2000*, and the related consolidated statements of income (loss), comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001*. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Owens Corning and subsidiaries as of December 31, 2001, and 2000*, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001*, in conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company voluntarily filed for Chapter 11 bankruptcy protection on October 5, 2000. This action, which was taken primarily as a result of asbestos litigation as discussed in Note 19 to the consolidated financial statements, raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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To the Stockholders and Board of Directors of Owens Corning:
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule** listed in the Index to Financial Statement Schedules is presented for the purpose of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule** has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
January 23, 2002,
Toledo, Ohio.
*The Company’s consolidated balance sheet as of December 31, 2000 and the consolidated statements of income (loss), comprehensive income (loss), stockholder’s equity and cash flows for the year ended December 31, 1999 are not included in this Form 10-K. Additionally, the information contained in the consolidated statement of comprehensive income (loss) for the years ended December 31, 2002, 2001 and 2000 has been integrated in the consolidated statement of stockholders’ equity for those years and the consolidated statement of comprehensive income (loss) has been deleted.
**As this report is a reproduction of the previously issued report from Arthur Andersen, the schedule to which this paragraph refers includes information for the years ending December 31, 2001, 2000 and 1999. However, the 1999 information is not included in this Form 10-K.
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OWENS CORNING AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of Owens Corning and its subsidiaries (the “Company”) generally include the accounts of majority owned subsidiaries, unless ownership is considered temporary. Intercompany accounts and transactions are eliminated.
Reclassifications
Certain reclassifications have been made to 2001 and 2000 to conform with the classifications used in 2002.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue when goods are shipped and title passes to the customer. Provisions for discounts and rebates to customers, returns, warranties and other adjustments are provided in the same period that the related sales are recorded and are typically based on historical experience.
Shipping and Handling Costs
The Company incurs certain expenses related to preparing, packaging and shipping its products to its customers, mainly third-party transportation fees. All costs related to these activities are included as a component of cost of goods sold in the Consolidated Statement of Income (Loss). All costs billed to the customer are included as revenue in the Consolidated Statement of Income (Loss).
Marketing and Advertising Expenses
Marketing and advertising costs are expensed the first time the advertising takes place. Marketing expenses include advertising, customer incentive programs, and marketing communications. Marketing expenses for 2002, 2001 and 2000 were $83 million, $87 million, and $92 million respectively.
Science and Technology Expenses
The Company incurs certain expenses related to science and technology. These expenses include salaries, building costs, utilities, administrative expenses, materials, and supplies for the Company to improve and develop its products.
Reorganization Items and Other Expenses
In accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”), revenues, expenses (including professional fees), realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business are reported separately as reorganization items in the Consolidated Statement of Income (Loss).
Stock Based Compensation Plans
The Company applies Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure An Amendment of FAS No. 123” (“SFAS 148”), for disclosures of its stock based compensation plans. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations for expense recognition as permitted by SFAS 123 and SFAS 148.
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OWENS CORNING AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Income per Share
Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share reflects the dilutive effect of common equivalent shares and increased shares that would result from the conversion of debt and equity securities. The effects of anti-dilution are not presented. Unless otherwise indicated, all per share information included in the Notes to the Consolidated Financial Statements is presented on a diluted basis.
Cash and Cash Equivalents
The Company defines cash and cash equivalents as cash and time deposits with maturities of three months or less when purchased.
Inventory Valuation
Inventories are stated at cost, which is less than market value, and include material, labor and manufacturing overhead. The majority of the U.S. inventories are valued using the first-in, first-out (FIFO) method and the balance of inventories are generally valued using the last-in, first-out (LIFO) method.
Investments in Affiliates
The Company accounts for investments in affiliates of between 20% and 50% ownership with significant influence using the equity method under which the Company’s share of earnings of the affiliate is reflected in income as earned and dividends are credited against the investment in affiliate when declared. If the Company’s ownership is less than 20%, or its ownership is less than 50% and the Company determines that it does not have significant influence, the Company accounts for its investments using the cost method under which the Company reflects dividends when declared as a reduction to the cost of the investment.
Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 142 eliminates the amortization of goodwill and indefinite-lived intangible assets; identifiable intangible assets with a determinable useful life will continue to be amortized. SFAS No. 142 requires an annual review for impairment using a fair value methodology. In performing its annual review, the Company uses an estimate of the undiscounted cash flows of the related business over the remaining life of the goodwill in assessing whether the goodwill is recoverable on a reporting unit basis.
Properties and Depreciation
The Company’s plant and equipment is depreciated principally using the straight-line method. Depreciation expense for the years ended December 31, 2002, 2001, and 2000 was $272 million, $220 million, and $177 million, respectively. The range of useful lives for the major components of the Company’s plant and equipment is as follows:
| Buildings and leasehold improvements | 15 - 40 years | |
| Machinery and equipment | 5 - 20 years | |
| Information Systems | 5 - 10 years |
Capitalization of Software Developed for Internal Use
The Company capitalizes the direct external and internal costs incurred in connection with the development, testing and installation of software for internal use. Internally developed software is included in plant and equipment and is amortized over its estimated useful life using the straight-line method, not to exceed 5 years.
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OWENS CORNING AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property Impairments
The Company exercises judgment in evaluating tangible and intangible long-lived assets for impairment. This requires estimating useful lives, future operating cash flows and estimated fair value of the assets under review. Changes in management intentions, market conditions or operating performance could indicate that impairment charges might be necessary that would be material to the Company’s consolidated financial statements in any given period.
Income Taxes
The Company recognizes current tax liabilities and assets for the estimated taxes payable or refundable on the tax returns for the current year. Deferred tax balances reflect the impact of temporary differences between the carrying amount of assets and liabilities and their tax basis. Amounts are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. In addition, realization of certain deferred tax assets is dependent upon our ability to generate future taxable income. The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. In addition, the Company maintains tax reserves to cover Internal Revenue Service (“IRS”) claims for income taxes and interest attributable to audits of open tax years.
Pension and Other Postretirement Benefits
Accounting for pensions and other postretirement benefits involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, extensive use is made of assumptions about inflation, investment returns, mortality, turnover, medical costs and discount rates. The results of this effort provide management with the necessary information on which to base its judgment and develop the estimates used to prepare the financial statements.
Reserve for Asbestos Litigation Claims
The Company estimates a reserve for asbestos-related liabilities that have been asserted or are probable of assertion. The estimate of liabilities for pending and expected future asbestos claims is subject to considerable uncertainty because such liabilities are influenced by numerous variables that are inherently difficult to predict, and such uncertainties significantly increased as a result of the Chapter 11 Cases. The Company will continue to review its asbestos reserve on a periodic basis and make such adjustments as may be appropriate. Any such adjustment could be material to the Company’s consolidated financial statements in any given period. Please see Note 19 to the Consolidated Financial Statements for further discussion.
Derivative Financial Instruments
Effective January 1, 2001, the Company implemented Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). This statement and its interpretations establish accounting and reporting standards requiring derivative instruments (including certain derivative instruments embedded in other contracts) to be recorded in the balance sheet as either an asset or liability measured at its fair value and related gains and losses to be recorded in income or other comprehensive income, as appropriate.
Foreign Currency Translation
The functional currency of the Company’s subsidiaries is generally the applicable local currency. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the period-end rate of exchange and their statement of income (loss) and statement of cash flows are converted on an ongoing basis at the rate of exchange when transactions occur. The resulting translation adjustment is included in “Accumulated other comprehensive loss” in the Consolidated Statement of Stockholders’ Equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the Consolidated Statement of Income (Loss) as incurred.
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
| 2002 | 2001 | 2000 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars, except share data) | |||||||||||||||||
| NET SALES | $ | 4,872 | $ | 4,762 | $ | 4,940 | |||||||||||
| COST OF SALES (Note 5) | 4,130 | 3,938 | 4,014 | ||||||||||||||
| Gross margin | 742 | 824 | 926 | ||||||||||||||
| OPERATING EXPENSES | |||||||||||||||||
| Marketing and administrative expenses (Note 5) | 522 | 524 | 542 | ||||||||||||||
| Science and technology expenses | 42 | 37 | 52 | ||||||||||||||
| Restructure costs (Note 5) | 61 | 26 | 32 | ||||||||||||||
| Chapter 11 related reorganization items (Note 1) | 96 | 87 | 24 | ||||||||||||||
| Provision (credit) for asbestos litigation claims - Owens | |||||||||||||||||
| Corning (Note 19) | 1,376 | (7 | ) | 790 | |||||||||||||
| Provision for asbestos litigation claims - Fibreboard (Notes 19 | |||||||||||||||||
| and 20) | 975 | - | - | ||||||||||||||
| Other (Note 5) | (17 | ) | 41 | 117 | |||||||||||||
| Total operating expenses | 3,055 | 708 | 1,557 | ||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | (2,313 | ) | 116 | (631 | ) | ||||||||||||
| OTHER | |||||||||||||||||
| Cost of borrowed funds (Notes 1, 3, 4 and 18) | 16 | 16 | 155 | ||||||||||||||
| Other (Notes 3, 18 and 20) | - | (2 | ) | 5 | |||||||||||||
| INCOME (LOSS) BEFORE INCOME TAX | |||||||||||||||||
| EXPENSE (BENEFIT) | (2,329 | ) | 102 | (791 | ) | ||||||||||||
| Income tax expense (benefit) (Notes 10 and 19) | 31 | 57 | (312 | ) | |||||||||||||
| INCOME (LOSS) BEFORE MINORITY INTEREST AND | |||||||||||||||||
| EQUITY IN NET INCOME (LOSS) OF AFFILIATES | (2,360 | ) | 45 | (479 | ) | ||||||||||||
| Minority interest (Notes 5 and 7) | (4 | ) | (4 | ) | (2 | ) | |||||||||||
| Equity in net income (loss) of affiliates (Note 13) | (4 | ) | (2 | ) | 3 | ||||||||||||
| NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT | |||||||||||||||||
| OF CHANGE IN ACCOUNTING PRINCIPLE | (2,368 | ) | 39 | (478 | ) | ||||||||||||
| Cumulative effect of change in accounting principle, net of tax | |||||||||||||||||
| (Note 22) | (441 | ) | - | - | |||||||||||||
| NET INCOME (LOSS) | $ | (2,809) | $ | 39 | $ | (478) | |||||||||||
| NET INCOME (LOSS) PER COMMON SHARE (Note 17) | |||||||||||||||||
| Basic net income (loss) per share | $ | (51.02) | $ | 0.72 | $ | (8.71) | |||||||||||
| Diluted net income (loss) per share | $ | (51.02) | $ | 0.66 | $ | (8.71) | |||||||||||
| Weighted average number of common shares outstanding | |||||||||||||||||
| and common equivalent shares during the period (in millions) | |||||||||||||||||
| Basic | 55.1 | 55.1 | 54.8 | ||||||||||||||
| Diluted | 55.1 | 59.9 | 54.8 | ||||||||||||||
The accompanying summary of significant accounting policies and notes
are an integral part of this statement
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002 AND 2001
| 2002 | 2001 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | (In millions of dollars) | |||||||||||||
| CURRENT | ||||||||||||||
| Cash and cash equivalents (Note 1) | $ | 875 | $ | 764 | ||||||||||
| Receivables, less allowances of $29 million in 2002 and | ||||||||||||||
| 2001 (Note 11) | 430 | 417 | ||||||||||||
| Inventories (Note 12) | 446 | 437 | ||||||||||||
| Deferred income taxes (Note 10) | 2 | 1 | ||||||||||||
| Income tax receivable (Note 10) | 4 | 5 | ||||||||||||
| Other current assets | 17 | 25 | ||||||||||||
| Total current | 1,774 | 1,649 | ||||||||||||
| OTHER | ||||||||||||||
| Insurance for asbestos litigation claims (Note 19) | 4 | 4 | ||||||||||||
| Restricted cash - asbestos and insurance related (Note 19) | 165 | 169 | ||||||||||||
| Restricted cash, securities, and other - Fibreboard (Notes 19 and 20) | 1,365 | 1,284 | ||||||||||||
| Deferred income taxes (Note 10) | 1,354 | 1,187 | ||||||||||||
| Goodwill, less accumulated amortization of $780 million in 2002 and | ||||||||||||||
| $131 million in 2001 (Notes 5, 6 and 22) | 122 | 610 | ||||||||||||
| Investments in affiliates (Notes 5 and 13) | 51 | 48 | ||||||||||||
| Other noncurrent assets (Note 9) | 198 | 247 | ||||||||||||
| Total other | 3,259 | 3,549 | ||||||||||||
| PLANT AND EQUIPMENT, at cost | ||||||||||||||
| Land | 69 | 67 | ||||||||||||
| Buildings and leasehold improvements | 692 | 669 | ||||||||||||
| Machinery and equipment | 3,201 | 2,854 | ||||||||||||
| Construction in progress | 164 | 256 | ||||||||||||
| 4,126 | 3,846 | |||||||||||||
| Less - accumulated depreciation | (2,239 | ) | (2,003 | ) | ||||||||||
| Net plant and equipment | 1,887 | 1,843 | ||||||||||||
| TOTAL ASSETS | $ | 6,920 | $ | 7,041 | ||||||||||
The accompanying summary of significant accounting policies and notes
are an integral part of this statement
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002 AND 2001 (continued)
| 2002 | 2001 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| LIABILITIES AND STOCKHOLDERS' EQUITY | (In millions of dollars) | |||||||||||||
| CURRENT | ||||||||||||||
| Accounts payable and accrued liabilities (Note 14) | $ | 756 | $ | 740 | ||||||||||
| Short-term debt (Note 4) | 40 | 43 | ||||||||||||
| Long-term debt - current portion (Note 3) | 65 | 66 | ||||||||||||
| Total current | 861 | 849 | ||||||||||||
| LONG-TERM DEBT (Note 3) | 71 | 5 | ||||||||||||
| OTHER | ||||||||||||||
| Other employee benefits liability (Note 8) | 368 | 331 | ||||||||||||
| Pension plan liability (Note 9) | 500 | 291 | ||||||||||||
| Other | 103 | 141 | ||||||||||||
| Total other | 971 | 763 | ||||||||||||
| LIABILITIES SUBJECT TO COMPROMISE (Notes 1, 3, 7 and 19) | 9,236 | 6,804 | ||||||||||||
| COMMITMENTS AND CONTINGENCIES (Notes 16, 18 and 19) | ||||||||||||||
| COMPANY-OBLIGATED SECURITIES OF ENTITIES | ||||||||||||||
| HOLDING SOLELY PARENT DEBENTURES - SUBJECT TO | ||||||||||||||
| COMPROMISE (Note 7) | 200 | 200 | ||||||||||||
| MINORITY INTEREST | 49 | 37 | ||||||||||||
| STOCKHOLDERS' EQUITY | ||||||||||||||
| Preferred stock, no par value; authorized 8 million shares, | ||||||||||||||
| none outstanding | - | - | ||||||||||||
| Common stock, par value $.10 per share; authorized 100 | ||||||||||||||
| million shares; issued 2002 - 55.2 million shares and 2001 - 55.3 | ||||||||||||||
| million shares (Notes 6 and 17) | 6 | 6 | ||||||||||||
| Additional paid in capital | 690 | 691 | ||||||||||||
| Deficit | (4,766 | ) | (1,957 | ) | ||||||||||
| Accumulated other comprehensive loss (Note 9) | (395 | ) | (355 | ) | ||||||||||
| Other (Note 17) | (3 | ) | (2 | ) | ||||||||||
| Total stockholders' equity | (4,468 | ) | (1,617 | ) | ||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 6,920 | $ | 7,041 | ||||||||||
The accompanying summary of significant accounting policies and notes
are an integral part of this statement
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
| 2002 | 2001 | 2000 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | ||||||||||||||||||||
| COMMON STOCK | ||||||||||||||||||||
| Balance beginning and end of year | $ | 6 | $ | 6 | $ | 6 | ||||||||||||||
| ADDITIONAL PAID IN CAPITAL | ||||||||||||||||||||
| Balance beginning of year | $ | 691 | $ | 694 | $ | 690 | ||||||||||||||
| Awards (forfeitures) of stock under | ||||||||||||||||||||
| stock compensation plans (Note 17) | (1 | ) | (3 | ) | 4 | |||||||||||||||
| Balance end of year | 690 | 691 | 694 | |||||||||||||||||
| DEFICIT | ||||||||||||||||||||
| Balance beginning of year | (1,957 | ) | (1,996 | ) | (1,510 | ) | ||||||||||||||
| Net income (loss) | (2,809 | ) | 39 | (478 | ) | |||||||||||||||
| Cash dividends declared | - | - | (8 | ) | ||||||||||||||||
| Balance end of year | (4,766 | ) | (1,957 | ) | (1,996 | ) | ||||||||||||||
| ACCUMULATED OTHER COMPREHENSIVE LOSS | ||||||||||||||||||||
| Balance beginning of year | ||||||||||||||||||||
| Currency translation adjustment | (133 | ) | (103 | ) | (62 | ) | ||||||||||||||
| Minimum pension liability adjustment | (230 | ) | (3 | ) | - | |||||||||||||||
| Other | 8 | 9 | 11 | |||||||||||||||||
| (355 | ) | (97 | ) | (51 | ) | |||||||||||||||
| Adjustments | ||||||||||||||||||||
| Currency translation adjustment | 74 | (30 | ) | (41 | ) | |||||||||||||||
| Minimum pension liability adjustment (net of taxes of $79 | (107 | ) | (227 | ) | (3 | ) | ||||||||||||||
| million in 2002, $153 million in 2001 and $2 million in | ||||||||||||||||||||
| 2000) | ||||||||||||||||||||
| Other | (7 | ) | (1 | ) | (2 | ) | ||||||||||||||
| Other comprehensive loss | (40 | ) | (258 | ) | (46 | ) | ||||||||||||||
| Balance end of year | ||||||||||||||||||||
| Currency translation adjustment | (59 | ) | (133 | ) | (103 | ) | ||||||||||||||
| Minimum pension liability adjustment | (337 | ) | (230 | ) | (3 | ) | ||||||||||||||
| Other | 1 | 8 | 9 | |||||||||||||||||
| Balance end of year | (395 | ) | (355 | ) | (97 | ) | ||||||||||||||
| OTHER | ||||||||||||||||||||
| Balance beginning of year | (2 | ) | (5 | ) | (15 | ) | ||||||||||||||
| Net increase (decrease) | (1 | ) | 3 | 10 | ||||||||||||||||
| Balance end of year | (3 | ) | (2 | ) | (5 | ) | ||||||||||||||
| STOCKHOLDERS' EQUITY | $ | (4,468 | ) | $ | (1,617 | ) | $ | (1,399 | ) | |||||||||||
| TOTAL COMPREHENSIVE LOSS | ||||||||||||||||||||
| Net income (loss) | $ | (2,809 | ) | $ | 39 | $ | (478 | ) | ||||||||||||
| Other comprehensive loss | (40 | ) | (258 | ) | (46 | ) | ||||||||||||||
| COMPREHENSIVE LOSS | $ | (2,849 | ) | $ | (219 | ) | $ | (524 | ) | |||||||||||
The accompanying summary of significant accounting policies and notes
are an integral part of this statement
– 64 –
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
| 2002 | 2001 | 2000 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | ||||||||||||||||||||
| NET CASH FLOW FROM OPERATIONS | ||||||||||||||||||||
| Net income (loss) | $ | (2,809 | ) | $ | 39 | $ | (478 | ) | ||||||||||||
| Reconciliation of net cash provided by (used in) operating activities: | ||||||||||||||||||||
| Noncash items: | ||||||||||||||||||||
| Provision (credit) for asbestos litigation claims (Note 19) | 2,356 | (7 | ) | 790 | ||||||||||||||||
| Provision for depreciation and amortization | 205 | 197 | 185 | |||||||||||||||||
| Provision for impairment of fixed assets | 67 | 40 | 18 | |||||||||||||||||
| Provision (credit) for deferred income taxes (Note 10) | (21 | ) | 47 | (361 | ) | |||||||||||||||
| Cumulative effect of accounting change (Note 22) | 441 | - | - | |||||||||||||||||
| Other (Note 5) | 132 | 87 | 126 | |||||||||||||||||
| (Increase) decrease in receivables (Note 11) | 6 | 41 | (198 | ) | ||||||||||||||||
| (Increase) decrease in inventories | (4 | ) | 19 | (78 | ) | |||||||||||||||
| Increase (decrease) in accounts payable and accrued | ||||||||||||||||||||
| liabilities | (88 | ) | 188 | 218 | ||||||||||||||||
| Increase in restricted cash - asbestos and | ||||||||||||||||||||
| insurance related (Note 19) | (7 | ) | (5 | ) | (164 | ) | ||||||||||||||
| liabilities subject to compromise (Note 1) | (1 | ) | (75 | ) | (100 | ) | ||||||||||||||
| Proceeds from insurance for asbestos litigation claims, | ||||||||||||||||||||
| excluding Fibreboard (Note 19) | 5 | 62 | 380 | |||||||||||||||||
| Payments for asbestos litigation claims, excluding | ||||||||||||||||||||
| Fibreboard (Note 19) | - | - | (521 | ) | ||||||||||||||||
| Pension fund contribution | - | (196 | ) | - | ||||||||||||||||
| Other | 75 | 41 | (7 | ) | ||||||||||||||||
| Net cash flow from operations | $ | 357 | $ | 478 | $ | (190 | ) | |||||||||||||
| NET CASH FLOW FROM INVESTING | ||||||||||||||||||||
| Additions to plant and equipment | $ | (248 | ) | $ | (270 | ) | $ | (476 | ) | |||||||||||
| Investment in subsidiaries, net of cash acquired (Note 6) | (14 | ) | (7 | ) | (4 | ) | ||||||||||||||
| Proceeds from the sale of affiliate or business (Note 6) | 12 | 34 | 193 | |||||||||||||||||
| Other | - | (6 | ) | (45 | ) | |||||||||||||||
| Net cash flow from investing | $ | (250 | ) | $ | (249 | ) | $ | (332 | ) | |||||||||||
The accompanying summary of significant accounting policies and notes
are an integral part of this statement
– 65 –
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (continued)
| 2002 | 2001 | 2000 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | ||||||||||||||||||||
| NET CASH FLOW FROM FINANCING (Notes 3 and 4) | ||||||||||||||||||||
| Net additions to long-term credit facilities $ | $ | - | $ | - | $ | 1,073 | ||||||||||||||
| Other additions to long-term debt | - | - | 29 | |||||||||||||||||
| Other reductions to long-term debt | (3 | ) | (4 | ) | (91 | ) | ||||||||||||||
| Net increase (decrease) in short-term debt | (4 | ) | (6 | ) | 7 | |||||||||||||||
| Subject to compromise (Note 1) | 1 | (4 | ) | - | ||||||||||||||||
| Dividends paid | - | - | (12 | ) | ||||||||||||||||
| Other | 1 | - | (4 | ) | ||||||||||||||||
| Net cash flow from financing | $ | (5 | ) | $ | (14 | ) | $ | 1,002 | ||||||||||||
| Effect of exchange rate changes on cash | 9 | (1 | ) | - | ||||||||||||||||
| Net increase in cash and cash equivalents | 111 | 214 | 480 | |||||||||||||||||
| Cash and cash equivalents at beginning of year | 764 | 550 | 70 | |||||||||||||||||
| Cash and cash equivalents at end of year | $ | 875 | $ | 764 | $ | 550 | ||||||||||||||
The accompanying summary of significant accounting policies and notes
are an integral part of this statement
– 66 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11
On October 5, 2000 (the “Petition Date”), Owens Corning and the 17 United States subsidiaries listed below (collectively, the “Debtors”) filed voluntary petitions for relief (the “Filing”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “USBC”). The Debtors are currently operating their businesses as debtors-in-possession in accordance with provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the “Chapter 11 Cases”) are being jointly administered under Case No. 00-3837 (JKF). The Chapter 11 Cases do not include other United States subsidiaries of Owens Corning or any of its foreign subsidiaries (collectively, the “Non-Debtor Subsidiaries”). As described more fully below under the heading “The Plan of Reorganization”, Owens Corning may cause certain of such Non-Debtor Subsidiaries that issued guarantees with respect to Owens Corning’s pre-petition bank credit facility to file petitions for relief under Chapter 11 of the Bankruptcy Code under certain circumstances. The subsidiary Debtors that filed Chapter 11 petitions for relief are:
| CDC Corporation | Integrex Testing Systems LLC | ||||
| Engineered Yarns America, Inc. | HOMExperts LLC | ||||
| Falcon Foam Corporation | Jefferson Holdings, Inc. | ||||
| Integrex | Owens-Corning Fiberglas Technology Inc. | ||||
| Fibreboard Corporation | Owens Corning HT, Inc. | ||||
| Exterior Systems, Inc. | Owens-Corning Overseas Holdings, Inc. | ||||
| Integrex Ventures LLC | Owens Corning Remodeling Systems, LLC | ||||
| Integrex Professional Services LLC | Soltech, Inc. | ||||
| Integrex Supply Chain Solutions LLC | |||||
The Debtors filed for relief under Chapter 11 to address the growing demands on Owens Corning’s cash flow resulting from its multi-billion dollar asbestos liability. This liability is discussed in greater detail in Note 19 to the Consolidated Financial Statements.
