SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
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
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. [ ]
At February 21, 2000, the aggregate market value of Registrant's
$.10 par value common stock (Registrant's voting stock) held by
non-affiliates was $850,590,859, assuming for purposes of this
computation only that all directors and executive officers are
considered affiliates.
At February 21, 2000, there were outstanding 55,485,313 shares of
Registrant's $.10 par value common stock.
Parts of Registrant's definitive 2000 proxy statement filed or to
be filed pursuant to Regulation 14A (the "2000 Proxy Statement")
are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
Owens Corning, a global company incorporated in Delaware in 1938,
serves consumers and industrial customers with building materials
systems and composites systems. The systems and services
provided by our Building Materials Systems division are used in
residential remodeling and repair, commercial improvement, new
residential and commercial construction, and other related
markets. The systems and services offered by our Composite
Systems division are used in end-use markets such as building
construction, automotive, telecommunications, marine, aerospace,
energy, appliance, packaging and electronics. Many of Owens
Corning's products are marketed under registered trademarks,
including Propink(R), Advantex(R), Miravista(R) and/or the color
PINK.
Approximately 80% of Owens Corning's sales are related to home
improvement, non-residential markets, sales of composite
materials and sales outside U.S. markets. Approximately 20% of
our sales are related to new U.S. residential construction.
Owens Corning operates in two reportable operating segments --
Building Materials Systems and Composite Systems. In 1999, the
Building Materials segment accounted for 80% of our total sales
while Composite Systems accounted for 20% of total sales. During
1999, Owens Corning implemented growth initiatives throughout the
businesses, mainly by establishing partnerships with e-business
and internet companies, leading technology companies, and
strategic manufacturing enterprises. We launched a national
advertising campaign targeting home owners and restructured our
organization to focus on the strategic growth markets that we are
pursuing. We also continued with the implementation of the
National Settlement Program, adding more participating
plaintiffs' law firms and increasing the number of settled
asbestos personal injury claims.
Owens Corning also has affiliate companies in a number of
countries. Affiliated companies' sales, earnings and assets are
not included in either operating segment unless we own more than
50% of the affiliate and the ownership is not considered
temporary.
Revenue from external customers, income from operations and total
assets attributable to each of Owens Corning's operating segments
and geographic regions, as well as information concerning the
dependence of our operating segments on foreign operations, for
each of the years 1999, 1998, and 1997, are contained in Note 1
to Owens Corning's Consolidated Financial Statements, entitled
"Segment Data", on pages 42 through 47 hereof.
Owens Corning's executive offices are at One Owens Corning
Parkway, Toledo, Ohio 43659; telephone (419) 248-8000. Owens
Corning's web site provides information on our business and
products, and assists our customers in various building projects.
It is located at www.owenscorning.com. Unless the context
requires otherwise, the terms "Owens Corning", "we" and "our" in
this report refer to Owens Corning and its subsidiaries.
BUILDING MATERIALS SYSTEMS
Principal Products And Methods Of Distribution
Building Materials Systems operates primarily in North America.
It also has a growing presence in Europe, Latin America and Asia
Pacific. Building Materials Systems sells a variety of products
and services in three major categories: (i) glass fiber, foam and
mineral wool insulation systems, (ii) roofing systems, and (iii)
exterior systems for the home, including vinyl and metal siding
and accessories, vinyl windows and patio doors, rainware
(consisting primarily of gutters and downspouts), manufactured
stone veneer and rebranded housewrap. The businesses responsible
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for these markets are: Insulating Systems, Roofing Systems,
Exterior Systems, System Thinking Sales and Distribution and
International Building Materials Systems.
In 1997, Owens Corning became the industry leader in the vinyl
siding market with our acquisitions of Fibreboard Corporation and
AmeriMark Building Products, Inc. Together, these acquisitions
represent over $1 billion in residential exterior building
product sales, including vinyl siding, vinyl windows and patio
doors, aluminum products and Cultured Stone(R) veneer. We have
six vinyl siding manufacturing plants, four aluminum products
manufacturing plants, two manufactured stone plants and more than
180 company-owned specialty distribution centers. Almost all
siding is sold through distribution, mostly specialty
distributors who cater to exterior contractors by providing
siding, siding accessories, aluminum rainware and often windows
and patio doors. Owens Corning's network of company-owned
outlets accounts for over half of Owens Corning's siding sales.
Cultured Stone products are sold primarily through independent
dealers and masonry suppliers.
The System Thinking Sales and Distribution Organization channels
our sales of building insulation systems, roofing shingles and
accessories, housewrap, windows/patio doors, and vinyl siding
through home centers, lumberyards, retailers and distributors.
Other channels of distribution for insulation systems in North
America include insulation contractors, wholesalers, specialty
distributors, metal building insulation laminators, mechanical
insulation distributors and fabricators, manufactured housing
producers, and appliance, office products and automotive
manufacturers. Foam insulation and related products are sold to
distributors and retailers who resell to residential builders,
remodelers and do-it-yourself customers; commercial and
industrial markets through specialty distributors; and, in some
cases, large contractors, particularly in the agricultural and
cold storage markets.
These products are used primarily in the home improvement, new
residential construction, and commercial construction and repair
markets. In 1999, approximately 20% of Owens Corning's sales
were related to new construction activities in the United States,
while home improvement and remodeling accounted for approximately
40%. Approximately 80% of roofing shingles sold in North America
are used for reroofing, with new residential construction
accounting for the remainder. Owens Corning also sells
residential shingles through exports from the U.S. to East
European, Latin American and Asia Pacific countries.
Owens Corning sells non-paving asphalt products, including
industrial and specialty applications, under the Trumbull brand
name. There are three principal kinds of industrial asphalt:
Built-Up Roofing Asphalt (BURA), used in commercial flat roof
systems to provide waterproofing and adhesion; saturants or
coating asphalt, used to manufacture roofing mats, felts and
residential shingles; and industrial specialty asphalt, used by
manufacturers in a variety of products such as waterproofing
systems, adhesives, coatings, dyes, and product extenders, as
well as in various automotive applications. There are several
channels of distribution for these products. They are used
internally in the manufacture of residential roofing products and
are also sold to other shingle manufacturers. In addition,
asphalt is sold to roofing contractors and distributors for BURA
systems and to manufacturers in a variety of other industries,
including automotive, chemical, rubber and construction.
In Europe, Asia and Latin America, building techniques do not
employ as much open-cavity construction as in North America,
resulting in a greater opportunity for growth in foam insulation
than glass fiber in these markets. In developing markets, both
foam and glass fiber insulation are opportunities. In Europe, we
sell building insulation to large insulation wholesalers, builder
merchants, contractors, distributors, and retailers.
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Owens Corning sells mechanical insulation products to
distributors, fabricators, and manufacturers in the heating,
ventilation, power and process, appliance and fire protection
industries. Outside North America, Owens Corning has foam plants
in the U.K., Spain and Italy and has licensed others for the
manufacture of foam products at locations in Europe, the Middle
East and Asia. Owens Corning sells foam products through
traditional agents and distributors.
In Latin America, Owens Corning produces and sells building and
mechanical insulation primarily through an affiliate joint
venture in Mexico, as well as exports from U.S. plants. In Asia
Pacific, we sell primarily mechanical insulation through joint
venture businesses, including two majority owned insulation
plants and an insulation fabrication center in China, two
minority owned joint ventures, one in Saudi Arabia and one in
Thailand, and four licensees.
Seasonality
Sales in the Building Materials segment tend to follow seasonal
home improvement, remodeling and renovation, and new construction
industry patterns. Sales levels for the segment, therefore, are
typically lower in the winter months.
Major Customers
No customer in the Building Materials segment accounted for more
than 4% of the segment's sales in 1999.
COMPOSITE MATERIALS
Principal Products and Methods of Distribution
Composite Systems operates in North America, Europe and Latin
America, with affiliates and licensees around the world,
including a growing presence in Asia Pacific. The businesses
responsible for these products include: Composites Systems and
Engineered Pipe Systems.
Owens Corning is the world's leading producer of glass fiber
materials used in composites. Composites systems are made up of
two or more components (e.g., plastic resin and a fiber,
traditionally a glass fiber) used in various applications to
replace traditional materials, such as aluminum, wood, and steel.
We are increasingly providing systems that are designed for a
specific end-use application, and entail a material, a
proprietary process and a fully assembled part or system. The
global composites industry has thousands of end-use applications.
Owens Corning has selected strategic markets and end-users, where
we provide integral solutions, such as the automotive,
telecommunications/electronics, and building construction
markets. A large portion of the business also serves thousands of
applications within the consumer, industrial and infrastructure
markets.
Within the building construction market, the major end-use
application for glass fiber is asphalt roofing shingles, where a
glass fiber mat is used to provide fire and mildew resistance in
95% of all such shingles produced in North America. We sell
glass fiber and/or mat directly to a small number of major
shingle manufacturers, including our own roofing business.
Tubs, showers and other related internal building components used
for both remodeling and new construction are also major
applications of composite materials in the construction market.
These end-use products are some of the first successful material
substitution conversions normally encountered in developing
countries. Glass fiber reinforcements and composite material
solutions for these markets are sold to direct accounts, and also
to distributors around the world, who in turn service thousands
of customers.
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More than 80% of transportation-related composite solutions are
used in automotive applications. Non-automotive transportation
applications include heavy trucks, rail cars, shipping
containers, refrigerated containers, trailers and commercial
ships. Growth continues in automotive applications, as composite
systems create new applications or displace other materials in
existing applications. There are hundreds of composites
applications, including body panels, door modules, integrated
front-end systems, instrument panels, chassis and underbody
components and systems, and heat and noise shields. These
composite parts are either produced by original equipment
manufacturers (OEMs), or are purchased by OEMs from first-tier
suppliers.
Within the telecommunications and electronics markets, glass
fiber composites are used to protect and reinforce fiber optic
and copper cables. Owens Corning also produces central strength
members for fiber optic cables. Other end-uses include
connectors, circuit breaker boxes, computer housings,
electricians' safety ladders, and hundreds of various
electro/mechanical components. Through its 49% interest in a
yarns joint venture, Owens Corning continues to participate in
the yarns and specialty material markets, where glass fiber is
used extensively in printed circuit boards made for the consumer
electronics, transportation, and telecommunications industries.
The consumer, industrial and infrastructure markets include
sporting goods and marine applications. Owens Corning sells
composite materials to OEMs and boat builders, both directly and
through distributors. Owens Corning manufactures large diameter
glass-reinforced plastic (GRP) pipe designed for use in
underground pressure and gravity fluid handling systems. The
pipe is a filament-wound structural composite made with glass
fiber and polyester resins. We, directly and with joint venture
partners around the world, manufacture and sell GRP pipe directly
to governments and private industry for major infrastructure
projects, primarily for the safe and efficient transport of water
and waste.
Major Customers
No customer in the Composite Materials segment accounted for more
than 5% of the segment's sales in 1999.
GENERAL
Raw Materials and Patents
Owens Corning considers the sources and availability of raw
materials, supplies, equipment and energy necessary for the
conduct of business in each of our operating segments to be
adequate.
Owens Corning has numerous U.S. and foreign patents issued and
applied for relating to our products and processes in each
operating segment, resulting from research and development
efforts.
We have issued royalty-bearing patent licenses to companies in
several foreign countries. The licenses cover technology relating
to both operating segments.
Including registered trademarks for the Owens Corning logo, the
color PINK, and FIBERGLAS, Owens Corning has approximately 300
trademarks registered in the United States and approximately
1,480 trademarks registered in other countries.
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We consider our patent and trademark positions to be adequate for
the present conduct of business in each of our operating
segments.
Working Capital
Owens Corning's manufacturing operations in each operating
segment are generally continuous in nature and we warehouse much
of our production prior to sale since we operate primarily with
short delivery cycles.
Research and Development
During 1999, 1998 and 1997, Owens Corning spent approximately $59
million, $57 million, and $69 million, respectively, for research
and development activities. Customer sponsored research and
development was not material in any of the last three years.
Environmental Control
Owens Corning's capital expenditures relating to compliance with
environmental control requirements were approximately $17 million
in 1999. We currently estimate that such capital expenditures
will be approximately $25 million in 2000 and $20 million in
2001.
We do not consider that we have experienced a material adverse
effect upon our capital expenditures or competitive position as a
result of environmental control legislation and regulations.
Operating costs of environmental control equipment, however, were
approximately $55 million in 1999. We continue to invest in
equipment and process modifications to remain in compliance with
applicable environmental laws and regulations.
The 1990 Clean Air Act Amendments (Act) provide that the United
States Environmental Protection Agency (EPA) will issue
regulations on a number of air pollutants over a period of years.
The EPA issued regulations for wool fiber glass and mineral wool
in June 1999 and for amino/phenolic resin in January, 2000. We
anticipate that our other sources to be regulated will be
secondary aluminum smelting, wet formed fiber glass mat, asphalt
processing and roofing, metal coil coating, and open molded fiber-
reinforced plastics, but all dates per the EPA's currently
announced schedule are listed as "Pending." Based on information
now known to us, including the nature and limited number of
regulated materials we emit, we do not expect the Act to have a
materially adverse effect on our results of operations, financial
condition or long-term liquidity.
Competition
Owens Corning's products compete with a broad range of products
made from numerous basic, as well as high-performance, materials.
We compete with a number of manufacturers in the United States of
glass fibers in primary forms, not all of which produce a broad
line of glass fiber products. Approximately one-half of these
producers compete with our Building Materials operating segment
in the sale of glass fibers in primary form. A similar number
compete with our Composite Materials operating segment.
Companies in other countries export small quantities of glass
fiber products to the United States. We also compete outside the
United States with a number of manufacturers of glass fibers in
primary forms.
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We also compete with many manufacturers, fabricators and
distributors in the sale of products made from glass fibers. In
addition, we compete with many other manufacturers in the sale of
roofing materials for sloped roofing, industrial asphalts, vinyl
siding, windows and patio doors and other products.
We provide services on a fee-for-service basis in the form of
materials and product testing, in competition with numerous
testing laboratories, and also sell claims management services.
Methods of competition include product performance, price, terms,
service and warranty.
ITEM 2. PROPERTIES
PLANTS
Owens Corning's principal plants as of March 1, 2000 are listed
below by operating segment and primary products, and are owned
except as noted. We consider that these properties are in good
condition and well maintained, and are suitable and adequate to
carry on our business. The capacity of each plant varies
depending upon product mix.
BUILDING MATERIALS SEGMENT
Thermal and Acoustical Insulation
Delmar, New York Palestine, Texas
Eloy, Arizona Phenix City, Alabama (1)
Fairburn, Georgia Salt Lake City, Utah
Kansas City, Kansas Santa Clara, California
Mount Vernon, Ohio Waxahachie, Texas
Newark, Ohio
Anshan, China Queensferry, United Kingdom
Babelegi, South Africa Ravenhead, United Kingdom
Candiac, Canada Scarborough, Canada
Edmonton, Canada Shanghai, China
Guangzhou, China Springs, South Africa
Pontyfelin, United Kingdom Vise', Belgium
(1) Facility is leased.
Foam Insulation
Rockford, Illinois Tallmadge, Ohio
Hartlepool, United Kingdom Valleyfield, Canada
Santa Perpetua, Spain (1) Volpiano, Italy
Turin, Italy (1)
(1) Facility is leased.
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Roofing and Asphalt Processing (one of each at every location,
except as noted).
Adelanto, California (1) (3) Jessup, Maryland
Atlanta, Georgia Kearny, New Jersey
Brookville, Indiana (1) Medina, Ohio
Channelview, Texas (2) Memphis, Tennessee
Compton, California Minneapolis, Minnesota
Denver, Colorado Morehead City, North
Detroit, Michigan (2) Carolina (2) (3)
Ennis, Texas (2) North Bend, Ohio (2)
Ft. Lauderdale, Florida (2) Oklahoma City, Oklahoma (2)
Houston, Texas Portland, Oregon (4)
Irving, Texas Savannah, Georgia (1)
Jacksonville, Florida Summit, Illinois
(1) Roofing plant only.
(2) Asphalt processing plant only.
(3) Facility is leased.
(4) Two asphalt processing plants, as well as one roofing plant.
OEM Solutions Group
Angola, Indiana Indianapolis, Indiana (1)
Athens, Alabama Johnson City, Tennessee (1)
Cleveland, Tennessee (1) Los Angeles, California (1)
Columbus, Ohio (1) Louisville, Kentucky (1)
Dallas, Texas (1) Montgomery, Alabama (1)
Grand Rapids, Michigan (1) Oklahoma City, Oklahoma (1)
Hazelton, Pennsylvania (1) Springfield, Tennessee (1)
Hebron, Ohio Tiffin, Ohio (1)
Brantford, Canada
(1) Facility is leased.
Manufactured Housing/Recreational Vehicles Specialty Parts
Douglas, Georgia Nappanee, Indiana
Elkhart, Indiana Plant City, Florida (1)
Goshen, Indiana Waco, Texas (1)
(1) Facility is leased.
Metal Products
Ashville, Ohio Richmond, Virginia
Beloit, Wisconsin Roxboro, North Carolina
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Cast Stone Products
Chester Co., South
Carolina (1) Navarre, Ohio
Napa, California (2)
(1) Under construction.
(2) Facility is leased.
Vinyl Siding
Atlanta, Georgia (1) Joplin, Missouri
Claremont, North Carolina Olive Branch, Mississippi
London, Ontario Mission, British Columbia
(1) Facility is leased.
Windows/Patio Doors
Bradenton, Florida Lakeland, Florida
In addition, Owens Corning has approximately 185 Specialty
Distribution Centers in 36 states in the U.S.
COMPOSITE MATERIALS SEGMENT
Textiles and Reinforcements
Aiken, South Carolina Fort Smith, Arkansas
Amarillo, Texas Huntingdon, Pennsylvania (1)
Anderson, South Carolina Jackson, Tennessee (1)
Duncan, South Carolina (1) New Braunfels, Texas (1)
Apeldoorn, The Netherlands Liversedge, United Kingdom
Battice, Belgium Rio Claro, Brazil
Birkeland, Norway San Vincente deCastellet/
Guelph, Canada Barcelona, Spain
Kimchon, Korea Springs, South Africa
L'Ardoise, France Wrexham, United Kingdom
(1) Facility is leased.
Engineered Pipe Systems
Bagneres-De-Bigorre,
France (1) Sandefjord, Norway (2)
(1) Facility is leased.
(2) Facility is partly leased.
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OTHER PROPERTIES
Owens Corning's principal executive offices of approximately
400,000 square feet are located in the Owens Corning World
Headquarters, Toledo, Ohio. The lease for this facility
terminates May 31, 2015, with options to extend through May 31,
2030.
Owens Corning's research and development activities are primarily
conducted at our Science and Technology Center, located on
approximately 500 acres of land outside Granville, Ohio. It
consists of more than 20 structures totaling more than 600,000
square feet. Our Integrex subsidiary maintains offices and
laboratories at the Science and Technology Center and also leases
facilities in Granville, Ohio; New York City, New York; and
Carmel, Indiana. Owens Corning also has Application Development
Centers in Battice, Belgium; Shanghai, China; and Bangalore,
India.
ITEM 3. LEGAL PROCEEDINGS
The paragraphs in Note 22 to Owens Corning's Consolidated
Financial Statements, entitled "Contingent Liabilities", on pages
78 through 84 hereof, are incorporated here by reference.
Securities and Exchange Commission rules require us to describe
certain governmental proceedings arising under federal, state or
local environmental provisions unless we reasonably believe that
the proceeding will result in monetary sanctions of less than
$100,000. The following proceeding is reported in response to
this requirement. Based on the information presently available
to us, however, we believe that the costs which may be associated
with this matter will not have a materially adverse effect on
Owens Corning's financial position or results of operations.
Owens Corning has received information that the Ohio
Environmental Protection Agency may be contemplating an
enforcement action relating to our plant in Newark, Ohio. It
is believed that this matter primarily involves alleged air
emission violations which occurred in the early 1990's.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Owens Corning has nothing to report under this Item.
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Executive Officers of Owens Corning
(as of March 1, 2000)
The term of office for elected officers is one year from the
annual election of officers by the Board of Directors following
the Annual Meeting of Stockholders in April. The name, age and
business experience during the past five years of Owens Corning's
executive officers as of March 1, 2000 are set forth below. All
those listed have been employees of Owens Corning during the past
five years except as indicated.
Name and Age Position*
Glen H. Hiner (65) Chairman of the Board and Chief Executive
Officer since January 1992. Director
since 1992.
Rhonda L. Brooks (48) Vice President and President, Roofing
Systems Business since January 1998;
formerly Vice President, Investor
Relations (1997), Vice President,
Marketing, Composites (1995), and Senior
Vice President and General Manager of Ply
Gem Industries.
