SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 2001
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
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 / /
Shares of common stock, par value $.10 per share, outstanding at March 31, 2001
55,362,424
- 2 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(unaudited)
Quarter Ended
March 31,
---------
2001 2000
---- ----
(In millions of dollars,
except share data)
NET SALES $ 1,067 $ 1,257
COST OF SALES 896 971
------------ -------------
Gross margin 171 286
------------ -------------
OPERATING EXPENSES
Marketing and administrative expenses 127 148
Science and technology expenses 10 15
Restructure costs (Note 4) 9 -
Chapter 11 related reorganization items (Note 1) 21 -
Other 21 18
------------ -------------
Total operating expenses 188 181
------------ -------------
INCOME (LOSS) FROM OPERATIONS (17) 105
OTHER
Cost of borrowed funds (Note 1) 4 42
Other (4) -
------------- -------------
INCOME (LOSS) BEFORE PROVISION (CREDIT) FOR
INCOME TAXES (17) 63
Provision (credit) for income taxes (Note 6) (5) 13
------------- -------------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
EQUITY IN NET INCOME (LOSS) OF AFFILIATES (12) 50
Minority interest - (2)
Equity in net income of affiliates 2 -
------------ ------------
NET INCOME (LOSS) $ (10) $ 48
============= ============
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share $ (.19) $ .88
------------- ------------
Diluted net income (loss) per share $ (.19) $ .84
============= ============
Weighted average number of common shares outstanding and
common equivalent shares during the period (in millions)
Basic 55.0 54.6
Diluted 55.0 59.8
The accompanying notes are an integral part of this statement.
- 3 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
March 31, December 31,
2001 2000
---- ----
ASSETS (In millions of dollars)
- ------
CURRENT
Cash and cash equivalents $ 454 $ 550
Receivables 597 488
Inventories (Note 7) 510 469
Deferred income taxes 5 6
Income tax receivable 5 31
Other current assets 24 20
----------- -----------
Total current 1,595 1,564
---------- -----------
OTHER
Insurance for asbestos litigation claims (Note 12) 59 59
Restricted cash and other - asbestos related (Note 12) 115 164
Restricted cash, securities and other - Fibreboard (Notes 12 and 13) 1,259 1,274
Deferred income taxes 1,063 1,075
Goodwill 628 636
Investments in affiliates 51 62
Other noncurrent assets 252 257
---------- ----------
Total other 3,427 3,527
---------- ----------
PLANT AND EQUIPMENT, at cost
Land 66 60
Buildings and leasehold improvements 661 663
Machinery and equipment 2,764 2,717
Construction in progress 239 327
---------- ----------
3,730 3,767
Less: Accumulated depreciation (1,942) (1,946)
---------- -----------
Net plant and equipment 1,788 1,821
---------- ----------
TOTAL ASSETS $ 6,810 $ 6,912
========== ==========
The accompanying notes are an integral part of this statement.
- 4 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (continued)
(unaudited)
March 31, December 31,
2001 2000
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars)
- ------------------------------------
CURRENT
Accounts payable and accrued liabilities $ 533 $ 491
Short-term debt 48 50
Long-term debt - current portion 67 68
----------- -----------
Total current 648 609
----------- -----------
LONG-TERM DEBT 7 7
----------- -----------
OTHER
Other employee benefits liability 324 322
Pension plan liability 79 75
Other 138 124
----------- -----------
Total other 541 521
----------- -----------
LIABILITIES SUBJECT TO COMPROMISE (Note 1) 6,812 6,935
----------- -----------
COMMITMENTS AND CONTINGENCIES
COMPANY-OBLIGATED SECURITIES OF ENTITIES
HOLDING SOLELY PARENT DEBENTURES - SUBJECT TO
COMPROMISE 200 200
----------- -----------
MINORITY INTEREST 39 39
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock 698 699
Deficit (2,006) (1,996)
Accumulated other comprehensive loss (126) (97)
Other (3) (5)
------------ ------------
Total stockholders' equity (1,437) (1,399)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,810 $ 6,912
=========== ===========
The accompanying notes are an integral part of this statement.
- 5 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Quarter Ended
March 31,
---------
2001 2000
---- ----
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net income (loss) $ (10) $ 48
Reconciliation of net cash provided by operating activities:
Noncash items:
Provision for depreciation and amortization 54 48
Provision (credit) for deferred income taxes 12 4
Other 23 (13)
(Increase) decrease in receivables (127) (181)
(Increase) decrease in inventories (51) (57)
Increase (decrease) in accounts payable and accrued liabilities 28 (80)
(Increase) decrease in restricted cash and other - asbestos related
(Note 12) 49 (256)
Change in liabilities subject to compromise (Note 1) (82) -
Proceeds from insurance for asbestos litigation claims, excluding
Fibreboard (Note 12) - 12
Payments for asbestos litigation claims, excluding Fibreboard
(Note 12) - (223)
Other 31 19
----------- -----------
Net cash flow from operations $ (73) $ (679)
------------ ------------
NET CASH FLOW FROM INVESTING
Additions to plant and equipment $ (42) $ (68)
Investment in subsidiaries, net of cash acquired - (4)
Proceeds from the sale of affiliate or business (Note 5) 20 50
Other 5 (2)
----------- ------------
Net cash flow from investing $ (17) $ (24)
------------ ------------
The accompanying notes are an integral part of this statement.