In late 2001, the asbestos-related Chapter 11 cases pending in the District of Delaware (the Chapter 11 Cases of Owens Corning and the cases of Armstrong World Industries, Inc., W.R. Grace & Co., Federal-Mogul Global, Inc., and USG Corporation) were ordered transferred to the United States District Court for the District of Delaware (the “District Court”) before Judge Alfred M. Wolin to facilitate development and implementation of a coordinated plan for management (the “Administrative Consolidation”). The District Court has entered an order referring the Chapter 11 Cases back to the USBC, where they were previously pending, subject to its ongoing right to withdraw such referral with respect to any proceedings or issues (the applicable court from time to time responsible for any particular aspect of the Chapter 11 Cases being hereinafter referred to as the “Bankruptcy Court”). Owens Corning is unable to predict what impact the Administrative Consolidation will have on the timing, outcome or other aspects of the Chapter 11 Cases.
On January 17, 2003, the Debtors, together with the Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants, filed a proposed joint plan of reorganization in the USBC. On March 28, 2003, the same proponents filed a proposed amended joint plan of reorganization (the “Plan”) in the USBC. Certain terms, conditions and provisions of the Plan are discussed below. The Plan is subject to confirmation by the Bankruptcy Court.
Consequence of Filing
As a consequence of the Filing, all pending litigation against the Debtors is stayed automatically by section 362 of the Bankruptcy Code and, absent further order of the Bankruptcy Court, no party may take
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
any action to recover on pre-petition claims against the Debtors. In addition, pursuant to section 365 of the Bankruptcy Code, the Debtors may reject or assume pre-petition executory contracts and unexpired leases, and other parties to contracts or leases that are rejected may assert rejection damages claims as permitted by the Bankruptcy Code.
Two creditors’ committees, one representing asbestos claimants and the other representing unsecured creditors, have been appointed as official committees in the Chapter 11 Cases. In addition, the Bankruptcy Court has appointed James J. McMonagle as Legal Representative for the class of future asbestos personal injury claimants against one or more of the Debtors. The two committees and the Legal Representative have the right to be heard on all matters that come before the Bankruptcy Court. Owens Corning expects that the two committees and the Legal Representative will play important roles in the Chapter 11 Cases and the negotiation of the terms of any plan or plans of reorganization. As noted above, the Debtors filed their Plan together with the Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants.
Owens Corning anticipates that substantially all liabilities of the Debtors as of the date of the Filing will be resolved under one or more Chapter 11 plans of reorganization to be proposed and voted on in the Chapter 11 Cases in accordance with the provisions of the Bankruptcy Code. Although the Debtors intend to seek confirmation of the Plan, there can be no assurance that the Plan will not be amended prior to confirmation, nor can there be any assurance that such Plan will be confirmed by the Bankruptcy Court and consummated. Owens Corning is unable to predict what impact the Administrative Consolidation will have on the timing of the confirmation of a plan or plans of reorganization or its effect, if any, on the terms thereof.
The Plan of Reorganization
Owens Corning believes that it is likely that the terms, conditions and provisions of the Plan will be the subject of continuing negotiations or litigation to resolve differences among the creditor constituencies as to their treatment. Accordingly, Owens Corning is unable to predict at this time what the treatment of creditors and equity holders of the respective Debtors will ultimately be under any plan or plans of reorganization finally confirmed. The current Plan provides for partial payment of all unsecured creditors’ claims, in the form of distributions of new common stock and notes of the reorganized company, and cash. Additional distributions from potential insurance and other third-party claims may also be paid to certain classes of unsecured creditors, but it is expected that all classes of unsecured creditors will be impaired. Therefore, the Plan also provides that the existing common stock of Owens Corning will be cancelled, and that current shareholders will receive no distribution or other consideration in exchange for their shares. It is impossible to predict at this time the terms and provisions of any plan or plans of reorganization that may ultimately be confirmed, when a plan or plans of reorganization will be confirmed, or the treatment of creditors thereunder.
The Plan is premised upon the substantive consolidation of the Debtors (but not the Fibreboard Settlement Trust) for the purposes of voting, determining which claims and interests will be entitled to vote to accept or reject the Plan, confirmation of the Plan, and the resultant discharge of and cancellation of claims and interests and distribution of assets, interests and other property under the Plan. For these purposes, the Plan would treat all assets and liabilities of each Debtor (excluding the Fibreboard Settlement Trust) as though they were merged with the assets and liabilities of Owens Corning. Certain creditor constituencies have asserted that substantive consolidation is not appropriate, however, and are expected to challenge that approach in litigation.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
The percentage recovery and value of the payments made under the Plan to each class of creditors will depend upon a number of factors. Those factors include the value of the shares of new common stock and notes to be issued by the Company, the amount of cash available for distribution, the resolution of certain inter-creditor issues, and the ultimate aggregate asbestos liability.
The Plan provides two alternative frameworks for creditor recoveries. One such alternative, which would apply in the event that the Plan were approved by the major creditor constituencies, would assume an aggregate liability for current and future asbestos personal injury claims against Owens Corning and Fibreboard of $16 billion, and a preferred recovery to holders of bank claims of $400 million, in addition to pro rata recovery on the balance of their claims. Under the other alternative, in the context of a non-consensual framework, such aggregate asbestos liabilities would be determined by the Bankruptcy Court as part of the confirmation hearing on the Plan. The Court has scheduled certain hearings concerning confirmation of the Plan to begin on April 8, 2003. Any disagreements raised by creditors with the terms of the Plan, including with respect to the appropriateness of substantive consolidation, will be handled through litigation as part of the confirmation process. Owens Corning is unable to predict the outcome of such litigation.
Under either Plan alternative, a majority of the newly issued common stock, together with notes, and cash, as well as the assets of the existing Fibreboard Settlement Trust (see Note 20 to the Consolidated Financial Statements), will fund a new trust created under the Plan intended to qualify under Section 524(g) of the Bankruptcy Code. The Section 524(g) trust will assume all obligations of Owens Corning, Fibreboard, and their respective subsidiaries and affiliates, for current and future asbestos personal injury claims and demands, and will, through Owens Corning and Fibreboard sub-accounts, make payments to claimants in accordance with trust distribution procedures to be agreed upon. In addition, the Plan provides for an injunction by the Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy Code that will enjoin actions against the reorganized Debtors for the purpose of, directly or indirectly, collecting, recovering or receiving payment of, on, or with respect to any claims resulting from asbestos-containing products allegedly manufactured, sold or installed by Owens Corning or Fibreboard, which claims will be paid in whole or in part by the Section 524(g) trust. Similar plans of reorganization have been confirmed in the Chapter 11 cases of other companies involved in asbestos-related litigation. Section 524(g) of the Bankruptcy Code provides that, if certain specified conditions are satisfied, a court may issue a supplemental permanent injunction barring the assertion of asbestos-related claims or demands against the reorganized company and channeling those claims to an independent trust.
Among other things, the Plan provides that (1) except as otherwise provided in the Plan, no distributions will be made under the Plan on account of inter-company claims among any of the Debtors, and (2) all guarantees of the Debtors of the obligations of any other Debtor will be deemed eliminated. Since, as described above, it is likely that the Plan will be the subject of continuing negotiations or litigation, Owens Corning is unable to predict at this time what the treatment of such matters, and other inter-company and intra-company arrangements, transactions and relationships that were entered into prior to the Petition Date, will ultimately be under any plan or plans of reorganization finally confirmed. Such matters and other arrangements, transactions and relationships may be challenged by various parties in the Chapter 11 Cases and payments and other obligations in respect thereof may be restricted or modified by order of, or subject to review and approval by, the Bankruptcy Court. The outcome of such challenges and other actions, if any, may have an impact on the treatment of various claims under the plan or plans ultimately confirmed and on the respective assets, liabilities and results of operations of Owens Corning and its subsidiaries. For example, Owens Corning is unable to predict at this time what the treatment will ultimately be under any such plan or plans with respect to (1) the guarantees issued by certain of Owens Corning’s U.S. subsidiaries, including Owens-Corning Fiberglas Technology Inc. (“OCFT”) and IPM Inc., a Non-Debtor Subsidiary that holds Owens Corning’s ownership interest in a majority of Owens Corning’s
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
foreign subsidiaries (“IPM”), with respect to Owens Corning’s $1.8 billion pre-petition bank credit facility (the “Pre-Petition Credit Facility”, which is in default) or (2) OCFT’s license agreements with Owens Corning and Exterior Systems, Inc., an indirect wholly-owned subsidiary of Owens Corning (“Exterior”), pursuant to which OCFT licenses intellectual property to Owens Corning and Exterior. In the event that (1) the major creditor constituencies do not approve the Plan and (2) no other acceptable alternative agreement is reached to release such entities from their guaranty obligations, Owens Corning expects to cause IPM as well as Vytec Corporation and Owens-Corning Fiberglas Sweden Inc., two other Non-Debtor Subsidiaries that have issued guarantees in connection with the Pre-Petition Credit Facility, to file for relief under Chapter 11 of the Bankruptcy Code, and to join in the proposal of the Plan, and will also seek to cause those Non-Debtor Subsidiaries to be substantively consolidated with the current Debtors for the purposes set forth in the Plan.
The Bankruptcy Court may confirm a plan of reorganization only upon making certain findings required by the Bankruptcy Code, and a plan may be confirmed over the dissent of non-accepting creditors and equity security holders if certain requirements of the Bankruptcy Code are met. The payment rights and other entitlements of pre-petition creditors and Owens Corning’s shareholders may be substantially altered by any plan or plans of reorganization confirmed in the Chapter 11 Cases, and the pre-petition creditors of some Debtors may be treated differently than those of other Debtors.
Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the date of the Filing. Differences between amounts recorded by the Debtors and claims filed by creditors will be investigated and resolved as part of the proceedings in the Chapter 11 Cases.
Bar Dates for Filing Claims
GENERAL BAR DATE
In connection with the Chapter 11 Cases, the Bankruptcy Court set April 15, 2002 as the last date by which holders of certain pre-petition claims against the Debtors must file their claims (the “General Bar Date”). The General Bar Date does not apply to asbestos-related personal injury claims and asbestos-related wrongful death claims (other than claims for contribution, indemnity, reimbursement, or subrogation). Any holder of a claim that was required to file a claim by the General Bar Date and did not do so will be barred from asserting such claim against any of the Debtors and will not participate in any distribution in any of the Chapter 11 Cases on account of such claim.
Approximately 24,000 proofs of claim (including late-filed claims), totaling approximately $16.1 billion, alleging a right to payment from a Debtor were filed with the Bankruptcy Court in response to the General Bar Date. Owens Corning is investigating these claims to determine their validity. The Bankruptcy Court will ultimately determine liability amounts that will be allowed for these claims in the Chapter 11 Cases.
In its initial review of the filed claims, Owens Corning has identified approximately 15,000 claims, totaling approximately $8.4 billion, which it believes should be disallowed by the Bankruptcy Court, primarily because they appear to be duplicate claims or claims that are not related to the indicated Debtor (the “Objectionable Claims”). Owens Corning likely will file objections to these Objectionable Claims. While the Bankruptcy Court will ultimately determine liability amounts, if any, that will be allowed as part of the Chapter 11 Cases, Owens Corning believes that all or substantially all of these claims will be disallowed.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
In addition to the Objectionable Claims described above, at December 31, 2002, the remaining filed proofs of claim included approximately 9,000 claims, totaling approximately $7.7 billion, as follows:
| – | Approximately 2,900 claims, totaling approximately $1.4 billion, associated with asbestos-related contribution, indemnity, reimbursement, or subrogation claims. Owens Corning will address all asbestos-related personal injury and wrongful death claims in the future as part of the Chapter 11 Cases. Please see Note 19 to the Consolidated Financial Statements for additional information concerning asbestos-related liabilities. |
| – | Approximately 600 claims, totaling approximately $0.7 billion, alleging asbestos-related property damage. Most of these claims were submitted with insufficient documentation to assess their validity. Owens Corning expects to vigorously defend any asserted asbestos-related property damage claims in the Bankruptcy Court. Based upon its historic experience in respect of asbestos-related property damage claims, Owens Corning does not anticipate significant liability from any such claims. |
| – | Approximately 5,500 claims, totaling approximately $5.6 billion, alleging rights to payment for financing, environmental, trade debt and other matters (the “General Claims”). The Company has previously recorded approximately $3.7 billion in liabilities for these claims. Based upon the claims information submitted, the General Claims with the largest variance from the recorded amounts are: claims by the United States Department of Treasury, totaling approximately $530 million, in connection with taxes (see discussion under the heading “Tax Claim” in Note 19 to the Consolidated Financial Statements); a contingent claim for approximately $458 million by the Pension Benefit Guaranty Corporation, as described more fully under the heading “PBGC Claim” in Note 19 to the Consolidated Financial Statements; claims for contract rejections, totaling approximately $310 million, of which approximately $250 million are protective claims covering contracts which have not been rejected by the Debtors as of December 31, 2002; a $275 million class action claim involving alleged problems with a specialty roofing product, which claim Owens Corning does not believe is meritorious based upon its historic experience with servicing its warranty program for such product; and environmental claims, totaling approximately $244 million. |
Owens Corning has recorded liability amounts for those claims that can be reasonably estimated and which it believes are probable of being allowed by the Bankruptcy Court. At this time, it is impossible to reasonably estimate the value of all the claims that will ultimately be allowed by the Bankruptcy Court, due to the uncertainties of the Chapter 11 process, the in-progress state of Owens Corning’s investigation of submitted claims, and the lack of documentation submitted in support of many claims. Owens Corning continues to evaluate claims filed in the Chapter 11 Cases and will make such adjustments as may be appropriate. Any such adjustments could be material to the Company’s consolidated financial position and results of operations in any given period. For a discussion of liability amounts in respect of asbestos personal injury claims, see Note 19 to the Consolidated Financial Statements.
ASBESTOS BAR DATE
As indicated above, the General Bar Date does not apply to asbestos-related personal injury claims and asbestos-related wrongful death claims (other than claims for contribution, indemnity, reimbursement, or subrogation). A bar date for filing proofs of claim against the Debtors with respect to asbestos-related personal injury claims and asbestos-related wrongful death claims has not been set. Despite this, approximately 2,900 proofs of claim (in addition to claims described above under “General Bar Date”), totaling approximately $2.2 billion, with respect to asbestos-related personal injury or wrongful death were filed with the Bankruptcy Court in response to the General Bar Date. Of these claims, Owens
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
Corning has identified approximately 1,100, totaling approximately $0.5 billion, as Objectionable Claims. Of the remaining claims, Owens Corning believes that a substantial majority represent claimants that had previously asserted asbestos-related claims against the Company. As noted above, under the Plan all asbestos-related personal injury and wrongful death claims will be channeled to the Section 524(g) trust, subject to approval by the Bankruptcy Court. Please see Note 19 to the Consolidated Financial Statements for additional information concerning asbestos-related liabilities.
Avoidance Actions
Under the Bankruptcy Code, October 4, 2002 was the deadline by which the Debtors, on behalf of the bankruptcy estates, could bring adversary actions seeking the return of potentially avoidable transfers made by the Debtors to certain parties within a prescribed period prior to the commencement of the Chapter 11 proceedings. As part of their review of potentially avoidable transactions, the Debtors (1) negotiated tolling agreements with some of the recipients of the preferential transfers in order to toll the time period in which to bring an avoidance action; (2) determined not to prosecute certain of those potential avoidance actions that were not the subject of tolling agreements; and (3) instituted, prior to the October 4, 2002 deadline, a total of 19 adversarial actions, including 3 preference actions, 1 turnover action, and 15 avoidance actions, as described further below. All such actions were commenced in the USBC.
Among the parties who were identified by the Debtors as having received potentially avoidable transfers were (a) 12 present and former officers that received certain pre-petition incentive payments exceeding a threshold in the aggregate per officer; (b) one director that received a pre-petition pension payment; and (c) a joint venture affiliate of the Company that received approximately $3.8 million in the one-year period prior to the commencement of the Chapter 11 proceedings.
The Debtors have executed tolling agreements with all 12 present and former officers, the director and the affiliate of the Company, as well as with certain other parties identified as having received potentially avoidable transfers.
The additional actions were commenced against various other defendants seeking, among other things, (a) avoidance of certain guarantees and certain preferential payments made in connection with Owens Corning’s Pre-Petition Credit Facility; (b) the return of up to approximately $515 million paid by the Company to shareholders of Fibreboard in connection with the Company’s purchase of Fibreboard in 1997 (the “FBD Shareholder Action”); (c) the return of up to approximately $61.8 million paid by the Company to shareholders in dividends in the period 1996 through 2000 (the “Dividend Action”); and (d) the return of approximately $133 million paid by the Company to Bank of America Corp. in connection with Owens Corning’s purchase of Fibreboard in 1997. Both the FBD Shareholder Action and the Dividend Action are defendant class actions. Certain present or former officers or directors of the Company may be members of either or both defendant classes.
Separately, and at the request of the Debtors’ Official Creditors’ Committee and the direction of the Bankruptcy Court, the Debtors either obtained tolling agreements from, or filed actions against, approximately 115 law firms that entered into NSP or non-NSP agreements (see Note 19) with the Debtors on behalf of claimants asserting asbestos-related personal injury or wrongful death claims. Lawsuits were brought against the 11 law firms that did not sign tolling agreements, seeking two forms of relief: (a) first, a declaratory judgment as to whether payments made, or obligations incurred, under NSP and non-NSP agreements were in exchange for reasonably equivalent value; and (b) second, in the event reasonably equivalent value was not received, the recovery or avoidance of payments made and obligations incurred under the relevant NSP and non-NSP agreements pursuant to applicable state and federal fraudulent conveyance law. The Official Creditors’ Committee was named as a defendant in such lawsuits, solely with respect to the declaratory relief sought.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
By motion filed on or about October 16, 2002, the Debtors sought an order of the Bankruptcy Court staying all of the foregoing litigation pending its disposition in a plan of reorganization. Pursuant to order of the Bankruptcy Court dated January 17, 2003, all of the foregoing litigation, other than the action relating to the avoidance of certain guarantees and certain preferential payments made in connection with Owens Corning’s Pre-Petition Credit Facility, has been stayed until April 28, 2003, at which time the court will consider whether such stay should be further extended. The Debtors’ action relating to the avoidance of certain guarantees and certain preferential payments made in connection with Owens Corning’s Pre-Petition Credit Facility is scheduled for trial before the District Court commencing in April 2003.
Certain Post-petition Matters
The Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of their pre-petition obligations, including employee wages, salaries, benefits and other employee obligations, pre-petition claims of critical vendors, and certain other pre-petition claims including certain customer program and warranty claims.
As a result of the Filing, contractual interest expense has not been accrued or recorded on pre-petition debt of the Debtors since the Petition Date. From the Petition Date through December 31, 2002, contractual interest expense not accrued or recorded on pre-petition debt totaled $362 million, of which $140 million relates to 2002, $171 million relates to 2001, and $51 million relates to 2000.
At December 31, 2002, the Company had $875 million of cash and cash equivalents (of which approximately $4 million was subject to administrative freeze pending the resolution of certain alleged set-off rights by certain pre-petition lenders). During the second quarter of 2002, the Bankruptcy Court approved a settlement reached with certain pre-petition lenders covering approximately $36 million of funds previously subject to administrative freeze (of which approximately $32 million was previously reflected in cash and cash equivalents). Under this settlement, the Company received approximately $18 million of the funds and the remainder was applied by the lenders to satisfy certain pre-petition indebtedness.
In connection with the Filing, the Debtors obtained a $500 million debtor-in-possession credit facility from a group of lenders led by Bank of America, N.A. (the “DIP Financing”), which was originally scheduled to expire November 15, 2002. Effective October 31, 2002, the DIP Financing was amended to, among other things, reduce the maximum available credit amount to $250 million and extend the scheduled expiration to November 15, 2004. There were no borrowings outstanding under the DIP Financing at December 31, 2002; however, approximately $62 million of the availability under this credit facility was utilized as a result of the issuance of standby letters of credit and similar uses.
As a consequence of the Filing and the impact of certain provisions of the Company’s DIP Financing and in a cash management order entered by the Bankruptcy Court, the Company and its subsidiaries are now subject to certain restrictions, including on their ability to pay dividends and to transfer cash and other assets to each other and to their affiliates.
The Company believes, based on information presently available to it, that its cash and cash equivalents, cash available from operations, and the DIP Financing will provide sufficient liquidity to allow it to continue as a going concern for the foreseeable future. However, the ability of the Company to continue as a going concern (including its ability to meet post-petition obligations of the Debtors and to meet obligations of the Non-Debtor Subsidiaries) and the appropriateness of using the going concern basis for its financial statements are dependent upon, among other things, (i) the Company’s ability to comply with
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
the terms of the DIP Financing and any cash management order entered by the Bankruptcy Court from time to time in connection with the Chapter 11 Cases, (ii) the ability of the Company to maintain adequate cash on hand, (iii) the ability of the Company to generate cash from operations, (iv) the ability of the Non-Debtor Subsidiaries to obtain necessary financing, (v) confirmation of a plan or plans of reorganization under the Bankruptcy Code, and (vi) the Company’s ability to maintain profitability following such confirmation.
Financial Statement Presentation
The Company’s Consolidated Financial Statements have been prepared in accordance with AICPA Statement of Position 90-7 (“SOP 90-7”), “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” and on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Filing, such realization of assets and liquidation of liabilities are subject to uncertainty. While operating as debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as permitted in the ordinary course of business, the Debtors, or some of them, may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the Consolidated Financial Statements. Further, a plan of reorganization could materially change the amounts and classifications reported in the consolidated historical financial statements.
Substantially all of the Company’s pre-petition debt is now in default due to the Filing. As described below, the accompanying Consolidated Financial Statements present the Debtors’ pre-petition debt under the caption “Liabilities Subject to Compromise”. This includes debt under the Pre-Petition Credit Facility and approximately $1.4 billion of other outstanding debt. As required by SOP 90-7, at the Petition Date the Company recorded the Debtors’pre-petition debt instruments at the allowed amount, as defined by SOP 90-7.
As reflected in the Consolidated Financial Statements, “Liabilities Subject to Compromise” refer to Debtors’liabilities incurred prior to the commencement of the Chapter 11 Cases. The amounts of the various liabilities that are subject to compromise are set forth below following the debtor-in-possession financial statements. These amounts represent Owens Corning’s estimate of known or potential pre-petition claims to be resolved in connection with the Chapter 11 Cases. Such claims remain subject to future adjustments. Adjustments may result from (1) negotiations; (2) actions of the Bankruptcy Court; (3) further developments with respect to disputed claims; (4) rejection of executory contracts and unexpired leases; (5) the determination as to the value of any collateral securing claims; (6) proofs of claim; or (7) other events. Payment terms for these amounts will be established in connection with the Chapter 11 Cases.
In this respect, the Company’s Consolidated Financial Statements, and the condensed financial statements presented below, reflect charges to income of $1.381 billion for Owens Corning and $975 million for Fibreboard during the quarterly period ended September 30, 2002, in connection with asbestos-related liabilities. Please see Note 19 to the Consolidated Financial Statements.
Debtor-In-Possession Financial Statements
The condensed financial statements of the Debtors are presented below. These statements reflect the financial position and results of operations of the combined Debtor entities, including certain amounts and activities between Debtors and non-debtor entities of Owens Corning that are eliminated in the Consolidated Financial Statements. Certain reclassifications to 2001 have been made between Debtor and non-debtor entities to conform with the classifications used in 2002.