David T. Brown (51) Vice President and President, Insulating
Systems Business since January 1998;
formerly Vice President and President,
Building Materials Sales and Distribution-
North America (1996), and Vice President
and President, Roofing/Asphalt.
Domenico Cecere (50) Senior Vice President and President,
Building Materials System Business since
January 1999; formerly Senior Vice
President and Chief Financial Officer
(1998), Vice President and President,
Roofing/Asphalt (1996), and Vice
President and Controller.
Deyonne F. Epperson
(43) Vice President and Controller since
February 2000; formerly Vice President,
Corporate Audit (1997), Director-level
member of the Treasury Management Team,
Corporate Treasury, at Honeywell (1995),
and Controller, Honeywell Technology
Center, at Honeywell.
Richard D. Lantz (48) Vice President and President, System
Thinking Sales and Distribution Business
since January 1998; formerly Vice
President - Marketing, Insulation
Business (1997), Vice President,
Marketing and Sales Support, Building
Materials Sales and Distribution (1996),
Vice President, Marketing, Roofing and
Asphalt (1995), and Business Development
Manager, Roofing and Asphalt.
Robert C. Lonergan
(56) Senior Vice President, Strategic
Resources since January 1998; formerly
Vice President and President, Building
Materials Europe and Africa (1997), Vice
President, Science and Technology (1995),
and President, Windows Division.
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Name and Age Position*
Heinz-J. Otto (50) Vice President and President, Composites
Systems Business since October 1996;
formerly Member of the Executive Board
and Head of Region Europe at Landis & Gyr
Corp. headquartered in Zug, Switzerland.
J. Thurston Roach (58) Senior Vice President and Chief Financial
Officer since January 1999; formerly
Senior Vice President and President,
North America Building Materials Systems
Business (1998), Vice Chairman of Simpson
Investment Company (1997), President of
Simpson Timber Company (1996), and Senior
Vice President, Chief Financial Officer
and Secretary of Simpson Investment
Company.
Maura Abeln Smith (44) Senior Vice President, General Counsel
and Secretary since February 1998;
formerly Vice President and General
Counsel of GE Plastics.
Michael H. Thaman (35) Vice President and President, Exterior
Systems Business since January 1999;
formerly Vice President and President,
Engineered Pipe Systems (1997), General
Manager, OEM Solutions Group (1996), and
Plant Manager - Toronto, Canada.
*Information in parentheses indicates year in which service in
position began.
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Part II
ITEM 5. MARKET FOR OWENS CORNING'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The principal market on which Owens Corning's common stock is
traded is the New York Stock Exchange. The high and low sales
prices in dollars per share for Owens Corning's common stock as
reported in the consolidated transaction reporting system for
each quarter during 1999 and 1998 are set forth in the following
tables.
1999 High Low 1998 High Low
- ------------------------------------ --------------------------------------
First Quarter 37-5/8 28-11/16 First Quarter 37 27
Second Quarter 43-3/4 30-13/16 Second Quarter 44-1/2 34-13/16
Third Quarter 35-15/16 21-11/16 Third Quarter 46-5/8 32
Fourth Quarter 22-7/8 14-9/16 Fourth Quarter 39-15/16 25-5/8
The number of stockholders of record of Owens Corning's common
stock on February 21, 2000 was 6,342.
Owens Corning declared regular dividends of $.075 per share of
common stock for each of the quarters of 1998 and 1999. In
connection with certain of our current bank credit facilities,
Owens Corning has agreed to restrictions affecting the payment of
cash dividends. As of March 1, 2000, these restrictions limited
funds available for the payment of cash dividends by Owens
Corning to $20 million annually.
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ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain financial information of the
Company.
1999 1998(a) 1997(b) 1996(c) 1995(d)
------ ------- ------- ------- -------
(In millions of dollars, except per
share data and where noted)
Net Sales $5,048 $5,009 $4,373 $3,832 $3,612
Cost of Sales 3,824 3,944 3,482 2,840 2,670
Marketing,
administrative
and other expenses 587 659 572 523 444
Science and Technology
expenses 59 57 69 84 78
Restructure costs - 117 68 38 -
Provision for
asbestos litigation
claims - 1,415 - 875 -
Gain on sale of
assets - 359 - 37 -
Income (loss) from
operations 578 (824) 182 (491) 420
Cost of borrowed
funds 152 140 111 77 87
Income (loss) before
provision
for income taxes 426 (964) 71 (568) 333
Provision (credit) for
income taxes 149 (306) 9 (283) 109
Net income (loss) 270 (705) 47 (284) 231
Net income (loss) per
share
Basic 4.98 (13.16) .89 (5.54) 4.73
Diluted 4.67 (13.16) .88 (5.54) 4.41
Dividends per share
on common stock
Declared 0.3000 .3000 .2750 .1250 -
Paid 0.3000 .3000 .2625 .0625 -
Weighted average
number of
shares outstanding
(in thousands)
Basic 54,083 53,579 52,860 51,349 48,744
Diluted 59,452 53,579 53,546 51,349 53,918
Net cash flow from
operations (28) 124 131 335 285
Capital spending 244 253 227 325 276
Total assets 6,494 5,101 4,996 3,913 3,261
Long-term debt 1,764 1,535 1,595 818 794
Average number of
employees
(in thousands) 20 20 22 19 17
(a) During 1998, the Company recorded a pretax charge of $1.415
billion ($906 million after-tax) for asbestos litigation
claims, a pretax charge of $243 million ($171 million after-
tax) for restructuring and other actions, a pretax net
credit of $275 million ($165 million after-tax) from the
sale of the Company's yarns and other businesses, a pretax
credit of $84 million ($52 million after tax) from the sale
of its ownership interest in Alpha/Owens-Corning, LLC, a
$39 million after-tax extraordinary loss from the early
retirement of debt, and a $10 million charge for various
tax adjustments.
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ITEM 6. SELECTED FINANCIAL DATA (Continued)
(b) During 1997, the Company recorded a pretax charge of $143
million ($104 million after-tax) for restructuring and
other actions as well as a $15 million after-tax charge for
the cumulative effect of the change in method of accounting
for business process reengineering costs. The incremental
sales from the 1997 acquisitions were $534 million during
1997.
(c) During 1996, the Company recorded a net pretax charge of
$875 million ($542 million after-tax) for asbestos
litigation claims that may be received after 1999 and
probable additional insurance recovery; special charges
totaling $42 million ($27 million after-tax) including
valuation adjustments associated with prior divestitures,
major product line productivity initiatives and a
contribution to the Owens-Corning Foundation; a pretax
charge of $43 million ($26 million after-tax) for
restructuring and other actions; a $27 million reduction of
tax reserves due to favorable legislation; and a pretax
gain of $37 million ($27 million after-tax) from the sale
of the Company's ownership interest in its former Japanese
affiliate, Asahi Fiber Glass Co. Ltd.
(d) During 1995, the Company recorded an $8 million tax credit
as a result of a tax loss carryback.
- 16 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(All per share information discussed below is on a diluted
basis.)
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ
materially from those projected in the statements. Some of the
important factors that may influence possible differences are
continued competitive factors and pricing pressures, construction
activity, interest rate movements, issues involving
implementation of new business systems, achievement of expected
cost reductions, asbestos litigation, and general economic
conditions.
RESULTS OF OPERATIONS
Business Overview
- -----------------
Owens Corning's growth agenda has focused on increasing sales and
earnings by (i) acquiring businesses with products that can be
sold through existing or complementary distribution channels,
(ii) achieving productivity improvements and cost reductions in
existing and acquired businesses, (iii) entering new growth
markets and (iv) forming strategic alliances and partnerships to
complement our existing markets. We have implemented two major
initiatives, the System Thinking (TM) strategy and Advantage
2000, to enhance sales growth and achieve productivity
improvements across all businesses. System Thinking for the Home
leverages our broad product offering and strong brand recognition
to increase our share of the building materials systems and home
improvement markets. This systems approach represents a focus on
systems-driven solutions that combine Owens Corning's insulation,
roofing, exterior and acoustic systems to provide a high
performance, cost-effective building "envelope" for the home. In
the Composite Systems business, Owens Corning has partnered with
end users, OEMs, systems suppliers and other players within the
supply chain for development of substitution opportunities for
composite systems. In addition, Owens Corning has virtually
completed the implementation of Advantage 2000, a fully
integrated business technology system designed to reduce costs
and improve business processes.
Owens Corning has grown its sales from $3.4 billion in 1994 to
over $5.0 billion in 1999 and 1998. Acquisitions have been a
significant component of that growth. Between 1994 and 1997, we
completed 17 acquisitions for an aggregate purchase price of over
$1.2 billion. These acquisitions have broadened the products and
services offered to home owners, home remodelers and home
builders to include siding, accessories and other home exteriors
products and have diversified the materials we utilize beyond
fiber glass to include polymers such as vinyl and styrene, and
metal and stone. (Please see Note 5 to the Consolidated
Financial Statements.) During 1999 and 1998, we formed many
alliances and partnerships to complement our existing markets.
Despite the benefits of our growth agenda, we experienced a
highly competitive pricing environment during 1997 and 1998. In
order to improve our strategic position and operational
efficiency, we implemented several profitability and productivity
initiatives, including the strategic restructuring program,
discussed below, which was begun in late 1997. This program,
along with the realignment of our Exterior Systems business,
enabled us to benefit from pretax cost reductions of
approximately $142 million during 1998 and an additional $84
million during 1999. The specific objectives of this strategic
program are discussed in "Restructuring of Operations and Other
Actions" below and in Note 4 to the Consolidated Financial
Statements.
- 17 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
During 1998, the pricing environment applicable to several of our
major products, particularly residential insulation, began to
improve. By the end of 1998, our average price levels of
insulation products surpassed the year-end 1997 levels. Despite
the successful implementation of price increases during 1998,
including the restoration of residential insulation prices to
their late 1996 levels, income from operations during 1998 was
adversely impacted by approximately $44 million, compared to
1997, due largely to the relatively low insulation pricing base
in effect at the beginning of 1998, the lag in fully realizing
the 1998 price increases as we honored the remainder of pre-
existing pricing contracts, and price declines attributable to
vinyl siding products.
During 1999, Owens Corning continued to benefit from its
previously implemented strategic initiatives. The cost
reductions and significant pricing improvements achieved during
1998 continued throughout 1999. Pricing improvements during
1999, particularly in residential insulation, resulted in
approximately a $140 million increase in income from operations
compared to 1998.
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------
Sales and Profitability
- -----------------------
Net sales for the year ended December 31, 1999 were $5.048
billion, up slightly from $5.009 billion in 1998. Net sales in
1997 were $4.373 billion. The sales increase reflects the
incremental benefits of acquisitions; continued strength in the
North American Building Materials Business; higher volume, offset
partially by price weakness, in the Composite Systems Business;
and the transfer of Owens Corning's yarns business to an
unconsolidated joint venture at the end of the third quarter of
1998. On a comparative basis, excluding the yarns and other
divested businesses in 1998, sales during 1999 were up 6% from
the 1998 level. The impact of currency translation on sales in
foreign currencies was slightly unfavorable during 1999, compared
to 1998, reflecting a stronger U.S. dollar during 1999. Please
see Note 1 to the Consolidated Financial Statements.
In the Building Materials Systems business, sales during 1999
reflect the continued strength in the U.S. roofing and insulation
markets. We continue to benefit from improved pricing of many of
our products, particularly residential insulation. Please see
"Building Materials Systems" below for further discussion of
these matters.
In the Composites Business, sales reflect a reduction
attributable to the transfer of our yarns business indicated
above. Composites sales also reflect volume increases in the
U.S. and Europe, offset partially by the impact of pricing
pressure, particularly in Europe. Please see "Composite Systems"
below for further discussion of these matters.
Sales outside the U.S. represented 19% of total sales for the
year ended December 31, 1999, compared to 20% during 1998 and 24%
for 1997. The relative decline in non-U.S. sales is largely due
to the 1999 sales increases attributable to U.S. roofing and
insulation products. Gross margin for the year ended December
31, 1999 was 24% of net sales, compared to 21% and 20% in 1998
and 1997, respectively. Gross margin during 1998 and 1997
reflected a charge of $65 million and $38 million, respectively,
for costs associated with Owens Corning's strategic restructuring
program. The increase in gross margin in 1999 also reflects price
increases applicable to several of our products and the
incremental benefits of the cost reductions resulting from the
strategic restructuring program.
- 18 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
For the year ended December 31, 1999, Owens Corning reported net
income of $270 million, or $4.67 per share, compared to a net
loss of $705 million, or $13.16 per share, for the year ended
December 31, 1998 and net income of $47 million, or $.88 per
share, for the year ended December 31, 1997. Net income in 1999
reflects the increase in gross margin, attributable partially to
volume but primarily to pricing improvements, particularly in
U.S. residential insulation markets, and the incremental benefits
of the cost-saving programs implemented throughout 1999 and 1998.
Net income in 1999 also reflects a tax credit of approximately
$13 million for a special tax election associated with U.K.
operations. During 1999, cost of borrowed funds was $152
million, up $12 million from 1998. The increase is primarily the
result of higher average debt outstanding. Marketing and
administrative expenses totaled $592 million, up slightly from
the 1998 level, resulting from growth funding and partially
offset by incremental restructuring benefit.
The net loss in 1998 included a $1.415 billion pretax charge
($906 million after-tax) for asbestos litigation claims, a $243
million pretax charge ($171 million after-tax) for restructuring
and other actions and a $359 million pretax gain ($217 million
after-tax) from the sale of certain businesses. Also included
were manufacturing and operating expense reductions, resulting
from the strategic restructuring program. Cost of borrowed funds
during 1998 was $140 million, $29 million higher than the 1997
level, due to higher levels of average debt, offset partially by
a reduction in average interest rates during 1998. The reduction
in equity in net income of affiliates for the year ended December
31, 1998 reflects the first quarter 1998 sale of Owens Corning's
50 percent ownership interest in Alpha/Owens Corning, LLC. As
part of a debt realignment strategy, we repurchased, via a tender
offer, certain debt securities during the third quarter of 1998
and recorded an extraordinary loss of $39 million, or $.72 per
share, net of related income taxes of $25 million. Please see
Notes 2, 4, 5 and 22 to the Consolidated Financial Statements.
Net income for the year ended December 31, 1997 was $47 million,
or $.88 per share, and reflected the adverse impact of lower
prices in insulation and composites worldwide compared to 1996.
Net income for 1997 also included a pretax charge of $143 million
($104 million after-tax) for restructuring and other actions; a
$15 million credit ($10 million after-tax) resulting from the
modification of certain employee benefits in the second quarter
of 1997; and a $15 million after-tax charge for the cumulative
effect of the change in method of accounting for business process
reengineering costs. Please see Notes 4, 6 and 8 to the
Consolidated Financial Statements.
Restructuring of Operations and Other Actions
- ---------------------------------------------
Please see also Note 4 to the Consolidated Financial Statements.
During the first and third quarters of 1998, Owens Corning
recorded a total pretax charge of $243 million for restructuring
and other actions as part of a strategic restructuring program to
reduce overhead, enhance manufacturing productivity, and close
manufacturing facilities, which was announced in early 1998.
This charge included $117 million for restructuring and $126
million for other actions in 1998, the majority of which
represented asset impairments. On a cumulative basis since the
fourth quarter of 1997, Owens Corning has recorded a total pretax
charge of $386 million for this program, of which $185 million
represented restructure costs and $201 million represented other
actions.
- 19 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The $117 million restructuring charge in 1998 included
approximately $90 million for costs associated with the
elimination of approximately 1,900 positions worldwide and $27
million for the divestiture of non-strategic businesses and
facilities, of which $3 million represented exit cost
liabilities, comprised primarily of lease commitments. The $27
million charge for non-strategic businesses and facilities
included $12 million for the closure of certain U.S.
manufacturing facilities, $6 million for the closure of a pipe
manufacturing facility in China, and $9 million for other
actions.
The primary components of the $126 million charge for other
actions in 1998 and their classification on our consolidated
statement of income included: $30 million to write down to fair
value certain manufacturing assets held for use in China, due
primarily to poor current and projected financial results at that
time, recorded as cost of sales; $15 million to write down to net
realizable value equipment and inventory made obsolete by changes
in our manufacturing and marketing strategies, recorded as cost
of sales; $17 million for the write-down of an investment in and
the write-off of a receivable from a joint venture in Korea to
reflect the business outlook at that time and the fair market
value of the assets, recorded as other operating expenses; $12
million for the write-down of goodwill associated with a 1995
acquisition, determined to be unrecoverable due to a change in
market conditions and customer demand, recorded as other
operating expenses; and $9 million for the write-down of certain
assets in the U.S. to fair market value, recorded as cost of
sales. Owens Corning plans to hold and use the investments but
disposed of most of the equipment in 1998. Also included in the
$126 million charge for other actions were $13 million for the
write-off of certain receivables in the U.S. and Asia determined
to be uncollectable, recorded as cost of sales and other
operating expenses; and $30 million for other actions recorded as
cost of sales, marketing and administrative expenses, and other
operating expenses.
During the fourth quarter of 1997, we recorded a $143 million
pretax charge for restructuring and other actions as the first
phase of the strategic restructuring program. The $143 million
pretax charge was comprised of a $68 million charge associated
with the restructuring of our business segments and a $75 million
charge associated with asset impairments, including investments
in certain affiliates. The components of the restructure charge
included $25 million for personnel reductions representing
severance costs associated with the elimination of nearly 550
positions worldwide; $41 million for the divestiture of non-
strategic businesses and facilities, of which $13 million
represented exit cost liabilities, primarily for leased warehouse
and office facilities to be vacated, and $28 million represented
non-cash asset revaluations; and $2 million for other actions.
The divestiture of non-strategic businesses and facilities
included the closure of the Candiac, Quebec manufacturing
facility. During the second quarter of 1999, the Candiac
manufacturing facility was re-opened in order to meet current
market demands.
The components of the $75 million of other actions during 1997
and their classification on Owens Corning's consolidated
statement of income included: $17 million for the write-off of
certain assets and investments associated with unconsolidated
joint ventures in Spain and Argentina due primarily to poor
current and projected financial results and the expected loss of
local partners, recorded as operating expenses; $12 million for
the write-down of certain investments in mainland China to
reflect the current business outlook at that time and the fair
market value of the investments, recorded as cost of sales; $24
million to write-down to net realizable value equipment and
inventory
- 20 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
made obsolete by changes in our manufacturing and marketing
strategies, recorded as cost of sales; $8 million for a
supplemental employee retirement plan approved by the Board of
Directors in December 1997, recorded as marketing and
administrative expenses; $5 million for the write-off of an
insurance receivable that was determined to be uncollectable
after judicial rejection of the claim, recorded as other
operating expenses; and $9 million for several other actions
recorded as cost of sales, marketing and administrative expenses,
and other operating expenses. Owens Corning plans to hold and
use the investments but disposed of the equipment in 1998.
As indicated above, certain of the charges recorded during 1998
and 1997 represented valuation adjustments associated with asset
impairments. We continually evaluate 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, we use an estimate of the expected undiscounted cash
flows to be generated by the asset to determine whether the
carrying amount is recoverable or if an impairment exists. When
it is determined that an impairment exists, we use 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.
As a result of the strategic restructuring program, Owens Corning
realized a decrease in manufacturing and operating expenses of
approximately $110 million during 1998 and an additional $61
million in 1999. The $171 million in pretax cost reductions,
the majority of which have been cash savings, is comprised of
approximately $145 million in reduced personnel costs,
approximately $15 million in reduced facility costs, and
approximately $11 million of reductions in related program
spending. We have also realized additional cost savings during
1999 resulting from improved logistics and materials sourcing.
Owens Corning also implemented programs to gain synergies in our
Exterior Systems Business during 1998. As a result of these
programs, which included closing redundant facilities,
integrating business systems, and improving purchasing leverage,
we reduced costs by approximately $32 million during 1998 and an
additional $23 million in 1999, the majority of which have been
cash savings.
Building Materials Systems
- --------------------------
In the Building Materials Systems segment, sales increased 5% in
1999, compared to 1998, largely reflecting volume and price
improvements attributable to U.S. residential insulation products
as well as in the vinyl siding market. Price improvements in the
North American roofing market during 1999 were offset by volume
declines in that market. The impact of sales denominated in
foreign currencies was unfavorable during 1999, compared to 1998,
reflecting a stronger U.S. dollar during 1999.
Income from operations was $437 million during 1999, compared to
$266 million during 1998. Income from operations in 1999
reflects price increases in the residential insulation market as
well as incremental cost reductions resulting from the strategic
restructuring program. Please see Note 1 to the Consolidated
Financial Statements.