– 74 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION STATEMENT OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
| 2002 | 2001 | 2000 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | |||||||||||||||||
| NET SALES | $ | 4,302 | $ | 4,161 | $ | 4,218 | |||||||||||
| COST OF SALES | 3,715 | 3,542 | 3,509 | ||||||||||||||
| Gross margin | 587 | 619 | 709 | ||||||||||||||
| OPERATING EXPENSES | |||||||||||||||||
| Marketing and administrative expenses | 473 | 474 | 460 | ||||||||||||||
| Science and technology expenses | 37 | 32 | 47 | ||||||||||||||
| Restructure costs | 44 | 16 | 26 | ||||||||||||||
| Chapter 11 related reorganization items | 96 | 87 | 24 | ||||||||||||||
| Provision (credit) for asbestos litigation claims - Owens | |||||||||||||||||
| Corning (Note 19) | 1376 | (7 | ) | 790 | |||||||||||||
| Provision for asbestos litigation claims - Fibreboard (Note 19) | 975 | - | - | ||||||||||||||
| Other (Including interest income from non-debtors of $56 | |||||||||||||||||
| million in 2002 and 2001 and $82 million in 2000) | (122 | ) | (90 | ) | (94 | ) | |||||||||||
| Total operating expenses | 2,879 | 512 | 1,253 | ||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | (2,292 | ) | 107 | (544 | ) | ||||||||||||
| OTHER | |||||||||||||||||
| Cost of borrowed funds | 5 | 1 | 174 | ||||||||||||||
| Other | - | (2 | ) | 5 | |||||||||||||
| INCOME (LOSS) BEFORE INCOME TAX EXPENSE | |||||||||||||||||
| (BENEFIT) | (2,297 | ) | 108 | (723 | ) | ||||||||||||
| Income tax expense (benefit) | 34 | 52 | (340 | ) | |||||||||||||
| INCOME (LOSS) BEFORE EQUITY IN NET INCOME | |||||||||||||||||
| (LOSS) OF AFFILIATES | (2,331 | ) | 56 | (383 | ) | ||||||||||||
| Equity in net income (loss) of affiliates | (3 | ) | (3 | ) | (2 | ) | |||||||||||
| NET INCOME (LOSS) BEFORE CUMULATIVE | |||||||||||||||||
| EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE | (2,334 | ) | 53 | (385 | ) | ||||||||||||
| Cumulative effect of change in accounting principle | (409 | ) | - | - | |||||||||||||
| NET INCOME (LOSS) | $ | (2,743 | ) | $ | 53 | $ | (385 | ) | |||||||||
– 75 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION BALANCE SHEET
DECEMBER 31, 2002, 2001 AND 2000
| 2002 | 2001 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | ||||||||||||||
| ASSETS | ||||||||||||||
| CURRENT | ||||||||||||||
| Cash and cash equivalents | $ | 622 | $ | 605 | ||||||||||
| Receivables | 336 | 315 | ||||||||||||
| Receivables - non-debtors | 933 | 849 | ||||||||||||
| Inventories | 328 | 311 | ||||||||||||
| Deferred income taxes | 4 | 4 | ||||||||||||
| Income tax receivable | 4 | 4 | ||||||||||||
| Other current assets | 15 | 25 | ||||||||||||
| Total current | 2,242 | 2,113 | ||||||||||||
| OTHER | ||||||||||||||
| Insurance for asbestos litigation claims | 4 | 4 | ||||||||||||
| Restricted cash and other - asbestos and insurance related | 165 | 169 | ||||||||||||
| Restricted cash, securities and other - Fibreboard | 1,365 | 1,284 | ||||||||||||
| Deferred income taxes | 1,248 | 1,143 | ||||||||||||
| Goodwill, net | 54 | 513 | ||||||||||||
| Investments in affiliates | 15 | 34 | ||||||||||||
| Investments in non-debtor subsidiaries | 757 | 758 | ||||||||||||
| Other noncurrent assets | 113 | 138 | ||||||||||||
| Total other | 3,721 | 4,043 | ||||||||||||
| PLANT AND EQUIPMENT, at cost | ||||||||||||||
| Land | 42 | 41 | ||||||||||||
| Buildings and leasehold improvements | 527 | 533 | ||||||||||||
| Machinery and equipment | 2,391 | 2,194 | ||||||||||||
| Construction in progress | 96 | 217 | ||||||||||||
| 3,056 | 2,985 | |||||||||||||
| Less - accumulated depreciation | (1,688 | ) | (1,548 | ) | ||||||||||
| Net plant and equipment | 1,368 | 1,437 | ||||||||||||
| TOTAL ASSETS | $ | 7,331 | $ | 7,593 | ||||||||||
– 76 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION BALANCE SHEET
DECEMBER 31, 2002, 2001 AND 2000 (continued)
| 2002 | 2001 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| LIABILITIES AND STOCKHOLDERS' EQUITY | (In millions of dollars) | |||||||||||||
| CURRENT | ||||||||||||||
| Accounts payable and accrued liabilities | $ | 533 | $ | 589 | ||||||||||
| Accounts payable and accrued liabilities - non-debtors | 49 | 12 | ||||||||||||
| Long-term debt - current portion | - | 1 | ||||||||||||
| Total current | 582 | 602 | ||||||||||||
| OTHER | ||||||||||||||
| Other employee benefits liability | 355 | 318 | ||||||||||||
| Pension plan liability | 429 | 264 | ||||||||||||
| Other | 81 | 110 | ||||||||||||
| Total other | 865 | 692 | ||||||||||||
| LIABILITIES SUBJECT TO COMPROMISE | 9,963 | 7,565 | ||||||||||||
| STOCKHOLDERS' EQUITY | ||||||||||||||
| Common stock | 6 | 6 | ||||||||||||
| Additional paid in capital | 690 | 691 | ||||||||||||
| Deficit | (4,485 | ) | (1,742 | ) | ||||||||||
| Accumulated other comprehensive loss | (290 | ) | (219 | ) | ||||||||||
| Other | - | (2 | ) | |||||||||||
| Total stockholders' equity | (4,079 | ) | (1,266 | ) | ||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 7,331 | $ | 7,593 | ||||||||||
– 77 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
| 2002 | 2001 | 2000 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | ||||||||||||||||||||
| NET CASH FLOW FROM OPERATIONS | ||||||||||||||||||||
| Net income (loss) | $ | (2,743 | ) | $ | 53 | $ | (385 | ) | ||||||||||||
| Reconciliation of net cash provided by (used in) operating activities | ||||||||||||||||||||
| Noncash items: | ||||||||||||||||||||
| Provision (credit) for asbestos litigation claims | 2,356 | (7 | ) | 790 | ||||||||||||||||
| Provision for depreciation and amortization | 149 | 145 | 135 | |||||||||||||||||
| Provision for impairment of fixed assets | 44 | 31 | 7 | |||||||||||||||||
| Provision (credit) for deferred income taxes | 14 | 79 | (345 | ) | ||||||||||||||||
| Cumulative effect of accounting change | 409 | - | - | |||||||||||||||||
| Other | 89 | 91 | 116 | |||||||||||||||||
| Increase in receivables | (111 | ) | (168 | ) | (154 | ) | ||||||||||||||
| (Increase) decrease in inventories | (25 | ) | 34 | (70 | ) | |||||||||||||||
| Increase (decrease) in accounts payable and accrued liabilities | (102 | ) | 175 | 452 | ||||||||||||||||
| (Increase) decrease in restricted cash - asbestos and insurance related | (7 | ) | (5 | ) | (164 | ) | ||||||||||||||
| Change in liabilities subject to compromise | (1 | ) | (75 | ) | (100 | ) | ||||||||||||||
| Proceeds from insurance for asbestos litigation claims, excluding | ||||||||||||||||||||
| Fibreboard | 5 | 62 | 380 | |||||||||||||||||
| Payments for asbestos litigation claims, excluding Fibreboard | - | - | (521 | ) | ||||||||||||||||
| Pension fund contribution | - | (182 | ) | - | ||||||||||||||||
| Other | 94 | 145 | (167 | ) | ||||||||||||||||
| Net cash flow from operations | $ | 171 | $ | 378 | $ | (26 | ) | |||||||||||||
| NET CASH FLOW FROM INVESTING | ||||||||||||||||||||
| Additions to plant and equipment | (162 | ) | (220 | ) | (422 | ) | ||||||||||||||
| Investment in non-debtor subsidiaries, net of cash acquired | (4 | ) | (5 | ) | (5 | ) | ||||||||||||||
| Proceeds from liquidation of non-debtor subsidiaries | 10 | - | 83 | |||||||||||||||||
| Investment in non-debtor subsidiaries | - | - | (146 | ) | ||||||||||||||||
| Proceeds from the sale of subsidiary | - | - | 50 | |||||||||||||||||
| Other | - | (5 | ) | (7 | ) | |||||||||||||||
| Net cash flow from investing | $ | (156 | ) | $ | (230 | ) | $ | (447 | ) | |||||||||||
– 78 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (continued)
| 2002 | 2001 | 2000 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | |||||||||||||||||
| NET CASH FLOW FROM FINANCING | |||||||||||||||||
| Net additions to long-term credit facilities | $ | - | $ | - | $ | 1,088 | |||||||||||
| Other additions to long-term debt | - | - | 7 | ||||||||||||||
| Other reductions to long-term debt | - | - | (61 | ) | |||||||||||||
| Subject to compromise | 1 | (4 | ) | (21 | ) | ||||||||||||
| Dividends paid | - | - | (12 | ) | |||||||||||||
| Other | 1 | - | (79 | ) | |||||||||||||
| Net cash flow from financing | $ | 2 | $ | (4 | ) | $ | 922 | ||||||||||
| Net increase in cash and cash equivalents | 17 | 144 | 449 | ||||||||||||||
| Cash and cash equivalents at beginning of year | 605 | 461 | 12 | ||||||||||||||
| Cash and cash equivalents at end of year | $ | 622 | $ | 605 | $ | 461 | |||||||||||
The amounts subject to compromise in the Consolidated and Debtor-in-Possession Balance Sheets consist of the following items at December 31:
| 2002 | 2001 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | ||||||||||||||
| Accounts payable | $ | 192 | $ | 195 | ||||||||||
| Accrued interest payable | 40 | 40 | ||||||||||||
| Accrued liabilities | 41 | 36 | ||||||||||||
| Debt | 2,854 | 2,843 | ||||||||||||
| Income taxes payable | 235 | 209 | ||||||||||||
| Reserve for asbestos litigation claims - Owens Corning | 3,564 | 2,197 | ||||||||||||
| Reserve for asbestos-related claims - Fibreboard | 2,310 | 1,284 | ||||||||||||
| Total consolidated | 9,236 | 6,804 | ||||||||||||
| Payables to non-Debtors | 727 | 761 | ||||||||||||
| Total Debtor | $ | 9,963 | $ | 7,565 | ||||||||||
– 79 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
The amounts for Chapter 11 related reorganization items in the Consolidated and Debtor-in-Possession Income Statements consist of the following for the years ended December 31:
| 2002 | 2001 | 2000 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | |||||||||||||||||
| Accelerated amortization of debt issuance costs | - | - | $ | 30 | |||||||||||||
| Professional fees | 70 | 60 | 6 | ||||||||||||||
| Payroll and compensation | 24 | 29 | 9 | ||||||||||||||
| Interest income | (22 | ) | (17 | ) | (5 | ) | |||||||||||
| (Gain)/loss on settlement of claims | 13 | 1 | (22 | ) | |||||||||||||
| Other, net | 11 | 14 | 6 | ||||||||||||||
| Total | $ | 96 | $ | 87 | $ | 24 | |||||||||||
2. SEGMENT DATA
During 2002, the Company realigned its internal operating segments. Following this realignment, the Company reviewed its segments in accordance with SFAS No. 131 and concluded that the aggregation of its operating segments into two reportable segments is still appropriate; however, certain components within the segments have changed. Net sales and income from operations have been restated for all periods presented to reflect this change. Accounting policies for the segments are the same as those for the Company.
The Company has reported financial and descriptive information about each of the Company’s two reportable segments below on a basis that is used internally for evaluating segment performance and deciding how to allocate resources to those segments.
The Company’s two reportable segments are defined as follows:
| Building Materials Systems | |
| Production and sale of glass wool fibers formed into thermal and acoustical insulation and air ducts; foam insulation; roofing shingles; vinyl and metal siding and accessories; windows and doors; cast stone building products; and branded housewrap. | |
| Composite Solutions | |
| Production and sale of glass fiber mat and asphalt materials; long-fiber reinforced thermoplastic compounds, glass fiber rovings and veils, tailored Composite Solutions for the building construction, transportation and telecommunications/electronics markets, and composite manufacturing services. | |
Income (loss) from operations by segment consists of net sales less related costs and expenses and is presented on a basis that is used internally for evaluating segment performance. Certain categories of expenses – such as cost of borrowed funds, general corporate expenses or income, and certain expense or income items – are excluded from the internal evaluation of segment performance. Accordingly, these items are not reflected in income (loss) from operations for the Company’s reportable segments. Reference is made to the reconciliation of reportable segment income from operations to consolidated income before income taxes below for additional information about such items.
– 80 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SEGMENT DATA (continued)
Total assets by reportable segment are those assets that are used in the Company’s operations in each segment and do not include general corporate assets. General corporate assets consist primarily of cash and cash equivalents, deferred taxes, asbestos-related assets, and corporate property and equipment. Reference is made to the reconciliation of reportable segment assets to consolidated total assets below for additional information about such items.
External customer sales by geographic region are attributed based upon the location from which the product is shipped. Long-lived assets by geographic region are attributed based upon the location of the assets and include net plant and equipment.
| NET SALES | 2002 | 2001 | 2000 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | |||||||||||
| Reportable Segments | |||||||||||
| Building Materials Systems | |||||||||||
| United States | $ | 3,378 | $ | 3,233 | $ | 3,243 | |||||
| Europe | 2 | 6 | 90 | ||||||||
| Canada and other | 193 | 179 | 188 | ||||||||
| Total Building Materials Systems | 3,573 | 3,418 | 3,521 | ||||||||
| Composite Solutions | |||||||||||
| United States | 832 | 829 | 895 | ||||||||
| Europe | 304 | 336 | 340 | ||||||||
| Canada and other | 163 | 179 | 184 | ||||||||
| Total Composite Solutions | 1,299 | 1,344 | 1,419 | ||||||||
| Total reportable segments | $ | 4,872 | $ | 4,762 | $ | 4,940 | |||||
| External Customer Sales by Geographic Region | |||||||||||
| United States | $ | 4,210 | $ | 4,062 | $ | 4,138 | |||||
| Europe | 306 | 342 | 430 | ||||||||
| Canada and other | 356 | 358 | 372 | ||||||||
| Net sales | $ | 4,872 | $ | 4,762 | $ | 4,940 | |||||
– 81 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SEGMENT DATA (continued)
| INCOME (LOSS) FROM OPERATIONS | 2002 | 2001 | 2000 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | |||||||||||
| Reportable Segments | |||||||||||
| Building Materials Systems | |||||||||||
| United States | $ | 247 | $ | 199 | $ | 284 | |||||
| Europe | (1 | ) | - | 2 | |||||||
| Canada and other | 27 | 14 | 31 | ||||||||
| Total Building Materials Systems | 273 | 213 | 317 | ||||||||
| Composite Solutions | |||||||||||
| United States | 12 | 104 | 107 | ||||||||
| Europe | 22 | 46 | 15 | ||||||||
| Canada and other | 26 | 22 | 22 | ||||||||
| Total Composite Solutions | 60 | 172 | 144 | ||||||||
| Total reportable segments | $ | 333 | $ | 385 | $ | 461 | |||||
| Geographic Regions | |||||||||||
| United States | $ | 259 | $ | 304 | $ | 391 | |||||
| Europe | 21 | 45 | 17 | ||||||||
| Canada and other | 53 | 36 | 53 | ||||||||
| Total reportable segments | $ | 333 | $ | 385 | $ | 461 | |||||
| Reconciliation to Consolidated Income (Loss) Before | |||||||||||
| Income Tax Expense (Benefit) | |||||||||||
| Restructuring and other charges (Note 5) | (166 | ) | (140 | ) | (229 | ) | |||||
| Chapter 11 related reorganization items (Note 1) | (96 | ) | (87 | ) | (24 | ) | |||||
| Provision for asbestos litigation claims (Note 19) | (2,351 | ) | 7 | (790 | ) | ||||||
| General corporate expense | (33 | ) | (49 | ) | (49 | ) | |||||
| Cost of borrowed funds | (16 | ) | (16 | ) | (155 | ) | |||||
| Other | - | 2 | (5 | ) | |||||||
| Consolidated Income (Loss) Before Income Tax Expense | |||||||||||
| (Benefit) | $ | (2,329 | ) | $ | 102 | $ | (791 | ) | |||
– 82 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SEGMENT DATA (continued)
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| TOTAL ASSETS | 2002 | 2001 | ||||||
| (In millions of dollars) | ||||||||
| Reportable Segments | ||||||||
| Building Materials Systems | ||||||||
| United States | $ | 1,476 | $ | 1,984 | ||||
| Europe | 7 | 5 | ||||||
| Canada and other | 165 | 163 | ||||||
| Total Building Materials Systems | 1,648 | 2,152 | ||||||
| Composite Solutions | ||||||||
| United States | 580 | 627 | ||||||
| Europe | 317 | 198 | ||||||
| Canada and other | 296 | 236 | ||||||
| Total Composite Solutions | 1,193 | 1,061 | ||||||
| Total Reportable Segments | $ | 2,841 | $ | 3,213 | ||||
| Reconciliation to Consolidated Total Assets | ||||||||
| Restricted cash - asbestos and insurance related | 165 | 169 | ||||||
| Insurance for asbestos litigation claims | 4 | 4 | ||||||
| Deferred income taxes | 1,356 | 1,188 | ||||||
| Income tax receivable | 4 | 5 | ||||||
| Cash and cash equivalents | 875 | 764 | ||||||
| Restricted cash, securities and other - Fibreboard | 1,365 | 1,284 | ||||||
| Investments in affiliates | 51 | 48 | ||||||
| LIFO inventory valuation adjustment | (88 | ) | (91 | ) | ||||
| Corporate fixed assets and other assets | 347 | 457 | ||||||
| Consolidated Total Assets | $ | 6,920 | $ | 7,041 | ||||
| LONG-LIVED ASSETS BY GEOGRAPHIC REGION | ||||||||
| United States | $ | 1,382 | $ | 1,448 | ||||
| Europe | 209 | 152 | ||||||
| Canada and other | 296 | 243 | ||||||
| Total Long-Lived Assets | $ | 1,887 | $ | 1,843 | ||||
– 83 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SEGMENT DATA (continued)
| PROVISION FOR DEPRECIATION AND | |||||||||||
| AMORTIZATION | 2002 | 2001 | 2000 | ||||||||
| (In millions of dollars) | |||||||||||
| Reportable Segments | |||||||||||
| Building Materials Systems | |||||||||||
| United States | $ | 90 | $ | 93 | $ | 85 | |||||
| Europe | - | - | 17 | ||||||||
| Canada and other | 9 | 10 | 10 | ||||||||
| Total Building Materials Systems | 99 | 103 | 112 | ||||||||
| Composite Solutions | |||||||||||
| United States | 28 | 25 | 23 | ||||||||
| Europe | 18 | 20 | 20 | ||||||||
| Canada and other | 23 | 19 | 9 | ||||||||
| Total Composite Solutions | 69 | 64 | 52 | ||||||||
| Total reportable segments | $ | 168 | $ | 167 | $ | 164 | |||||
| Geographic Regions | |||||||||||
| United States | $ | 118 | $ | 118 | $ | 108 | |||||
| Europe | 18 | 20 | 37 | ||||||||
| Canada and other | 32 | 29 | 19 | ||||||||
| Total reportable segments | $ | 168 | $ | 167 | $ | 164 | |||||
| Reconciliation to Consolidated Provision for | |||||||||||
| Depreciation and Amortization | |||||||||||
| General Corporate Depreciation and Amortization | 37 | 30 | 21 | ||||||||
| Consolidated Provision for Depreciation and | |||||||||||
| Amortization | $ | 205 | $ | 197 | $ | 185 | |||||
– 84 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SEGMENT DATA (continued)
| ADDITIONS TO PLANT AND EQUIPMENT | 2002 | 2001 | 2000 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | |||||||||||
| Reportable Segments | |||||||||||
| Building Materials Systems | |||||||||||
| United States | $ | 102 | $ | 134 | $ | 169 | |||||
| Europe | - | - | 5 | ||||||||
| Canada and other | 15 | 6 | 5 | ||||||||
| Total Building Materials Systems | 117 | 140 | 179 | ||||||||
| Composite Solutions | |||||||||||
| United States | 29 | 61 | 146 | ||||||||
| Europe | 69 | 26 | 66 | ||||||||
| Canada and other | 4 | 12 | 59 | ||||||||
| Total Composite Solutions | 102 | 99 | 271 | ||||||||
| Total Reportable Segments | $ | 219 | $ | 239 | $ | 450 | |||||
| Geographic Regions | |||||||||||
| United States | $ | 131 | $ | 195 | $ | 315 | |||||
| Europe | 69 | 26 | 71 | ||||||||
| Canada and other | 19 | 18 | 64 | ||||||||
| Total Reportable Segments | $ | 219 | $ | 239 | $ | 450 | |||||
| Reconciliation to Consolidated Additions to Plant and | |||||||||||
| Equipment | |||||||||||
| General Corporate Additions | 29 | 31 | 26 | ||||||||
| Consolidated Additions to Plant and Equipment | $ | 248 | $ | 270 | $ | 476 | |||||
– 85 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. LONG-TERM DEBT
| 2002 | 2001 | |||||||
|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | ||||||||
| Long-Term Debt: | ||||||||
| Guaranteed debentures due in 2001, 10% | $ | 42 | $ | 42 | ||||
| Term loan due 2009, 3 month LIBOR plus 1.5% (Note 6) | 33 | - | ||||||
| Term loan due 2009, 10% (Note 6) | 24 | - | ||||||
| Asian credit facility due in 2003, variable interest rate ranging from | ||||||||
| LIBOR plus 0.6% to LIBOR plus 2.5% | 22 | 22 | ||||||
| Redeemable convertible debentures due 2010, 12.25% (Note 6) | 7 | - | ||||||
| Other long-term debt due through 2008, at rates from 7.24% to 11.45% | 8 | 7 | ||||||
| 136 | 71 | |||||||
| Less - current portion | (65 | ) | (66 | ) | ||||
| Total long-term debt | $ | 71 | $ | 5 | ||||
| Long-Term Debt Subject to Compromise: | ||||||||
| U.S. credit facility due in 2002, variable | $ | 1,451 | $ | 1,469 | ||||
| Debentures due in 2018, 7.5% | 400 | 400 | ||||||
| Debentures due in 2005, 7.5% | 300 | 300 | ||||||
| Debentures due in 2009, 7.0% | 250 | 250 | ||||||
| Debentures due in 2008, 7.7% | 250 | 250 | ||||||
| Bonds due in 2000, 7.25%, payable in Deutsche marks (Note 18) | 60 | 60 | ||||||
| Debentures due in 2002, 8.875% | 40 | 40 | ||||||
| Debentures due in 2012, 9.375% | 7 | 7 | ||||||
| Other long-term debt due through 2012, at rates from 6.25% to 13.80% | 92 | 62 | ||||||
| Total long-term debt subject to compromise | $ | 2,850 | $ | 2,838 | ||||
Due to the Filing (see Note 1), pre-petition long-term debt of the Debtors has been reclassified to the caption Subject to Compromise in the above table and on the Consolidated Balance Sheet. From the Petition Date through December 31, 2002, contractual interest expense not accrued or recorded on pre-petition debt totaled $362 million, of which $140 million, $171 million and $51 million relates to 2002, 2001 and 2000, respectively. At December 31, 2002 and 2001, the amounts shown under the caption “Long-Term Debt” in the table above represent long-term debt of non-Debtor subsidiaries.
In connection with the Filing, the Debtors obtained a $500 million debtor-in-possession credit facility from a group of lenders led by Bank of America, N.A. (the “DIP Financing”), which was originally scheduled to expire November 15, 2002. In October 2002, the Debtors reached agreement with the lenders to renew the DIP Financing for an additional term of two years, with a reduced maximum availability of $250 million. The interest rate applicable is a floating rate varying from 0.75% to 2.00%, based upon the average daily outstanding balance, plus LIBOR. The facility had a commitment fee on unused portions of 0.375% at December 31, 2002 and 2001. The amount available under the facility depends on a borrowing base of qualifying receivables and inventory of the Debtors, which did not reduce the amount available at December 31, 2002. While the Company had no outstanding borrowings from the facility at year-end 2002 or 2001, approximately $62 million and $40 million, respectively, of this facility was utilized at such times for standby letters of credit and similar uses. Consequently, $188 million was available under this facility at December 31, 2002. This facility has super priority in the bankruptcy proceeding.
The Asian credit facility is payable in U.S. dollars and had a rate of interest at December 31, 2002 and 2001, of 1.98% and 2.53%, respectively. As a result of the Filing, the Company violated a non-financial covenant of this facility and it is considered callable at the discretion of the financial institution.
– 86 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. LONG-TERM DEBT (continued)
Consequently, the liability has been reflected as current at December 31, 2002 and 2001. Subsequent to December 31, 2002, the Company reached an agreement with the financial institution to restructure this facility. In exchange for an allowed guarantee claim against the Debtors of the full amount of the facility, the financial institution agreed to reduce the debt of the responsible subsidiary by approximately $4 million, and extend the term of the facility.
After the Filing, the Company discontinued debt payments to its non-Debtor subsidiary responsible for the $42 million in guaranteed debentures due 2001. As this subsidiary has no assets other than this intercompany receivable, it was unable to make required payments and is in default. At December 31, 2002 and 2001, this instrument was classified as a current liability.
The agreements relating to the facilities described above contain restrictive covenants, including requirements for minimum earnings before income taxes, depreciation and amortization and limitations on additional borrowings, among other restrictions. The agreements include a provision that would result in all of the unpaid principal and accrued interest of the facilities becoming due immediately upon a change of control in ownership of the Company. A material adverse change in the Company’s business, assets, liabilities, financial condition or results of operations constitutes default under the agreements.
The aggregate maturities for all long-term debt issues for each of the five years following December 31, 2002 and thereafter are:
| Year | (In millions of dollars) | |||||||
|---|---|---|---|---|---|---|---|---|
| 2003 | $ | 65 | ||||||
| 2004 | 21 | |||||||
| 2005 | 9 | |||||||
| 2006 | 8 | |||||||
| 2007 | 12 | |||||||
| thereafter | 21 | |||||||
4. SHORT-TERM DEBT
| 2002 | 2001 | |||||||
|---|---|---|---|---|---|---|---|---|
| Short-Term Debt: | (In millions of dollars) | |||||||
| Balance outstanding at December 31 | $ | 40 | $ | 43 | ||||
| Weighted average interest rates on short-term debt | ||||||||
| outstanding at December 31 | 7.3 | % | 7.2 | % | ||||
| 2002 | 2001 | |||||||
| Short-Term Debt Subject to Compromise: | (In millions of dollars) | |||||||
| Balance outstanding at December 31 | $ | 4 | $ | 5 | ||||
The Company had no unused short-term lines of credit at December 31, 2002 and $6 million at December 31, 2001.
After the Filing, the Company discontinued debt payments to its non-Debtor European subsidiary responsible for $32 million in short-term debt. As this subsidiary has no assets other than this intercompany receivable, it was unable to make required payments and is in default.
– 87 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES
2002 Charges
As a result of a comprehensive strategic review and actions taken, the Company recorded approximately $166 million in pretax charges during 2002, comprised of a $61 million pretax restructure charge and $105 million of pretax other charges. The Company recorded $113 million in the fourth quarter of 2002, $44 million in the third quarter, $(3) million in the second quarter and $12 million in the first quarter.
The $61 million restructure charge includes $17 million of severance costs associated with the elimination of approximately 830 positions due to plant closures in the U.S. and U.K. and $18 million of severance costs associated with the elimination of approximately 349 other positions, primarily impacting administrative personnel. As of December 31, 2002, approximately 1,142 of these positions were actually eliminated. As of December 31, 2002, approximately $11 million has been paid and charged against the reserve. The remaining $26 million restructure charge represents the cost of closure of non-strategic facilities, comprised of $24 million in non-cash asset write-downs to fair value and $2 million of other exit cost liabilities.
The $105 million in other pretax charges was recorded as a $110 million charge to cost of sales and a credit of $5 million to other operating expenses. The $110 million charge to cost of sales includes: (1) charges of $66 million to write-down assets to net realizable value based on valuations of the future cash flows of the assets using assumptions consistent with current market conditions, $28 million in the Composite Solutions segment, primarily as the result of a plant closure, and $38 million in the Building Materials segment, primarily as the result of plans to sell certain facilities; (2) a $19 million charge for inventory made obsolete by changes in the Company’s manufacturing and marketing processes; (3) a charge of $6 million associated with the Company’s previously announced plan to realign its Newark, OH manufacturing facility; and (4) $19 million of other restructure charges.
2001 Charges
The Company spent a significant amount of time reviewing its cost structures in 2001 as a response to the impact of the weaker economy. This review led the Company to record approximately $140 million in pretax charges during 2001, comprised of a $26 million pretax restructure charge and $114 of pretax other charges. The $114 million of pretax other charges was accounted for as a $79 million pretax charge to cost of sales and a $35 million pretax charge to other operating expense. The Company recorded $46 million in the fourth quarter, $35 million in the third quarter, $17 million in the second quarter and $42 million in the first quarter.
The $26 million restructure charge represents $21 million of severance costs associated with the elimination of approximately 460 positions, primarily in the United States and the United Kingdom The primary groups impacted included manufacturing and administrative personnel. As of December 31, 2002, approximately $20 million has been paid and charged against the reserve. The remaining $5 million restructure charge represents a non-cash asset write-down to fair value and exit cost liabilities.
– 88 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES
The $114 million of pretax other charges included: (1) $39 million of asset impairments mainly associated with the Building Materials segment to write-down assets to net estimated fair value on a held in use basis in certain manufacturing facilities due to changes in the Company’s manufacturing and marketing strategies; (2) $29 million in costs associated with the Company’s plan to realign its Newark, OH manufacturing facility; (3) a charge of $6 million to write-down inventory to reflect updated estimates of the net realizable value due to changes in the Company’s manufacturing and marketing strategies; (4) a $2 million pretax loss from the sale of the Company’s investment in its Pipe joint ventures and subsidiaries; (5) a charge of $4 million to write-down the Company’s investment and related assets in Alcopor Owens Corning to net realizable value; and (6) various other charges totaling $34 million.
2000 Charges
During 2000, the Company recorded pretax charges of $229 million for restructuring and other activities as a result of its reassessment of business strategies with respect to investments in certain ventures, facilities and overhead expenditures. The $229 million pretax charge was comprised of a $32 million charge associated with the restructuring of the Company’s business segments and $197 million of other charges, the majority of which represented impairments of long-lived assets. In addition, the Company recorded a $6 million pretax credit to minority interest resulting from charges related to a majority-owned consolidated subsidiary. The components of the $32 million restructuring charge included $16 million for personnel reductions, $10 million for the divestiture of non-strategic businesses and facilities, and $6 million for asset impairments associated with the planned closing of two lines at our Newark, Ohio manufacturing facility. This represented the first phase of the Company’s plan to realign operations at the Newark facility.
The $197 million of other charges was comprised of $95 million of asset impairments, a $6 million charge for a settlement loss associated with one of the Company’s U.S. pension plans, and $96 million of charges focused on improving business operations and was accounted for as a $77 million charge to cost of sales, a $114 million charge to other operating expenses and a $6 million charge to marketing and administrative expenses. The $95 million of asset impairments included: (1) $54 million to write-down the Company’s investment and related assets in Alcopor Owens Corning, a building materials joint venture in Europe, to estimated fair value on a held for sale basis; (2) $12 million to write-down the Company’s investment in a venture in South Africa, on a held-in-use basis based upon management’s analysis of current and expected future financial results and constraints on the Company’s ability to fund future significant capital investments in this entity as a consequence of the bankruptcy filing. This $12 million charge was offset by a $6 million credit to record the minority owner’s share, recorded in the minority interest line on the Consolidated Statement of Income (Loss); (3) $8 million to write-down to fair value the investments in the Company’s Pipe joint ventures and subsidiaries on a held for sale basis; (4) $10 million to write-down the equity investment in ImproveNet, due to a significant decrease inmarket value which management believes is other than temporary; and (5) $11 million associated with asset impairments within our Cultured Stone and other businesses.
The $96 million charge consisted of $43 million to write-down inventory made obsolete by changes in the Company’s manufacturing and marketing strategies; $19 million to write-down equipment and receivables; $15 million to increase warranty reserves due to general changes in estimates associated with these reserves; and various other charges totaling $19 million recorded as other operating expenses. As of December 31, 2002, approximately $15 million has been paid and charged against the reserve for personnel reductions and approximately $3 million has been charged against exit cost liabilities.
– 89 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued)
The following table summarizes the status of the liabilities from the 2002, 2001 and 2000 restructure programs described above, including cumulative spending and adjustments and the remaining balance as of December 31, 2002:
| Facility and | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Personnel | Business Exit | |||||||||||
| (In millions of dollars) | Costs | Costs | Total | |||||||||
| Charges to expense | $ | 16 | $ | 4 | $ | 20 | ||||||
| Payments | 4 | 1 | 5 | |||||||||
| Balance at December 31, 2000 | 12 | 3 | 15 | |||||||||
| Charges to expense | 21 | - | 21 | |||||||||
| Payments | 24 | 3 | 27 | |||||||||
| Balance at December 31, 2001 | 9 | - | 9 | |||||||||
| Charges to expense | 35 | 2 | 37 | |||||||||
| Payments | 16 | 1 | 17 | |||||||||
| Balance at December 31, 2002 | $ | 28 | $ | 1 | $ | 29 | ||||||
During 1997 and 1998, the Company implemented a restructuring program related to closing manufacturing locations and reducing overhead. As of December 31, 2002, approximately $15 million in reserves remain and are primarily related to ongoing personnel severance costs.
The Company continually evaluates whether events and circumstances have occurred that indicate that the carrying amount of certain long-lived assets is recoverable. When factors indicate that a long-lived asset should be evaluated for possible impairment, the Company uses an estimate of the expected undiscounted cash flows to be generated by the asset to determine whether the carrying amount is recoverable or if impairment exists. When it is determined that an impairment exists, the Company uses the fair market value of the asset, usually measured by the discounted cash flows to be generated by the asset, to determine the amount of the impairment to be recorded in the financial statements.
6. ACQUISITIONS AND DIVESTITURES OF BUSINESSES
Acquisition
In June 2002, the Company received Bankruptcy Court approval to consummate the restructuring of the Company’s Indian joint venture, Owens-Corning (India) Limited (“OCIL”), a producer of composite material. As part of the restructuring, the Company, through its wholly-owned subsidiary, IPM Inc., contributed approximately $3 million of cash into OCIL and the Company agreed to allow a guarantee claim in the amount of approximately $19 million in its Chapter 11 proceedings in respect of OCIL’s junior debt. In addition, OCIL’s senior debt maturities were extended, and its junior debt was converted to approximately $7 million of redeemable convertible debentures. Through these restructuring efforts the Company’s ownership interest in OCIL increased from approximately 50% to approximately 60%. The Company consolidated OCIL on July 1, 2002 when the restructuring was consummated by all of the parties to the restructuring and approved by the Indian Government, at which time the allowed claim of approximately $19 million was added to Liabilities Subject to Compromise. The Company accounted for this transaction under the purchase method of accounting, whereby the assets acquired and liabilities assumed, including approximately $57 million of senior debt (consisting of approximately $33 million of debentures due in 2009 at a variable interest rate and approximately $24 million of debentures due in 2009
– 90 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. ACQUISITIONS AND DIVESTITURES OF BUSINESSES (continued)
at a fixed interest rate of 10%), approximately $7 million of redeemable convertible debentures due in 2010, and approximately $4 million of other debt, were recorded at their fair values and the Company began consolidating this subsidiary on July 1, 2002. The $19 million allowed claim was recorded at its estimated fair value of approximately $6 million as an additional investment in OCIL and the difference of approximately $13 million was recorded as reorganization expense in the Company’s consolidated statement of income (loss). Prior to July 1, 2002, the Company accounted for this joint venture under the equity method. The proforma effect of this acquisition on revenues and earnings was not material.
Divestitures
In the fourth quarter of 2001, the Company sold its remaining 40% interest in Alcopor Owens Corning, an unconsolidated joint venture. The Company reduced its investment in the joint venture to net realizable value during the third quarter of 2001. See Note 5 to the Consolidated Financial Statements. Net proceeds on the divestiture were approximately $23 million, of which approximately $9 million remained in escrow at December 31, 2001 and was received in January 2002. As part of the divestiture, the Company was obligated to fund certain U.K pension obligations in the amount of approximately $14 million.
During the first quarter of 2001, the Company completed the sale of the majority of its Engineered Pipe Business, a producer of glass-reinforced plastic pipe with operations mostly in Europe. Net proceeds from the sale were $22 million.
During the second quarter of 2000, the Company completed the sale of its European Building Materials business to Alcopor Owens Corning, in which the Company had a 40% interest. Proceeds from the sale, net of the Company’s $34 million cash infusion into the joint venture, were $177 million. In connection with this transaction, the joint venture assumed $62 million of debt from Owens Corning and the Company incurred fees of approximately $6 million, resulting in net cash proceeds of approximately $109 million. A pretax gain of approximately $5 million, including a $54 million write-off of goodwill, was realized from the sale. During the fourth quarter of 2000, the Company reduced its investment in Alcopor Owens Corning to estimated net realizable value. See Note 5 to the Consolidated Financial Statements.
The results of operations of the European Building Materials business are reflected in the Company’s Consolidated Statement of Income (Loss) through the period ending May 31, 2000. For the five months ended May 31, 2000, the European Building Materials business generated sales of approximately $79 million, and income from operations of approximately $3 million. Effective May 31, 2000, the Company accounted for its ownership interest in Alcopor Owens Corning under the equity method.
During the first quarter of 2000, the Company completed the sale of the assets of Falcon Foam, a producer of foam insulation in Michigan and California. Net proceeds from the sale were $50 million and resulted in a pretax loss of approximately $5 million, including a $32 million write-off of goodwill.
7. CONVERTIBLE MONTHLY INCOME PREFERRED SECURITITIES
In 1995, Owens Corning Capital, LLC (“OC Capital”), a Delaware limited liability company in which Owens Corning indirectly owns all of the common limited liability company interests (the “Common Securities”), completed a private offering of 4 million shares of 6-1/2% Convertible Monthly Income Preferred Securities (“Preferred Securities”). The aggregate purchase price for the offering was $200 million.
– 91 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. CONVERTIBLE MONTHLY INCOME PREFERRED SECURITITIES (continued)
The only asset of OC Capital is $253 million of 6-1/2% Convertible Subordinated Debentures due 2025 of Owens Corning (the “Debentures”), which were issued in exchange for the proceeds of the Preferred Securities and the Common Securities.
As a result of the Filing (see Note 1), Owens Corning is no longer making interest payments to OC Capital on the Debentures. As a result, OC Capital no longer has funds available to pay distributions on the Preferred Securities and stopped paying such distributions in October 2000.
Distributions of $10 million ($6 million after-tax) for 2000 have been recorded net of tax as minority interest on the Company’s Consolidated Statement of Income (Loss).
8. POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and its subsidiaries maintain health care and life insurance benefit plans for certain retired employees and their dependents. The health care plans in the U.S. are nonfunded and pay either 1) stated percentages of covered medically necessary expenses, after subtracting payments by Medicare or other providers and after stated deductibles have been met, or 2) fixed amounts of medical expense reimbursement.
Employees become eligible to participate in the health care plans upon retirement under the Company’s pension plans if they have accumulated 10 years of service after age 45. Some of the plans are contributory, with some retiree contributions adjusted annually. The Company has reserved the right to change or eliminate these benefit plans subject to the terms of collective bargaining agreements.
In accordance with Statement of Financial Accounting Standards No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” the following tables provide a reconciliation of the changes in the accumulated postretirement benefits obligation and the accrued benefits cost liability at December 31, 2002 and 2001:
| 2002 | 2001 | |||||||
|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | ||||||||
| Change in Accumulated Postretirement Benefit Obligation | ||||||||
| Benefits obligation at beginning of period | $ | 477 | $ | 374 | ||||
| Service cost | 14 | 8 | ||||||
| Interest cost | 33 | 28 | ||||||
| Amendments | - | 5 | ||||||
| Actuarial loss | 5 | 91 | ||||||
| Currency (gain) loss | 1 | (1 | ) | |||||
| Benefits paid | (27 | ) | (28 | ) | ||||
| Benefits obligation at end of period | $ | 503 | $ | 477 | ||||
| Funded status | $ | (503 | ) | $ | (477 | ) | ||
| Unrecognized net actuarial loss | 135 | 142 | ||||||
| Benefit payments net of additional accruals subsequent to | ||||||||
| October 31, 2002 and 2001 valuation dates | 5 | 7 | ||||||
| Accrued benefit cost (includes current liabilities of $26 million and | ||||||||
| $25 million in 2002 and 2001, respectively) | $ | (363 | ) | $ | (328 | ) | ||
| Weighted-average assumptions as of December 31 | ||||||||
| Discount rate | 6.75 | % | 7.0 | % | ||||
– 92 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued)
The following table presents the components of net periodic benefits cost during 2002, 2001 and 2000:
| Components of net periodic benefit cost | 2002 | 2001 | 2000 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Service cost | $ | 14 | $ | 8 | $ | 7 | |||||
| Interest cost | 33 | 28 | 24 | ||||||||
| Amortization of prior service cost | 11 | - | - | ||||||||
| Net periodic benefit cost | $ | 58 | $ | 36 | $ | 31 | |||||
For measurement purposes, a 7 – 13% annual rate of increase in the per capita cost of covered health care claims was assumed for 2003, varying by plan. The assumed rate decreases to 5 – 6% by 2006. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, a one-percentage point change in the assumed health care cost trend rate would have the following effects as of October 31, 2002 and 2001:
| 2002 | 2001 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1-Percentage Point | 1-Percentage Point | |||||||||||||
| Increase | Decrease | Increase | Decrease | |||||||||||
| (In millions of dollars) | ||||||||||||||
| Effect on total of service and | ||||||||||||||
| interest cost components | $ | 6 | $ | (6 | ) | $ | 4 | $ | (4 | ) | ||||
| Effect on accumulated | ||||||||||||||
| postretirement benefit obligation | 50 | (43 | ) | 47 | (40 | ) | ||||||||
The Company may also provide benefits to former or inactive employees after employment but before retirement under certain conditions. These benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits (including workers’ compensation), job training and counseling, and continuation of benefits such as health care and life insurance coverage. The accrued postemployment benefits cost liabilities at October 31, 2002 and 2001, as reflected on the balance sheet at December 31, 2002 and 2001, were $35 million and $33 million, respectively, including current liabilities of $4 million in both years. The net postemployment benefits expense was approximately $8 million in 2002 and $4 million in both 2001 and 2000.
9. PENSION PLANS
The Company has several defined benefit pension plans covering most employees. Under the plans, pension benefits are generally based on an employee’s pay and number of years of service. Company contributions to these pension plans are determined by an independent actuary to meet or exceed minimum funding requirements. Plan assets consist primarily of equity securities with the balance in fixed income investments. The unrecognized cost of retroactive amendments and actuarial gains and losses are amortized over the average future service period of plan participants expected to receive benefits.
– 93 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. PENSION PLANS (continued)
In accordance with Statement of Financial Accounting Standards No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” the following tables provide a reconciliation of the changes in the projected pension benefits obligation, the changes in the pension plan assets, and the net pension liability at October 31, 2002 and 2001, as reflected on the consolidated balance sheet at December 31, 2002 and 2001:
| Change in Projected Pension Benefit Obligation | 2002 | 2001 | ||||||
|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | ||||||||
| Benefits obligation at beginning of period | $ | 1,157 | $ | 979 | ||||
| Service cost | 14 | 15 | ||||||
| Interest cost | 75 | 70 | ||||||
| Amendments | - | 7 | ||||||
| Impact of curtailment | - | - | ||||||
| Impact of foreign currency translation | 21 | (2 | ) | |||||
| Actuarial loss | 66 | 217 | ||||||
| Acquisitions | 1 | - | ||||||
| Employee contributions | - | 1 | ||||||
| Benefits paid | (128 | ) | (130 | ) | ||||
| Benefits obligation at end of period | $ | 1,206 | $ | 1,157 | ||||
Benefits paid during 2002 and 2001 include payments resulting from the Company’s restructuring program and the sale of certain businesses (see Notes 5 and 6).
| Change in Pension Plan Assets | 2002 | 2001 | ||||||
|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | ||||||||
| Fair value of plan assets at beginning of period | $ | 858 | $ | 936 | ||||
| Actual return on plan assets | (53 | ) | (129 | ) | ||||
| Impact of foreign currency translation | 15 | (3 | ) | |||||
| Employer contributions | 17 | 182 | ||||||
| Acquisitions | 1 | - | ||||||
| Benefits paid | (127 | ) | (128 | ) | ||||
| Fair value of plan assets at end of period | $ | 711 | $ | 858 | ||||
| Funded status | $ | (495 | ) | $ | (299 | ) | ||
| Contributions subsequent to valuation date | - | 14 | ||||||
| Unrecognized net transition asset | (7 | ) | (12 | ) | ||||
| Unrecognized net actuarial loss | 636 | 457 | ||||||
| Unrecognized prior service cost | 30 | 30 | ||||||
| Prepaid benefit cost | $ | 164 | $ | 190 | ||||
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. PENSION PLANS (continued)
| Amounts Recognized in the Consolidated Balance Sheet | 2002 | 2001 | ||||||
|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | ||||||||
| Prepaid benefit cost | $ | 56 | $ | 71 | ||||
| Accrued benefit liability (includes no current liabilities in 2002 | ||||||||
| and $3 million in 2001) | (500 | ) | (294 | ) | ||||
| Intangible asset | 28 | 28 | ||||||
| Accumulated other comprehensive loss | 337 | 230 | ||||||
| Deferred tax asset | 243 | 155 | ||||||
| Net amount recognized | $ | 164 | $ | 190 | ||||
The combination of a decline in asset value, noted above, and decreases in the discount rate and expected return on plan assets, noted below, caused a significant other comprehensive loss in 2002. The combination of a decline in asset value, and a decrease in the discount rate, caused a significant other comprehensive loss in 2001.
| Weighted-average assumptions as of December 31 | 2002 | 2001 | ||||||
|---|---|---|---|---|---|---|---|---|
| Discount rate | 6 | .75% | 7 | .00% | ||||
| Expected return on plan assets | 8 | .00% | 9 | .00% | ||||
| Rate of compensation increase | 5 | .00% | 5 | .50% | ||||
The following table presents the components of net periodic pension cost during 2002, 2001 and 2000:
| Components of Net Periodic Pension Cost | 2002 | 2001 | 2000 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | |||||||||||
| Service cost | $ | 14 | $ | 15 | $ | 18 | |||||
| Interest cost | 75 | 70 | 64 | ||||||||
| Expected return on plan assets | (80 | ) | (73 | ) | (73 | ) | |||||
| Amortization of transition amount | (4 | ) | (5 | ) | (5 | ) | |||||
| Amortization of prior service cost | - | - | (2 | ) | |||||||
| Amortization of net actuarial loss | 23 | 1 | 1 | ||||||||
| Curtailment/settlement (gain) loss | 2 | 7 | 9 | ||||||||
| Net periodic benefit cost | $ | 30 | $ | 15 | $ | 12 | |||||
Certain of the Company’s pension plans have an accumulated benefit obligation (“ABO”) in excess of the fair value of plan assets. The ABO and fair value of plan assets for such plans are $1,115 million and $624 million, respectively, at October 31, 2002, and $1,046 million and $761 million, respectively, at October 31, 2001.
Certain of the Company’s pension plans are not funded. The portion of the total projected benefit obligation attributable to unfunded plans is approximately $7 million and $12 million at October 31, 2002 and 2001, respectively.
The Company also sponsors defined contribution plans available to substantially all U.S. employees. Company contributions reflect a matching of a percentage of employee savings up to a maximum savings level and certain profit-sharing awards. The Company recognized expense of $34 million in 2002, $31 million in 2001, and $26 million in 2000 for contributions to these plans.
– 95 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. INCOME TAXES
| 2002 | 2001 | 2000 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | |||||||||||
| Income (loss) before income tax expense (benefit): | |||||||||||
| U.S. | $ | (2,422 | ) | $ | 24 | $ | (849 | ) | |||
| Foreign | 93 | 78 | 58 | ||||||||
| Total | $ | (2,329 | ) | $ | 102 | $ | (791 | ) | |||
| Income tax expense (benefit): | |||||||||||
| Current | |||||||||||
| U.S. | $ | (143 | ) | $ | 25 | $ | 7 | ||||
| State and local | (22 | ) | (32 | ) | (1 | ) | |||||
| Foreign | 28 | 17 | 31 | ||||||||
| Total current | (137 | ) | 10 | 37 | |||||||
| Deferred | |||||||||||
| U.S. | 138 | (3 | ) | (330 | ) | ||||||
| State and local | 21 | 36 | (23 | ) | |||||||
| Foreign | 9 | 14 | 4 | ||||||||
| Total deferred | 168 | 47 | (349 | ) | |||||||
| Total income tax expense (benefit) | $ | 31 | $ | 57 | $ | (312 | ) | ||||
The reconciliation between the U.S. federal statutory rate and the Company’s effective income tax rate is:
| 2002 | 2001 | 2000 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. federal statutory rate | (35 | )% | 35 | % | (35 | )% | |||||
| State and local income taxes, net of federal tax | |||||||||||
| benefit | (4 | ) | 4 | (4 | ) | ||||||
| Foreign tax rate differential | - | - | 1 | ||||||||
| Change in valuation allowance | 39 | - | - | ||||||||
| Adjustment to estimated liability for tax claims | 1 | 9 | - | ||||||||
| Other, net | - | 7 | (2 | ) | |||||||
| Effective tax rate | 1 | % | 55 | % | (40 | )% | |||||
As of December 31, 2002, the Company has not provided for withholding or U.S. federal income taxes on approximately $407 million of accumulated undistributed earnings of its foreign subsidiaries as they are considered by management to be permanently reinvested. If these undistributed earnings were not considered to be permanently reinvested, approximately $124 million of deferred income taxes would have been provided.