- 21 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Composite Systems
- -----------------
In the Composite Systems segment, sales were down 12% during
1999, compared to 1998, due largely to the disposition (discussed
below) of 51% of Owens Corning's yarns and specialty materials
business (the "yarns business") late in the third quarter of
1998. Adjusted for the impact of this disposition, sales were up
6% during 1999, compared to 1998, due to volume increases in the
U.S., driven by strong roofing mat sales, and in Europe,
particularly in reinforcements. The translation impact of sales
denominated in foreign currencies was unfavorable during 1999,
reflecting a stronger U.S. dollar.
Income from operations was $159 million in 1999, compared to $208
million in the prior-year period. Approximately one-fourth of
the 1998 income was attributable to the yarns business. Adjusted
for the disposition of the yarns business, income from operations
during 1999 increased 5% compared to 1998, reflecting pricing
weakness, particularly in Europe. We expect business conditions
in Europe to remain highly competitive during 2000. Please see
Note 1 to the Consolidated Financial Statements.
During the third quarter of 1998, we formed a joint venture for
our yarns business to which we contributed two manufacturing
plants and certain proprietary technology. On September 30,
1998, we completed the disposition of 51% of the yarns business
to a U.S. subsidiary of Groupe Porcher Industries of Badinieres,
France for $340 million. We continue to have a 49% ownership
interest in the joint venture. Upon closing, we also received a
distribution of approximately $193 million from the joint
venture. By retaining a 49% ownership interest in the joint
venture, we will continue to safeguard our proprietary technology
and participate in the yarns market. Please see Note 5 to the
Consolidated Financial Statements.
The results of operations of the yarns business were reflected in
our consolidated statement of income through the period ending
September 30, 1998. For the nine months ended September 30,
1998, the yarns business recorded sales of approximately $205
million and income from operations of approximately $57 million.
Effective September 30, 1998, we account for our ownership
interest in the yarns joint venture under the equity method.
Accounting Changes
- ------------------
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133). This statement establishes accounting and reporting
standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS 133 requires that changes in
the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that
receive hedge accounting. In June 1999, the FASB issued SFAS
137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No.
133." SFAS 137 delays the effective date to fiscal years
beginning after June 15, 2000, but earlier adoption is allowed.
- 22 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
We are assessing the impact of SFAS 133 on our financial
statements and plan to adopt this accounting change effective
January 1, 2001. We have substantially completed an inventory of
our freestanding derivatives, including forward contracts, option
contracts, currency swaps and interest rate swaps, and have begun
an inventory of derivatives which may be embedded in other
contracts. We plan to complete these inventories, estimate the
financial impact of adoption, evaluate existing risk management
activities, and perform an information systems assessment by the
end of the second quarter of 2000. We will review our risk
management policies and modify our business processes as needed
in order to comply with SFAS 133 and to temper the volatility in
earnings and other comprehensive income.
LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS
Cash flow from operations was negative $28 million for the year
ended December 31, 1999, compared to $124 million for the year
ended December 31, 1998. Compared to 1998, cash flow from
operations in 1999 reflects an increase in payments for asbestos
litigation claims, net of insurance. The increase in payments
for asbestos litigation claims reflects Owens Corning's
implementation of the National Settlement Program (NSP) in the
fourth quarter of 1998. During 1999, payments for asbestos
litigation claims were $860 million and proceeds from insurance
were $180 million, compared to $455 million and $47 million,
respectively, during 1998. This increase in payments for
asbestos litigation claims, net of insurance, was offset, in
part, by increased earnings and the favorable impact of a decline
in receivables during 1999 compared to 1998. Please see Note 22
to the Consolidated Financial Statements.
Inventories at December 31, 1999 were $466 million, an increase
of $29 million from an unusually low level at December 31, 1998.
Receivables at December 31, 1999 were $358 million, a $93 million
decrease from the December 31, 1998 level, resulting from strong
year-end collection efforts. The decrease in accounts payable and
accrued liabilities from $942 million at December 31, 1998 to
$839 million at December 31, 1999 reflects asbestos-related
payments of $80 million as well as spending associated with
restructure liabilities during the year.
At December 31, 1999, our net working capital was negative $828
million and our current ratio was .72, compared to negative $354
million and .81, respectively, at December 31, 1998. This
decline in net working capital is largely attributable to a
decrease in accounts receivable, as described above, as well as a
$225 million increase in the current portion of the reserve for
asbestos litigation claims, net of insurance, partially offset by
the related income tax benefit. The increase in the current
portion of the reserve for asbestos litigation claims reflects
the implementation of the NSP.
Owens Corning's total borrowings at December 31, 1999 were $1.991
billion, $365 million higher than at year-end 1998. The increase
reflects additional cash requirements related to the asbestos
claims paid during 1999 under the NSP, offset in part by a
favorable increase in cash flow from operations attributable to
improved working capital management. As of December 31, 1999, we
had unused lines of credit of $1.239 billion available under long-
term bank credit facilities and an additional $174 million under
short-term facilities, compared to $1.307 billion and $124
million, respectively, at year-end 1998. The decrease in unused
long-term available lines of credit reflects increased borrowings
at December 31, 1999 compared to December 31, 1998.
Additionally, letters of credit issued under the long-term bank
facility also reduce the available credit. The increase in
unused short-term available lines of credit results from a $50
million increase in the credit available under short-term
facilities. Please see Notes 2 and 3 to the Consolidated
Financial Statements.
- 23 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
During 1998, Owens Corning implemented a debt realignment program
intended to reduce financing costs. This program, which extended
the average length of term debt from four years to ten years,
included the issuance of a total of $950 million in new debt
securities, the repurchase of $309 million of Trust Preferred
Hybrid Securities and the retirement of $361 million of higher-
rate debt securities. During the first quarter of 1999, we issued
$250 million of debt securities, the proceeds of which were used
to reduce borrowings under the long-term bank credit facility.
Capital spending for property, plant and equipment, excluding
acquisitions, was $244 million in 1999. Owens Corning
anticipates that 2000 capital spending, exclusive of acquisitions
and investments in affiliates, will be approximately $300
million, most of which is uncommitted. We expect that funding
for these expenditures will be from our operations and external
sources as required.
Asbestos Litigation
- -------------------
Please see also Notes 17 and 22 to the Consolidated Financial
Statements.
Owens Corning has implemented the NSP, which, as of December 31,
1999, has settled approximately 235,000 asbestos personal injury
claims against Owens Corning. The NSP has also established
procedures and fixed payments for resolving future claims brought
by participating plaintiffs' law firms through an administrative
processing arrangement, without litigation, through at least
2008.
Payments under the NSP for settled present claims will generally
be made through 2002, with the majority of payments made in 1999
and 2000. It is anticipated that payments for a limited number
of future "exigent claims" (principally those of living
malignancy claimants) will generally begin in 2001. Payments for
other qualifying future claims generally will begin in 2003, and
will be made on the following schedule, based on when such claims
are accepted by Owens Corning for payment:
Date Accepted for Payment Year in which Claim Will be Paid
------------------------- --------------------------------
January 1, 1999 through June 30,
2000 2003
July 1, 2000 through December 31,
2001 2004
January 1, 2002 through June 30,
2003 2005
July 1, 2003 through December 31,
2004 2006
January 1, 2005 through June 30,
2006 2007
July 1, 2006 or later 60 days to one year after acceptance
The schedule of payments for qualifying future claims under NSP
Agreements entered into during the fourth quarter of 1999 and
thereafter will be delayed by at least one year.
If, in any calendar year after 2002, the payment of any amounts
under the NSP in respect of future claims might cause a default
under Owens Corning's then prevailing loan covenants, Owens
Corning will have the right to defer payment of such amounts
until February 15 of the following year. Commencing in 2003,
subject to the variables and uncertainties discussed in Note 22
to the Consolidated Financial Statements, Owens Corning expects
that its payments for such amounts will not exceed $150 million
per year. Additional settlement payments will be made by
Fibreboard, as discussed below.
- 24 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Gross payments for asbestos litigation claims during 1999 by
Owens Corning (excluding Fibreboard), including payments for
claims settled in prior years, were $860 million. Proceeds from
insurance were $180 million, resulting in a net pretax cash
outflow of $680 million. During 2000, the total payments for
asbestos litigation claims by Owens Corning (excluding
Fibreboard) are expected to be approximately $950 million.
Proceeds from insurance of $25 million are expected to be
available to cover these costs, resulting in a net pretax cash
outflow of $925 million. Owens Corning currently estimates that
it (excluding Fibreboard) will incur total asbestos payments
before tax and application of insurance recoveries of
approximately $400 million in 2001 and $250 million in 2002.
Fibreboard is a party to the NSP Agreements, which became
effective as to Fibreboard in the fourth quarter of 1999, when
the Insurance Settlement (discussed below) became effective. As
of December 31, 1999, Fibreboard has settled, through the NSP,
approximately 200,000 asbestos personal injury claims. The NSP
Agreements also provide for the resolution of other future
asbestos personal injury claims against Fibreboard through the
administrative processing arrangement described above for Owens
Corning. The timing of payments for settled and future
Fibreboard claims will be consistent, generally, with the timing
of Owens Corning payments, described above.
Under the Insurance Settlement, two of Fibreboard's insurers
provided $1,873 million during the fourth quarter of 1999 to fund
Fibreboard's costs of resolving pending and future asbestos
claims, under the NSP, in the tort system, or otherwise. The
Insurance Settlement funds are held in and invested by the
Fibreboard Settlement Trust and are available to satisfy
Fibreboard's pending and future asbestos related liabilities. As
of December 31, 1999, $1,838 million was held in the Fibreboard
Settlement Trust. On an ongoing basis, the funds held in the
Trust will be subject to investment earnings/losses and will be
reduced as applied to satisfy Fibreboard's asbestos liabilities.
Generally, it is expected that payments of Fibreboard's asbestos
liabilities will be paid directly by the Fibreboard Settlement
Trust on behalf of Fibreboard. Any asbestos related amounts paid
directly by Fibreboard are subject to reimbursement from the
Trust's assets. Under the terms of the Trust, any of such assets
which ultimately are not used to fund Fibreboard's asbestos
liabilities must be distributed to charity.
Funds held in the Fibreboard Settlement Trust are reflected on
Owens Corning's Consolidated Balance Sheet as restricted assets.
These assets are reflected as current assets or other assets,
with each category denoted "Restricted securities - Fibreboard".
The funds held in the Trust must be expended either in connection
with Fibreboard's asbestos related liabilities or to satisfy the
obligation under the Trust to distribute to charity the assets,
if any, remaining in the Trust after satisfaction of all such
liabilities. Accordingly, Owens Corning's Consolidated Balance
Sheet also reflects liabilities in an aggregate amount equal to
the funds held in the Trust. These liabilities, denoted as
"Asbestos-related liabilities - Fibreboard", are reflected as
current or other liabilities, depending on the period in which
payment is expected. At December 31, 1999, Owens Corning
estimates Fibreboard's asbestos related liabilities at $1,750
million, with a residual obligation to charity of $88 million.
See Note 23 to the Consolidated Financial Statements for
additional information concerning the Fibreboard Settlement
Trust.
Gross payments for asbestos litigation claims against Fibreboard
during 1999 were approximately $136 million, all of which were
paid/reimbursed by Fibreboard's insurers or the Fibreboard
Settlement Trust. Owens Corning currently estimates that Fibreboard
- 25 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
will incur total asbestos payments of approximately $900 million
in 2000, $350 million in 2001 and $170 million in 2002, all of
which are payable/reimbursable by the Fibreboard Settlement
Trust as described above.
Owens Corning expects funds generated from operations, together
with funds available under long-term and short-term bank credit
facilities, liability insurance policies, and the Fibreboard
Settlement Trust, to be sufficient to meet its liquidity
requirements.
Environmental Matters
- ---------------------
Owens Corning has been deemed by the Environmental Protection
Agency (EPA) to be a Potentially Responsible Party (PRP) with
respect to certain sites under the Comprehensive Environmental
Response, Compensation and Liability Act (Superfund). We have
also been deemed a PRP under similar state or local laws. In
other instances, other PRPs have brought suits or claims against
us as a PRP for contribution under such federal, state or local
laws. During 1999, we were designated as a PRP in such federal,
state, local or private proceedings for 10 additional sites. At
December 31, 1999, a total of 46 such PRP designations remained
unresolved. We are also involved with environmental
investigation or remediation at a number of other sites at which
it has not been designated a PRP.
We have established a $29 million reserve for our Superfund (and
similar state, local and private action) contingent liabilities.
Based upon information presently available to us, and without
regard to the application of insurance, we believe that,
considered in the aggregate, the additional costs associated with
such contingent liabilities, including any related litigation
costs, will not have a materially adverse effect on our results
of operations, financial condition or long-term liquidity.
The 1990 Clean Air Act Amendments (Act) provide that the EPA will
issue regulations on a number of air pollutants over a period of
years. The EPA issued regulations for wool fiber glass and
mineral wool in June 1999 and for amino/phenolic resin in
January, 2000. We anticipate that our other sources to be
regulated will be secondary aluminum smelting, wet formed fiber
glass mat, asphalt processing and roofing, metal coil coating,
and open molded fiber-reinforced plastics, but all dates per the
EPA's currently announced schedule are listed as "Pending."
Based on information now known to us, including the nature and
limited number of regulated materials it emits, we do not expect
the Act to have a materially adverse effect on our results of
operations, financial condition or long-term liquidity.
Year 2000 Readiness
- -------------------
Background
- ----------
Some of our existing information technology ("IT") systems and
control systems containing embedded technology such as
processors, controllers and microchips ("Non-IT") were originally
programmed using two digits rather than four digits to define the
applicable year. As a result, such systems, if they had not been
remediated, may have experienced miscalculations or disruptions
when processing information containing dates that fall after
December 31, 1999 or other dates that could cause computer
malfunctions (the "Year 2000 Issue").
- 26 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
State of Readiness
- ------------------
In recognition of the significance of the Year 2000 Issue, we
formed a senior management team representing business units and
business process functions including information technology,
sourcing, customer relations, logistics, facilities, and legal.
This team oversaw our efforts to assess and resolve the Year 2000
Issue. In addition, individual organizational units developed,
and implemented, Year 2000 plans. These plans included
assessments of all of our IT and Non-IT systems, and an
evaluation of the external environment to identify significant
exposure areas and to develop appropriate remediation or other
risk management approaches. We also developed business continuity
plans to help assure that all of our operations were prepared in
the case of an unexpected system, supplier or customer failure.
Transition to the Year 2000
- ---------------------------
As a result of the assessments and preparations performed over
the past five years, we experienced no failures of our IT or Non-
IT systems which could have resulted in an interruption of
production or service to its customers. The few minor failures
that did occur were of only a nuisance level nature and were
corrected and resolved within hours of their occurrence.
Costs
- -----
The cumulative cost of systems replacement, Year 2000
remediation, and regular update from 1995 through 1999 was
approximately $160 million, including technology, design and
development, and related training and deployment in business
locations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market Risk
- -----------
Owens Corning is exposed to the impact of changes in foreign
currency exchange rates and interest rates in the normal course
of business. We manage such exposures through the use of certain
financial and derivative financial instruments. Our objective
with these instruments is to reduce exposure to fluctuations in
earnings and cash flows associated with changes in foreign
currency exchange rates and interest rates.
We enter into various forward contracts and options, which change
in value as foreign currency exchange rates change, to preserve
the carrying amount of foreign currency-denominated assets,
liabilities, commitments, and certain anticipated foreign
currency transactions and earnings.
We also enter into certain currency and interest rate swaps to
protect the carrying amount of our investments in certain foreign
subsidiaries, to hedge the principal and interest payments of
certain debt instruments, and to manage our exposure to fixed
versus floating interest rates.
Our policy is to use foreign currency and interest rate
derivative financial instruments only to the extent necessary to
manage exposures as described above. We do not enter into
foreign currency or interest rate derivative transactions for
speculative purposes.
- 27 -
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK (Continued)
We use a variance-covariance Value at Risk (VAR) computation
model to estimate the potential loss in the fair value of our
interest rate-sensitive financial instruments and our foreign
currency-sensitive financial instruments. The VAR model uses
historical foreign exchange rates and interest rates as an
estimate of the volatility and correlation of these rates in
future periods. It estimates a loss in fair market value using
statistical modeling techniques.
The amounts presented below represent the maximum potential one-
day loss in fair value that we would expect from adverse changes
in foreign currency exchange rates or interest rates assuming a
95% confidence level:
December 31, December 31,
Risk Category 1999 1998
- ------------- ---- ----
(In millions of dollars)
Foreign currency $ - $1
Interest rate $ 6 $8
Virtually all of the potential loss associated with interest rate
risk is attributable to fixed-rate long-term debt instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 31 through 89 hereof are incorporated here by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Owens Corning has nothing to report under this Item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF OWENS CORNING
The information required by this Item is incorporated by
reference from Owens Corning's 2000 Proxy Statement except that
certain information concerning Owens Corning's executive officers
is included on pages 11 through 12 hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by
reference from Owens Corning's 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by
reference from Owens Corning's 2000 Proxy Statement.
- 28 -
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by
reference from Owens Corning's 2000 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. See Index to Financial Statements on page 30 hereof
2. See Index to Financial Statement Schedules on page 90 hereof
3. See Exhibit Index beginning on page 92 hereof
Management contracts and compensatory plans and arrangements
required to be filed as an exhibit pursuant to Item 14(c) of
Form 10-K are denoted in the Exhibit Index by an asterisk
("*").
(b) REPORTS ON FORM 8-K
During the fourth quarter of 1999, Owens Corning filed the
following current report on Form 8-K:
- Dated October 14, 1999, under Item 5, "Other Events" and Item 7,
"Financial Statements and Exhibits"
- 29 -
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/ Glen H. Hiner Date 3/10/2000
Glen H. Hiner, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ Glen H. Hiner Date 3/10/2000
Glen H. Hiner, Chairman of the Board,
Chief Executive Officer and Director
/s/ J. Thurston Roach Date 3/13/2000
J. Thurston Roach, Senior Vice
President and Chief Financial Officer
/s/ Deyonne F. Epperson Date 3/13/2000
Deyonne F. Epperson, Vice President
and Controller
/s/ Curtis H. Barnette Date 3/13/2000
Curtis H. Barnette, Director
Date
Norman P. Blake, Jr., Director
/s/ Gaston Caperton Date 3/12/2000
Gaston Caperton, Director
/s/ Leonard S. Coleman, Jr. Date 3/13/2000
Leonard S. Coleman, Jr., Director
/s/ William W. Colville Date 3/11/2000
William W. Colville, Director
/s/ Landon Hilliard Date 3/13/2000
Landon Hilliard, Director
Date
Jon M. Huntsman, Jr., Director
/s/ Ann Iverson Date 3/14/2000
Ann Iverson, Director
/s/ W. Walker Lewis Date 3/12/2000
W. Walker Lewis, Director
/s/ Furman C. Moseley, Jr. Date 3/13/2000
Furman C. Moseley, Jr., Director
/s/ W. Ann Reynolds Date 3/13/2000
W. Ann Reynolds, Director
- 30 -
INDEX TO FINANCIAL STATEMENTS
------------------------------
Item Page
- ---- ----
Report of Independent Public Accountants......................31
Summary of Significant Accounting Policies...............32 - 33
Consolidated Statement of Income - for the
years ended December 31, 1999, 1998 and 1997............34 - 35
Consolidated Statement of Comprehensive Income -
for the years ended December 31, 1999, 1998 and 1997.........36
Consolidated Balance Sheet - December 31, 1999 and 1998..37 - 38
Consolidated Statement of Stockholders' Equity -
for the years ended December 31, 1999, 1998 and 1997.........39
Consolidated Statement of Cash Flows - for the years
ended December 31, 1999, 1998 and 1997..................40 - 41
Notes to Consolidated Financial Statements
Notes 1 through 24......................................42 - 89
- 31 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders of Owens Corning:
We have audited the accompanying consolidated balance sheet of OWENS
CORNING (a Delaware corporation) and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of income,
comprehensive income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. 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 generally accepted
auditing standards. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements,
during the fourth quarter of 1997, the Company changed its method of
accounting for business process reengineering costs.
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.
ARTHUR ANDERSEN LLP
January 24, 2000
Toledo, Ohio
- 32 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Principles of Consolidation
Owens Corning and subsidiaries' (the "Company") consolidated
financial statements include the accounts of majority owned
subsidiaries, unless ownership is considered temporary.
Intercompany accounts and transactions are eliminated.
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.
Inventory Valuation
Inventories are stated at cost, which is less than market value, and
include material, labor and manufacturing overhead. The majority of
U.S. inventories are valued using the last-in, first-out (LIFO)
method and the balance of inventories are generally valued using the
first-in, first-out (FIFO) method.
Goodwill
Goodwill is carried at cost, less accumulated amortization, and is
amortized on a straight-line basis over a period of forty years.
The Company continually evaluates whether events and circumstances
have occurred that indicate the remaining estimated useful life of
goodwill may warrant revision or that the remaining balance may not
be recoverable. When factors indicate that goodwill should be
evaluated for possible impairment, 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.
Investments in Affiliates
Investments in affiliates are accounted for using the equity method,
under which the Company's share of earnings of these affiliates is
reflected in income as earned and dividends are credited against the
investment in affiliates when received.
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.
- 33 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(Continued)
Depreciation
For assets placed in service prior to January 1, 1992, the
Company's plant and equipment is depreciated primarily using the
double-declining balance method for the first half of an asset's
estimated useful life and the straight-line method is used
thereafter. For assets placed in service after December 31, 1991,
the Company's plant and equipment is depreciated using the
straight-line method.
Derivative Financial Instruments
Gains and losses on hedges of existing assets or liabilities are
included in the carrying amount of those assets or liabilities
and are ultimately recognized in income as part of those carrying
amounts. Gains and losses on hedges of net investments in foreign
subsidiaries are included in stockholders' equity. Gains and
losses related to qualifying hedges of firm commitments or
anticipated transactions also are deferred and are recognized in
income or as adjustments of carrying amounts when the hedged
transaction occurs. Gains and losses on forward currency exchange
contracts that do not qualify as hedges are recognized as other
income or expense.
Stock Based Compensation Plans
The Company applies Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) 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.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities 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.
Reclassifications
Certain reclassifications have been made to 1998 and 1997 to
conform with the classifications used in 1999.
- 34 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENT OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
----------------------------------------------------
1999 1998 1997
---- ---- ----
(In millions of dollars,
except share data)
NET SALES $ 5,048 $ 5,009 $ 4,373
COST OF SALES 3,824 3,944 3,482
------- ------- --------
Gross margin 1,224 1,065 891
------- ------- --------
OPERATING EXPENSES
Marketing and administrative
expenses 592 587 544
Science and technology expenses
(Note 12) 59 57 69
Provision for asbestos litigation
claims (Note 22) - 1,415 -
Restructure costs (Note 4) - 117 68
Other (Note 4) (5) 72 28
------- ------- --------
Total operating expenses 646 2,248 709
------- ------- --------
Gain on sale of assets (Note 5) - 359 -
INCOME (LOSS) FROM OPERATIONS 578 (824) 182
OTHER
Cost of borrowed funds (Notes
2, 3 and 21) 152 140 111
Other (Note 23) - - -
-------- ------- --------
INCOME (LOSS) BEFORE PROVISION
(CREDIT) FOR INCOME TAXES 426 (964) 71
Provision (credit) for income taxes
(Note 11) 149 (306) 9
-------- ------- --------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND EQUITY IN NET
INCOME (LOSS) OF AFFILIATES 277 (658) 62
Minority interest (Notes 7 and 8) (6) (16) (11)
Equity in net income (loss) of
affiliates (Note 15) (1) 8 11
------- ------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 270 (666) 62
Extraordinary loss (Note 2) - (39) -
Cumulative effect of accounting - - (15)
change (Note 6) -------- ------- --------
NET INCOME (LOSS) $ 270 $(705) $ 47
======== ======= ========
The accompanying summary of significant accounting policies and
notes are an integral part of this statement.
- 35 -
OWENS CORNING AND SUBSIDIARIES
-----------------------------
CONSOLIDATED STATEMENT OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
----------------------------------------------------
(Continued)
1999 1998 1997
---- ---- ----
(In millions of dollars,
except share data)
NET INCOME PER COMMON SHARE (Note 19)
Basic:
Income (loss) before
extraordinary item and
cumulative effect of
accounting change $ 4.98 $(12.44) $ 1.18
Extraordinary loss (Note 2) - (.72) -
Cumulative effect of accounting
change (Note 6) - - (.29)
-------- --------- ---------
Net Income (Loss) per Share $ 4.98 $(13.16) $ .89
======== ========= =========
Diluted:
Income (loss) before
extraordinary item and
cumulative effect of
accounting change $ 4.67 $ (12.44) $ 1.17
Extraordinary loss (Note 2) - (.72) -
Cumulative effect of accounting
change (Note 6) - - (.29)
-------- --------- ---------
Net Income (Loss) per Share $ 4.67 $(13.16) $ .88
======== ========= =========
Weighted average number of common
shares outstanding and common
equivalent shares during the period
(in millions)
Basic 54.1 53.6 52.9
Diluted 59.5 53.6 53.5
The accompanying summary of significant accounting policies and
notes are an integral part of this statement.
- 36 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
------------------------------------------------------
1999 1998 1997
---- ---- ----
(In millions of dollars)
Net Income (Loss) $ 270 $ (705) $ 47
Other comprehensive income, net of
tax:
Foreign currency translation
adjustments (21) 6(a) (46)
Minimum pension liability
adjustment (net of taxes
of $1 million in 1999 and 1998) 2 1 -
Hedging gains/(losses) 5 (4) 10
------- ------- -------
Other comprehensive income (loss) (14) 3 (36)
------- ------- -------
Comprehensive income (loss) $ 256 $ (702) $ 11
====== ======= =======
(a) Includes certain reclassifications to net income due to the
sale or disposition of certain businesses, the impact of which
was not material to other comprehensive income.
The accompanying summary of significant accounting policies and
notes are an integral part of this statement.
- 37 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
CONSOLIDATED BALANCE SHEET - DECEMBER 31, 1999 AND 1998
-------------------------------------------------------
1999 1998
---- ----
ASSETS (In millions of
- ------ dollars)
CURRENT
Cash and cash equivalents $ 70 $ 54
Restricted securities - Fibreboard -
current portion (Note 23) 900 -
Receivables, less allowances of $26
million in 1999 and $23 million in
1998 (Note 13) 358 451
Inventories (Note 14) 466 437
Insurance for asbestos litigation
claims - current portion Note 22) 25 150
Deferred income taxes (Note 11) 185 293
Income tax receivable (Note 11) 61 117
Other current assets 23 27
------ ------
Total current 2,088 1,529
------- ------
OTHER
Insurance for asbestos litigation
claims (Note 22) 205 260
Restricted securities - Fibreboard
(Note 23) 938 -
Asbestos costs to be reimbursed -
Fibreboard (Note 22) - 74
Deferred income taxes (Note 11) 547 608
Goodwill, less accumulated
amortization of $97 million
in 1999 and $78 million in 1998
Notes 4 and 5) 743 762
Investments in affiliates (Notes 4 and
15) 65 45
Other noncurrent assets (Note 10) 208 205
------ ------
Total other 2,706 1,954
------- -------
PLANT AND EQUIPMENT, at cost
Land 70 64
Buildings and leasehold improvements 725 701
Machinery and equipment 2,639 2,476
Construction in progress 258 257
------ ------
3,692 3,498
Less: Accumulated depreciation (1,992) (1,880)
------- -------
Net plant and equipment 1,700 1,618
------- ------
TOTAL ASSETS $6,494 $5,101
======= =======
The accompanying summary of significant accounting policies and
notes are an integral part of this statement.
- 38 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
CONSOLIDATED BALANCE SHEET - DECEMBER 31, 1999 AND 1998
--------------------------------------------------------
(Continued)
1999 1998
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of
- ------------------------------------ dollars)
CURRENT
Accounts payable and accrued liabilities
(Note 16) $ 839 $ 942
Reserve for asbestos litigation claims -
current portion (Note 22) 950 850
Asbestos related liabilities - Fibreboard
- - current portion (Note 23) 900 -
Short-term debt (Note 3) 68 69
Long-term debt - current portion (Note 2) 159 22
------ ------
Total current 2,916 1,883
------ ------
LONG-TERM DEBT (Note 2) 1,764 1,535
------ ------
OTHER
Reserve for asbestos litigation claims
(Note 22) 820 1,780
Asbestos related liabilities - Fibreboard
(Note 23) 938 79
Other employee benefits liability (Note
9) 318 326
Pension plan liability (Note 10) 42 55
Other 339 364
------ ------
Total other 2,457 2,604
------ ------
COMMITMENTS AND CONTINGENCIES (Notes 18,
21 and 22)
COMPANY OBLIGATED SECURITIES OF ENTITIES
HOLDING SOLELY PARENT DEBENTURES
(Notes 7 and 8) 194 194
------ ------
MINORITY INTEREST 44 19
------- -------
STOCKHOLDERS' EQUITY
Preferred stock, no par value; authorized
8 million shares, none outstanding (Note
20)
Common stock, par value $.10 per share;
authorized 100 million shares; issued
1999 - 54.8 million and 1998 - 54.3
million shares (Notes 5 and 19) 695 679
Deficit (1,510) (1,762)
Accumulated other comprehensive income (51) (37)
Other (Note 19) (15) (14)
------- -------
Total stockholders' equity (881) (1,134)
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' $6,494 $5,101
EQUITY ======= =======
The accompanying summary of significant accounting policies and
notes are an integral part of this statement.
- 39 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
----------------------------------------------------
1999 1998 1997
---- ---- ----
COMMON STOCK (In millions of dollars)
Balance beginning of year $679 $ 657 $ 606
Issuance of stock for:
Acquisitions (Note 5) - - 16
Awards under stock compensation
plans (Note 19) 16 22 35
-------- -------- ------
Balance end of year 695 679 657
-------- -------- ------
DEFICIT
Balance beginning of year (1,762) (1,041) (1,072)
Net income (loss) 270 (705) 47
Cash dividends declared (18) (16) (16)
-------- --------- -------
Balance end of year (1,510) (1,762) (1,041)
-------- --------- -------
ACCUMULATED OTHER COMPREHENSIVE
INCOME
Balance beginning of year
Currency translation adjustment (41) (47) (1)
Minimum pension liability (2) (3) (3)
adjustment
Deferred gains (losses) on hedges 6 10 -
-------- --------- -------
(37) (40) (4)
Adjustments
Currency translation adjustment (21) 6 (46)
Minimum pension liability 2 1 -
adjustment
Deferred gains (losses) on hedges 5 (4) 10
-------- --------- -------
(14) 3 (36)
Balance end of year
Currency translation adjustment (62) (41) (47)
Minimum pension liability - (2) (3)
adjustment
Deferred gains (losses) on hedges 11 6 10
-------- --------- -------
Balance end of year (51) (37) (40)
-------- --------- -------
OTHER
Balance beginning of year (14) (17) (14)
Net increase (decrease) (1) 3 (3)
------- -------- -------
Balance end of year (15) (14) (17)
------- -------- -------
STOCKHOLDERS' EQUITY $(881) $(1,134) $ (441)
======= ======== =======
The accompanying summary of significant accounting policies and
notes are an integral part of this statement.
- 40 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
----------------------------------------------------
1999 1998 1997
---- ---- ----
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net income (loss) $ 270 $ (705) $ 47
Reconciliation of net cash provided
by operating activities:
Noncash items:
Provision for asbestos
litigation claims (Note 22) - 1,415 -
Extraordinary loss from early
retirement of debt (Note 2) - 39 -
Cumulative effect of accounting
change (Note 6) - - 15
Provision for depreciation and
amortization 210 197 173
Provision (credit) for deferred
income taxes (Note 11) 163 (416) 110
Gain on sale of assets (Note 5) - (359) -
Other (Note 4) (2) 122 49
(Increase) decrease in receivables
(Note 13) 112 (58) 57
(Increase) decrease in inventories (25) 16 60
Increase (decrease) in accounts
payable and accrued liabilities (113) 120 (60)
Disbursements of VEBA trust - - 19
Proceeds from insurance for
asbestos litigation claims,
excluding Fibreboard (Note 22) 180 47 97
Payments for asbestos litigation
claims, excluding Fibreboard
(Note 22) (860) (455) (300)
Proceeds from Fibreboard Settlement
Trust as reimbursed for claims
paid (Note 23) 22 - -
Payments for Fibreboard asbestos
litigation claims
paid directly by the Company and
reimbursed by the Fibreboard (22) - -
Settlement Trust (Note 23)
Other 37 161 (136)
------- ------- --------
Net cash flow from operations (28) 124 131
------- ------- --------
NET CASH FLOW FROM INVESTING
Additions to plant and equipment (244) (253) (227)
Investment in subsidiaries, net of
cash acquired (Note 5) (1) - (564)
Proceeds from the sale of affiliate
or business (Notes 5 and 15) - 668 -
Other 20 (33) (8)
------- ------- --------
Net cash flow from investing $(225) $ 382 $ (799)
------- ------- --------
The accompanying summary of significant accounting policies and
notes are an integral part of this statement.
- 41 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
----------------------------------------------------
(Continued)
1999 1998 1997
---- ---- ----
NET CASH FLOW FROM FINANCING (Notes 2,
3 and 8)
Net additions (reductions) to long-
term credit facilities $ 91 $ (635) $ 796
Other additions to long-term debt 253 971 108
Other reductions to long-term debt (38) (494) (133)
Net increase (decrease) in short-
term debt (24) 41 (81)
Repurchase of trust preferred hybrid
securities - (309) -
Premiums paid for early retirement
of debt - (62) -
Dividends paid (16) (16) (14)
Other 2 (4) 6
------- ------- -------
Net cash flow from financing 268 (508) 682
------- ------- -------
Effect of exchange rate changes on 1 (2) (1)
cash ------- ------- -------
Net increase (decrease) in cash and 16 (4) 13
cash equivalents
Cash and cash equivalents at beginning 54 58 45
of year ------- ------- ------
Cash and cash equivalents at end of $ 70 $ 54 $ 58
year ======= ======= =======
The accompanying summary of significant accounting policies and
notes are an integral part of this statement.
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OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
1. Segment Data
In accordance with Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," the Company has identified two reportable operating
segments and has reported financial and descriptive information
about each of those 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 operating segments are defined as
follows:
Building Materials
- ------------------
Production and sale of glass wool fibers formed into
thermal and acoustical insulation and air ducts; extruded
polystyrene insulation; roofing shingles and asphalt
materials; windows and doors; vinyl and metal siding and
accessories; cast stone building products; and the branded
sale of housewrap.
Composite Materials
-------------------
Production and sale of glass fiber rovings, mats and
veils; long-fibre reinforced thermoplastic compounds,
glass reinforced plastic pipe; tailored composite
solutions for the automotive, buildings and
telecommunications markets, and composite manufacturing
services.
Intersegment sales, which include sales of Composite Materials to
Building Materials, are generally recorded at market or
equivalent value and are included in the internal evaluation of
segment performance. Income (loss) from operations by operating
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 non-recurring 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 operating segments. Please refer to
the reconciliation of reportable operating segment income from
operations to consolidated income before income taxes below for
additional information about such items.
Total assets by reportable operating segment are those assets
that are used in the Company's operations in each operating
segment and do not include general corporate assets. General
corporate assets consist primarily of cash and cash equivalents,
deferred taxes, asbestos assets, and corporate property and
equipment. Please refer to the reconciliation of reportable
operating 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.
- 43 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
1. Segment Data (Continued)
NET SALES 1999 1998 1997
---- ---- ----
(In millions of dollars)
Reportable Operating Segments
- -----------------------------
Building Materials
United States $3,632 $3,436 $ 2,704
Europe 234 272 301
Canada and other 245 219 212
------ ------- -------
Total Building Materials 4,111 3,927 3,217
------ ------- -------
Composite Materials
United States 569 686 707
Europe 338 372 392
Canada and other 144 135 157
------ ------- --------
Total Composite Materials 1,051 1,193 1,256
------ ------- --------
Total Reportable Operating
Segments 5,162 5,120 4,473
Reconciliation to Consolidated Net
Sales
- -----------------------------------
Composite Materials U.S. sales to
Building Materials U.S. (114) (111) (100)
------- ------- --------
Net Sales $5,048 $5,009 $ 4,373
======= ======= =======
External Customer Sales by Geographic
Region
- -------------------------------------
United States $4,087 $4,011 $ 3,311
Europe 572 644 693
Canada and other 389 354 369
------ ------ -------
Net Sales $5,048 $5,009 $ 4,373
====== ====== =======
- 44 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
1. Segment Data (Continued)
INCOME (LOSS) FROM OPERATIONS 1999 1998 1997
---- ---- ----
(In millions of dollars)
Reportable Operating Segments
- -----------------------------
Building Materials
United States $ 392 $ 235 $ 180
Europe 12 15 (1)
Canada and other 33 16 (6)
------- ------- --------
Total Building Materials 437 266 173
------- ------- --------
Composite Materials
United States 144 170 180
Europe (1) 27 (9)
Canada and other 16 11 5
------ ------- -------
Total Composite Materials 159 208 176
------ -------- -------
Total Reportable Operating $ 596 $ 474 $ 349
Segments ====== ======= =======
Geographic Regions
- ------------------
United States $ 536 $ 405 $ 360
Europe 11 42 (10)
Canada and other 49 27 (1)
------- ------- --------
Total Reportable Operating $ 596 $ 474 $ 349
Segments ====== ======= =======
Reconciliation to Consolidated Income
(Loss) Before Provision (Credit) for
Income Taxes
- --------------------------------------
Restructuring and other charges - (243) (143)
(Note 4)
Asbestos litigation claims (Note 22) - (1,415) -
Gain on sale of affiliate or - 359 -
business (Note 5)
General corporate income (expense) (18) 1 (24)
Cost of borrowed funds (152) (140) (111)
------- ------- --------
Consolidated Income (Loss) Before
Provision (Credit) for Income
Taxes $ 426 $ (964) $ 71
======= ======= =======
- 45 -
OWENS CORNING AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
1. Segment Data (Continued)
TOTAL ASSETS December 31,
1999 1998 1997
---- ---- ----
(In millions of dollars)
Reportable Operating Segments
- -----------------------------
Building Materials
United States $ 1,973 $1,894 $ 2,066
Europe 226 279 268
Canada and other 222 220 330
------- ------- -------
Total Building Materials 2,421 2,393 2,664
------- ------- -------
Composite Materials
United States 317 331 438
Europe 201 244 260
Canada and other 300 163 164
------- ------- -------
Total Composite Materials 818 738 862
------- ------- -------
Total Reportable Operating $ 3,239 $3,131 $ 3,526
Segments ======== ======= =======
Reconciliation to Consolidated
Total Assets
- ------------------------------
Asbestos insurance asset 230 484 573
Deferred income taxes 732 901 488
Income tax receivable 61 117 96
Cash and cash equivalents 70 54 58
Restricted marketable equity
securities - Fibreboard 1,838 - -
Settlement Trust
Investments in affiliates 65 45 52
LIFO inventory valuation (66) (56) (74)
adjustment
Other general corporate assets 325 425 277
------- ------- --------
Consolidated Total Assets $6,494 $5,101 $ 4,996
======= ======= ========
LONG-LIVED ASSETS BY GEOGRAPHIC
REGION
- -------------------------------
United States $1,707 $1,698 $ 1,792
Europe 339 371 357
Canada and other 397 311 382
------- ------- -------
Total Long-Lived Assets $2,443 $ 2,380 $ 2,531
======= ======= =======
- 46 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
1. Segment Data (Continued)
PROVISION FOR DEPRECIATION AND
AMORTIZATION 1999 1998 1997
---- ---- ----
(In millions of dollars)
Reportable Operating Segments
- -----------------------------
Building Materials
United States $ 95 $ 96 $ 72
Europe 20 20 18
Canada and other 13 12 16
-------- ------ -------
Total Building Materials 128 128 106
-------- ------ -------
Composite Materials
United States 22 19 24
Europe 19 18 18
Canada and other 18 11 9
-------- ------ -------
Total Composite Materials 59 48 51
-------- ------ -------
Total Reportable Operating $ 187 $ 176 $ 157
Segments ======== ====== =======
Geographic Regions
United States $ 117 $ 115 $ 96
Europe 39 38 36
Canada and other 31 23 25
-------- ------ -------
Total Reportable Operating $ 187 $ 176 $ 157
Segments ======== ====== =======
Reconciliation to Consolidated
Provision for Depreciation and
Amortization
- -------------------------------
General Corporate Depreciation
and Amortization 23 21 16
-------- ------- --------
Consolidated Provision for
Depreciation and Amortization $ 210 $ 197 $ 173
======== ======= ========
- 47 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
1. Segment Data (Continued)
ADDITIONS TO LONG-LIVED ASSETS
- ------------------------------
ADDITIONS TO PLANT AND EQUIPMENT
1999 1998 1997
---- ---- ----
(In millions of dollars)
Reportable Operating Segments
- -----------------------------
Building Materials
United States $ 127 $ 117 $ 82
Europe 17 15 18
Canada and other 9 17 29
------- ------- -------
Total Building Materials 153 149 129
------- ------- -------
Composite Materials
United States 12 32 21
Europe 18 35 14
Canada and other 25 4 17
------- ------- -------
Total Composite Materials 55 71 52
------- ------- -------
Total Reportable Operating $ 208 $ 220 $ 181
Segments ======= ======= =======
Geographic Regions
- -------------------
United States $ 139 $ 149 $ 103
Europe 35 50 32
Canada and other 34 21 46
------- ------ -------
Total Reportable Operating $ 208 $ 220 $ 181
Segments ======== ======= ========
ADDITIONS TO GOODWILL (1) - - 446
-------- ------- -------
Total Additions to Long-Lived
Assets of Reportable $ 208 $ 220 $ 627
Operating Segments ======== ======= ========
(1) During 1997, the Company made certain acquisitions (Note 5) which
included cash expenditures for goodwill of $446 million, of which
$431 million was in Building Materials in the U.S., $9 million was
in Composite Materials in the U.S., and $6 million was in Building
Materials in Europe.