– 96 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. INCOME TAXES (continued)
At December 31, 2002, the Company had net operating loss carryforwards for certain of its foreign subsidiaries and certain of its state tax jurisdictions, the tax benefit of which is approximately $384 million. The following table details the expiration periods of the $384 million net operating loss carryforwards:
| Period | Carryforwards | ||
|---|---|---|---|
| 2003-2007 | $ 27 | ||
| 2008-2012 | 39 | ||
| 2013-2017 | 24 | ||
| 2018-2022 | 248 | ||
| Indefinite | 46 | ||
| Total deferred taxes | $ 384 | ||
The cumulative temporary differences giving rise to the deferred tax assets and liabilities at December 31, 2002 and 2001 are as follows:
| 2002 | 2001 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Deferred | Deferred | |||||||||||||
| Deferred | Tax | Deferred | Tax | |||||||||||
| Tax Assets | Liabilities | Tax Assets | Liabilities | |||||||||||
| (In millions of dollars) | ||||||||||||||
| Asbestos litigation claims | $ | 1,843 | $ | - | $ | 876 | $ | - | ||||||
| Other employee benefits | 167 | - | 152 | - | ||||||||||
| Pension plans | 243 | 51 | 155 | 61 | ||||||||||
| Depreciation | 1 | 361 | - | 303 | ||||||||||
| Operating loss carryforwards | 384 | - | 325 | - | ||||||||||
| State and local taxes | - | 57 | - | 58 | ||||||||||
| Other | 552 | 367 | 521 | 338 | ||||||||||
| Subtotal | 3,190 | 836 | 2,029 | 760 | ||||||||||
| Valuation allowances | (998 | ) | - | (81 | ) | - | ||||||||
| Total deferred taxes | $ | 2,192 | $ | 836 | $ | 1,948 | $ | 760 | ||||||
In 2002, the Company increased its asbestos-related reserves through charges to income of $1.381 billion for Owens Corning asbestos-related liabilities and $975 million for Fibreboard asbestos-related liabilities, for an aggregate charge of $2.356 billion (see Note 19 to the Consolidated Financial Statements). In connection with such charges, management evaluated the amount of deferred tax assets attributable to such charges and also assessed the likelihood of realization of such deferred tax assets in light of the Company’s financial position and the Chapter 11 proceedings. As the result of such assessment, management determined that a valuation allowance was required for the full amount of such attributable deferred tax assets. As a result, no tax benefit was recorded in connection with the asbestos-related charges .
Management fully expects to realize its net deferred tax assets through income from future operations.
– 97 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. ACCOUNTS RECEIVABLE SECURITIZATION
In 2002, 2001 and 2000, the Company sold certain accounts receivable of certain European operations. At December 31, 2002 and 2001, $10 million and $22 million, respectively, had been sold and reflected as a reduction of accounts receivable in the Company’s Consolidated Balance Sheet.
The Company maintains an allowance for doubtful accounts based upon the expected collectibility of all consolidated trade accounts receivable, including receivables sold. Discounts on receivables sold of $1 million for both of the years ended December 31, 2002 and 2001, and $8 million for the year ended December 31, 2000, were recorded as other expenses on the Company’s Consolidated Statement of Income (Loss).
12. INVENTORIES
Inventories are summarized as follows:
| 2002 | 2001 | |||||||
|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | ||||||||
| Finished goods | $ | 385 | $ | 378 | ||||
| Materials and supplies | 149 | 150 | ||||||
| FIFO inventory | 534 | 528 | ||||||
| Excess of FIFO over LIFO | (88 | ) | (91 | ) | ||||
| Total inventories | $ | 446 | $ | 437 | ||||
Approximately $150 million and approximately $120 million of total inventories were valued using the LIFO method at December 31, 2002 and 2001, respectively.
– 98 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. INVESTMENTS IN AFFILIATES
At December 31, 2002 and 2001, the Company’s affiliates, which generally are engaged in the manufacture of fibrous glass and related products for the insulation, construction, reinforcements, and textile markets, include:
| Percent Ownership | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | ||||||||||
| Advanced Glassfiber Yarns, LLC (U. S.) | 49 | % | 49 | % | |||||||
| Arabian Fiberglass Insulation Company, Ltd. (Saudi Arabia) | 49 | % | 49 | % | |||||||
| Automotive Composite Solutions (International) | 26 | % | 26 | % | |||||||
| Fiberteq LLC (U. S.) | 50 | % | 50 | % | |||||||
| Owens Corning Energy LLC (U. S.) | 50 | % | 50 | % | |||||||
| (a) | Owens Corning (India) Limited (India) | 60 | % | 50 | % | ||||||
| (b) | Owens Corning South Africa (Pty) Ltd. | 46 | % | 51 | % | ||||||
| Owens Corning Yapi Merkezi Boru Sanayi VeTicaret A.S. (Turkey) | - | 50 | % | ||||||||
| Stamax B.V. (Netherlands) | 50 | % | 50 | % | |||||||
| Stamax NA LLC (U. S.) | 50 | % | 50 | % | |||||||
| (c) | Vitro-Fibras, S.A. (Mexico) | 40 | % | 40 | % | ||||||
| (a) | During 2002, the Company increased its ownership interest in Owens Corning (India) Limited (India) to 60% and began consolidating this subsidiary (see Note 6). |
| (b) | As of January 1, 2002, the Company's ownership interest in Owens Corning South Africa (Pty) Ltd. was diluted due to an additional investment by other investors and the affiliate was deconsolidated from the financial statements. |
| (c) | Although the Company's ownership interest in Vitro-Fibras, S.A is 40% as of December 31, 2002, this investment is accounted for using the cost method because the Company determined that it does not have significant influence in this affiliate. |
The following table provides summarized financial information on a combined 100% basis for the Company's affiliates accounted for under the equity method:
| 2002 | 2001 | 2000 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | |||||||||||||||||||||||
| At December 31: | |||||||||||||||||||||||
| Current assets | $ | 111 | $ | 114 | $ | 266 | |||||||||||||||||
| Noncurrent assets | 309 | 528 | 827 | ||||||||||||||||||||
| Current liabilities | 445 | 98 | 188 | ||||||||||||||||||||
| Noncurrent liabilities | 65 | 457 | 706 | ||||||||||||||||||||
| For the year ended December 31: | |||||||||||||||||||||||
| Net sales | 297 | 369 | 699 | ||||||||||||||||||||
| Gross margin | 60 | 116 | 172 | ||||||||||||||||||||
| Net income (loss) | (213 | ) | 18 | 22 | |||||||||||||||||||
The Company’s equity in undistributed earnings of affiliates was $3 million at December 31, 2002.
During 2002, the Company’s joint venture affiliate, Advanced Glassfiber Yarns, LLC filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Owens Corning’s investment in this affiliate was written off during 2002, the effect of which was approximately a $1 million loss recorded in the Consolidated Statement of Income (Loss). The net loss generated during 2002 by this affiliate was responsible for a majority of the net loss reflected above.
– 99 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| 2002 | 2001 | |||||||
|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | ||||||||
| Accounts payable | $ | 309 | $ | 362 | ||||
| Payroll and vacation pay | 120 | 144 | ||||||
| Payroll, property, and miscellaneous taxes | 37 | 46 | ||||||
| Other employee benefits liability (Note 8) | 30 | 30 | ||||||
| Restructure costs (Note 5) | 58 | 16 | ||||||
| Other | 202 | 142 | ||||||
| Total | $ | 756 | $ | 740 | ||||
15. CONSOLIDATED STATEMENT OF CASH FLOWS
Cash payments (refunds) for income taxes and cost of borrowed funds are summarized as follows:
| 2002 | 2001 | 2000 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars) | |||||||||||
| Income taxes | $ | 27 | $ | (22 | ) | $ | (26 | ) | |||
| Cost of borrowed funds (Note 3) | 7 | 8 | 154 | ||||||||
The Company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents.
As a result of the Filing (see Note 1), contractual interest expense has not been paid on pre-petition debt of the Debtors since the Petition Date.
During the year ended December 31, 2000, gross payments for asbestos litigation claims filed against Fibreboard were approximately $820 million, all of which were paid/reimbursed by Fibreboard’s insurers or the Fibreboard Settlement Trust.
16. LEASES
The Company leases certain equipment and facilities under operating leases, some of which include cost-escalation clauses, expiring on various dates through 2020. Total rental expense charged to operations was $104 million in 2002, $124 million in 2001, and $185 million in 2000. At December 31, 2002, the minimum future rental commitments under noncancellable leases with initial maturities greater than one year payable over the remaining lives of the leases are:
| Minimum Future | ||||||||
|---|---|---|---|---|---|---|---|---|
| Period | Rental Commitments | |||||||
| (In millions of dollars) | ||||||||
| 2003 | $ | 107 | ||||||
| 2004 | 73 | |||||||
| 2005 | 59 | |||||||
| 2006 | 46 | |||||||
| 2007 | 42 | |||||||
| 2008 through 2020 | 100 | |||||||
| $ | 427 | |||||||
– 100 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. LEASES (continued)
Pursuant to the Bankruptcy Code, Owens Corning and the other Debtors in the Chapter 11 Cases may elect to reject or assume unexpired pre-petition leases. The Debtors are currently reviewing the leases for which such an election exists to determine whether they should be accepted or rejected. The Bankruptcy Court has extended the time period within which the Debtors must make their elections through June 4, 2003, and may grant further extensions. In the process of their review, the Debtors may conclude that certain of the arrangements constitute secured financings rather than leases, in which event the Debtors may take action to obtain a court determination that the applicable facility is owned rather than leased.
17. STOCK COMPENSATION PLANS
During 2002, the Company had two stock-based compensation plans applicable to employees. The Company’s stockholder approved Stock Performance Incentive Plan (“SPIP”) authorized grants of stock options, restricted stock, performance restricted stock and phantom performance units. Effective May 2002, the SPIP expired as to new grants, but outstanding awards continue according to their terms. The Owens Corning 1995 Stock Plan (“95 Stock Plan”) authorizes grants of options, restricted stock and performance stock awards (collectively, the 95 Stock Plan and the SPIP are referred to as the “Employee Plans”). The 95 Stock Plan permits up to 1% of common shares outstanding at the beginning of each calendar year to be awarded as stock options and restricted stock (with 25% of this amount as the maximum permitted number of restricted stock awards). The Company may carry forward, for the 95 Stock Plan, unused shares from prior years and may increase the shares available for awards in any calendar year through an advance of up to 25% of the subsequent year’s allocation (determined by using 25% of the current year’s allocation). These shares are also subject to the 25% limit for restricted stock awards. At December 31, 2002, the maximum number of shares available under the 95 Stock Plan for stock awards was 770,411 shares. The following are descriptions of the awards granted under the Employee Plans:
Stock Options
| The exercise price of each option awarded under the Employee Plans equals the market price of the Company’s common stock on the date of grant and an option’s maximum term is 10 years. Shares issued from the exercise of options are recorded in the common stock accounts at the option price. The awards and vesting periods of such awards are determined at the discretion of the compensation committee of the Board of Directors. No stock options were awarded in 2002 or 2001. During 2000, stock options covering 1,531,244 shares were awarded under the Employee Plans. |
Restricted Stock Awards
| Compensation expense for restricted stock awards is measured based on the market price of the stock at date of grant and is recognized on a straight-line basis over the vesting period. Stock restrictions lapse, subject to alternate vesting plans for death, disability, approved early retirement and involuntary termination, over various periods ending in 2006. At December 31, 2002, the Company had 96,088 shares of restricted stock outstanding. There were no restricted stock grants in 2002 or 2001. During 2000, 11,000 shares of restricted stock were granted. The weighted-average grant-date fair value for shares granted was $15.37 for 2000. |
– 101 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. STOCK COMPENSATION PLANS (continued)
Performance Restricted Stock Awards
| Performance restricted stock awards represent the opportunity to earn up to a specified number of shares of the Company’s common stock, if the Company achieves specified performance goals during the designated performance period. Any portion of the award not earned during the performance period is forfeited by the holder at the end of such period. Compensation expense is measured based on market price of the Company’s common stock and is recognized over the performance period, which is generally three years. At December 31, 2002, the Company had no performance restricted stock awards outstanding and none were granted during 2002, 2001 or 2000. |
Phantom Performance Units
| Phantom performance units provide the holder the opportunity to earn a cash award equal to the fair market value of the Company’s common stock upon the attainment of certain performance goals. Any portion of the award not earned during the performance period is forfeited by the holder at the end of such period. Compensation expense is measured based on the market price of the Company’s common stock and is recognized over the performance period, which is generally three years. At December 31, 2002, the Company had no performance units outstanding and none were granted during 2002, 2001 or 2000. |
Performance Stock Awards
| Performance stock awards provide the holder the opportunity to earn unrestricted stock based upon achievement of specified goals within a designated performance period. Compensation cost for these awards is accrued over the performance period based upon a base compensation level and the performance level achieved. Stock awards are issued in the year subsequent to the performance period. No performance stock awards were issued in 2002 or 2001. In 2000, 638,541 shares were issued to employees. |
The Company also has a plan to award stock and stock options to non-employee directors. The receipt of the stock awards may be deferred at the discretion of the directors. Approximately 452,157 shares were available under this plan at December 31, 2002. As of December 31, 2002, 24,259 deferred awards were outstanding. No options were issued in 2002, 2001 or 2000. In 2002, no stock awards were granted; in 2001, 4,500 stock awards were granted and issued; in 2000, 5,000 stock awards were granted, 1,000 of which were issued. The weighted-average grant-date fair value for shares granted in 2001 and 2000 was $2.24 and $17.97, respectively.
The Company applies Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure An Amendment of FAS No. 123” (“SFAS 148”), for disclosures of its stock based compensation plans. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations for expense recognition as permitted by SFAS 123 and SFAS 148. All stock options issued by the Company are exercisable at a price equal to the market price at the date of grant. Accordingly, no compensation cost has been recognized for any of the options granted under the Employee Plans. The compensation cost that has been recorded for awards other than options was $2 million in 2002, less than $1 million in 2001, and $1 million in 2000.
– 102 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. STOCK COMPENSATION PLANS (continued)
A summary of the status of the Company’s plans that issue options as of December 31, 2002, 2001, and 2000 and changes during the years ended on those dates is presented below:
| 2002 | 2001 | 2000 | |||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted- | Weighted- | Weighted- | |||||||||||||||||||||||||||||||||||||
| Number | Average | Number | Average | Number | Average | ||||||||||||||||||||||||||||||||||
| of | Exercise | of | Exercise | of | Exercise | ||||||||||||||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | ||||||||||||||||||||||||||||||||||
| Beginning of year | 7,206,400 | $ | 33.27 | 8,130,529 | $ | 32.98 | 7,720,367 | $ | 36.29 | ||||||||||||||||||||||||||||||
| Options granted | - | $ | - | - | $ | - | 1,531,244 | $ | 15.37 | ||||||||||||||||||||||||||||||
| Options exercised | - | $ | - | - | $ | - | (183 | ) | $ | 15,37 | |||||||||||||||||||||||||||||
| Options canceled | (716,526 | ) | $ | 32.20 | (924,129 | ) | $ | 30.92 | (1,120,899 | ) | $ | 31.68 | |||||||||||||||||||||||||||
| End of year | 6,489,874 | $ | 33.39 | 7,206,400 | $ | 33.27 | 8,130,529 | $ | 32.98 | ||||||||||||||||||||||||||||||
| Exercisable | 5,419,864 | $ | 35.79 | 5,145,431 | $ | 36.46 | 4,903,779 | $ | 37.42 | ||||||||||||||||||||||||||||||
| Weighted-average | |||||||||||||||||||||||||||||||||||||||
| fair-value of options | |||||||||||||||||||||||||||||||||||||||
| granted during the | |||||||||||||||||||||||||||||||||||||||
| year | $ | - | $ | - | $ | 7.03 | |||||||||||||||||||||||||||||||||
The following table summarizes information about options outstanding at December 31, 2002:
| Options Outstanding | Options Exercisable | ||||||
|---|---|---|---|---|---|---|---|
| Number | Weighted-Average | Number | Weighted- | ||||
| Range of | Outstanding | Remaining | Exercise | Exercisable | Average | ||
| Exercise Prices | at 12/31/02 | Contractual Life | Price | at 12/31/02 | Exercise Price | ||
| $ 14.187 | - | $ 28.437 | 1,850,732 | 5.57 | $ 20.249 | 1,104,387 | $ 23.545 |
| $ 31.562 | - | $ 34.812 | 1,701,282 | 4.30 | $ 34.143 | 1,377,617 | $ 33.986 |
| $ 34.875 | - | $ 40.500 | 1,445,477 | 2.48 | $ 38.434 | 1,445,477 | $ 38.434 |
| $ 40.687 | - | $ 44.750 | 1,315,145 | 2.95 | $ 43.739 | 1,315,145 | $ 43.739 |
| $ 44.875 | - | $ 45.500 | 177,238 | 2.98 | $ 45.449 | 177,238 | $ 45.449 |
The fair value of each option granted in 2000 was estimated on the date of grant using the Black-Scholes option-pricing model and the weighted-average assumptions shown below. No options were granted in 2002 and 2001.
| Assumptions | 2000 |
|---|---|
| Risk-free interest rate | 6.50% |
| Expected life (in years) | 5 |
| Expected volatility | 40.72% |
| Expected dividends | 0.00% |
– 103 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. STOCK COMPENSATION PLANS (continued)
Had compensation cost for the Employee Plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method described in SFAS 123, the Company’s net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below:
| 2002 | 2001 | 2000 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars, except share data) | |||||||||||||||||
| Net income (loss), as reported | $ | (2,809 | ) | $ | 39 | $ | (478 | ) | |||||||||
| Less - total stock-based employee | |||||||||||||||||
| compensation expense determined under | |||||||||||||||||
| fair value based method for all awards, | |||||||||||||||||
| net of related tax effects | (4 | ) | (6 | ) | (9 | ) | |||||||||||
| Pro forma net income | $ | (2,813 | ) | $ | 33 | $ | (487 | ) | |||||||||
| Basic net income (loss) per share | |||||||||||||||||
| As reported | $ | (51.02 | ) | $ | 0.72 | $ | (8.71 | ) | |||||||||
| Pro Forma | $ | (51.09 | ) | $ | 0.60 | $ | (8.88 | ) | |||||||||
| Diluted net income (loss) per share | |||||||||||||||||
| As reported | $ | (51.02 | ) | $ | 0.66 | $ | (8.71 | ) | |||||||||
| Pro Forma | $ | (51.09 | ) | $ | 0.55 | $ | (8.88 | ) | |||||||||
The following table reconciles the net income (loss) and weighted average number of shares used in the basic earnings per share calculation to the net income (loss) and weighted average number of shares used to compute diluted earnings per share.
| 2002 | 2001 | 2000 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions of dollars, except share data) | ||||||||||||
| Net income (loss) used for basic and diluted | ||||||||||||
| earnings per share | $ (2,809 | ) | $ 39 | $ (478 | ) | |||||||
| Weighted-average number of shares outstanding | ||||||||||||
| used for basic earnings per share (thousands) | 55,054 | 55,056 | 54,816 | |||||||||
| Non-vested restricted shares (thousands) | - | 299 | - | |||||||||
| Deferred awards (thousands) | - | 24 | - | |||||||||
| Shares from assumed conversion of | ||||||||||||
| preferred securities (thousands) (see Note 7) | - | 4,566 | - | |||||||||
| Weighted-average number of shares outstanding and | ||||||||||||
| common equivalent shares used for diluted earnings | ||||||||||||
| per share (thousands) | 55,054 | 59,945 | 54,816 | |||||||||
– 104 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. STOCK COMPENSATION PLANS (continued)
For the year ended 2002, the number of shares used in the calculation of diluted earnings per share did not include 164 thousand common equivalent shares of non-vested restricted stock, 25 thousand common equivalent shares of deferred awards and 4,566 thousand common equivalent shares from assumed conversion of preferred securities due to their anti-dilutive effect. For the year ended 2000, the number of shares used in the calculation of diluted earnings per share did not include 468 thousand common equivalent shares of non-vested restricted stock, 52 thousand common equivalent shares of deferred awards and 4,566 thousand common equivalent shares from assumed conversion of preferred securities due to their anti-dilutive effect.
18. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS
The Company is a party to financial instruments in the normal course of business to reduce exposure to fluctuating foreign currency exchange rates, interest rates, and commodity prices. The Company is exposed to credit loss in the event of nonperformance by the other parties to the financial instruments described below. However, the Company does not anticipate nonperformance by the other parties. The Company does not engage in trading activities with these financial instruments and does not generally require collateral or other security to support these financial instruments. The amounts of derivatives summarized in the foreign currency exchange risk and interest rate risk management section below do not generally represent the amounts exchanged by the parties and, thus, are not a measure of the exposure of the Company through its use of derivatives. The amounts exchanged were calculated on the basis of the notional amounts and the other terms of the derivatives, which relate to interest rates, exchange rates, securities prices, financial, or other indices.
The Company performs an ineffectiveness analysis of its financial instruments for each period based on terms of the contract and the underlying item being hedged. If at any time the derivative ceases to be highly effective, any change in fair value of the derivative is recorded as other income in the Consolidated Statement of Income (Loss).
Assets and liabilities designated as hedged items are assessed for impairment or for the need to recognize an increased obligation, respectively, according to generally accepted accounting principles that apply to those assets or liabilities. Such assessments are made after hedge accounting has been applied to the asset or liability and exclude a consideration of (1) any anticipated effects of hedge accounting and (2) the fair value of any related hedging instrument that is recognized as a separate asset or liability. The assessment for an impairment of an asset, however, includes a consideration of the losses that have been deferred in other comprehensive income as a result of a cash flow hedge of that asset.
The Company typically enters into financial instruments with terms of less than one year. As of December 31, 2002, less than $1 million of gains on financial instruments included in accumulated other comprehensive income in the Consolidated Balance Sheet will be reclassified as earnings during the next twelve months. Transactions and events that are expected to occur over the next twelve months and will necessitate reclassifying the derivative gains as earnings include actual direct-foreign-export sales or import purchases and actual purchases of natural gas.
– 105 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS (continued)
The Company enters into various types of derivative financial instruments to manage its foreign currency exchange risk and interest rate risk, as indicated in the following table:
| Notional Amount | Notional Amount | ||
|---|---|---|---|
| December 31, 2002 | December 31, 2001 | ||
| (In millions of dollars) | |||
| Forward currency exchange contracts | $ 59 | $ 30 | |
| Interest rate swaps | 41 | 19 | |
| Commodity future contracts | 350,000 MMBTU per month for two months, | 540,000 MMBTU per month for nine months | |
| 250,000 MMBTU for one month | |||
Foreign Currency Exchange Risk and Interest Rate Risk Management
The Company enters into forward currency exchange contracts to manage its exposure against foreign currency fluctuations on certain assets and liabilities denominated in foreign currencies. In the fourth quarter of 2002, the Company entered into 5 contracts that exchanged approximately 8 million British pounds sterling to euros, approximately 50 million Norwegian krone to U.S. dollars and approximately 1 million U.S. dollars to euros. As of December 31, 2002, all of these contracts were outstanding. As of December 31, 2001, the Company had 2 forward currency exchange contracts outstanding that exchanged approximately 75 million Norwegian krone and approximately 14 million euros. These contracts are considered highly effective hedges, as the gains or losses on the contracts substantially offset the gain or loss from currency value fluctuations. The Company accounts for the contracts as fair value hedges and changes in the fair value are recorded as other income in the Consolidated Statement of Income (Loss), the effect of which was not material during any period. The fair value of these derivatives, which is recorded as an other current asset in the Consolidated Balance Sheet was not material in any period.
The Company also enters into forward currency exchange contracts to manage its exposure against foreign currency fluctuations on certain future sales and purchases. In the fourth quarter, the Company entered into a series of 12 monthly contracts that exchange approximately 12 million U.S. dollars to Canadian dollars, an additional 12 monthly contracts that exchange approximately 12 million euros into U.S. dollars, and a contract that exchanged approximately 4 million U.S. dollars to British pounds sterling. As of December 31, 2002, all of these contracts were outstanding. These contracts are considered highly effective hedges, as the gains or losses on the contracts substantially offset the gain or loss from currency value fluctuations. The Company accounts for the contracts as cash flow hedges and changes in the fair market value are recorded in other comprehensive income (loss), except to the extent of ineffectiveness, which is recorded as other income in the Consolidated Statement of Income (Loss). As of December 31, 2002, accumulated other comprehensive income (loss) related to these contracts was a loss of less than $1 million, and the ineffectiveness recorded as other income (loss) was not material. The fair value of these derivatives, which is recorded as an other current asset in the Consolidated Balance Sheet, was not material in any period.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS (continued)
During 2001, the Company also entered into a foreign currency exchange contract to reduce its exposure to certain U.S. dollar denominated debt instruments in China. The 2001 contract, which matured in the first quarter of 2002, exchanged approximately 83 million Chinese renminbi against approximately 10 million U.S. dollars. During the first quarter of 2002, the Company entered into a new contract that exchanged 83 million Chinese renminbi against approximately 10 million U.S. dollars. During the third quarter, the Company entered into a new contract that exchanged approximately 83 million Chinese renminbi against 10 million U.S. Dollars, which remained outstanding at December 31, 2002. These contracts effectively extended the hedge of U.S. dollar denominated debt entered into in 2001. These contracts are considered highly effective hedges, as the gains or losses on the contracts substantially offset the gain or loss from currency value fluctuations. The Company accounts for the contracts as fair value hedges and changes in the fair value are recorded as other income in the Consolidated Statement of Income (Loss), the effect of which was not material during any period. The fair value of these derivatives, which is recorded as an other current asset in the Consolidated Balance Sheet, was not material in any period.