- 48 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
2. Long-Term Debt
1999 1998
---- ----
(In millions of
dollars)
U.S. credit facility due in 2002, $ 366 $ 259
variable
Asian credit facility due in 2003, 23 29
variable
European credit facilities due in - 10
1999, variable
Debentures due in 2005, 7.5% 300 300
Debentures due in 2008, 7.7% 250 250
Debentures due in 2009, 7.0% 250 -
Debentures due in 2018, 7.5% 400 400
Guaranteed debentures due in 2001, 10% 42 42
Debentures due in 2002, 8.875% 40 40
Debentures due in 2012, 9.375% 7 7
U.S. medium term notes due in 2000, 60 60
7.0%
Bonds due in 2000, 7.25%, payable in
Deutsche marks (Note 21) 50 50
Eurobonds due through 2001, 9.814% 25 36
(Note 21)
Other long-term debt due through 2012,
at rates from 6.25% to 13.80% 110 74
------- -------
1,923 1,557
Less: Current portion (159) (22)
------- -------
Total long-term debt $1,764 $1,535
======= ======
In 1998, the Company amended its long-term revolving credit
agreement and reduced the maximum commitment equivalent to $1.8
billion, of which portions can be denominated in Canadian
dollars, Belgian francs or British pounds subject to the
provisions of the agreement. The agreement allows the Company to
borrow under multiple options, which provide for varying terms
and interest rates. The commitment fee, charged on the entire
commitment, is a sliding scale based on credit ratings and was
.25% at December 31, 1999. As of December 31, 1999, $195 million
of this facility was used for standby letters of credit and
$1.239 billion was unused. The weighted average rate of interest
on this facility was 6.81% at December 31, 1999.
The Asian credit facility is payable in U.S. dollars and has an
aggregate commitment of 35 million U.S. dollars. The rate of
interest on this facility at December 31, 1999 was 7.08%. The
commitment fee on the unused portions of the facility was .375%
at December 31, 1999.
The European credit facilities, which terminated in 1999, was
payable in U.S. dollars and had an aggregate commitment of 10
million U.S. dollars.
- 49 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
2. Long-Term Debt (Continued)
As is typical for bank credit facilities, the agreements relating
to the facilities described above contain restrictive covenants,
including requirements for the maintenance of interest coverage,
a leverage ratio and minimum coverage of fixed charges; and
limitations on the early retirement of subordinated debt,
additional borrowings, payment of dividends, and purchase of
Company stock. The agreements include a provision which 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 a default under the agreements.
During the first quarter of 1999, the Company issued $250 million
of senior debt securities ("the securities") as unsecured
obligations of the Company. These securities, which mature in
2009, bear an annual rate of interest of 7.0%, payable
semiannually. The proceeds from the issuance of these securities
were used to reduce borrowings under the Company's long-term
revolving credit agreement. See also Note 21 to the Consolidated
Financial Statements.
During 1998, the Company issued three series of debt securities
for an aggregate principal amount of $950 million. The first
series, representing $300 million of the securities, is due May
1, 2005 and bears an annual rate of interest of 7.5%, payable
semiannually. The second series, representing $250 million of
the securities, is due May 1, 2008 and bears an annual rate of
interest of 7.7%, payable semiannually. The third series, with an
aggregate amount of $400 million, bears an annual rate of
interest of 7.5%, payable semiannually, and matures on August 1,
2018. All series of securities (the "Notes") were issued as
unsecured obligations of the Company and are redeemable, in whole
or in part, at the option of the Company at any time at a
redemption price equal to the greater of (i) 100% of the
principal amount of such Notes or (ii) the sum of the present
values of the remaining scheduled payments of principal and
interest at prevailing market rates.
During the third quarter of 1998, the Company commenced cash
tender offers (the "tender offers") for an aggregate principal
amount of $450 million for the following debt securities: the
$150 million aggregate principal amount of the Company's 8-7/8%
Debentures due 2002, the $150 million aggregate principal amount
of the Company's 9-3/8% Debentures due 2012, and the $150 million
aggregate principal amount of the Company's 10% Debentures due
2001. The tender offers were completed on August 3, 1998 and as
of that date, approximately $361 million of these Debentures had
been tendered. In connection with this early retirement of debt,
the Company paid premiums of approximately $62 million, incurred
non-cash costs of approximately $2 million, and recorded an
extraordinary loss of approximately $39 million, or $.72 per
share, net of related income taxes of $25 million.
Additionally, during the third quarter of 1998, the Company
repurchased its $309 million of Trust Preferred Hybrid Securities
at face value which had been issued in October 1997 as payment
for the Company's acquisition of the assets of AmeriMark and also
repaid $100 million of other debt which matured in August 1998.
- 50 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
2. Long-Term Debt (Continued)
The aggregate maturities and sinking fund requirements for all
long-term debt issues for each of the five years following
December 31, 1999 are:
Credit Other Long-Term
Year Facilities Debt
---- ----------- ----------------
(In millions of dollars)
2000 $ - $159
2001 - 64
2002 366 88
2003 23 1
2004 - 7
3. Short-Term Debt
1999 1998
---- ----
(In millions of dollars)
Balance outstanding at
December 31 $ 68 $ 69
Weighted average
interest rates on
short-term debt
outstanding at
December 31 6.7% 6.4%
The Company had unused short-term lines of credit totaling $174
million and $124 million at December 31, 1999 and 1998,
respectively.
- 51 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------
(Continued)
4. Restructuring of Operations and Other Actions
During the third quarter of 1998, the Company recorded a $148
million pretax charge for restructuring and other actions as the
final phase of the Company's previously announced program to
close manufacturing facilities, enhance manufacturing
productivity and reduce overhead. On a cumulative basis since
the fourth quarter of 1997, the Company has recorded a total
pretax charge of $386 million, of which $143 million was recorded
in the fourth quarter of 1997, $95 million was recorded in the
first quarter of 1998, and $148 million was recorded in the third
quarter of 1998.
The $148 million pretax charge in the third quarter of 1998 was
comprised of a $30 million charge associated with the
restructuring of the Company's business segments and a $118
million charge associated with other actions, the majority of
which represent asset impairments. The $30 million restructure
charge has been classified as a separate component of operating
expenses on the Company's consolidated statement of income while
the $118 million charge for other actions was comprised of a $60
million charge to cost of sales, a $4 million charge to marketing
and administrative expenses, and a $54 million charge to other
operating expenses. The components of the restructure charge
included $9 million for personnel reductions and $21 million for
the divestiture of non-strategic businesses and facilities, of
which $20 million represented non-cash asset write-downs to
estimated fair value and $1 million represented exit cost
liabilities, comprised primarily of lease commitments. The $9
million for personnel reductions represented severance costs
associated with the elimination of approximately 400 positions,
primarily in the U.S. and Asia. The primary groups affected
included manufacturing and administrative personnel. As of
December 31, 1999, approximately $8 million has been paid and
charged against the reserve for personnel reductions,
representing the elimination of approximately 400 positions, the
majority of whose severance payments were made over the course of
1999. Charges of approximately $1 million have been made against
exit cost liabilities and no adjustments have been made to the
liability.
The components and classification of the $118 million of other
actions, of which $103 million represents non-cash asset
revaluations, included: $30 million to write down to fair value
certain manufacturing assets held for use in China, due primarily
to poor current and projected financial results at that time,
recorded as cost of sales; $15 million to write down to net
realizable value equipment and inventory made obsolete by changes
in the Company's manufacturing and marketing strategies, recorded
as cost of sales; $17 million for the write-down of an investment
in and the write- off of a receivable from a joint venture in
Korea to reflect the business outlook at that time and the fair
market value of the assets, recorded as other operating expenses;
$12 million for the write-down of goodwill associated with the
1995 acquisition of Fiber-lite, determined to be unrecoverable
due to a change in market conditions and customer demand,
recorded as other operating expenses; and $9 million for the
write-down of certain assets in the U.S. to fair market value,
recorded as cost of sales. The Company plans to hold and use the
investments but disposed of the equipment in 1998. Also included
in the $118 million charge for other actions were $13 million for
the write- off of certain receivables in the U.S. and Asia
determined to be uncollectable, recorded as cost of sales and
other operating expenses; and $22 million for other actions
recorded as cost of sales, marketing and administrative expenses,
and other operating expenses.
- 52 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
4. Restructuring of Operations and Other Actions (Continued)
During the first quarter of 1998, the Company recorded a $95
million pretax charge for restructuring and other actions as the
second phase of the Company's strategic restructuring program to
enhance manufacturing productivity and reduce overhead.
The $95 million pretax charge in the first quarter of 1998 was
comprised of an $87 million charge associated with the
restructuring of the Company's business segments and an $8
million charge associated with other actions. The $87 million
restructure charge has been classified as a separate component of
operating expenses on the Company's consolidated statement of
income while the $8 million charge for other actions was
comprised of a $5 million charge to cost of sales and a $3
million charge to marketing and administrative expenses. The
components of the restructure charge included $81 million for
personnel reductions and $6 million for the divestiture of non-
strategic businesses and facilities, of which $2 million
represented exit cost liabilities, comprised primarily of lease
commitments. The $81 million for personnel reductions represented
severance costs associated with the elimination of approximately
1,500 positions worldwide. The primary employee groups affected
included manufacturing and corporate administrative personnel.
As of December 31, 1999, approximately $67 million has been paid
and charged against the reserve for personnel reductions,
representing the elimination of approximately 1,500 employees,
the majority of whose severance payments were made over the
course of 1998 and 1999, and approximately $2 million has been
charged against exit cost liabilities. No adjustments have been
made to the liability.
During the fourth quarter of 1997, the Company recorded a $143
million pretax charge for restructuring and other actions as the
first phase of the program to close manufacturing facilities,
enhance manufacturing productivity and reduce overhead. The $143
million pretax charge was comprised of a $68 million charge
associated with the restructuring of the Company's business
segments and a $75 million charge associated with asset
impairments, including investments in certain affiliates. The
components of the restructure charge included $25 million for
personnel reductions; $41 million for the divestiture of non-
strategic businesses and facilities, of which $13 million
represented exit cost liabilities, primarily for leased warehouse
and office facilities to be vacated, and $28 million represented
non-cash asset revaluations; and $2 million for other actions.
The divestiture of non-strategic businesses and facilities
included the closure of the Candiac, Quebec manufacturing
facility. During the second quarter of 1999, the Candiac
manufacturing facility was re-opened in order to meet current
market demands.
The $25 million for personnel reductions during the fourth
quarter of 1997 represented severance costs associated with the
elimination of nearly 550 positions worldwide. The primary
employee groups affected included manufacturing and corporate
administrative personnel. As of December 31, 1999, approximately
$22 million has been paid and charged against the reserve for
personnel reductions, representing the elimination of
approximately 550 employees, the majority of whose severance
payments were made over the course of 1998 and 1999, and
approximately $10 million has been charged against exit cost
liabilities. No adjustments have been made to the liability.
- 53 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
4. Restructuring of Operations and Other Actions (Continued)
The components and classification of the $75 million of other
actions during the fourth quarter of 1997 included: $17 million
for the write-off of certain assets and investments associated
with unconsolidated joint ventures in Spain and Argentina due
primarily to poor current and projected financial results and the
expected loss of local partners, recorded as other operating
expenses; $12 million for the write-down of certain investments
in mainland China to reflect the current business outlook, at
that time, and the fair market value of the investments, recorded
as cost of sales; $24 million to write down to net realizable
value equipment and inventory made obsolete by changes in the
Company's manufacturing and marketing strategies, recorded as
cost of sales; $8 million for a supplemental employee retirement
plan approved by the Board of Directors in December 1997,
recorded as marketing and administrative expenses; $5 million for
the write-off of an insurance receivable that was determined to
be uncollectable after judicial rejection of the Company's claim,
recorded as other operating expenses; and $9 million for several
other actions recorded as cost of sales, marketing and
administrative expenses, and other operating expenses. The
Company plans to hold and use the investments but disposed of
most of the equipment in 1998.
The following table summarizes the status of the liabilities from
the restructure program described above, including cumulative
spending and adjustments and the remaining balance as of December
31, 1999:
(In millions of dollars) Beginning Total Ending
Liability Payments Liability
--------- -------- ---------
Personnel Costs $ 115 $ (97) $ 18
Facility and Business
Exit Costs 16 (13) 3
Other 2 (2) -
----- ------ -----
Total $ 133 $(112) $ 21
===== ====== =====
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 an 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.
- 54 -
OWENS CORNING AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
5. Acquisitions and Divestitures of Business
Acquisitions
- ------------
In connection with a proposal received from its Korean joint
venture partner, the Company infused approximately $29 million of
cash into this venture in March 1999. As a result of this
investment, along with additional investments by the other
partner, the Company increased its ownership interest in Owens
Corning Korea to 70%. The Company accounted for this transaction
under the purchase method of accounting whereby the assets
acquired and liabilities assumed, including $84 million in debt,
have been recorded at their fair values and the results of
operations have been consolidated since the date of acquisition.
Prior to that date, the Company accounted for this joint venture
under the equity method. The pro forma effect of this
acquisition was not material to the financial statements.
During 1997, the Company made several acquisitions in the
Building Materials segment in the United States and Europe and
two acquisitions in the Composite Materials segment in the United
States and Canada. These acquisitions were consummated through
the exchange of various combinations of common stock, cash, and
trust preferred hybrid securities (Note 8) for an aggregate
purchase price of $886 million. The largest of these was the
acquisition of Fibreboard Corporation (Fibreboard), a North
American manufacturer of vinyl siding and accessories, as well as
manufactured stone, which operates more than 130 company-owned
distribution centers in 32 states. The purchase price of this
acquisition was $660 million, including debt assumed of $138
million and was consummated by the exchange of cash for all of
the outstanding common shares of Fibreboard at a price of $55 per
share. At the time of acquisition, management formulated a plan
to divest Fibreboard's calcium silicate insulation and metal
jacket business (Pabco). During the first quarter of 1998, the
Company sold Pabco for approximately $37 million.
The second largest acquisition in 1997 was the acquisition of
AmeriMark Building Products, Inc. (AmeriMark), a specialty
building products company serving the exterior residential
housing industry. The acquisition was completed for a purchase
price of $317 million and was consummated by the exchange of $309
million in trust preferred hybrid securities and $8 million in
cash for the net assets of AmeriMark.
The Company completed four additional acquisitions during 1997 in
the U.S., Europe and Canada. The aggregate purchase price of
these acquisitions was $47 million. These acquisitions exchanged
340,000 shares of the Company's common stock and $34 million in
cash for the net assets of the acquired companies. Additionally,
during 1997, the Company issued 178,218 shares of its common
stock as a final adjustment to certain of its 1995 acquisitions.
The incremental sales from the acquisitions, in the year of
acquisition, were $534 million for the year ended December 31,
1997. The pro forma effect of the 1997 acquisitions, except for
the acquisitions of Fibreboard and AmeriMark, was not material to
net income for the year ended December 31, 1997.
All acquisitions were accounted for under the purchase method of
accounting, whereby the assets acquired and liabilities assumed
have been recorded at their fair values and the results of
operations for the acquisitions have been included in the
Company's consolidated financial statements subsequent to the
dates of acquisition. The estimated fair value of assets
acquired during 1997 was $1.409 billion, and liabilities assumed,
including $150 million in debt, totaled $523 million. Total
assets acquired during 1997 included goodwill of $546 million, of
which $446 million represents a cash expenditure.
- 55 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
5. Acquisitions and Divestitures of Business (Continued)
The following unaudited table presents the pro forma results of
operations for the year ended December 31, 1997, assuming the
acquisitions of Fibreboard and AmeriMark occurred at the
beginning of the period presented. These results include certain
adjustments, primarily for depreciation and amortization,
interest and other expenses directly attributable to the
acquisition and are not necessarily indicative of what the
results would have been had the transactions actually occurred at
the beginning of the period presented. The pro forma results do
not include operations that were discontinued by Fibreboard prior
to the acquisition, or Pabco.
Year Ended
December 31, 1997
-----------------
(In millions of dollars,
except share data)
Net sales $ 5,041
Income from continuing operations 46
Diluted earnings per share from
continuing operations $ .86
Divestitures
- ------------
Late in the first quarter of 1998, the Company sold its 50%
ownership interest in Alpha/Owens Corning, LLC. With cash
proceeds of approximately $103 million, the Company recorded a
pretax gain of approximately $84 million.
During the third quarter of 1998, the Company formed a joint
venture for its yarns and specialty materials business (the
"yarns business") to which it contributed two manufacturing
plants and certain proprietary technology. On September 30,
1998, the Company completed the sale of 51% of the yarns business
to a U.S. subsidiary of Groupe Porcher Industries of Badinieres,
France for $340 million. The Company continues to have a 49%
ownership interest in the joint venture. Upon closing, the
Company also received a distribution of $193 million from the
joint venture. In connection with the sale, the Company entered
into an agreement with the joint venture to support the liquidity
of the joint venture up to a maximum of $65 million. As a
result of the sale of 51% interest ofin the yarns joint venture
business and the receipt of the distribution from the joint
venture, the Company recordeded a pretax gain of $295 million,
net of its commitment under the agreement referred to above.
The results of operations of the yarns business are reflected in
the Company's consolidated statement of income through the period
ending September 30, 1998. For the nine months ended September
30, 1998 and the year ended December 31, 1997, the yarns business
recorded sales of approximately $205 million and $277 million,
respectively, and income from operations of approximately $57
million and $80 million, respectively. Effective September 30,
1998, the Company accounts for its ownership interest in the
yarns business under the equity method.
- 56 -
OWENS CORNING AND SUBSIDIARIES
-----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
5. Acquisitions and Divestitures of Business (Continued)
Additionally, during the third quarter of 1998, the Company sold
its Kitsons distribution business in the U.K. and its windows
manufacturing business in the U.S. and recorded a pretax loss of
approximately $20 million.
6. Business Process Reengineering Costs
In the fourth quarter of 1997, the Company recorded a $15 million
charge, or $.29 per share, net of related income taxes of $10
million, to comply with a new required accounting interpretation
announced November 20, 1997. The Emerging Issues Task Force, a
subcommittee of the Financial Accounting Standards Board (FASB),
requires that the cost of business process reengineering
activities that are part of a systems development project be
expensed as those costs are incurred. Any unamortized costs that
had previously been capitalized were written off as a cumulative
adjustment in the fourth quarter of 1997.
7. Convertible Monthly Income Preferred Securities (MIPS)
In 1995, Owens Corning Capital, L.L.C. ("OC Capital"), a Delaware
limited liability company, all of the common limited liability
company interests in which are owned indirectly by the Company,
completed a private offering of 4 million shares of Convertible
Monthly Income Preferred Securities ("Preferred Securities").
The aggregate purchase price for the offering was $200 million.
The Preferred Securities are guaranteed in certain respects by
the Company and are convertible, at the option of the holders,
into Company common stock at the rate of 1.1416 shares of Company
common stock for each Preferred Security (equivalent to a
conversion price of $43.80 per common share). Effective June 1,
1998, OC Capital can initiate conversion. Distributions on the
Preferred Securities are cumulative and are payable at the annual
rate of 6-1/2% of the liquidation preference of $50 per Preferred
Security. Distributions of $13 million ($8 million after-tax)
have been recorded net of tax as minority interest on the
Company's consolidated statement of income for each of the years
ended December 31, 1999, 1998 and 1997.
The Company issued $200 million of 6-1/2% Convertible Subordinated
Debentures due 2025 to OC Capital, which represents the sole
asset of OC Capital, in exchange for the proceeds of the
offering.
- 57 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
8. Trust Preferred Hybrid Securities
In 1997, the Company delivered 6,180,000 7% Income PRIDES
securities ("Hybrid Securities") in payment of $309 million of
the purchase price for the Company's acquisition of the assets of
AmeriMark Building Products, Inc. (Note 5).
Distributions of $13 million and $5 million ($8 million and $3
million after-tax, respectively) pursuant to the Trust Preferred
Securities have been recorded net of tax as minority interest
during 1998 and 1997, respectively.
During the third quarter of 1998, the Company repurchased the
Hybrid Securities at face value and redeemed the Debentures.
9. 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 unfunded 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
October 31, 1999 and 1998, as reflected on the consolidated
balance sheet at December 31, 1999 and 1998:
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OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
9. Postemployment and Postretirement Benefits Other Than Pensions
(Continued)
1999 1998
---- ----
(In millions of
dollars)
Change in Accumulated Postretirement
Benefit Obligation
- -------------------------------------
Benefits obligation at beginning of $ 343 $ 328
period
Service cost 8 9
Interest cost 24 23
Amendments 1 (2)
Impact of curtailment - (12)
Actuarial (gain) loss (35) 20
Currency (gain) loss 1 (2)
Benefits paid (23) (21)
-------- -------
Benefits obligation at end of period $ 319 $ 343
======== =======
Funded status $(319) $(343)
Unrecognized net actuarial (gain) loss 2 37
Unrecognized prior service cost - (11)
Benefit payments subsequent to
valuation date 4 3
-------- -------
Accrued benefit cost (includes current
liabilities of $26 million and $21
million in 1999 and 1998 respectively) $(313) $(314)
======== =======
Weighted-average assumptions as of
December 31 1999 1998
- ---------------------------------- ---- ----
Discount rate 8.0% 7.0%
The following table presents the components of net periodic
benefits cost during 1999, 1998 and 1997:
Components of net periodic benefit cost 1999 1998 1997
- --------------------------------------- ---- ---- ----
(In millions of dollars)
Service cost $ 8 $ 9 $ 7
Interest cost 24 23 20
Amortization of prior service cost (9) (20) (20)
Curtailment (gain) loss - (3) -
---- ------ -----
Net periodic benefit cost $ 23 $ 9 $ 7
==== ====== =====
For measurement purposes, a 6.5% annual rate of increase in the
per capita cost of covered health care claims was assumed for
2000. The rate was assumed to decrease to 6.0% for 2001 and
thereafter. 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, 1999 and
1998:
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OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
9. Postemployment and Postretirement Benefits Other Than Pensions
(Continued)
1999 1998
---- ----
1-Percentage Point 1-Percentage Point
Increase Decrease Increase Decrease
-------- -------- --------- --------
(In millions of dollars)
Effect on total of
service and interest
cost components $ 4 $ (3) $ 4 $ (3)
Effect on accumulated
postretirement
benefit obligation 29 (23) 31 (27)
The Company also recognizes the obligation to 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 liability at October 31, 1999 and 1998, as reflected on the
balance sheet at December 31, 1999 and 1998 was $34 million and
$36 million, respectively, including current liabilities of $4
million and $3 million, respectively. The net postemployment
benefits expense was $2 million in 1999 and 1998, and less than
$1 million in 1997.
10. 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 based on the
calculations of independent actuaries using the projected unit
credit method. 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.
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, 1999 and 1998, as reflected on
the consolidated balance sheet at December 31, 1999 and 1998:
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OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
10. Pension Plans (Continued)
1999 1998
---- ----
(In millions of
dollars)
Change in Projected Pension Benefit
Obligation
- ------------------------------------
Benefits obligation at beginning of
period $ 975 $ 997
Service cost 19 19
Interest cost 65 69
Amendments 2 2
Impact of curtailment (4) (7)
Impact of foreign currency translation - (7)
Actuarial (gain) loss (57) 70
Employee contributions 2 3
Benefits paid (137) (171)
------- -------
Benefits obligation at end of period $ 865 $ 975
======= =======
Benefits paid during 1999 and 1998 include payments resulting
from the Company's restructuring program and the sale of certain
businesses. (Notes 4 and 5)
Change in Pension Plan Assets 1999 1998
- ----------------------------- ---- ----
(In millions of
dollars)
Fair value of plan assets at beginning
of period $ 961 $1,059
Actual return on plan assets 154 74
Impact of foreign currency translation 2 (9)
Employer contributions 2 4
Employee contributions 3 3
Settlement (16) (5)
Benefits paid (129) (165)
------- -------
Fair value of plan assets at end of
period $ 977 $ 961
======= =======
Funded status $ 112 $ (14)
Unrecognized net transition (asset)
obligatn (22) (31)
Unrecognized net actuarial (gain) loss (53) 77
Unrecognized prior service cost (25) (32)
------- -------
Prepaid (accrued) benefit cost $ 12 $ -
======= =======
Amounts Recognized in the Consolidated
Balance Sheet 1999 1998
- -------------------------------------- ---- ----
(In millions of
dollars)
Prepaid benefit cost $ 51 $ 53
Accrued benefit liability (includes
current liabilities of less than $1 (39) (56)
million in 1999 and 1998)
Accumulated other comprehensive income - 3
-------- -------
Net amount recognized $ 12 $ -
======== =======
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OWENS CORNING AND SUBSIDIARIES
-----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
10. Pension Plans (Continued)
Weighted-average assumptions as of
December 31 1999 1998
---------------------------------- ---- ----
Discount rate 8.00% 7.00%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 5.50% 5.50%
The following table presents the components of net periodic
pension cost during 1999, 1998 and 1997:
Components of Net Periodic
Pension Cost 1999 1998 1997
-------------------------- ---- ---- ----
(In millions in dollars)
Service cost $ 19 $ 19 $ 15
Interest cost 65 69 64
Expected return on plan assets (75) (83) (84)
Amortization of transition
amount (5) (5) (5)
Amortization of prior service
cost (4) (7) (7)
Amortization of net actuarial
(gain) loss 5 4 11
Curtailment/Settlement (gain)
loss (6) 1 2
------ ------ -----
Net periodic benefit cost $(1) $(2) $ (4)
====== ====== =====
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
$9 million and $4 million, respectively, at October 31, 1999, and
$744 million and $707 million, respectively, at October 31, 1998.
Certain of the Company's pension plans are unfunded. The portion
of the total projected benefit obligation attributable to
unfunded plans is approximately $3 million and $13 million at
October 31, 1999 and 1998, respectively.
The Company also sponsors defined contribution plans available to
substantially all U.S. employees. Company contributions for the
plans are based on matching a percentage of employee savings up
to a maximum savings level. The Company's contributions were $14
million in 1999, $14 million in 1998, and $13 million in 1997.
- 62 -
OWENS CORNING AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
11. Income Taxes
1999 1998 1997
---- ---- ----
(In millions in dollars)
Income (loss) before provision
(credit) for income taxes:
U.S. $ 374 $(897) $151
Foreign 52 (67) (80)
----- ----- -----
Total $ 426 $(964) $71
===== ===== =====
Provision (credit) for income
taxes:
Current
U.S. $(56) $(86) $(123)
State and local (2) - 1
Foreign 16 5 21
----- ----- -----
Total current (42) (81) (101)
----- ----- -----
Deferred
U.S. 158 (203) 151
State and local 25 (20) (3)
Foreign 8 (2) (38)
----- ----- -----
Total deferred 191 (225) 110
----- ----- -----
Total provision (credit)
for income taxes $ 149 $(306) $9
===== ===== =====
The reconciliation between the U.S. federal statutory rate and
the Company's effective income tax rate is:
1999 1998 1997
---- ---- ----
U.S. federal statutory rate 35% (35)% 35%
State and local income taxes 4 (1) 5
Operating losses of foreign
subsidiaries 2 3 24
Foreign tax credits (1) - (6)
Change in effective state
income tax rate - - (9)
Conclusion of prior year tax
audits - - (4)
Utilization of tax loss
carrybacks - - (20)
Adjustment of valuation
allowances - - (10)
Special tax election (a) (3) (1) -
Other (2) 2 (3)
------- ------ ------
Effective tax rate 35% (32)% 12%
======= ======= ======
(a) Represents a one-time tax benefit associated with Asia
Pacific operations in 1998 and with UK operations in 1999.
- 63 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
11. Income Taxes (Continued)
As of December 31, 1999, the Company has not provided for
withholding or U.S. federal income taxes on approximately $288
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 $26
million of deferred income taxes would have been provided.
At December 31, 1999, 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 $275 million. Tax benefits of $208 million expire
over the period from 2000 through 2020, and the remaining $67
million have an indefinite carryforward.
The cumulative temporary differences giving rise to the deferred
tax assets and liabilities at December 31, 1999 and 1998 are as
follows:
1999 1998
---- ----
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Tax Liabilities
-------- ----------- --------- -----------
(In millions of dollars)
Asbestos litigation
claims $ 618 $ - $ 844 $ -
Other employee
benefits 140 - 142 -
Pension plans 20 17 23 12
Depreciation - 254 - 217
Operating loss
carryforwards 275 - 157 -
State and local taxes - 58 - 60
Other 283 214 237 155
------ ----- ------ --------
Subtotal 1,336 543 1,403 444
Valuation allowances (61) - (58) -
------ ----- ------ --------
Total deferred taxes $1,275 $ 543 $1,345 $ 444
====== ===== ====== ========
Management fully expects to realize its net deferred tax assets
through income from future operations.
12. Science and Technology Expenses
Science and technology expenses represent research and
development costs of $59 million in 1999, $57 million in 1998,
and $69 million in 1997.
- 64 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
13. Accounts Receivable Securitization
In 1999, 1998 and 1997, the Company sold certain accounts
receivable of its Building Materials operations to a 100% owned
subsidiary, Owens Corning Funding Corporation ("OC Funding"). OC
Funding has an agreement whereby it can sell, on a revolving
basis, an undivided percentage ownership interest in a designated
pool of accounts receivable, up to a maximum of $125 million,
which will expire in October 2000. At December 31, 1999 and
1998, $125 million have been sold under this agreement, and the
sale has been reflected as a reduction of accounts receivable in
the Company's consolidated balance sheet.
In 1999, 1998 and 1997, the Company also sold certain accounts
receivable of certain European operations. At December 31, 1999
and 1998, $70 million and $71 million have been sold,
respectively, and the sale has been 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 by OC Funding and
the European operations. Discounts of $9 million, $9 million and
$6 million on the receivables sold have been recorded as other
expenses on the Company's consolidated statement of income for
the years ended December 31, 1999, 1998 and 1997, respectively.
14. Inventories
Inventories are summarized as follows:
1999 1998
---- ----
(In millions of
dollars)
Finished goods $ 374 $ 317
Materials and supplies 158 176
------ -------
FIFO inventory 532 493
Less: Reduction to LIFO basis (66) (56)
------ -------
Total inventory $ 466 $ 437
====== =======
Approximately $269 million and $271 million of total inventories
were valued using the LIFO method at December 31, 1999 and 1998,
respectively.
- 65 -
OWENS CORNING AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
15. Investments in Affiliates
At December 31, 1999 and 1998, 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
1999 1998
---- ----
Advanced Glassfiber Yarns, LLC (U. S.) 49% 49%
Amiantit Fiberglass Industries, 30% 30%
Ltd. (Saudi Arabia)
Arabian Fiberglass Insulation Company,
Ltd. Saudi Arabia) 49% 49%
Owens Corning Energy LLC (U. S.) 50% -
Flowtite Andercol S.A. (Colombia) 50% 50%
(a) Flowtite Argentina (Argentina) 100% 100%
Flowtite (Botswana) (Proprietary) 49% 49%
Limited (Botswana)
(a) Flowtite Iberica, S.A. (Spain) 100% 100%
Mat Line LLC (U. S.) 50% -
Northern Elastomeric, Inc. (U. S.) 50% -
Owens Corning (India) Limited (India) 49% 49%
(b) Owens Corning Korea (Korea) 70% 30%
Owens Corning (Nanjing) (China) 50% 50%
Owens Corning Yapi Merkezi Boru Sanayi
VeTicaret A.S. (Turkey) 50% 50%
Owens-Corning Eternit Rohre 50% 50%
GmbH (Germany)
Siam Fiberglass Co., Ltd. (Thailand) 17% 17%
Stamax LLC (Netherlands) 50% -
Stamax NA LLC (U. S.) 50% -
Vitro-Fibras, S.A. (Mexico) 40% 40%
(a) In late 1997, the Company acquired 100% ownership of Owens-
Corning Canos, S.A. and Flowtite Iberica, S.A. The Company
considers its 100% ownership to be temporary and therefore
continues to account for them as unconsolidated affiliates
under the equity method.
(b) On March 12, 1999, the Company increased its ownership interest
in Owens Corning Korea to 70%, and has consolidated this
subsidiary since that date.
- 66 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
15. Investments in Affiliates (Continued)
The following table provides summarized financial information on
a combined 100% basis for the Company's affiliates accounted for
under the equity method:
1999 1998 1997
---- ---- ----
(In millions of dollars)
At December 31:
Current assets $239 $245 $227
Noncurrent assets 623 684 289
Current liabilities 171 143 145
Noncurrent liabilities 514 585 287
For the year ended December
31:
Net sales 477 540 535
Gross margin 138 159 133
Net income 7 30 21
The Company's equity in undistributed net income of affiliates
was $12 million at December 31, 1999.
Net sales, gross margin, and net income for the year ended
December 31, 1998 have been presented on a full-year basis for
Advanced Glassfiber Yarns, LLC (AGY). The Company's former
specialty yarns business is included in the Company's
consolidated financial statements through the period ending
September 30, 1998 (Note 5).
Net sales, gross margin, and net income for Owens Corning Korea
have been included in the amounts reported for 1998 and 1997.
This information has not been included for 1999 as the entity has
been consolidated since March 12, 1999.
- 67 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
16. Accounts Payable and Accrued Liabilities
1999 1998
---- ----
(In millions of dollars)
Accounts payable $ 456 $ 522
Payroll and vacation pay 26 51
Payroll, property, and miscellaneous taxes 32 34
Other employee benefits liability
(Note 9) 30 24
Restructure costs (Note 4) 17 35
Other 278 276
------ ------
Total $ 839 $ 942
====== ======
17. Consolidated Statement of Cash Flows
Cash payments (refunds) for income taxes and cost of borrowed
funds are summarized as follows:
1999 1998 1997
---- ---- ----
(In millions of dollars)
Income taxes $ (77) $(80) $ (6)
Cost of borrowed funds 154 151 123
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
During the years ended December 31, 1999 and 1998 and the six
months ended December 31, 1997, gross payments for asbestos
litigation claims filed against Fibreboard were approximately
$136 million, $129 million and $126 million, respectively, all of
which were paid/reimbursed by Fibreboard's insurers or the
Fibreboard Settlement Trust.
See Notes 5 and 8 for supplemental disclosure of non-cash
investing and financing activities.
18. Leases
The Company leases certain manufacturing equipment and office and
warehouse facilities under operating leases, some of which
include cost escalation clauses, expiring on various dates
through 2015. Total rental expense charged to operations was $143
million in 1999, $130 million in 1998, and $124 million in 1997.
At December 31, 1999, the minimum future rental commitments under
noncancellable leases with initial maturities greater than one
year payable over the remaining lives of the leases are:
- 68 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
18. Leases (Continued)
Minimum Future
Rental Commitments
Period ------------------
------ (In millions of dollars)
2000 $ 82
2001 68
2002 57
2003 42
2004 22
2005 through 2015 94
------
$ 365
=======
19. Stock Compensation Plans
The Company currently has three stock-based compensation plans.
The Company's Stock Performance Incentive Plan ("SPIP") grants
stock options, restricted stock, performance restricted stock and
phantom performance units. The Owens Corning 1995 Stock Plan ("95
Stock Plan") grants options, restricted stock and performance
stock awards. The SPIP and the 95 Stock Plan (collectively, the
"Plans"), permit up to 2 percent and 1 percent, respectively, 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, independently for each
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.
During 1999, the maximum number of shares available under the
Plans for stock awards was 2,616,789 shares. The following are
descriptions of the awards granted under the Plans:
Stock Options
-------------
Under the Plans, the exercise prices of each option equal 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. During 1999,
1998 and 1997, respectively, 1,930,292, 1,747,472 and 1,103,027
stock options were awarded under the Plans.
Restricted Stock Awards
-----------------------
Under the Plans, compensation expense 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, 1999, the Company had 408,117 shares of restricted stock
outstanding. During 1999, 1998 and 1997, 284,500, 64,550 and
77,250 shares of restricted stock were granted, respectively.
The weighted-average grant-date fair value for shares granted
was $34.81, $30.36 and $44.66 for 1999, 1998 and 1997,
respectively.
- 69 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
19. Stock Compensation Plans (Continued)
Performance Restricted Stock Awards
-----------------------------------
Under the Plans, certain officers are awarded performance
shares. Performance shares 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 officer 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, 1999, the Company had
64,675 units outstanding and none were granted during 1999.
During 1998 and 1997, respectively, 46,600 and 37,100
performance shares were granted.
Phantom Performance Units
-------------------------
Under the Plans, certain officers are awarded phantom
performance units. Each unit provides 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 officer 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, 1999, the Company had 104,899 phantom
performance units outstanding and none were granted during
1999. During 1998 and 1997, respectively, 65,750 and 77,850
units, were awarded.
Performance Stock Awards
------------------------
Under the Plans, certain employees are awarded unrestricted
stock based upon achievement of certain 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. The number of shares issued is based upon the market
price of the stock on date of issuance and the level of
compensation earned. In 1999, 1998 and 1997, respectively,
267,711, 74,854, and 122,362 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
334,500 shares were available under this plan at December 31,
1999. As of December 31, 1999, 22,000 deferred awards were
outstanding. In 1999, 10,000 options and 5,000 stock awards were
granted, 500 of which were issued. In 1998, no options and 5,500
stock awards were granted, 500 of which were issued. In 1997,
10,000 options and 5,500 stock awards were granted, of which
3,500 were issued. The weighted-average grant-date fair value
for shares granted was $36.53, $40.72 and $39.13 for 1999, 1998
and 1997, respectively.
- 70 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
19. Stock Compensation Plans (Continued)
The Company applies Financial Accounting Standards Board
Statement No. 123 (SFAS 123) 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. 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 Plans. The
compensation cost that has been recorded for awards other than
options was $21 million, $21 million and $12 million in 1999,
1998 and 1997, respectively.
A summary of the status of the Company's plans that issue options
as of December 31, 1999, 1998, and 1997 and changes during the
years ending on those dates is presented below:
1999 1998 1997
---- ---- ----
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ---------
Beginning 6,095,968 $ 36.72 5,126,158 $ 38.15 4,894,439 $ 35.59
of Year
Options 1,940,292 $ 34.81 1,747,472 $ 32.17 1,113,027 $ 44.80
granted
Options (79,850) $ 28.66 (495,797) $ 32.74 (724,661) $ 30.29
exercised
Options (236,043) $ 38.02 (281,865) $ 41.62 (156,647) $ 41.63
canceled --------- --------- ---------
End of year 7,720,367 $ 36.29 6,095,968 $ 36.72 5,126,158 $ 38.15
========= ========= =========
Exercisable 4,426,982 $ 37.22 3,568,291 $ 36.60 3,047,126 $ 34.78
Weighted-
average
fair-value
of options
granted
during the
year $ 12.14 $ 10.96 $ 14.29
- 71 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
19. Stock Compensation Plans (Continued)
The following table summarizes information about options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
----------------------------------- -------------------
Number Weighted-Average Number Weighted
Outstanding Remaining Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices 12/31/99 Life Price 12/31/99 Price
- --------------- ----------- ----------- -------- ----------- --------
$17.860 - $28.438 1,267,298 6.14 $27.253 609,600 $25.998
$28.500 - $34.625 876,016 3.54 $31.618 862,016 $31.586
$34.813 - $34.875 1,885,524 9.00 $34.813 30,976 $34.822
$35.250 - $40.500 1,822,969 5.50 $38.456 1,436,189 $38.636
$40.688 - $47.000 1,868,560 6.09 $43.980 1,488,201 $43.752
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted average assumptions by year:
Assumptions 1999 1998 1997
----------- ---- ---- ----
Risk-free interest rate 4.79% 5.46% 6.31%
Expected life (in years) 5 5 5
Expected volatility 32.44% 29.89% 24.64%
Expected dividends .61% .69% .82%
Had compensation cost for the 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:
1999 1998 1997
---- ---- ----
(In millions of dollars,
except share data)
Net income (loss) As reported $ 270 $ (705) $ 47
Pro forma $ 260 $ (714) $ 40
Basic net income As reported $4.98 $(13.16) $.89
(loss) per share Pro forma $4.80 $(13.33) $.76
Diluted net income As reported $4.67 $(13.16) $.88
(loss) per share Pro forma $4.50 $(13.33) $.75
The Company cautions that the pro forma results in 1997 do not
reflect the full impact of pro forma compensation expense.
Options vest ratably over a three year period;, therefore, 1998
is the first year in which the full impact is reflected.
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.