During 2002 and 2001, the Company invested excess cash in South America in Brazilian certificates of deposit, treasury bonds and debentures. At the same time these investments were made, an equivalent amount of Brazilian real was swapped into U.S. dollars at a U.S. dollar interest rate with matching investment amounts and maturity dates. The purpose of these swap contracts is to reduce the impact of changes in the Brazilian real and U.S. dollar exchange rates. At December 31, 2002, there were 49 such cross-currency interest rate swap contracts outstanding at a notional amount of $41 million U.S. dollars. At December 31, 2001, there were 18 such cross-currency interest rate swap contracts outstanding at a notional amount of $19 million U.S. dollars. These contracts are considered highly effective hedges, as the gains or losses on the contracts substantially offset the gain or loss from currency value fluctuations. The Company accounts for the contracts as fair value hedges and changes in the fair market value are recorded in other comprehensive income (loss), except to the extent of ineffectiveness, which is recorded as other income in the Consolidated Statement of Income (Loss), the effect of which was not material during any period. The fair value of these derivatives, which is recorded as an other current asset in the Consolidated Balance Sheet, was not material in any period.
Commodity Risk Management
During the fourth quarter of 2002, the Company entered into 3 swap agreements for 950,000 MMBTU’s of natural gas to hedge its exposure to fluctuating natural gas prices. These contracts expire during the first quarter of 2003. These contracts are accounted for as cash flow hedges and changes in the fair market value are recorded in other comprehensive income (loss), except to the extent of ineffectiveness, which is recorded as other income in the Consolidated Statement of Income (Loss). At December 31, 2002, the accumulated other comprehensive income related to the contracts was approximately $1 million and the ineffectiveness recorded as other income in the Consolidated Statement of Income (Loss) was not material. The fair value of these derivatives, which is recorded as an other current asset in the Consolidated Balance Sheet, was approximately $1 million.
During 2001, the Company entered into a swap contract for 4,860,000 MMBTU’s of natural gas to hedge its exposure to fluctuating commodity prices. The contract expired during the third quarter of 2002. At December 31, 2001, accumulated other comprehensive income (loss) related to the contract was a loss of approximately $2 million and the ineffectiveness recorded as other income (loss) in the Consolidated Statement of Income (Loss) was not material. The fair value of these derivatives, which is recorded as an other current liability in the Consolidated Balance Sheet, was a loss of approximately $2 million.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS (continued)
Other Financial Instruments with Off-Balance-Sheet Risk
As of December 31, 2002 and December 31, 2001, the Company was contingently liable for guarantees of indebtedness owed by certain unconsolidated affiliates of approximately $6 million and $38 million, respectively. As of December 31, 2002, and December 31, 2001, approximately $4 million and $34 million, respectively, of such indebtedness was alleged to be in default as a result of the Filing. Included in such indebtedness as of December 31, 2001 was approximately $19 million owed by Owens-Corning (India) Limited, which was consolidated during the third quarter of 2002 (see Note 6). Subject to the foregoing, the Company is of the opinion that its unconsolidated affiliates will be able to perform under their respective payment obligations in connection with such guaranteed indebtedness and that no payments will be required and no losses will be incurred by the Company under such guarantees.
There is no market for the guarantees of indebtedness discussed above, and they were issued without explicit cost. Therefore, it is not practicable to establish their fair value.
Concentrations of Credit Risk
As of December 31, 2002 and 2001, the Company has no significant group concentrations of credit risk.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each category of financial instruments:
Cash and short-term financial instruments
The carrying amount approximates fair value due to the short maturity of these instruments.
Restricted cash – asbestos and insurance related
| The fair values of cash and marketable securities classified as restricted cash have been estimated by traded market values or by obtaining quotations from brokers. |
Restricted cash, securities and other – Fibreboard
| The fair values of cash and marketable securities in the Fibreboard Settlement Trust have been estimated by traded market values or by obtaining quotations from brokers. |
Long-term notes receivable
The fair value has been estimated using the expected future cash flows discounted at market interest rates.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS (continued)
Long-term debt
| The fair value of the Company’s long-term debt, which is not subject to compromise, has been estimated based on quoted market prices for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities. The Company is unable to estimate the fair value of long-term debt of the Debtors which is subject to compromise at December 31, 2002, due to the uncertainties associated with the Filing. |
Foreign currency swaps and interest rate swaps
| The fair values of foreign currency swaps and interest rate swaps have been estimated by traded market values or by obtaining quotations from brokers. |
Forward currency exchange contracts, option contracts, and financial guarantees
| The fair values of forward currency exchange contracts, option contracts, and financial guarantees are based on the estimated cost to acquire similar agreements or on the estimated cost to terminate these agreements or otherwise settle the obligations with the counter parties at the reporting date. |
The estimated fair values of the Company’s financial instruments as of December 31, 2002 and 2001, which have fair values different than their carrying amounts, are as follows:
| 2002 | 2001 | ||||||
|---|---|---|---|---|---|---|---|
| Carrying | Fair | Carrying | Fair | ||||
| Amount | Value | Amount | Value | ||||
| (In millions of dollars) | |||||||
| Assets | |||||||
| Long-term notes receivable | $ 7 | $ 7 | $ 26 | $ 26 | |||
| Liabilities | |||||||
| Long-term debt | 71 | 71 | 5 | 5 | |||
The Company’s estimates of fair value approximate carrying value for all derivative financial instruments.
As of December 31, 2002 and 2001, the Company is contingently liable for guarantees of indebtedness owed by certain unconsolidated affiliates. There is no market for these guarantees and they were issued without explicit cost. Therefore, it is not practicable to establish their fair value.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. CONTINGENT LIABILITIES AND OTHER MATTERS
Asbestos Liabilities
ITEM A. – OWENS CORNING (EXCLUDING FIBREBOARD)
Numerous claims have been asserted against Owens Corning alleging personal injuries arising from inhalation of asbestos fibers. Virtually all of these claims arise out of Owens Corning’s manufacture, distribution, sale or installation of an asbestos-containing calcium silicate, high temperature insulation product, the manufacture and distribution of which was discontinued in 1972. Owens Corning received approximately 18,000 asbestos personal injury claims during 2000, approximately 32,000 such claims during 1999 and approximately 69,000 such claims during 1998. Owens Corning cautions that it has limited information about many of such claims, and the actual numbers of claims asserted remain subject to adjustment.
Prior to October 5, 2000, when the Debtors, including Fibreboard (see Item B below), filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, the vast majority of asserted asbestos personal injury claims were in the process of being resolved through the National Settlement Program described below. As a result of the Filing, all pre-petition asbestos claims and pending litigation against the Debtors, including without limitation claims arising under the National Settlement Program, were automatically stayed (see Note 1). Owens Corning expects that all pending and future asbestos claims against Owens Corning and Fibreboard will be resolved pursuant to a plan or plans of reorganization. Owens Corning is unable to determine at this time whether asbestos-related claims asserted against Fibreboard will be treated in the same manner as those asserted against Owens Corning in any such plan or plans ultimately confirmed.
As more fully discussed in Note 1 and under the heading “Reserve” below, the Debtors, together with the Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants, filed on March 28, 2003 a proposed amended joint plan of reorganization for the Debtors, that provides for two alternative frameworks for creditor recoveries. Ultimately, as described more fully under the heading “Reserve”below, it is anticipated that Owens Corning’s total liability for asbestos claims will be determined after a lengthy period of negotiations and, if necessary, by the Bankruptcy Court, taking into account numerous factors not present in the Company’s pre-petition environment. Such factors include the claims of competing creditor groups as to the appropriate treatment of their allowed claims in the plan or plans of reorganization, the size of the total asbestos liability, the total number of present asbestos claims allowed, the total amount of future asbestos claims allowed, and the impact of the Administrative Consolidation.
National Settlement Program Claims
Beginning in late 1998, Owens Corning implemented a National Settlement Program (“NSP”) to resolve personal injury asbestos claims through settlement agreements with individual plaintiffs’ law firms. The NSP was intended to better manage the asbestos liabilities of Owens Corning and Fibreboard (see Item B below), and to help Owens Corning better predict the timing and amount of indemnity payments for both pending and future asbestos claims.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
The number of law firms participating in the NSP expanded from approximately 50 when the NSP was established to approximately 120 as of the Petition Date. Each of these participating law firms agreed to a long-term settlement agreement which varied by firm (“NSP Agreement”) extending through at least 2008 which provided for the resolution of their existing asbestos claims, including unfiled claims pending with the participating law firm at the time it entered into an NSP Agreement (“Initial Claims”). The NSP agreements also established procedures and fixed payments for resolving without litigation claims against either Owens Corning or Fibreboard, or both, arising after a participating firm entered into an NSP Agreement (“Future Claims”).
Settlement amounts for both Initial Claims and Future Claims were negotiated with each firm participating in the NSP, and each firm was to communicate with its respective clients to obtain authority to settle individual claims. Payments to individual claimants were to vary based on a number of factors, including the type and severity of disease, age and occupation. All such payments were subject to delivery of satisfactory evidence of a qualifying medical condition and exposure to Owens Corning’s and/or Fibreboard’s products, delivery of customary releases by each claimant, and other conditions. Certain claimants settling non-malignancy claims with Owens Corning and/or Fibreboard were entitled to an agreed pre-determined amount of additional compensation if they later developed a more severe asbestos-related medical condition.
As to Future Claims, each participating NSP firm agreed (consistent with applicable legal requirements) to recommend to its future clients, based on appropriately exercised professional judgment, to resolve their asbestos personal injury claims against Owens Corning and/or Fibreboard through an administrative processing arrangement, rather than litigation. In the case of Future Claims involving non-malignancy, claimants were required to present medical evidence of functional impairment, as well as the product exposure criteria and other requirements set forth above, to be entitled to compensation.
As of the Petition Date, the NSP covered approximately 239,000 Initial Claims against Owens Corning, approximately 150,000 of which had satisfied all conditions to final settlement, including receipt of executed releases, or other resolution (the “Final NSP Settlements”) at an average cost per claim of approximately $9,300. As of the Petition Date, approximately 89,000 of such Final NSP Settlements had been paid in full or otherwise resolved, and approximately 61,000 were unpaid in whole or in part. As of such date, the remaining balance payable under NSP Agreements in connection with these unpaid Final NSP Settlements was approximately $510 million. Through the Petition Date, Owens Corning had received approximately 6,000 Future Claims under the NSP.
At this time, Owens Corning is unable to predict the manner in which the NSP Agreements and the resolution of claims thereunder will ultimately be treated under the terms of any plan or plans of reorganization.
Non-NSP Claims
As of the Petition Date, approximately 29,000 asbestos personal injury claims were pending against Owens Corning outside the NSP. This compares to approximately 25,000 such claims pending on December 31, 1999. The information needed for a critical evaluation of pending claims, including the nature and severity of disease and definitive identifying information concerning claimants, typically becomes available only through the discovery process or as a result of settlement negotiations, which often occur years after particular claims are filed. As a result, Owens Corning has limited information about many of such claims.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
Owens Corning resolved (by settlement or otherwise) approximately 10,000 asbestos personal injury claims outside the NSP during 1998, 5,000 such claims during 1999 and 3,000 such claims during 2000 prior to the Petition Date. The average cost of resolution was approximately $35,900 per claim for claims resolved during 1998, $34,600 per claim for claims resolved during 1999, and $44,800 per claim for claims resolved during 2000 prior to the Petition Date. Generally, these claims were settled as they were scheduled for trial, and they typically involved more serious injuries and diseases. Accordingly, Owens Corning does not believe that such average costs of resolution are representative of the value of the non-NSP claims then pending against the Company.
At this time, Owens Corning is unable to predict the manner in which non-NSP claims will ultimately be treated under the terms of any plan or plans of reorganization.
Asbestos-Related Payments
As a result of the Filing, Owens Corning has not made any asbestos-related payments since the Petition Date except for approximately $20 million paid on its behalf by third parties pursuant to appeal bonds issued prior to the Petition Date. During 1999 and 2000 (prior to the Petition Date), Owens Corning (excluding Fibreboard) made asbestos-related payments falling within four major categories: (1) Settlements in respect of verdicts incurred or claims resolved prior to the implementation of the NSP (“Pre-NSP Settlements”); (2) NSP settlements; (3) Non-NSP settlements covering cases not resolved by the NSP; and (4) Defense, claims processing and administrative expenses, as follows:
| 2000 (through | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 1999 | October 4, 2000) | ||||||||||
| (In millions of dollars) | |||||||||||
| Pre-NSP Settlements | $ | 170 | $ | 51 | |||||||
| NSP Settlements | 570 | 538 | |||||||||
| Non-NSP Settlements | 30 | 42 | |||||||||
| Defense, Claims Processing and Administrative Expenses | 90 | 54 | |||||||||
| $ | 860 | $ | 685 | ||||||||
All amounts discussed above are before tax and application of insurance recoveries.
Prior to the Petition Date, Owens Corning deposited certain amounts in escrow accounts to facilitate claims processing under the NSP (“Administrative Deposits”). Amounts deposited into escrow in Administrative Deposits during a reporting period are included in the payments shown for NSP Settlements during the period. At December 31, 2002, approximately $106 million of Administrative Deposits previously made by Owens Corning had not been finally distributed to claimants (“Undistributed Administrative Deposits”) and, accordingly, are reflected in Owens Corning’s consolidated balance sheet as restricted assets (under the caption “Restricted cash – asbestos and insurance related”) and have not been subtracted from Owens Corning’s reserve for asbestos personal injury claims (discussed below).
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
At this time, Owens Corning is unable to predict what the treatment of funds held in Undistributed Administrative Deposits will ultimately be under the terms of any plan or plans of reorganization. However, in 2001, the holder of approximately $49 million of Undistributed Administrative Deposits for Owens Corning (and approximately $28 million of similar Undistributed Administrative Deposits for Fibreboard) filed a motion with the Bankruptcy Court requesting an order authorizing distribution of the deposits it holds (“Subject Deposits”) to the escrow beneficiaries. As the result of hearings held on June 20 and July 22, 2002, the Bankruptcy Court has ruled that escrow beneficiaries that had received both written notice of approval for payment and an initial payment from the Subject Deposits prior to the Petition Date would be entitled to receive their remaining payments (plus post-judgment interest after June 20, 2002) from the principal of the Subject Deposits, with the balance of the Subject Deposits, if any, plus any other investment proceeds to be returned to Owens Corning (or Fibreboard, as appropriate) as contributor of the deposits. The creditors’ committee representing unsecured creditors and the Legal Representative for the class of future asbestos claimants have each filed a notice of appeal from the order.
Reserve
Owens Corning estimates a reserve in accordance with generally accepted accounting principles to reflect asbestos-related liabilities that have been asserted or are probable of assertion, in which liabilities are probable and reasonably estimable. This reserve was established initially through a charge to income in 1991, with additional charges to income of $1.1 billion in 1996, $1.4 billion in 1998, $1.0 billion in 2000 and $1.4 billion in the third quarter of 2002.
As of December 31, 2002, a reserve of approximately $3.6 billion in respect of Owens Corning’s asbestos-related liabilities was one of the items included in Owens Corning’s consolidated balance sheet under the category “Liabilities Subject to Compromise”. For periods prior to the Petition Date, these liabilities were reflected as current or other liabilities (depending on the period in which payment was expected) under the category “Reserve for asbestos litigation claims”.
As Owens Corning has discussed in previous public filings, any estimate of its liabilities for pending and expected future asbestos claims is subject to considerable uncertainty because such liabilities are influenced by numerous variables that are inherently difficult to predict. As discussed further below, such uncertainties significantly increased as a result of the Chapter 11 Cases. Prior to the Petition Date, such variables included, among others, the cost of resolving pending non-NSP claims; the disease mix and severity of disease of pending NSP claims; the number, severity of disease, and jurisdiction of claims filed in the future (especially the number of mesothelioma claims); how many future claimants were covered by an NSP Agreement; the extent, if any, to which individual claimants exercised a right to opt out of an NSP Agreement and/or engage counsel not participating in the NSP; the extent, if any, to which counsel not bound by an NSP Agreement undertook the representation of asbestos personal injury plaintiffs against Owens Corning; the extent, if any, to which Owens Corning exercised its right to terminate one or more of the NSP Agreements due to excessive opt-outs or for other reasons; and Owens Corning’s success in controlling the costs of resolving future non-NSP claims.
As one example of the difficulties inherent in estimating future asbestos claims, Owens Corning notes that the Manville Personal Injury Settlement Trust, a trust established to settle asbestos claims against Johns Manville Corporation, announced in June 2001 that it was reducing its initial settlement distributions by fifty percent on the basis of the continued record pace of asbestos claim filings and the prediction of its consultants that the trust might receive 1.5 to 2.5 million additional claims.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
The Chapter 11 Cases have significantly increased the inherent difficulties and uncertainties involved in estimating the number and cost of resolution of present and future asbestos-related claims against Owens Corning and will likely have the effect of increasing the number and ultimate cost of resolution of such claims substantially. In particular, the status of the NSP Agreements and the ultimate treatment of pending and future claims thereunder will depend on the outcome of negotiations among the various constituencies in the Chapter 11 Cases and determinations by the Bankruptcy Court as to the issues involved, none of which can be predicted at this time. The uncertainties associated with the status of the NSP Agreements and the treatment of claims thereunder include the following:
| – | It is possible that one or more constituencies in the Chapter 11 Cases may seek to set aside the NSP Agreements on various grounds. In any event, it is highly uncertain how any plan or plans of reorganization will ultimately treat the various types of NSP claims, including without limitation claims with no evidence of significant medical impairment, or whether such unimpaired claims will be treated as allowed claims thereunder. |
| – | The settlement values for specified categories of disease set forth in the NSP Agreements were established by arm’s-length negotiations with the participating law firms in circumstances very different from those prevailing in the Chapter 11 Cases. The settlement values available to individual claimants under the arrangements to be included in any plan or plans of reorganization may vary substantially from those contemplated by the NSP Agreements. Because Owens Corning’s estimate of liabilities in respect of non-NSP claims assumed payment of settlement values similar to those contained in the NSP Agreements, such estimate is subject to similar uncertainty. |
Additional uncertainties raised by the Chapter 11 Cases include the following:
| – | The impact, if any, the Administrative Consolidation will have on the timing, outcome or other aspects of the Chapter 11 Cases. |
| – | It is uncertain what claim submission process will be prescribed by the Bankruptcy Court for pre-petition asbestos claims against Owens Corning or Fibreboard and what effects such process may have, including on the number of such claims. Moreover, the Filing, including the significant publicity associated with the Chapter 11 Cases and notices required by the Bankruptcy Code that must be given to creditors and other parties in interest, has significantly increased the inherent difficulties and uncertainties involved in estimating the number and cost of resolution of not only pre-petition claims but also additional claims that may be asserted in the course of the Chapter 11 Cases. |
| – | Owens Corning anticipates that the number and estimated aggregate value of allowed future claims will ultimately be determined either as a result of negotiations involving the Legal Representative for the class of future asbestos claimants and the other interested constituencies or, if necessary, by the Bankruptcy Court. It is not possible to predict the outcome of such negotiations, or Bankruptcy Court determination, at this time. |
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
In connection with the negotiation of a plan or plans of reorganization, a number of interested constituencies, including the representatives of the pre-petition and future asbestos claimants and other pre-petition creditors, have developed or will develop analyses of liability for both pre-petition and future asbestos claims. Owens Corning and Fibreboard will also utilize their own analyses in the negotiation process. Such analyses by the Debtors and other interested constituencies will also be required in connection with the establishment, as part of the plan of reorganization, of a Section 524(g) trust for the benefit of asbestos claimants. Based on facts currently known to it, including positions that have been articulated by various interested constituencies, Owens Corning believes that the estimates included in most or all such analyses will vary substantially from the amounts of Owens Corning’s and Fibreboard’s respective asbestos reserves in prior periods, and will also vary substantially from one another, for a number of reasons.
First, such analyses will not involve the same type of estimation process required in connection with the preparation of financial statements under generally accepted accounting principles. In general, such accounting principles require accruals with respect to contingent liabilities (including asbestos liabilities) only to the extent that such liabilities are both probable and reasonably estimable. With respect to such liabilities that are probable as to which a reasonable estimate can be made only in terms of a range (with no point within the range determined to be more probable than any other point in such range), such accounting principles require only the accrual of the amount representing the low point in such range.
In contrast, analyses prepared by interested constituencies in asbestos-related bankruptcy cases customarily cover potential liabilities over a 50-year period (at the end of which it is anticipated that potential asbestos claimants would in any event have died as a result of other non-asbestos-related causes). Owens Corning believes that any such analyses, and any assumptions utilized in the preparation of such analyses, are inherently speculative for a number of reasons, including the variables and uncertainties described in this Note. Moreover, because such analyses are prepared solely for use in the negotiation of a plan of reorganization, they naturally reflect the respective interests of the different constituencies putting them forward. Certain constituencies, for example, may have an interest in presenting an analysis that estimates such liability at the highest level that can arguably be justified; others may have an interest in estimating such liability at the lowest possible level; while others may have an interest in estimating such liability at a point between the two extremes, in an effort to achieve consensus in the negotiation of the plan of reorganization. In addition, interested constituencies in Owens Corning’s bankruptcy proceedings may also take into account the implications of any such analyses prepared for use in Owens Corning’s bankruptcy proceedings on their position in one or more of the other asbestos-related bankruptcy cases pending in the District of Delaware or elsewhere.
None of the creditor constituencies has yet made available to Owens Corning any such analysis of liability for pre-petition or future asbestos claims. However, based upon its recent discussions and negotiations with representatives of the creditor constituencies, Owens Corning believes that some of these creditor analyses associated with the resolution of Owens Corning’s and Fibreboard’s asbestos-related liabilities in the context of the Chapter 11 proceedings will be well in excess of Owens Corning’s and Fibreboard’s current asbestos-related reserves. For example, the Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants have taken the position that the aggregate amount of pre-petition and future asbestos claims for Owens Corning and Fibreboard, on a combined net present value basis, is in excess of $16 billion. In addition, in October 2002, Owens Corning and Fibreboard completed their own analyses of liability for purposes of facilitating plan discussions, which, as to future asbestos claims, were prepared by an outside consultant experienced in estimating asbestos-related claims in asbestos-related bankruptcies. These analyses indicate net present values for pre-petition and future asbestos claims of Owens Corning and Fibreboard combined of approximately
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
$5.874 billion, if NSP settlement values are assumed, and $8.547 billion, if 5-year historical settlement values for Owens Corning and Fibreboard, respectively, are used. Based upon these analyses and the information derived from Owens Corning’s discussions and negotiations with the various creditor constituencies concerning their relative positions on the terms of an acceptable plan of reorganization, Owens Corning decided, in connection with its financial statements for the third quarter of 2002, to increase its and Fibreboard’s aggregate asbestos-related reserve to the lower of the two net present value numbers indicated by Owens Corning’s and Fibreboard’s analyses. Consequently, Owens Corning increased its reserves for the period ended September 30, 2002, through charges to income of $1.381 billion for Owens Corning asbestos-related liabilities and $975 million for Fibreboard asbestos-related liabilities, for an aggregate charge of $2.356 billion. In addition, since the reserve for Fibreboard asbestos-related liabilities exceeds the funds held in the Fibreboard Settlement Trust, the residual amount payable to charity under the terms of the Trust (see Note 20) was reduced to zero as of September 30, 2002.
As noted above and in Note 1, the Debtors, together with the Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants, filed on March 28, 2003 a proposed amended joint plan of reorganization for the Debtors, that provides two alternative frameworks for creditor recoveries. One such alternative, that would apply in the event that the Plan were approved by the major creditor constituencies, would assume an aggregate liability for current and future asbestos personal injury claims against Owens Corning and Fibreboard of $16 billion (on a net present value basis), composed of $10.7 billion for Owens Corning and $5.3 billion for Fibreboard. Under the other alternative, such liabilities would be determined by the Bankruptcy Court as part of the confirmation hearing on the Plan. Although Owens Corning believes that estimates in the amounts reflected in the first alternative are supportable, it is currently anticipated that the number and estimated aggregate value of current and future claims will ultimately be determined as a result of negotiations involving the Official Committee of Asbestos Claimants, the Legal Representative of the class of future asbestos claimants and other interested constituencies or, if necessary, by the Bankruptcy Court. It is not possible to predict the outcome of such negotiations at this time. In recent discussions, for example, the bank and bond creditor groups have continued to assert that such aggregate liability approximates the amount of Owens Corning’s existing reserves. Ultimately, Owens Corning’s (and Fibreboard’s) total liability for asbestos claims will be finally determined after a lengthy period of negotiations and, if necessary, by the Bankruptcy Court, taking into account numerous factors not present in the Company’s pre-petition environment. Such factors include the claims of competing creditor groups as to the appropriate treatment of their allowed claims in the plan or plans of reorganization, the size of the total asbestos liability, the total number of present asbestos claims allowed, the total amount of future asbestos claims allowed, and the impact of the Administrative Consolidation.