- 72 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
19. Stock Compensation Plans (Continued)
1999 1998 1997
---- ---- ----
(In millions of dollars, except share data)
Net income (loss) used for
basic earnings per share $ 270 $(705) $ 47
Net income (loss) effect
of assumed conversion of
preferred securities 8 - -
----- ----- ------
Net income (loss) used
for diluted earnings
per share $ 278 $(705) $ 47
===== ===== ======
Weighted average number
of shares outstanding
used for basic earnings
per share (thousands) 54,083 53,579 52,860
Deferred awards and stock
options 803 - 686
Shares from assumed conversion
of preferred securities 4,566 - -
----- ------ ------
Weighted average number of
shares outstanding and common
equivalent shares used for
diluted earnings per share
thousands) 59,452 53,579 53,546
====== ====== ======
During 1998 and 1997, diluted shares outstanding exclude
approximately 4.6 million common shares from the potential
conversion of certain preferred securities of a subsidiary (Note
7) due to their anti-dilutive effect. For the year ended
December 31, 1998, diluted shares also exclude approximately 700
thousand shares, primarily from the potential exercise of stock
options, due to their anti-dilutive effect.
20. Share Purchase Rights
Through December 1999, each outstanding share of the Company's
common stock included a preferred share purchase right. Each
right entitled the holder to buy from the Company one one-
hundredth of a share of Series A Participating Preferred Stock of
the Company at a price of $190. The Board of Directors had
designated 750,000 shares of the Company's authorized preferred
stock as Series A Participating Preferred Stock. There were no
preferred shares outstanding at December 31, 1998.
On December 31, 1999, the Company redeemed all share purchase
rights outstanding under its Rights Agreement established in
December 1996. Pursuant to the terms of the Rights Agreement,
the redemption price was $0.01 per right. The redemption price
was paid in January 2000.
- 73 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
21. Derivative Financial Instruments and Fair Value of
Financial Instruments
The Company is a party to financial instruments with
off-balance-sheet risk in the normal course of business to help
meet financing needs and to reduce exposure to fluctuating
foreign currency exchange rates and interest rates. 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 notional amounts of derivatives summarized in
the foreign 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, or financial or other indexes.
Foreign Exchange Risk and Interest Rate Risk Management
- -------------------------------------------------------
The Company enters into various types of derivative financial
instruments to manage its foreign exchange risk and interest rate
risk, as indicated in the following table.
Notional Amount Notional Amount
December 31, 1999 December 31, 1998
----------------- -----------------
(In millions of dollars)
Forward currency exchange
contracts $ 203 $ 303
Combined interest rate
currency swaps 140 190
Options purchased 1 10
Currency swaps 190 215
Interest rate swaps 151 33
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.
As of December 31, 1999, the Company has 26 forward currency
exchange contracts maturing in 2000 which exchange 89 million
Euro, 32 million U.S. dollars, 23 million British pounds, 255
million Norwegian krone, and various other currencies. As of
December 31, 1998, the Company has 28 forward currency exchange
contracts maturing in 1999 which exchange 4.2 billion Belgian
francs, 57 million U.S. dollars, 43 million Dutch guilders, 6
million British pounds, 95 million Norwegian krone, and various
other currencies. Gains and losses on these foreign currency
hedges are included in the carrying amount of the related assets
and liabilities.
During 1998, the Company entered into forward currency exchange
contracts to reduce its exposure to currency fluctuations on the
anticipated 1999 net sales to certain Japanese companies. The
four forward currency exchange contracts, which matured in 1999,
exchanged approximately 1.356 billion Japanese yen against
approximately 10 million U.S. dollars. For the year ended
December 31, 1999, the Company recorded losses on these forward
currency exchange contracts of approximately $2 million.
- 74 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
21. Derivative Financial Instruments and Fair Value of
Financial Instruments (Continued)
During 1999 and 1998, 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 1999
contract, which matures in 2000, will exchange approximately 67
million Chinese renminbi against approximately 8 million U.S.
dollars. The 1998 contract, which matured in 1999, exchanged
approximately 158 million Chinese renminbi against approximately
19 million U.S. dollars.
The Company enters into combined interest rate currency swaps to
hedge its equity investments in certain foreign subsidiaries to
manage its exposure against fluctuations in foreign currency
rates. As of December 31, 1998 and 1997, the Company had three
combined interest rate currency swaps which matured in 1999 to
manage this exposure. These contracts exchanged 921 million
Belgian francs, 50 million French francs, 17 million Dutch
guilders and 50 million U.S. dollars. At December 31, 1999 and
1998, deferred gains of $11 million and $6 million, respectively,
are included as a component of stockholders' equity.
In 1994, the Company entered into two currency swap transactions
to manage its exposure against foreign currency fluctuations on
the principal amount of its guaranteed 9.814% Eurobonds (Note 2).
During 1995, the Company terminated these swaps. The termination
of these swaps exchanged 140 million U.S. dollars for
approximately 89 million British pounds, resulting in a gain of
approximately 10 million U.S. dollars. At that time, the Company
entered into a combined interest rate currency swap and a
currency swap exchanging U.S. dollars into British pounds to
hedge the interest and principal payments of the Eurobonds. These
agreements also convert part of the fixed rate interest into
variable rate interest. The gain on the exercised swaps is being
amortized over the life of the original hedge. At December 31,
1999 and 1998, $1 million and $2 million, respectively, of
unamortized gain on the four cross-currency interest rate swaps
is included in other liabilities.
The Company has a cross-currency swap converting from Deutsche
marks into U.S. dollars to hedge the interest and principal
payments of its 7.25% Deutsche mark bonds, due in 2000. The
agreement establishes a fixed interest rate of 11.1%.
- 75 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
21. Derivative Financial Instruments and Fair Value of Financial
Instruments (Continued)
During 1999, the Company entered into an interest rate swap to
convert one half of the principal payments on its $250 million
debt issuance from a fixed rate of 7.0% to a floating LIBOR rate.
As of December 31, 1999, the Company has an interest rate swap to
convert $26 million in equipment lease payments from a floating
LIBOR to a fixed rate of 5.52%. As of December 31, 1998, the
Company had an interest rate swap to convert $33 million in
equipment lease payments from a floating LIBOR to a fixed rate of
5.52%. The differential interest to be paid or received is
accrued as interest rates change and is recognized over the life
of the agreement. As of December 31, 1999 and 1998, this amount
was not material to the consolidated financial statements.
During 1997, the Company entered into interest rate swaps to
manage its interest rate risk. As of December 31, 1997, the
Company had seven ordinary interest rate swaps that effectively
converted an aggregate principal amount of $350 million of
variable rate long-term debt into fixed rate borrowings. These
swaps were terminated during 1998, resulting in the deferral of a
loss of approximately $8 million which is being amortized through
2002. For each of the years ended December 31, 1998 and 1997,
losses of approximately $1 million related to these swaps have
been recorded as a component of cost of borrowed funds.
During 1997, the Company entered into three interest rate swaps
as a hedge against interest rate fluctuation on an anticipated
refinancing of the Trust Preferred Hybrid Securities (See Note
8). These swaps were intended to lock in an interest rate of 6.3%
on a notional amount of $150 million. During 1998, the Company
terminated these swaps and incurred an $8 million loss on the
transaction. This loss was recorded as other operating expenses
on the Company's consolidated statement of income for the year
ended December 31, 1998.
Other Financial Instruments with Off-Balance-Sheet Risk
- -------------------------------------------------------
As of December 31, 1999 and 1998, the Company is contingently
liable for guarantees of indebtedness owed by certain
unconsolidated affiliates of $125 million and $116 million,
respectively. 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.
Concentrations of Credit Risk
- -----------------------------
As of December 31, 1999 and 1998, 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 Securities Fibreboard Settlement Trust
-------------------------------------------------
The fair values of securities in the Fibreboard Settlement
Trust have been estimated by traded market values or by
obtaining quotes from brokers.
- 76 -
OWENS CORNING AND SUBSIDIARIES
-----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
21. Derivative Financial Instruments and Fair Value of
Financial Instruments (Continued)
Long-term notes receivable
--------------------------
The fair value has been estimated using the expected future
cash flows discounted at market interest rates.
Long-term debt
---------------
The fair value of the Company's long-term debt 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.
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 quotes 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 fees
currently charged for 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, 1999 and 1998, which have fair values
different than their carrying amounts, are as follows:
1999 1998
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In millions of dollars)
Assets
- ------
Long-term notes receivable $ 15 $ 13 $ 20 $ 17
Liabilities
- -----------
Long-term debt 1,764 1,654 1,535 1,561
Off-Balance-Sheet Financial
Instruments - Unrealized gains (losses)
- -----------------------------------------
Currency swaps - 19 - 32
Interest rate swaps - (1) - -
Combined interest rate
currency swaps - 4 - 13
Options - - - -
Forward currency exchange
contracts - (1) - (1)
- 77 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
21. Derivative Financial Instruments and Fair Value of Financial
Instruments (Continued)
As of December 31, 1999 and 1998, 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.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133).
This statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded
in the balance sheet as either an asset or liability measured at
its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that
receive hedge accounting.
Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of SFAS 133," which delayed the effective date
of SFAS 133, is effective for fiscal years beginning after June
15, 2000, but earlier adoption is allowed. The Company is
assessing the impact of SFAS 133 on its financial statements and
plans to adopt this accounting change effective January 1, 2001.
The Company has substantially completed an inventory of its
freestanding derivatives, including forward contracts, option
contracts, currency swaps and interest rate swaps, and has begun
an inventory of derivatives which may be embedded in other
contracts. The Company plans to complete these inventories,
estimate the financial impact of adoption, evaluate existing risk
management activities, and perform an information systems
assessment by the end of the second quarter of 2000. The Company
will review its risk management policies and modify its business
processes as needed in order to comply with SFAS 133 and to
temper the volatility in earnings and other comprehensive income.
- 78 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
22. Contingent Liabilities
ASBESTOS LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD)
Numerous claims have been asserted against Owens Corning alleging
personal injury 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. The vast majority of these claims are being resolved
through the National Settlement Program described below. As a
result of this program, the number of new lawsuits filed against
Owens Corning has been sharply reduced from historical levels.
National Settlement Program
- ---------------------------
Owens Corning has implemented a National Settlement Program
(NSP), which it continues to expand. As of December 31, 1999,
the number of plaintiffs' law firms participating in the NSP is
approximately 110 and Owens Corning has settled, through the NSP,
approximately 235,000 asbestos personal injury claims. The NSP
also establishes procedures and fixed payments for resolving
future claims brought by participating plaintiffs' law firms
without litigation through at least 2008. Average payments made
under the NSP are substantially lower than those experienced by
Owens Corning for comparable claims prior to the NSP.
Owens Corning established the NSP in response to the rising cost
in recent years of mesothelioma settlements and judgments, as
well as significant changes in the legal environment, such as the
Supreme Court's 1997 decision in Georgine v. Amchem Products,
Inc., striking down an asbestos class action settlement. The NSP
is designed to better manage Owens Corning's asbestos liability,
and that of Fibreboard (see Item B below), and to help Owens
Corning better predict the timing and amount of indemnity
payments for both pending and future claims.
Under the NSP, each participating law firm has agreed to a long-
term settlement agreement ("NSP Agreement"). The NSP Agreements
provide for the resolution of both present claims (those claims,
including unfiled claims, pending at the time a participating
plaintiffs' firm entered into an NSP Agreement) and future claims
against Owens Corning and Fibreboard for settlement amounts
negotiated with each participating firm. NSP Agreements may be
extended beyond 2008 by mutual agreement of the parties.
As to present claims, settlement amounts to each claimant vary
based on a number of factors, including the type and severity of
disease. All payments will be subject to satisfactory evidence
of a qualifying medical condition and exposure to Owens Corning's
products, delivery of customary releases by each claimant, and
other conditions. The NSP allows claimants to receive prompt
payment without incurring the significant delays and
uncertainties of litigation. Certain claimants settling non-
malignancy claims with Owens Corning and/or Fibreboard have
agreed to accept as part of the settlement a pre-determined
amount of additional compensation if they later develop a more
severe asbestos-related medical condition.
- 79 -
OWENS CORNING AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------
(Continued)
22. Contingent Liabilities (Continued)
Under each NSP Agreement, a participating firm also agrees
(consistent with applicable legal requirements) to recommend to
its future clients, based on appropriately exercised professional
judgment, to resolve any future asbestos personal injury claims
against Owens Corning and Fibreboard through an administrative
processing arrangement, rather than litigation. Under such
arrangement, no settlement payment will be made for future claims
unless specified medical criteria, product exposure and other
requirements are met, and the amount of any such payment will be
within a range of specified cash settlement values based on the
disease of the claimant and other factors. In the case of future
claims not involving malignancy, such criteria require medical
evidence of functional impairment. Payments to claimants for
both settled present and future claims are being managed by
Integrex, a wholly-owned Owens Corning subsidiary that
specializes in, among other things, claims processing.
Payments under the NSP for settled present claims will generally
be made through 2002, with the majority of payments made in 1999
and 2000. It is anticipated that payments for a limited number
of future "exigent claims" (principally those of living
malignancy claimants) will generally begin in 2001. Payments for
other qualifying future claims generally will begin in 2003, and
will be made on the following schedule, based on when such claims
are accepted by Owens Corning for payment:
Date Accepted for Payment Year in which Claim Will be Paid
- --------------------------------- --------------------------------
January 1, 1999 through June 30,
2000 2003
July 1, 2000 through December
31, 2001 2004
January 1, 2002 through June 30,
2003 2005
July 1, 2003 through December
31, 2004 2006
January 1, 2005 through June 30,
2006 2007
July 1, 2006 or later 60 days to one year after acceptance
The schedule of payments for qualifying future claims under NSP
Agreements entered into during the fourth quarter of 1999 and
thereafter will be delayed by at least one year.
If, in any calendar year after 2002, the payment of any amounts
under the NSP in respect of future claims might cause a default
under Owens Corning's then prevailing loan covenants, Owens
Corning will have the right to defer payment of such amounts
until February 15 of the following year. Commencing in 2003,
subject to the variables and uncertainties discussed below, Owens
Corning expects that its payments for such amounts will not
exceed $150 million per year. Additional settlement payments will
be made by Fibreboard (see Item B below).
Owens Corning and Fibreboard (see Item B below) each retains the
right to terminate any individual NSP Agreement if in any year
more than a specified number of plaintiffs represented by the
plaintiffs' firm in question opt out of such agreement. Opt out
procedures for future claims are specified in the settlement
agreements, and provide for mediation and further negotiation
before a claimant may pursue his or her case in the court system.
- 80 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
22. Contingent Liabilities (Continued)
Asbestos Related Payments
- -------------------------
In 1999, Owens Corning made $860 million of asbestos related
payments, falling within four major categories: (1) Settlements
in respect of verdicts incurred 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:
(In millions of dollars)
Pre-NSP Settlements $ 170
NSP Settlements 570
Non-NSP Settlements 30
Defense, Claims Processing and
Administrative Expenses 90
------
$ 860
All amounts discussed above are before tax and application of
insurance recoveries. Owens Corning currently estimates that it
will incur total asbestos payments before tax and application of
insurance recoveries of approximately $950 million during 2000,
$400 million in 2001 and $250 million in 2002. The actual amounts
of such payments will depend on numerous variables, including the
rate at which NSP claims are submitted and processed, the
severity of disease (especially mesothelioma) involved in such
claims, the number of non-NSP claims resolved and the cost of
resolving such claims.
In this respect, since implementation of the NSP, Owens Corning's
preference has been to attempt to settle non-NSP claims (using
criteria similar to those established by the NSP) rather than
take them through the litigation process. Such settlements
expedite payments to deserving claimants while increasing
predictability to Owens Corning. Owens Corning notes that in
recent months it has received a number of settlement demands from
non-NSP plaintiffs' counsel which have exceeded historical
settlement averages for like cases. In the event this trend
continues, and Owens Corning is unable to reach acceptable
settlements, Owens Corning may have to take certain cases to
trial in order to obtain fair and appropriate resolution of those
cases, and to pay settlement amounts that more closely
approximate NSP settlement values. If this strategy is
successful, non-participating plaintiffs' counsel may elect to
join the NSP rather than continue to seek excessive settlement
values. However, the increased costs of defense, the possibility
of adverse verdicts which exceed NSP settlement values, and the
delays inherent in litigation, may affect the predictability of
Owens Corning's estimated cash outflows for asbestos.
Asbestos Legislation
- --------------------
In the fall of 1999, both the United States Senate and House of
Representatives held hearings on proposed legislation (S 758 and
HR 1283) intended to address the problem of asbestos litigation.
Although the original House and Senate proposals were virtually
identical, the House has been active in considering revisions to
HR 1283. It appears likely that a substitute for or amendment of
HR 1283 will be introduced in the House Judiciary Committee
during 2000. While details of the revised legislation have yet
to be determined, Owens Corning believes that key members of
Congress view the NSP favorably and that, if any asbestos
legislation is enacted, it will be consistent with the continued
implementation of the NSP.
- 81 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
22. Contingent Liabilities (Continued)
Other Asbestos Related Litigation
- ---------------------------------
As previously reported, Owens Corning believes that it has spent
significant amounts to resolve claims of asbestos claimants whose
injuries were caused or exacerbated by cigarette smoking. Owens
Corning is 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.
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.
The court has set a February 2001 trial date for this action. 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.
Insurance
- ---------
As of December 31, 1999, Owens Corning had approximately $230
million in unexhausted insurance coverage (net of deductibles and
self-insured retentions) under its liability insurance policies
applicable to asbestos personal injury claims. A substantial
portion of this amount represents unconfirmed potential non-
products coverage with excess level insurance carriers, as to
which Owens Corning has estimated its probable recoveries. Owens
Corning also has a significant amount of other unconfirmed
potential non-products coverage with excess level carriers. The
amount and timing of recoveries from excess level policies will
depend on subsequent negotiations or proceedings.
Reserve
- -------
Owens Corning's financial statements include a reserve for the
estimated cost associated with Owens Corning's asbestos personal
injury claims. This reserve was established initially through a
charge to income in 1991, with an additional $1.1 billion charge
to income (before taking into account probable non-products
insurance recoveries) recorded in 1996. Reflecting the
substantial new information about now settled present and
expected future claims gained in the NSP negotiations with
plaintiffs' law firms, and the recent changes in the legal
environment referred to above, Owens Corning in the fourth
quarter of 1998 increased its asbestos reserves by $1.4 billion.
This resulted in an after-tax charge to 1998 earnings of
$906 million. Subject to the variables and uncertainties
referred to below, Owens Corning estimates that its
liabilities associated with pending and unasserted future
asbestos personal injury claims and its insurance recoveries in
respect of such claims, at December 31, 1999, are as follows:
- 82 -
OWENS CORNING AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
22. Contingent Liabilities (Continued)
December 31, December 31,
1999 1998
---- ----
(In millions of dollars)
Reserve for asbestos litigation
claims
- ---------------------------------
Current $ 950 $ 850
Other 820 1,780
------- ------
Total Reserve $ 1,770 $ 2,630
------- -------
Insurance for asbestos litigation
claims
- ---------------------------------
Current $ 25 $ 150
Other 205 260
------- -------
Total Insurance $ 230 $ 410
------- -------
Net Owens Corning Asbestos
Liability $ 1,540 $ 2,220
======= =======
The NSP has improved Owens Corning's ability to quantify the cost
of resolving virtually all of the claims that were pending (filed
and unfiled) against Owens Corning prior to the NSP.
Nevertheless, Owens Corning cautions that its estimate of its
liabilities for unresolved pending and expected future non-NSP
claims, as well as future NSP claims is influenced by numerous
variables that are difficult to predict and that such estimate
therefore remains subject to considerable uncertainty. Such
variables include, among others, the number, severity of disease,
and jurisdiction of claims filed in the future (especially the
number of mesothelioma claims); how many future claimants are
covered by an NSP Agreement; the extent, if any, to which an
individual claimant exercises his or her right to opt out of an
NSP Agreement and/or utilize other counsel not participating in
the NSP; the extent, if any, to which counsel that are not bound
by an NSP Agreement undertake the representation of asbestos
personal injury plaintiffs against Owens Corning; the extent, if
any, to which Owens Corning exercises 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 claims outside the NSP. As referenced above,
Owens Corning also notes that in recent months it has received a
number of settlement demands from non-NSP plaintiff's counsel
which have exceeded historical settlement averages for like
cases. Although Owens Corning presently cannot assess what
impact, if any, the number of extraordinarily high settlement
demands might have on its estimate of its liabilities for
asbestos claims, this event further contributes to the
uncertainty surrounding that estimate.
Owens Corning will continue to review the adequacy of its
estimates of liabilities and insurance on a periodic basis and
make such adjustments as may be appropriate.
Management Opinion
- ------------------
Although any opinion is necessarily judgmental and must be based
on an assessment of the variables and uncertainties described
above, in the opinion of management, while any additional
uninsured and unreserved costs which may arise out of pending
personal injury asbestos claims and additional similar asbestos
claims filed in the future may be substantial over time,
management believes that such additional costs will not impair
the ability of Owens Corning to meet its obligations or to
reinvest in its businesses.
- 83 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
22. Contingent Liabilities (Continued)
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING)
Prior to 1972, Fibreboard manufactured insulation products
containing asbestos. Fibreboard has since been named as defendant
in many thousands of personal injury claims for injuries
allegedly caused by asbestos exposure. The vast majority of
these claims are being resolved through the NSP, as described
below.
National Settlement Program
- ---------------------------
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 settle 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 December 31, 1999,
Fibreboard has settled, through the NSP, approximately 200,000
asbestos personal injury claims. The NSP Agreements also provide
for the resolution of other future asbestos personal injury
claims against Fibreboard through the administrative processing
arrangement described in Item A. The timing of payments for
settled and future Fibreboard claims will be consistent,
generally, with the timing of Owens Corning payments, described
in Item A.
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 and is final and not subject to appeal.
Since 1993, Continental and Pacific have 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 million during the fourth quarter of 1999 to fund
Fibreboard's costs of resolving pending and future asbestos
claims, under the NSP, in the tort system, or otherwise.
The Insurance Settlement funds are held in and invested by the
Fibreboard Settlement Trust and are available to satisfy
Fibreboard's pending and future asbestos related liabilities. As
of December 31, 1999, $1,838 million was held in the Fibreboard
Settlement Trust. On an ongoing basis, the funds held in the
Trust will be subject to investment earnings/losses and will be
reduced as applied to satisfy Fibreboard's asbestos liabilities.
Generally, it is expected that payments of Fibreboard's asbestos
liabilities will be paid directly by the Fibreboard Settlement
Trust on behalf of Fibreboard. Any asbestos related amounts paid
directly by Fibreboard are subject to reimbursement from the
Trust's assets. Under the terms of the Trust, any of such assets
which ultimately are not used to fund Fibreboard's asbestos
liabilities must be distributed to charity.
- 84 -
OWENS CORNING AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
22. Contingent Liabilities (Continued)
Funds held in the Fibreboard Settlement Trust are reflected on
Owens Corning's consolidated balance sheet as restricted assets.
These assets are reflected as current assets or other assets,
with each category denoted "Restricted securities - Fibreboard".
The funds held in the Trust must be expended either in connection
with Fibreboard's asbestos related liabilities or to satisfy the
obligation under the Trust to distribute to charity the assets,
if any, remaining in the Trust after satisfaction of all such
liabilities. Accordingly, Owens Corning's consolidated balance
sheet also reflects liabilities in an aggregate amount equal to
the funds held in the Trust. These liabilities, denoted as
"Asbestos-related liabilities - Fibreboard", are reflected as
current or other liabilities, depending on the period in which
payment is expected. At December 31, 1999, Owens Corning
estimates Fibreboard's asbestos related liabilities at $1,750
million. See Note 23 for additional information concerning the
Fibreboard Settlement Trust.
Asbestos Related Payments
- -------------------------
Gross payments for asbestos litigation claims against Fibreboard
during 1999 were approximately $136 million, all of which were
paid/reimbursed by Fibreboard's insurers or the Fibreboard
Settlement Trust. Owens Corning currently estimates that
Fibreboard will incur total asbestos payments of approximately
$900 million in 2000, $350 million in 2001 and $170 million in
2002, all of which are payable/reimbursable by the Fibreboard
Settlement Trust as described above. The actual amounts of such
payments will depend on numerous variables, including the rate at
which NSP claims are submitted and processed, the severity of
disease (especially mesothelioma) involved in such claims, the
number of non-NSP claims resolved and the cost of resolving such
claims.
Management Opinion
- ------------------
Owens Corning cautions that its estimate of Fibreboard's asbestos
related liabilities is influenced by the same types of variables
and is subject to similar uncertainty as in the case of Owens
Corning. Although any opinion is necessarily judgmental and must
be based on an assessment of the variables and uncertainties
described above, Owens Corning believes the amounts available
from the Fibreboard Settlement Trust will be adequate to fund
Fibreboard's ongoing defense and indemnity costs associated with
asbestos-related personal injury claims for the foreseeable
future.
OTHER LIABILITIES
Various other lawsuits and claims arising in the normal course of
business are pending against Owens Corning, some of which allege
substantial damages. Management believes that the outcome of
these lawsuits and claims will not have a materially adverse
effect on Owens Corning's financial position or results of
operations.
- 85 -
OWENS CORNING AND SUBSIDIARIES
-------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------
(Continued)
23. Fibreboard Settlement Trust
Under the Insurance Settlement described in Note 22, two of
Fibreboard's insurers provided $1.873 billion during the fourth
quarter of 1999 to fund Fibreboard's costs of resolving pending
and future asbestos claims. The Insurance Settlement funds are
held in and invested by the Fibreboard Settlement Trust (the
"Trust") and are available to satisfy Fibreboard's pending and
future asbestos related liabilities. On an ongoing basis, the
funds held in the Trust will be subject to investment
earnings/losses and will be reduced as applied to satisfy
Fibreboard's asbestos liabilities. Under the terms of the Trust,
any Trust assets which ultimately are not used to fund
Fibreboard's asbestos liabilities must be distributed to charity.
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.
General Accounting Treatment
- ----------------------------
The assets of the Trust are comprised of cash and marketable
securities (collectively, the "Trust Assets") and are reflected
on Owens Corning's consolidated balance sheet as restricted
assets. These assets are reflected as current assets or other
assets, with each category denoted "Restricted securities -
Fibreboard". The funds held in the Trust must be expended either
in connection with Fibreboard's asbestos related liabilities or
to satisfy the obligation under the Trust to distribute to
charity the assets, if any, remaining in the Trust after
satisfaction of all such liabilities. Accordingly, Owens
Corning's consolidated balance sheet also reflects liabilities in
an aggregate amount equal to the funds held in the Trust. These
liabilities, denoted as "Asbestos related liabilities -
Fibreboard," are reflected as current or other liabilities,
depending on the period in which payment is expected. At
December 31, 1999, Owens Corning estimates Fibreboard's asbestos
related liabilities at $1.750 billion, with a residual obligation
to charity of $88 million. Payments from the Trust for asbestos
related liabilities reduce both the assets and related
liabilities on the consolidated balance sheet.
For accounting purposes, the Trust Assets are classified from
time to time as "available for sale" or "held to maturity" and
are reported in the Company's consolidated financial statements
in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly,
marketable securities classified as available for sale are
recorded at fair market value and marketable securities
designated as held to maturity are recorded at amortized cost.
Any unrealized increase/decrease in fair market value is
reflected as a change in the carrying amount of the asset on the
consolidated balance sheet as well as an increase/decrease to
other comprehensive income within stockholders' equity, net of
tax. The residual liability to be paid to charity will also
increase/decrease, with a related decrease/increase to other
comprehensive income within stockholders' equity, net of tax.
Any earnings and realized gains/losses on the Trust Assets are
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. The
residual liability to be paid to charity will also
increase/decrease, with related other expense/income on the
consolidated statement of income. Cost for purposes of computing
realized gains/losses is determined using the specific
identification method.
- 86 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
23. Fibreboard Settlement Trust (Continued)
Results for the Period Ending December 31, 1999
- -----------------------------------------------
Since the funding of the Trust in the fourth quarter of 1999,
Trust Assets generated interest/dividend earnings of
approximately $17 million, which have been recorded as an
increase in the carrying amount of the assets on Owens Corning's
consolidated balance sheet and as other income on the
consolidated statement of income. This income, however, has been
offset by an equal charge to other expense, which represents the
increase in the residual liability to be paid to charity.
Payments for asbestos litigation claims from the Trust during
December 1999 were approximately $51 million. Such payments were
funded by existing cash in the Trust or proceeds from the sale of
securities. The sale of securities during December 1999 resulted
in a realized loss of less than $1 million. 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, 1999, the fair market value adjustment for those
securities designated as available for sale resulted in an
unrealized loss of approximately $1 million. This loss has been
reflected in the Company's consolidated balance sheet as a
reduction to the carrying amount of the asset and a charge to
other comprehensive income. This loss has also been reflected as
a reduction to the liability to be paid to charity, with a
corresponding credit to other comprehensive income.
At December 31, 1999, the fair value of Trust Assets was $1.838
billion, all of which were invested in marketable securities.
$900 million of these marketable securities have been classified
as a current asset while the remaining securities have been
classified as noncurrent assets.
The amortized cost, gross unrealized holding gains and losses and
fair value of the investment securities available for sale at
December 31, 1999 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- ---------
(In millions of dollars)
US Government Bonds $ 221 $ - $ - $ 221
Municipal Bonds 199 - - 199
Corporate Bonds 85 - - 85
Corporate Notes 1,334 - (1) 1,333
--------- ---------- ---------- ---------
Total $ 1,839 $ - $ (1) $1,838
Maturities of investment securities classified as available for
sale at December 31, 1999 by contractual maturity are shown
below. Expected maturities will differ from contractual
maturities because borrowers may have the right to recall or
prepay obligations with or without call or prepayment penalties.
- 87 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
23. Fibreboard Settlement Trust (Continued)
Amortized
Cost Fair Value
---- ----------
(In millions of dollars)
Due within one year $ 1,152 $ 1,152
Due after one year through
five years 72 72
Due after five years through
ten years 87 87
Due after ten years 528 527
----------- -----------
Total $ 1,839 $ 1,838
The table below summarizes Trust activity from inception to
December 31, 1999:
Interest Unrealized Sale Realized
Balance and Gain/ of Gain/ Balance
12/8/99 Dividends (Loss) Securities (Loss) Payments 12/31/99
------- --------- --------- ---------- -------- -------- --------
(In millions of dollars)
Assets
- ------
Cash $ - $ - $ - $ 51 $ - $(51) $ -
Marketable
Securities:
Available
for Sale $1,873 $17 $ (1) $ (51) - - $1,838
------ ----- ------- -------- ----- ------ -------
Total Assets $1,873 $17 $ (1) $ - $ - $(51) $1,838
====== ===== ======= ======== ====== ====== =======
Liabilities
- -----------
Asbestos
Litigation
Claims $1,801 $ - $ - $ - $ - $(51) $1,750
Charity $ 72 $17 $ (1) - - - $ 88
------ ----- ------- -------- ------ ------ -------
Total
Liabilities $1,873 $17 $ (1) $ - $ - $(51) $1,838
====== ===== ======= ======== ====== ====== =======
- 88 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
24. Quarterly Financial Information (Unaudited)
Quarter
-------------------------------------
First Second Third Fourth
----- ------ ----- ------
(In millions of dollars, except share data)
1999
- ----
Net sales $ 1,130 $1,310 $1,333 $1,275
Cost of sales 871 987 986 980
------- ------ ------- ------
Gross margin $ 259 $ 323 $ 347 $ 295
======= ====== ======= ======
Net income $ 44 $ 76 $ 89 $ 61
======= ====== ======= ======
Net income per share:
Basic net income
per share $ .81 $ 1.41 $ 1.64 $ 1.11
======= ======= ======= ======
Diluted net income
per share $ .77 $ 1.31 $ 1.53 $ 1.05
======= ======= ======= ======
- 89 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Continued)
24. Quarterly Financial Information (Unaudited)(Continued)
Quarter
------------------------------------
First Second Third Fourth
----- ------ ----- ------
(In millions of dollars, except share data)
1998
- ----
Net sales $1,137 $1,286 $1,324 $1,262
Cost of sales 938 985 1,060 961
------ ------- ------ ------
Gross margin $ 199 $ 301 $ 264 $ 301
====== ======== ====== ======
Income (loss) before
extraordinary item 8 59 135 (868)
Extraordinary loss
(Note 2) - - (39) -
------ -------- ------- ------
Net income (loss) $ 8 $ 59 $ 96 $(868)
====== ======== ======= ======
Net income (loss) per share:
Basic net income (loss) per share:
Income (loss) before
extraordinary item .16 1.09 2.51 (16.16)
Extraordinary
loss (Note 2) - - (.72) -
------ -------- -------- -------
Net income (loss)
per share $ .16 $ 1.09 $ 1.79 $(16.16)
======== ======== ======== =======
Diluted net income (loss) per share:
Income (loss) before
extraordinary item $ .16 $ 1.02 $ 2.32 $(16.16)
Extraordinary loss
(Note 2) - - (.66) -
------- -------- -------- --------
Net income (loss)
per share $ .16 $ 1.02 $ 1.66 $(16.16)
======= ======== ========= =======
- 90 -
INDEX TO FINANCIAL STATEMENT SCHEDULES
--------------------------------------
Number Description Page
- ------ ----------- ----
II Valuation and Qualifying Accounts
and Reserves - for the years ended
December 31, 1999, 1998, and 1997..................91
- 91 -
OWENS CORNING AND SUBSIDIARIES
------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
-------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
-----------------------------------------------------
Column A Column B Column C Column D Column E
Additions
----------------
(1) (2)
Balance Charged
at to Charged Balance
Beginning Costs to at
of and Other End of
Classification Period Expenses Accounts Deductions Period
- -------------- -------- -------- -------- ---------- ------
(In millions of dollars)
FOR THE YEAR ENDED
DECEMBER 31, 1999:
Allowance deducted
from asset to
which it applies -
Doubtful Accounts $ 23 $ 5 $ - $ 2 (B) $ 26
Reserve to which it
applies -
Restructure Costs 49 - - 28 (C) 21(E)
FOR THE YEAR ENDED
DECEMBER 31, 1998:
Allowance deducted
from asset to
which it applies -
Doubtful Accounts $ 20 $ 9 $ - $ 6(B) $ 23
Reserve to which
it applies -
Restructure Costs 44 93 - 88(C) 49(D)
FOR THE YEAR ENDED
DECEMBER 31, 1997:
Allowance deducted
from asset to
which it applies -
Doubtful Accounts $ 17 $ 3 $ 6(A) $ 6(B) $ 20
Reserve to which
it applies -
Restructure Costs 34 40 - 30(C) 44
Notes:
(A) Allowances of subsidiaries acquired.
(B) Uncollectible accounts written off, net of recoveries.
(C) Cash payments.
(D) Includes non-current liabilities of $14 million.
(E) Includes non-current liabilities of $8 million.
- 92 -
EXHIBIT INDEX
-------------
Exhibit
Number Document Description
- -------- --------------------
(3) Articles of Incorporation and By-Laws.
(i) Certificate of Incorporation of Owens Corning, as
amended (incorporated herein by reference to Exhibit
(3) to Owens Corning's quarterly report on Form 10-Q
(File No. 1-3660) for the quarter ended March 31,
1997).
(ii) By-Laws of Owens Corning, as amended (filed
herewith).
(4) Instruments Defining the Rights of Security Holders,
Including Indentures.
Indenture, dated as of May 5, 1997, between Owens Corning
and The Bank of New York, as Trustee (incorporated herein
by reference to Exhibit 4.5.1 to Owens Corning's current
report on Form 8-K (File No. 1-3660), filed May 14,
1997).
Credit Agreement, dated as of June 26, 1997, among Owens
Corning, other Borrowers and Guarantors, the Banks listed
on Annex A thereto, and Credit Suisse First Boston, as
Agent (incorporated herein by reference to Exhibit (4) to
Owens Corning's quarterly report on Form 10-Q (File No. 1-
3660) for the quarter ended June 30, 1997), as amended by
Amendment No. 1 thereto (incorporated herein by reference
to Exhibit (4) to Owens Corning's annual report on Form
10-K (File No. 1-3660) for the year ended December 31,
1997) and Amendment No. 2 thereto (incorporated herein by
reference to Exhibit (4) to Owens Corning's annual report
on Form 10-K (File No. 1-3660) for the year ended
December 31, 1998).
Owens Corning agrees to furnish to the Securities and
Exchange Commission, upon request, copies of all
instruments defining the rights of holders of long-term
debt of Owens Corning where the total amount of
securities authorized under each issue does not exceed
ten percent of Owens Corning's total assets.
(10) Material Contracts.
Credit Agreement, dated as of June 26, 1997, among Owens
Corning, other Borrowers and Guarantors, the Banks
listed on Annex A thereto, and Credit Suisse First
Boston, as Agent (incorporated herein by reference to
Exhibit (4) to Owens Corning's quarterly report on Form
10-Q (File No. 1-3660) for the quarter ended June 30,
1997), as amended by Amendment No. 1 thereto
(incorporated herein by reference to Exhibit (4) to
Owens Corning's annual report on Form 10-K (File No. 1-
3660) for the year ended December 31, 1997) and
Amendment No. 2 thereto (incorporated herein by
reference to Exhibit (4) to Owens Corning's annual
report on Form 10-K (File No. 1-3660) for the year ended
December 31, 1998).
* Director's Charitable Award Program, as amended (filed
herewith).
* Key Management Severance Agreement with David T. Brown
(filed herewith).
- 93 -
EXHIBIT INDEX
-------------
* Corporate Incentive Plan Terms Applicable to Key Employees
Other Than Certain Executive Officers (incorporated
herein by reference to Exhibit (10) to Owens Corning's
quarterly report on Form 10-Q (File No. 1-3660) for the
quarter ended June 30, 1999).
The following documents are incorporated herein by reference
to Exhibit (10) to Owens Corning's quarterly
report on Form 10-Q (File No. 1-3660) for the quarter
ended March 31, 1999:
* - Owens Corning Deferred Compensation Plan.
* - Corporate Incentive Plan Terms Applicable to Certain
Executive Officers.
The following documents are incorporated herein by
reference to Exhibit (10) to Owens Corning's annual
report on Form 10-K (File No. 1-3660) for the year ended
December 31, 1998:
* - Stock Performance Incentive Plan, as amended.
* - Key Management Severance Agreement with Maura Abeln
Smith.
* - Key Management Severance Agreement with Domenico Cecere.
* - Key Management Severance Agreement with J. Thurston
Roach.
* - Letter to Maura Abeln Smith.
* - Letter to J. Thurston Roach.
* Owens Corning Supplemental Executive Retirement Plan,
effective as of January 1, 1998 (incorporated herein by
reference to Exhibit (10) to Owens Corning's quarterly
report on Form 10-Q (File No. 1-3660) for the quarter
ended June 30, 1998).
The following documents are incorporated herein by reference
to Exhibit (10) to Owens Corning's annual report
on Form 10-K (File No. 1-3660) for the year ended
December 31, 1997:
* - Renewal Agreement, effective as of July 31, 1999, with
Glen H. Hiner.
* - Agreement with Domenico Cecere.
* 1987 Stock Plan for Directors, as amended (incorporated
herein by reference to Exhibit (10) to Owens Corning's
quarterly report on Form 10-Q (File No. 1-3660) for the
quarter ended June 30, 1997).
The following documents are incorporated herein by
reference to Exhibit (10) to Owens Corning's quarterly
report on Form 10-Q (File No. 1-3660) for the quarter
ended June 30, 1996:
* - Long-Term Performance Incentive Plan Terms Applicable
to Certain Executive Officers.
* - Long-Term Performance Incentive Plan Terms Applicable
to Officers Other Than Certain Executive Officers.
- 94 -
EXHIBIT INDEX
-------------
* Agreement, dated as of January 1, 1995, with William W.
Colville (incorporated herein by reference to Exhibit
(10) to Owens Corning's annual report on Form 10-K (File
No. 1-3660) for the year ended December 31, 1994) and
amendment dated September 29, 1997 (incorporated herein
by reference to Exhibit (10) to Owens Corning's annual
report on Form 10-K (File No. 1-3660) for the year ended
December 31, 1997).
* Executive Supplemental Benefit Plan, as amended
(incorporated herein by reference to Exhibit (10) to
Owens Corning's quarterly report on Form 10-Q (File
No. 1-3660) for the quarter ended March 31, 1993).
* Employment Agreement, dated as of December 15, 1991,
with Glen H. Hiner (incorporated herein by reference
to Exhibit (10) to Owens Corning's annual report on Form
10-K (File No. 1-3660) for the year ended December 31,
1991), as amended by First Amending Agreement made as of
April 1, 1992 (incorporated herein by reference to
Exhibit (19) to Owens Corning's quarterly report on Form
10-Q (File No. 1-3660) for the quarter ended June 30,
1992).
* Form of Directors' Indemnification Agreement (incorporated
herein by reference to Exhibit (10) to Owens
Corning's annual report on Form 10-K (File No. 1-3660)
for the year ended December 31, 1989).
* Deferred Compensation Plan for Directors, as amended
(incorporated herein by reference to Exhibit (10) to
Owens Corning's annual report on Form 10-K (File No. 1-
3660) for the year ended December 31, 1987).
(11) Statement re Computation of Per Share Earnings (filed
herewith).
(21) Subsidiaries of Owens Corning (filed herewith).
(23) Consent of Arthur Andersen LLP (filed herewith).
(27) Financial Data Schedule (filed herewith).
* Denotes management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of Form
10-K.