At December 31, 2002, the approximate balances of the components of Owens Corning’s asbestos-related reserve were:
| Balance | |
|---|---|
| (In billions of dollars) | |
| Unpaid Final Settlements (NSP and other) | $ 0.60 |
| Other Pending and Future Claims | 3.00 |
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
In connection with this asbestos reserve, Owens Corning notes that:
| – | The “Unpaid Final Settlements” component represented the remaining estimated cost for all asbestos personal injury claims pending against Owens Corning which were subject to final settlement agreements for which releases from claimants were obtained, and under which all other conditions to settlement had been satisfied, as of the Petition Date. |
| – | The “Other Pending and Future Claims” component represented the estimated cost of resolving, through the Chapter 11 process, (i) asbestos personal injury claims pending against Owens Corning which were subject to resolution under NSP Agreements but for which releases were not obtained from claimants prior to the Petition Date; (ii) all other asbestos personal injury claims pending against Owens Corning which were not subject to any settlement agreement; and (iii) future asbestos personal injury claims against Owens Corning made after the Petition Date. |
Owens Corning believes that its reserve for asbestos claims represents at least a minimum in a range of possible outcomes of the plan negotiation process as to the amount of its total liability for asbestos-related claims against it as determined through the Chapter 11 process. Given the nature of the Chapter 11 proceedings, described above, Owens Corning cautions that the total asbestos-related liability ultimately established in the Chapter 11 proceedings may be either higher or lower than the Company’s reserve. Owens Corning notes that it expects an ongoing high level of negotiations and information exchanges with the various creditor constituencies and other parties for the duration of the Chapter 11 proceedings. Owens Corning will continue to review its asbestos reserve on a periodic basis and make such adjustments as may be appropriate. However, it is possible that Owens Corning will not be in a position to conclude that a further revision to the reserve is appropriate until additional significant developments occur during the course of the Chapter 11 Cases, including resolution by negotiation or the Bankruptcy Court of its total liability for asbestos claims. Any such revision could, however, be material to the Company’s consolidated financial position and results of operations in any given period.
ITEM B. – FIBREBOARD (EXCLUDING OWENS CORNING)
Prior to 1972, Fibreboard manufactured asbestos containing products, including insulation products. Fibreboard has since been named as defendant in many thousands of personal injury claims for injuries allegedly caused by asbestos exposure. Fibreboard received approximately 22,000 asbestos personal injury claims during 2000. Prior to the Petition Date, the vast majority of Fibreboard asbestos personal injury claims were in the process of being resolved through the NSP, as described below. As a result of the Filing, all pre-petition asbestos claims and pending litigation against the Debtors were automatically stayed (see Note 1). Owens Corning expects that all pending and future asbestos claims against Owens Corning and Fibreboard will be resolved pursuant to a plan or plans of reorganization. Owens Corning is unable to determine at this time whether asbestos-related claims asserted against Fibreboard will be treated in the same manner as those asserted against Owens Corning in any such plan or plans ultimately confirmed.
As discussed in Item A above, the Debtors (including Fibreboard), together with the Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants, filed on March 28, 2003 a proposed amended joint plan of reorganization for the Debtors (including Fibreboard) that provides two alternative frameworks for creditor recoveries. One such alternative, that would apply in the event that the Plan were approved by the major creditor constituencies, would assume an aggregate liability for current and future asbestos personal injury claims against Owens Corning and Fibreboard of $16 billion (on a net present value basis), composed of $10.7 billion for Owens Corning and $5.3 billion for Fibreboard. Under the other alternative, such liabilities would be determined by the Bankruptcy Court as part of the confirmation hearing on the Plan. Although Owens Corning believes that estimates in the
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19. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
amounts reflected in the first alternative are supportable, it is currently anticipated that the number and estimated aggregate value of current and future claims will ultimately be determined as a result of negotiations involving the Official Committee of Asbestos Claimants, the Legal Representative of the class of future asbestos claimants and other interested constituencies or, if necessary, by the Bankruptcy Court. It is not possible to predict the outcome of such negotiations at this time. In recent discussions, for example, the bank and bond creditor groups have continued to assert that such aggregate liability approximates the amount of Owens Corning’s existing reserves. Ultimately, Owens Corning’s (and Fibreboard’s) total liability for asbestos claims will be finally determined after a lengthy period of negotiations and, if necessary, by the Bankruptcy Court, taking into account numerous factors not present in the Company’s pre-petition environment. Such factors include the claims of competing creditor groups as to the appropriate treatment of their allowed claims in the plan or plans of reorganization, the size of the total asbestos liability, the total number of present asbestos claims allowed, the total amount of future asbestos claims allowed, and the impact of the Administrative Consolidation.
National Settlement Program Claims
Fibreboard is a participant in the NSP and is a party to the NSP Agreements discussed in Item A. The NSP Agreements became effective as to Fibreboard in the fourth quarter of 1999, when the Insurance Settlement (discussed below) became effective. The NSP Agreements settled asbestos personal injury claims that had been filed against Fibreboard by participating plaintiffs’ law firms and claims that could have been filed against Fibreboard by such firms following the lifting, in the third quarter of 1999, of an injunction which had barred the filing of asbestos personal injury claims against Fibreboard.
As of the Petition Date, the NSP covered approximately 206,000 Initial Claims against Fibreboard, approximately 118,000 of which had satisfied all conditions to final settlement, including receipt of executed releases, or other resolution as Final NSP Settlements at an average cost per claim of approximately $7,400. As of the Petition Date, approximately 62,000 of such Final NSP Settlements had been paid in full or otherwise resolved and approximately 56,000 were unpaid in whole or in part. As of such date, the remaining balance payable under NSP Agreements in connection with these unpaid Final NSP Settlements was approximately $330 million. The NSP Agreements also provided for the resolution of Future Claims against Fibreboard through the administrative processing arrangement described in Item A. Through the Petition Date, Fibreboard had received approximately 6,000 Future Claims under the NSP.
At this time, Owens Corning is unable to predict the manner in which the NSP Agreements and the resolution of Fibreboard claims thereunder will ultimately be treated under the terms of any plan or plans of reorganization.
Non-NSP Claims
As of the Petition Date, approximately 9,000 asbestos personal injury claims were pending against Fibreboard outside the NSP. This compares to approximately 1,000 such claims pending on December 31, 1999. Fibreboard resolved (by settlement or otherwise) approximately 2,000 asbestos personal injury claims outside the NSP during 2000 prior to the Petition Date at an average cost of resolution of approximately $45,000 per claim. Generally, these claims were settled as they were scheduled for trial, and they typically involved more serious injuries and diseases. Accordingly, Owens Corning does not believe that such average costs of resolution are representative of the value of the non-NSP claims then pending against Fibreboard.
At this time, Owens Corning is unable to predict the manner in which Fibreboard non-NSP claims will ultimately be treated under the terms of any plan or plans of reorganization.
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19. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
Insurance Settlement
In 1993, Fibreboard and two of its insurers, Continental Casualty Company (“Continental”) and Pacific Indemnity Company (“Pacific”), entered into the Insurance Settlement. The Insurance Settlement became effective in the fourth quarter of 1999, is final and is not subject to appeal.
Since 1993, Continental and Pacific paid, either directly or through an escrow account funded by them, for substantially all settlements of asbestos claims reached prior to the initiation of the NSP. Under the Insurance Settlement, Continental and Pacific provided $1.873 billion during the fourth quarter of 1999 to fund costs of resolving pending and future Fibreboard asbestos-related liabilities, whether under the NSP, in the tort system, or otherwise.
As of December 31, 2002, the Insurance Settlement funds were held in and invested by the Fibreboard Settlement Trust. As of that date, $1.238 billion was held in the Fibreboard Settlement Trust and $127 million was held in Undistributed Administrative Deposits in respect of Fibreboard claims. On an ongoing basis, the funds held in the Fibreboard Settlement Trust will be subject to investment earnings/losses and will be reduced if and as applied to satisfy asbestos-related liabilities. Under the terms of the Fibreboard Settlement Trust, any of such assets that ultimately are not used to fund Fibreboard’s asbestos-related liabilities must be distributed to charity. However, since the reserve for Fibreboard asbestos-related liabilities exceeds the funds held in the Fibreboard Settlement Trust, the residual amount payable to charity under the terms of the Trust (see Note 20) was reduced to zero as of September 30, 2002.
Funds held in the Fibreboard Settlement Trust and Fibreboard’s Undistributed Administrative Deposits are reflected on Owens Corning’s consolidated balance sheet as restricted assets. At December 31, 2002, these assets were reflected as non-current assets, under the category “Restricted cash, securities and other – Fibreboard”. See Note 20 for additional information concerning the Fibreboard Settlement Trust.
At this time, Owens Corning is unable to predict what the treatment of funds held in the Fibreboard Settlement Trust and in Undistributed Administrative Deposits in respect of Fibreboard claims (see Item A) will ultimately be under the terms of any plan or plans of reorganization.
Asbestos-Related Payments
As a result of the Filing, Fibreboard has not made any asbestos-related payments since the Petition Date. During 2000 (prior to the Petition Date), gross payments for asbestos-related claims against Fibreboard, all of which were paid/reimbursed by the Fibreboard Settlement Trust, fell within four major categories, as follows:
| 2000 (through October 4, 2000) | |||||
|---|---|---|---|---|---|
| (In millions of dollars) | |||||
| Pre-NSP Settlements | $ | 29 | |||
| NSP Settlements | 705 | ||||
| Non-NSP Settlements | 41 | ||||
| Defense, Claims Processing and Administrative Expenses | 45 | ||||
| $ | 820 | ||||
The payments for NSP Settlements include Administrative Deposits during the reporting period in respect of Fibreboard claims.
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19. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
Reserve
Owens Corning estimates a reserve for Fibreboard in accordance with generally accepted accounting principles to reflect asbestos-related liabilities. As described in Item A above, this reserve was increased in the third quarter of 2002 through a charge to income of $975 million. As of December 31, 2002, a reserve of approximately $2.3 billion in respect of these asbestos-related liabilities was one of the items included in Owens Corning’s consolidated balance sheet under the category “Liabilities Subject to Compromise”. For periods prior to the Petition Date, they were reflected as current or other liabilities (depending on the period in which payment was expected) under the category “Asbestos-related liabilities – Fibreboard”.
As noted in Item A above as to Owens Corning, the estimate of Fibreboard’s liabilities for pending and expected future asbestos claims is subject to considerable uncertainty because such liabilities are influenced by numerous variables that are inherently difficult to predict, and such uncertainties significantly increased as a result of the Filing, including those set forth in Item A above. In addition, as noted above, the Debtors filed on March 28, 2003 a proposed amended joint plan of reorganization for the Debtors (including Fibreboard) that provided for two alternative frameworks for creditor recoveries. One such alternative, in the context of a consensual framework, specified an aggregate liability for current and future asbestos personal injury claims against Owens Corning and Fibreboard of $16 billion (on a net present value basis) composed of $10.7 billion for Owens Corning and $5.3 billion for Fibreboard. Under the other alternative, such liabilities would be determined by the Bankruptcy Court as part of the confirmation hearing on the proposed plan. Although Owens Corning believes that estimates in the amounts reflected in the first alternative are supportable, it is currently anticipated that the number and estimated aggregate value of current and future claims will ultimately be determined as a result of negotiations involving the Official Committee of Asbestos Claimants, the Legal Representative of the class of future asbestos claimants and other interested constituencies or, if necessary, by the Bankruptcy Court. It is not possible to predict the outcome of such negotiations at this time. In recent discussions, for example, the bank and bond creditor groups have continued to assert that such aggregate liability approximates the amount of Owens Corning’s existing reserves. Ultimately, Fibreboard’s (and Owens Corning’s) total liability for asbestos claims will be finally determined after a lengthy period of negotiations and, if necessary, by the Bankruptcy Court, taking into account numerous factors not present in the Company’s pre-petition environment. In light of the above, at this time Owens Corning is unable to predict what the treatment of funds held in the Fibreboard Settlement Trust and in Undistributed Administrative Deposits in respect of Fibreboard claims will be under the terms of any plan or plans of reorganization ultimately confirmed.
At December 31, 2002, the approximate balances of the components of the Fibreboard asbestos-related reserve were:
| Balance | |||||
|---|---|---|---|---|---|
| (In millions of dollars) | |||||
| Unpaid Final Settlements (NSP and other) | $ | 0.40 | |||
| Other Pending and Future Claims | 1.90 | ||||
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19. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
In connection with this asbestos reserve, Owens Corning notes that:
| – | The “Unpaid Final Settlements” component represented the remaining estimated cost for all asbestos personal injury claims pending against Fibreboard which were subject to final settlement agreements for which releases from claimants were obtained, and under which all other conditions to settlement had been satisfied, as of the Petition Date. |
| – | The “Other Pending and Future Claims” component represented the estimated cost of resolving, through the Chapter 11 process, (i) asbestos personal injury claims pending against Fibreboard which were subject to resolution under NSP Agreements but for which releases were not obtained from claimants prior to the Petition Date; (ii) all other asbestos personal injury claims pending against Fibreboard which were not subject to any settlement agreement; and (iii) future asbestos personal injury claims against Fibreboard made after the Petition Date. |
Owens Corning believes that Fibreboard’s reserve for asbestos claims represents at least a minimum in a range of possible outcomes of the plan negotiation process as to the amount of Fibreboard’s total liability for asbestos-related claims against it as determined through the Chapter 11 process. Given the nature of the Chapter 11 proceedings, described above, Owens Corning cautions that the total asbestos-related liability ultimately established in the Chapter 11 proceedings may be either higher or lower than Fibreboard’s reserve. Owens Corning notes that it expects an ongoing high level of negotiations and information exchanges with the various creditor constituencies and other parties for the duration of the Chapter 11 proceedings. Owens Corning will continue to review Fibreboard’s asbestos reserve on a periodic basis and make such adjustments as may be appropriate. However, it is possible that Owens Corning will not be in a position to conclude that a further revision to the reserve is appropriate until significant additional developments occur during the course of the Chapter 11 Cases, including resolution by negotiation or the Bankruptcy Court of Fibreboard’s total liability for asbestos claims. Any such revision could, however, be material to the Company’s consolidated financial position and results of operations in any given period.
ITEM C. – OTHER ASBESTOS-RELATED MATTERS
Tax Legislation
As previously reported, on April 4, 2001, the United States House of Representatives introduced proposed legislation (HR 1412, also known as the Asbestos Tax Fairness Act) to exempt income earned by qualifying asbestos-related settlement funds, including qualifying trusts established under Section 524(g) of the Bankruptcy Code, from federal income tax. The exemption from income tax would have benefited the Fibreboard Settlement Trust (described in Note 20) by having the effect of enlarging the corpus of the trust through tax-free income accumulation. In addition, the legislation would have allowed asbestos defendants to carry-back net operating losses (“NOLs”) created by asbestos payments to the years in which the products containing asbestos were produced or distributed (and to each subsequent year) in order to obtain a refund of federal income taxes paid in those periods. In the case of Owens Corning, this would have entitled the Company to carry-back its NOLs to the early 1950s. On June 14, 2001, a companion bill identical to HR 1412 was introduced in the United States Senate (S 1048).
Despite strong bipartisan support for both bills, Congress did not act on them before it adjourned in late 2002, at which time both bills lapsed. Consequently, similar legislation will be considered in the current Congress only if newly introduced.
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19. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
Other Asbestos-Related Litigation
As previously reported, the Company believes that it has spent significant amounts to resolve claims of asbestos claimants whose injuries were caused or exacerbated by cigarette smoking. Owens Corning and Fibreboard are pursuing litigation against tobacco companies (discussed below) to obtain payment of monetary damages (including punitive damages) for payments made by Owens Corning and Fibreboard to asbestos claimants who developed smoking-related diseases. There can be no assurance that any such litigation will go to trial or be successful.
In October 1998, the Circuit Court for Jefferson County, Mississippi granted leave to file an amended complaint in an existing action to add claims by Owens Corning against seven tobacco companies and several other tobacco industry defendants. On June 17, 2001, the Jefferson court entered an order dismissing Owens Corning’s case in response to the defendants’ motion for summary judgment on the basis that Owens Corning’s injuries were indirect and thus too remote under Mississippi law to allow recovery. The Company has appealed such dismissal to the Supreme Court of Mississippi.
In addition to the Mississippi lawsuit, a lawsuit brought in December 1997 by Owens Corning and Fibreboard is pending in the Superior Court for Alameda County, California against the same tobacco companies. In August 2001, the defendants filed motions to dismiss Owens Corning’s and Fibreboard’s claims on the basis of the decision in the Mississippi lawsuit as well as California law. As the result of a hearing on these motions on November 20, 2001, the California court denied the motion to dismiss Fibreboard’s claims on the basis of the decision in the Mississippi lawsuit and otherwise stayed the proceeding pending the outcome of the Mississippi suit.
Insurance
As of December 31, 2002, Owens Corning’s financial statements reflect $4 million in unexhausted insurance coverage (net of deductibles and self-insured retentions) under its liability insurance policies applicable to asbestos personal injury claims. This amount represented unconfirmed potential non-products coverage with excess level insurance carriers, as to which Owens Corning had estimated its probable recoveries.
Owens Corning also has other unconfirmed potential non-products coverage with excess level carriers. Owens Corning is actively pursuing non-products insurance recoveries under these policies. In October, 2001, Owens Corning filed a lawsuit in Lucas County, Ohio, against ten excess level carriers for declaratory relief and damages for failure to make payments under its non-products insurance coverage. The amount and timing of recoveries from excess level policies will depend on the outcome of litigation or other proceedings, possible settlements of those proceedings, or other negotiations.
As previously reported, late in the second quarter of 2001, Owens Corning entered into a settlement agreement with one of its excess insurance carriers, resolving a dispute concerning coverage from such insurer for non-products asbestos-related personal injury claims. As a result, during the third quarter of 2001, the carrier funded $55 million into an escrow account to be released in conjunction with implementation of an approved plan of reorganization. The escrowed funds plus earnings are reflected on Owens Corning’s consolidated balance sheet as restricted assets, under the category “Restricted cash – asbestos and insurance related”.
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19. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
Other Matters
SECURITIES LITIGATION
On or about April 30, 2001, certain of the Company’s current and former directors and officers, as well as certain underwriters, were named as defendants in a lawsuit captioned John Hancock Life Insurance Company, et al. v. Goldman, Sachs & Co., et al. in the United States District Court for the District of Massachusetts. An amended complaint was filed by the plaintiffs on or about July 5, 2001. Owens Corning is not named in the lawsuit. The suit purports to be a securities class action on behalf of purchasers of certain unsecured debt securities of Owens Corning in offerings occurring on or about April 30, 1998 and July 23, 1998. The complaint alleges that the registration statements pursuant to which the offerings were made contained untrue and misleading statements of material fact and omitted to state material facts which were required to be stated therein and which were necessary to make the statements therein not misleading, in violation of sections 11, 12(a)(2) and 15 of the Securities Act of 1933. The amended complaint seeks an unspecified amount of damages or, where appropriate, rescission of the plaintiffs’ purchases. The defendants filed a motion to dismiss the action on November 20, 2001. A hearing was held on this motion on April 11, 2002, and the Court issued a decision denying the motion on August 26, 2002. The Company believes that the claim is without merit. The named defendants in this proceeding have each filed contingent indemnification claims with respect to this litigation against Owens Corning pursuant to the General Bar Date process described below.
On or about January 27, 2003, certain of the Company’s current and former directors and officers were named as defendants in a lawsuit captioned Robert Greenburg, et al. v. Glen Hiner, et al. in the United States District Court for the Northern District of Ohio, Western Division. Owens Corning is not named in the lawsuit. The suit purports to be a class action for securities fraud under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on behalf of a class comprised of persons who purchased stock of Owens Corning during the period from September 20, 1999, through October 5, 2000. The complaint seeks an unspecified amount of damages and/or, where appropriate, rescission. Subsequent to January 27, 2003, three substantially similar actions, with named plaintiffs Nicholas Radosevich, Howard E. Leppla, and William Benanchietti, respectively, were filed against the same defendants in the same court. The Company believes that these claims are without merit. The named defendants in these proceedings have each filed contingent indemnification claims with respect to this litigation against Owens Corning pursuant to the General Bar Date process described below.
GENERAL BAR DATE CLAIMS
In connection with the Chapter 11 Cases, the Bankruptcy Court set April 15, 2002 as the last date by which holders of certain pre-petition claims against the Debtors must file their claims (the “General Bar Date”). The General Bar Date does not apply to asbestos-related personal injury claims and asbestos-related wrongful death claims (other than claims for contribution, indemnity, reimbursement, or subrogation). Approximately 24,000 proofs of claim (including the claims described below under the headings “PBGC Claim” and “Tax Claim”), totaling approximately $16.1 billion, alleging a right to payment from a Debtor were filed with the Bankruptcy Court in response to the General Bar Date. For further information concerning these claims, please see Note 1, under the heading “General Bar Date”.
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19. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
PBGC CLAIM
In connection with the General Bar Date described above, the Pension Benefit Guaranty Corporation (“PBGC”), an agency of the United States, has filed a claim, in the amount of approximately $458 million, in connection with statutory liability for unfunded benefit liabilities of the Owens Corning Merged Retirement Plan (the “Pension Plan”). The claim states that it is contingent upon termination of the Pension Plan. Since Owens Corning does not anticipate that the Debtors’ plan or plans of reorganization will provide for termination of the Pension Plan, it believes that this claim ultimately will become moot.
TAX CLAIM
Owens Corning’s federal income tax returns typically are audited by the Internal Revenue Service (“IRS”) in multi-year audit cycles. The audit for the years 1992-1995 was completed in late 2000. Due to the Filing, the IRS also accelerated and completed the audit for the years ended 1996-1999 by March of 2001. As the result of these audits and unresolved issues from prior audit cycles, the IRS is asserting claims for approximately $390 million in income taxes plus interest of approximately $175 million.
Pending audit of Owens Corning’s federal income tax return for the year 2000, the IRS has also filed a protective claim in the amount of approximately $50 million, covering a tax refund received by Owens Corning for such year, plus interest.
As described in Note 1, under the heading “General Bar Date”, the United States Department of Treasury has filed proofs of claim, totaling approximately $530 million, in connection with these tax claims.
In accordance with generally accepted accounting principles, Owens Corning maintains tax reserves to cover audit issues. While Owens Corning believes that the existing reserves are appropriate in light of the audit issues involved, its defenses, its prior experience in resolving audit issues, and its ability to realize certain challenged deductions in subsequent tax returns if the IRS were successful, there can be no assurance that such reserves will be sufficient. Owens Corning will continue to review its tax reserves on a periodic basis and make such adjustments as may be appropriate. Any such revision could be material to the Company’s consolidated financial position and results of operations in any given period.
AVOIDANCE ACTIONS
Under the Bankruptcy Code, October 4, 2002 was the deadline by which the Debtors, on behalf of the bankruptcy estates, could bring adversary actions seeking the return of potentially avoidable transfers made by the Debtors to certain parties within a prescribed period prior to the commencement of the Chapter 11 proceedings. As part of their review of potentially avoidable transactions, the Debtors (1) negotiated tolling agreements with some of the recipients of the preferential transfers in order to toll the time period in which to bring an avoidance action; (2) determined not to prosecute certain of those potential avoidance actions that were not the subject of tolling agreements; and (3) instituted, prior to the October 4, 2002 deadline, a total of 19 adversarial actions, including 3 preference actions, 1 turnover action, and 15 avoidance actions, as described further below. All such actions were commenced in the USBC.
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19. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)
Among the parties who were identified by the Debtors as having received potentially avoidable transfers were (a) 12 present and former officers that received certain pre-petition incentive payments exceeding a threshold in the aggregate per officer; (b) one director that received a pre-petition pension payment; and (c) a joint venture affiliate of the Company that received approximately $3.8 million in the one-year period prior to the commencement of the Chapter 11 proceedings.
The Debtors have executed tolling agreements with all 12 present and former officers, the director and the affiliate of the Company, as well as with certain other parties identified as having received potentially avoidable transfers.
The additional actions were commenced against various other defendants seeking, among other things, (a) avoidance of certain guarantees and certain preferential payments made in connection with Owens Corning’s Pre-Petition Credit Facility; (b) the return of up to approximately $515 million paid by the Company to shareholders of Fibreboard in connection with the Company’s purchase of Fibreboard in 1997 (the “FBD Shareholder Action”); (c) the return of up to approximately $61.8 million paid by the Company to shareholders in dividends in the period 1996 through 2000 (the “Dividend Action”); and (d) the return of approximately $133 million paid by the Company to Bank of America Corp. in connection with Owens Corning’s purchase of Fibreboard in 1997. Both the FBD Shareholder Action and the Dividend Action are defendant class actions. Certain present or former officers or directors of the Company may be members of either or both defendant classes.
Separately, and at the request of the Debtors’ Official Creditors’ Committee and the direction of the Bankruptcy Court, the Debtors either obtained tolling agreements from, or filed actions against, approximately 115 law firms that entered into NSP or non-NSP agreements with the Debtors on behalf of claimants asserting asbestos-related personal injury or wrongful death claims. Lawsuits were brought against the 11 law firms that did not sign tolling agreements, seeking two forms of relief: (a) first, a declaratory judgment as to whether payments made, or obligations incurred, under NSP and non-NSP agreements were in exchange for reasonably equivalent value; and (b) second, in the event reasonably equivalent value was not received, the recovery or avoidance of payments made and obligations incurred under the relevant NSP and non-NSP agreements pursuant to applicable state and federal fraudulent conveyance law. The Official Creditors’ Committee was named as a defendant in such lawsuits, solely with respect to the declaratory relief sought.
By motion filed on or about October 16, 2002, the Debtors sought an order of the Bankruptcy Court staying all of the foregoing litigation pending its disposition in a plan of reorganization. Pursuant to order of the Bankruptcy Court dated January 17, 2003, all of the foregoing litigation, other than the action relating to the avoidance of certain guarantees and certain preferential payments made in connection with Owens Corning’s Pre-Petition Credit Facility, has been stayed until April 28, 2003, at which time the court will consider whether such stay should be further extended. The Debtors’ action relating to the avoidance of certain guarantees and certain preferential payments made in connection with Owens Corning’s Pre-Petition Credit Facility is scheduled for trial before the District Court commencing in April 2003.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
20. FIBREBOARD SETTLEMENT TRUST
Under the Insurance Settlement described in Note 19, two of Fibreboard’s insurers provided $1.873 billion during the fourth quarter of 1999 to fund the costs of resolving pending and future Fibreboard asbestos-related liabilities. As of December 31, 2002, the Insurance Settlement funds were held in and invested by the Fibreboard Settlement Trust (the “Trust”). On an ongoing basis, the funds held in the Trust will be subject to investment earnings/losses and will be reduced if and as applied to satisfy Fibreboard asbestos-related liabilities. Under the terms of the Trust, any Trust assets that ultimately are not used to fund Fibreboard’s asbestos-related liabilities must be distributed to charity. Based on currently available information, Owens Corning does not believe that any such assets will remain for distribution at the conclusion of the Chapter 11 cases.
The Trust is a qualified settlement fund for federal income tax purposes, and is taxed separately from Owens Corning on its net taxable income, after deduction for related administrative expenses.
At this time, Owens Corning is unable to predict what the treatment of the Fibreboard Settlement Trust will ultimately be under the terms of any plan or plans of reorganization.
General Accounting Treatment
The assets of the Trust are comprised of cash and marketable securities (collectively, the “Trust Assets”) and, with Fibreboard’s Undistributed Administrative Deposits, are reflected on Owens Corning’s consolidated balance sheet as restricted assets. At December 31, 2002, these assets were reflected as non-current assets, under the category “Restricted cash, securities and other – Fibreboard”. Owens Corning estimates a reserve for Fibreboard in accordance with generally accepted accounting principles to reflect asbestos-related liabilities (see Note 19, Part B). As of December 31, 2002, these liabilities were one of the items included in Owens Corning’s consolidated balance sheet under the category “Liabilities Subject to Compromise”. For periods prior to the Petition Date, they were reflected as current or other liabilities (depending on the period in which payment was expected) under the category “Asbestos-related liabilities – Fibreboard”. At December 31, 2002, the Consolidated Financial Statements reflect Fibreboard’s reserve for asbestos litigation claims at $2.310 billion.
For accounting purposes, the Trust Assets are classified from time to time as “trading securities”, “available for sale”, or “held to maturity” and are reported in the Consolidated Financial Statements in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Accordingly, marketable securities classified as trading securities and available for sale are recorded at fair market value and marketable securities designated as held to maturity are recorded at amortized cost. At December 31, 2002 and 2001, substantially all marketable securities were classified as “trading securities”.
Through the third quarter of 2002, any unrealized increase/decrease in fair market value was reflected as a change in the carrying amount of the asset on the Consolidated Balance Sheet as well as other income/expense on the Consolidated Statement of Income (Loss). Subsequent to the third quarter of 2002, any unrealized increase/decrease in fair market value is reflected as an increase/decrease in the carrying amount of such assets on the Consolidated Balance Sheet as well as a decrease/increase in Chapter 11 related reorganization items on the Consolidated Statement of Income (Loss).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
20. FIBREBOARD SETTLEMENT TRUST (continued)
Through the third quarter of 2002, any earnings and realized gains/losses on the Trust Assets were reflected as an increase/decrease in the carrying amount of such assets on the Consolidated Balance Sheet as well as other income/expense on the Consolidated Statement of Income (Loss). Subsequent to the third quarter of 2002, any earnings and realized gains/losses are reflected as an increase/decrease in the carrying amount of such assets on the Consolidated Balance Sheet as well as a decrease/increase in Chapter 11 related reorganization items on the Consolidated Statement of Income (Loss). Cost for purposes of computing realized gains/losses is determined using the specific identification method.
Through the third quarter of 2002, the residual obligation to charity, included in liabilities subject to compromise on the Consolidated Balance Sheet, increased/decreased, with the related decrease/increase to other expense/income on the Consolidated Statement of Income (Loss). As of September 30, 2002, the residual obligation to charity was reclassified to Fibreboard’s reserve for asbestos litigation claims as the liability exceeded the Trust Assets, thus no amounts were recorded to the residual obligation to charity subsequent to that date.
Results for the Periods Ending December 31, 2002 and 2001
During 2002 and 2001, Trust Assets generated interest/dividend earnings of approximately $54 million and approximately $55 million, respectively, which have been recorded as an increase in the carrying amount of the assets on the Consolidated Balance Sheet. The $55 million generated during 2001 was reflected as other income on the Consolidated Statement of Income (Loss). Of the $54 million generated during 2002, $40 million was generated during the first three quarters of 2002, which was reflected as other income on the Consolidated Statement of Income (Loss) and $14 million was generated during the fourth quarter of 2002, which was recorded as Chapter 11 related reorganization items on the Consolidated Statement of Income (Loss). Through the third quarter of 2002 and the year ended 2001, this income was offset by an equal charge to other expense, which represented an increase in the residual obligation to charity.
At December 31, 2002 and 2001, the fair market value adjustment for those securities designated as trading securities resulted in an unrealized gain of approximately $20 million and approximately $1 million, respectively, which have been recorded as an increase in the carrying amount of the assets on the Consolidated Balance Sheet. The $1 million generated during 2001 was reflected as other income on the Statement of Income (Loss). Of the $20 million generated during 2002, $21 million was generated during the first three quarters of 2002, which was reflected as other income on the Consolidated Statement of Income (Loss) and a loss of $1 million was generated during the fourth quarter of 2002, which was recorded as Chapter 11 related reorganization items on the Consolidated Statement of Income (Loss). Through the third quarter of 2002 and the year ended 2001, the income was offset by an equal charge to other expense, which represented an increase in the residual obligation to charity.
As a result of the Filing, no payments for asbestos litigation claims from the Trust have been made subsequent to that date. However, approximately $2 million and $12 million was paid during 2002 and 2001 for taxes related to earnings of the Trust. These payments were funded by existing cash in the Trust or proceeds from the sale of securities. The sale of securities in 2002 and 2001 resulted in a realized loss of $4 million and a realized gain of $4 million, respectively. Realized gains or losses from the sale of securities are reflected on the Company’s financial statements in the same manner as actual returns on Trust Assets, described above.
At December 31, 2002, the fair value of Trust Assets and Administrative Deposits was $1,365 million, which was comprised of Trust Assets of $1,238 million of marketable securities and Administrative Deposits of $127 million.
– 127 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
20. FIBREBOARD SETTLEMENT TRUST (continued)
The table below summarizes Trust and Administrative Deposits activity for the year ended December 31, 2002:
| Interest | Unrealized | Realized | |||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | and | Gain/ | Gain/ | Balance | |||||||||||||||||||||||||||||||||||||||||||
| 12/31/01 | Dividends | (Loss) | (Loss) | Provision | Other | Payments | 12/31/02 | ||||||||||||||||||||||||||||||||||||||||
| (In millions of dollars) | |||||||||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash | $ | (18 | ) | $ | - | $ | - | $ | - | $ | - | $ | 18 | $ | - | $ | - | ||||||||||||||||||||||||||||||
| Marketable securities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Trading Securities | 1,169 | 54 | 20 | (4 | ) | - | 1 | (2 | ) | 1,238 | |||||||||||||||||||||||||||||||||||||
| Total Trust assets | 1,151 | 54 | 20 | (4 | ) | - | 19 | (2 | ) | 1,238 | |||||||||||||||||||||||||||||||||||||
| Administrative Deposits | 133 | - | - | - | - | (6 | ) | - | 127 | ||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 1,284 | $ | 54 | $ | 20 | $ | (4 | ) | $ | - | $ | 13 | $ | (2 | ) | $ | 1,365 | |||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
| Accounts payable | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 18 | $ | - | $ | 18 | |||||||||||||||||||||||||||||||
| Asbestos litigation claims | 1,213 | - | - | - | 1,103 | (6 | ) | - | 2,310 | ||||||||||||||||||||||||||||||||||||||
| Residual obligation to charity | 71 | 40 | 21 | (2 | ) | (128 | ) | - | (2 | ) | - | ||||||||||||||||||||||||||||||||||||
| Total Trust liabilities | 1,284 | 40 | 21 | (2 | ) | 975 | 12 | (2 | ) | 2,328 | |||||||||||||||||||||||||||||||||||||
| Liabilities in excess of Trust Assets | - | 14 | (1 | ) | (2 | ) | (975 | ) | 1 | - | (963 | ) | |||||||||||||||||||||||||||||||||||
| Total liabilities less excess of Trust Assets | $ | 1,284 | $ | 54 | $ | 20 | $ | (4 | ) | $ | - | $ | 13 | $ | (2 | ) | $ | 1,365 | |||||||||||||||||||||||||||||
– 128 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
20. FIBREBOARD SETTLEMENT TRUST (continued)
The table below summarizes Trust and Administrative Deposits activity for the year ended December 31, 2001:
| Net | |||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Interest | Purchases | Realized | |||||||||||||||||||||||||||||||||||||||
| Balance | and | of | Gain/ | Balance | |||||||||||||||||||||||||||||||||||||
| 12/31/00 | Dividends | Securities | (Loss) | Other | Payments | 12/31/01 | |||||||||||||||||||||||||||||||||||
| (In millions of dollars) | |||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||
| Cash | $ | 12 | $ | - | $ | (30 | ) | $ | - | $ | - | $ | - | $ | (18 | ) | |||||||||||||||||||||||||
| Marketable Securities: | |||||||||||||||||||||||||||||||||||||||||
| Trading Securities | 1,092 | 55 | 30 | 4 | - | (12 | ) | 1,169 | |||||||||||||||||||||||||||||||||
| Total Trust Assets | 1,104 | 55 | - | 4 | - | (12 | ) | 1,151 | |||||||||||||||||||||||||||||||||
| Administrative Deposits | 170 | - | - | - | (37 | ) | - | 133 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 1,274 | $ | 55 | $ | - | $ | 4 | $ | (37 | ) | $ | (12 | ) | $ | 1,284 | |||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||
| Asbestos Litigation Claims | $ | 1,250 | $ | - | $ | - | $ | - | $ | (37 | ) | $ | - | $ | 1,213 | ||||||||||||||||||||||||||
| Residual obligation to charity | 24 | 55 | - | 4 | - | (12 | ) | 71 | |||||||||||||||||||||||||||||||||
| Total liabilities | $ | 1,274 | $ | 55 | $ | - | $ | 4 | $ | (37 | ) | $ | (12 | ) | $ | 1,284 | |||||||||||||||||||||||||
– 129 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. QUARTERLY FINANCIAL INFORMATION (unaudited)
| Quarter | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First | Second | Third | Fourth | ||||||||||||||||||||
| (In millions of dollars, except share data) | |||||||||||||||||||||||
| 2002 | |||||||||||||||||||||||
| Net sales | $ | 1,107 | $ | 1,285 | $ | 1,306 | $ | 1,174 | |||||||||||||||
| Cost of sales | 935 | 1,043 | 1,097 | 1,055 | |||||||||||||||||||
| Gross margin | $ | 172 | $ | 242 | $ | 209 | $ | 119 | |||||||||||||||
| Provision for asbestos litigation claims (Note 19) | $ | - | $ | (5 | ) | $ | 2,356 | $ | - | ||||||||||||||
| Income (loss) from operations | $ | 3 | $ | 70 | $ | (2,342 | ) | $ | (44 | ) | |||||||||||||
| Tax Provision (credit) | $ | - | $ | 30 | $ | 10 | $ | (9 | ) | ||||||||||||||
| Net income (loss) before cumulative effect | |||||||||||||||||||||||
| of change in accounting principle | $ | (6 | ) | $ | 36 | $ | (2,359 | ) | $ | (39 | ) | ||||||||||||
| Cumulative effect of change in | |||||||||||||||||||||||
| accounting principle, net of tax (Note 22) | (441 | ) | - | - | - | ||||||||||||||||||
| Net income (loss) | $ | (447 | )(a) | $ | 36 | $ | (2,359 | ) | $ | (39 | ) | ||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||||
| Basic net income (loss) per share | $ | (8.11 | ) | $ | 0.65 | $ | (42.84 | ) | $ | (0.72 | ) | ||||||||||||
| Diluted net income (loss) per share | $ | (8.11 | ) | $ | 0.60 | $ | (42.84 | ) | $ | (0.72 | ) | ||||||||||||
| (a) | The Company’s Form 10-Q for the first quarter of 2002 reported results without the cumulative effect of change in accounting principle. This charge was determined in the second quarter of 2002 and recorded in the first quarter as required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (see Note 22). |
| Quarter | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First | Second | Third | Fourth | ||||||||||||||||||||
| (In millions of dollars, except share data) | |||||||||||||||||||||||
| 2001 | |||||||||||||||||||||||
| Net sales | $ | 1,067 | $ | 1,239 | $ | 1,291 | $ | 1,165 | |||||||||||||||
| Cost of sales | 896 | 1,014 | 1,046 | 982 | |||||||||||||||||||
| Gross margin | $ | 171 | $ | 225 | $ | 245 | $ | 183 | |||||||||||||||
| Income (loss) from operations | $ | (17 | ) | $ | 57 | $ | 63 | $ | 13 | ||||||||||||||
| Tax Provision (credit) | $ | (5 | ) | $ | 25 | $ | 26 | $ | 11 | ||||||||||||||
| Net income (loss) | $ | (10 | ) | $ | 29 | $ | 27 | $ | (7 | ) | |||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||||
| Basic net income (loss) per share | $ | (0.19 | ) | $ | 0.53 | $ | 0.50 | $ | (0.12 | ) | |||||||||||||
| Diluted net income (loss) per share | $ | (0.19 | ) | $ | 0.49 | $ | 0.46 | $ | (0.12 | ) | |||||||||||||
– 130 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
22. GOODWILL AND OTHER INTANGIBLES
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), which it uses to account for goodwill and other intangible assets. SFAS No. 142 eliminates the amortization of goodwill and indefinite-lived intangible assets; identifiable intangible assets with a determinable useful life will continue to be amortized. SFAS No. 142 requires an annual review for impairment using a fair value methodology.
The Company applied SFAS No. 142 beginning in the first quarter of 2002, which required the Company to cease amortizing goodwill and indefinite-lived intangibles. The Company has no indefinite-lived intangibles, separately identified. In addition, the Company tested goodwill for impairment using the two-step process prescribed in SFAS No. 142. The first step is a screen for potential impairment. The second step, which is performed on those reporting units determined to have potential impairment based on the first step, measures the amount of the impairment, if any. The results of the first step indicated that the carrying values of some reporting units exceeded the corresponding fair values, which were determined based on the discounted estimated future cash flows of the reporting units. In the second step, the implied fair value of goodwill of these reporting units was determined through the allocation of the fair value to the underlying assets and liabilities. The January 1, 2002 carrying value of the goodwill in these reporting units exceeded their implied fair value by $491 million, resulting in a non-cash charge of $491 million ($441 million net of tax). This charge was determined during the second quarter of 2002 and, as required by SFAS No. 142, was recorded as a cumulative effect of a change in accounting principle in the first quarter of 2002. The goodwill recorded in the December 31, 2001 financial statements, which included the $491 million described above, was supported by the undiscounted estimated future cash flow of the related operations in accordance with Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”.
The Company completed the required annual review for impairment, utilizing a discounted cash flow method, in the fourth quarter of 2002. The test indicated that no additional impairment of goodwill and other indefinite-lived intangible assets occurred in 2002.
To maintain a consistent basis for measurement of performance, the Company reclassified previously reported segment information related to goodwill and total assets to correspond to the earnings measurements by which the businesses are evaluated. Accordingly, approximately $15 million of goodwill as of January 1, 2002, was reclassified to the Building Materials Systems segment from the Composite Solutions segment. Previously reported segment information has been revised to reflect this change (see Note 2).
The changes in goodwill by segment during the year ended December 31, 2002, were as follows:
| Effect of | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at | Adopting | Foreign | Balance at | ||||||||||||||||||||||||||
| December 31, | SFAS No. | Exchange | December 31, | ||||||||||||||||||||||||||
| 2001 | 142 | Reallocation | and Other | 2002 | |||||||||||||||||||||||||
| (In millions of dollars) | |||||||||||||||||||||||||||||
| Composite Solutions | $ | 33 | $ | - | $ | (15 | ) | $ | - | $ | 18 | ||||||||||||||||||
| Building Materials | 577 | (491 | ) | 15 | 3 | 104 | |||||||||||||||||||||||
| Total | $ | 610 | $ | (491 | ) | $ | - | $ | 3 | $ | 122 | ||||||||||||||||||
– 131 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
22. GOODWILL AND OTHER INTANGIBLES (continued)
SFAS No. 142 does not provide for restatement of our results of operations for periods ending prior to January 1, 2002. A reconciliation of the previously reported net income and earnings per share as if SFAS No. 142 had been adopted prior to January 1, 2000 is presented as follows:
| Year Ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2000 | |||||||||||||||
| (In millions of dollars, except per share data) | |||||||||||||||||
| Net income (loss): | |||||||||||||||||
| Reported net income (loss) | $ | (2,809 | ) | $ | 39 | $ | (478 | ) | |||||||||
| Add back cumulative effect of change in | |||||||||||||||||
| accounting principle, net of tax | 441 | - | - | ||||||||||||||
| Add back goodwill amortization, net of tax | - | 14 | 14 | ||||||||||||||
| Adjusted net income (loss) | $ | (2,368 | ) | $ | 53 | $ | (464 | ) | |||||||||
| Basic earnings (loss) per share: | |||||||||||||||||
| As reported | $ | 51.02 | ) | $ | 0.72 | $ | (8.71 | ) | |||||||||
| Add back cumulative effect of change in | |||||||||||||||||
| accounting principle, net of tax | 8.01 | - | - | ||||||||||||||
| Add back goodwill amortization, net of tax | - | 0.25 | 0.25 | ||||||||||||||
| Adjusted basic earnings (loss) per share: | $ | (43.01 | ) | $ | 0.97 | $ | (8.46 | ) | |||||||||
| Diluted earnings (loss) per share: | |||||||||||||||||
| As reported | $ | 51.02 | ) | $ | 0.66 | $ | (8.71 | ) | |||||||||
| Add back cumulative effect of change in | |||||||||||||||||
| accounting principle, net of tax | 8.01 | - | - | ||||||||||||||
| Add back goodwill amortization, net of tax | - | 0.23 | 0.25 | ||||||||||||||
| Adjusted Diluted earnings (loss) per share: | $ | (43.01 | ) | $ | 0.89 | $ | (8.46 | ) | |||||||||
Substantially all of the Company’s acquired other intangible assets are subject to amortization. Other intangible asset amortization expense was approximately $4 million in 2002 and $5 million in 2001. The Company estimates that amortization of other intangible assets will be approximately $4 million for each of the next five years. The components of other intangible assets are as follows:
| December 31, 2002 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted Average | Gross Carrying | Accumulated | |||||||||||||||
| Lives | Amount | Amortization | |||||||||||||||
| (In millions of dollars) | |||||||||||||||||
| Contract-based | 6 | $ | 5 | $ | (1 | ) | |||||||||||
| Technology-based | 21 | 17 | (9 | ) | |||||||||||||
| Marketing-related | 6 | 13 | (9 | ) | |||||||||||||
| $ | 35 | $ | (19 | ) | |||||||||||||
– 132 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
23. WARRANTIES
The Company records a liability for warranty obligations at the date the related products are sold. Adjustments are made as new information becomes available. A reconciliation of the warranty liabilities for the year ended December 31, 2002 is as follows:
| (In millions of dollars, | |||||
|---|---|---|---|---|---|
| except share data) | |||||
| Balance at December 31, 2001 | $ | 57 | |||
| Amounts accrued for current year | 14 | ||||
| Adjustments of prior accrual estimates | 2 | ||||
| Settlements of warranty claims | (16 | ) | |||
| Balance at December 31, 2002 | $ | 57 | |||
24. ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company will adopt Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations”. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The prospective effects of adoption are not expected to be material to the Company.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and had no material impact on the Company’s financial statements upon adoption. This Statement supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of a segment of a business (as previously defined in that Opinion). This Statement also amends ARB No. 51, “Consolidated Financial Statements”, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary.
Effective January 1, 2003, the Company will adopt Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002". This Statement (1) rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”, and FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers”, (2) amends FASB Statement No. 13, “Accounting for Leases”, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions, and (3) amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The effect of adoption will not be material to the Company.
– 133 –
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
24. ACCOUNTING PRONOUNCEMENTS (continued)
Effective January 1, 2003, the Company will adopt Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The accounting for similar events and circumstances will be the same, thereby improving the comparability and representational faithfulness of reported financial information. The prospective effects of adoption are not expected to be material to the Company.
In December 2002, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 45, “Guarantor´s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others – an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34". This Interpretation clarifies disclosures that are required to be made for certain guarantees at the time the guarantees are issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Effective December 31, 2002, the Company adopted the disclosure requirements in this Interpretation, including those relating to warranty obligations. Effective January 1, 2003, the Company will adopt the initial recognition and initial measurement provisions of this Interpretation on a prospective basis for guarantees issued or modified after December 31, 2002. The prospective effects of adoption are not expected to be material to the Company.
In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123". Effective December 31, 2002, the Company adopted the amendments to Statement 123 provided in paragraphs 2(a)-2(e) of this Statement. Effective January 1, 2003, the Company will adopt the amendment to Statement 123 provided in paragraph 2(f) of this Statement, and the amendment to Opinion 28 provided in paragraph 3. The effect of adoption will not be material to the Company.
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51". Effective July 1, 2003, the Company will adopt the provisions of this Interpretation which requires the primary beneficiary in a variable interest entity to consolidate the entity, even if the primary beneficiary does not have a majority voting interest, for variable interest entities existing prior to January 31, 2003. Effective January 31, 2003, the Company will adopt the consolidation requirements of this Interpretation for any variable interest entity created on or after that date. Effective December 31, 2002, the Company adopted the requirements of this Interpretation for entities to disclose information regarding guarantees or exposures to loss relating to any variable interest entity existing prior to January 31, 2003 in financial statements issued after January 31, 2003. The Company has certain entities which are potentially subject to the consolidation requirements of this Interpretation; however, the effects of consolidation, if necessary, would not be material to the Company. The prospective effects of adoption are not expected to be material to the Company.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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 CORNING
| By | /s/ Charles E. Dana | Date April 4, 2003 |
| Charles E. Dana, Vice President – Corporate Controller and Global Sourcing | ||
CERTIFICATION
I, David T. Brown, Chief Executive Officer of the registrant, certify that:
| (1) | I have reviewed this annual report on Form 10-K of Owens Corning; |
| (2) | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| (4) | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| (a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| (b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| (c) | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| (5) | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| (6) | The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
April 4, 2003
/s/ David T. Brown
David T. Brown
Chief Executive Officer
CERTIFICATION
I, Michael H. Thaman, Chief Financial Officer of the registrant, certify that:
| (1) | I have reviewed this annual report on Form 10-K of Owens Corning; |
| (2) | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| (4) | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| (a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| (b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| (c) | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| (5) | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| (6) | The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
April 4, 2003
/s/ Michael H. Thaman
Michael H. Thaman
Chief Financial Officer
EXHIBIT INDEX
| Exhibit | |
| Number | Document Description |
(23) Consent of PricewaterhouseCoopers LLP (filed herewith).
(99) Additional Exhibits
| Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) (filed herewith). |
| Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer) (filed herewith). |