- 6 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(unaudited)
Quarter Ended
March 31,
2001 2000
---- ----
(In millions of dollars)
NET CASH FLOW FROM FINANCING
Net additions to long-term credit facilities $ - $ 655
Other reductions to long-term debt (1) (11)
Net increase (decrease) in short-term debt (2) 35
Dividends paid - (4)
Other (1) -
------------ -----------
Net cash flow from financing $ (4) $ 675
------------ -----------
Effect of exchange rate changes on cash (2) (1)
------------ -----------
Net decrease in cash and cash equivalents (96) (29)
Cash and cash equivalents at beginning of period 550 70
----------- -----------
Cash and cash equivalents at end of period $ 454 $ 41
=========== ===========
The accompanying notes are an integral part of this statement.
- 7 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11
On October 5, 2000 (the "Petition Date"), Owens Corning and the 17 United States
subsidiaries listed below (collectively, the "Debtors"), filed voluntary
petitions for relief (the "Filing") under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). The Debtors are currently
operating their businesses as debtors-in-possession in accordance with
provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors
(collectively, the "Chapter 11 Cases") are being jointly administered under Case
No. 00-3837 (JKF). The Chapter 11 Cases do not include other United States
subsidiaries of Owens Corning or any of its foreign subsidiaries (collectively,
the "Non-Debtor Subsidiaries"). The subsidiary Debtors that filed Chapter 11
petitions for relief are:
CDC Corporation Integrex Testing Systems LLC
Engineered Yarns America, Inc. HOMExperts LLC
Falcon Foam Corporation Jefferson Holdings, Inc.
Integrex Owens-Corning Fiberglas Technology Inc.
Fibreboard Corporation Owens Corning HT, Inc.
Exterior Systems, Inc. Owens-Corning Overseas Holdings, Inc.
Integrex Ventures LLC Owens Corning Remodeling Systems, LLC
Integrex Professional Services LLC Soltech, Inc.
Integrex Supply Chain Solutions LLC
The Debtors filed for relief under Chapter 11 to address the growing demands on
Owens Corning's cash flow resulting from its multi-billion dollar asbestos
liability. This liability is discussed in greater detail in Note 12 to the
Consolidated Financial Statements.
Consequence of Filing
- ---------------------
As a consequence of the Filing, all pending litigation against the Debtors is
stayed automatically by section 362 of the Bankruptcy Code and, absent further
order of the Bankruptcy Court, no party may take any action to recover on
pre-petition claims against the Debtors. In addition, pursuant to section 365 of
the Bankruptcy Code, the Debtors may reject or assume pre-petition executory
contracts and unexpired leases, and other parties to contracts or leases that
are rejected may assert rejection damages claims as permitted by the Bankruptcy
Code.
Two creditors' committees, one representing asbestos claimants and the other
representing unsecured creditors, have been appointed as official committees in
the Chapter 11 Cases and, in accordance with the provisions of the Bankruptcy
Code, will have the right to be heard on all matters that come before the
Bankruptcy Court. Owens Corning expects that the appointed committees, together
with a legal representative of future asbestos claimants to be appointed by the
Bankruptcy Court, will play important roles in the Chapter 11 Cases and the
negotiation of the terms of any plan or plans of reorganization.
Owens Corning anticipates that substantially all liabilities of the Debtors as
of the date of the Filing will be resolved under one or more Chapter 11 plans of
reorganization to be proposed and voted on in the Chapter 11 Cases in accordance
with the provisions of the Bankruptcy Code. Although the Debtors intend to file
and seek confirmation of such a plan or plans, there can be no assurance as to
when the Debtors will file such a plan or plans, or that such plan or plans will
be confirmed by the Bankruptcy Court and consummated.
- 8 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
As provided by the Bankruptcy Code, the Debtors initially had the exclusive
right to propose a plan of reorganization for 120 days following the Petition
Date, until February 2, 2001. On January 17, 2001, the Bankruptcy Court extended
such exclusivity period until August 2, 2001, and similarly extended the
Debtors' exclusive rights to solicit acceptances of a reorganization plan from
April 3, 2001 to October 3, 2001. If the Debtors fail to file a plan of
reorganization during such period or any extension thereof, or if such plan is
not accepted by the requisite numbers of creditors and equity holders entitled
to vote on the plan, other parties in interest in the Chapter 11 Cases may be
permitted to propose their own plan(s) of reorganization for the Debtors.
Owens Corning is unable to predict at this time what the treatment of creditors
and equity holders of the respective Debtors will be under any proposed plan or
plans of reorganization. Such plan or plans may provide, among other things,
that all present and future asbestos-related liabilities of Owens Corning and
Fibreboard will be discharged and assumed and resolved by one or more
independently administered trusts established in compliance with Section 524(g)
of the Bankruptcy Code. Such plan or plans may also provide for the issuance of
an injunction by the Bankruptcy Court pursuant to Section 524(g) of the
Bankruptcy Code that will enjoin actions against the reorganized Debtors for the
purpose of, directly or indirectly, collecting, recovering or receiving payment
of, on, or with respect to any claims resulting from asbestos-containing
products allegedly manufactured, sold or installed by Owens Corning or
Fibreboard, which claims will be paid in whole or in part by one or more Section
524(g) trusts. Similar plans of reorganization have been confirmed in the
Chapter 11 cases of other companies involved in asbestos-related litigation.
Section 524(g) of the Bankruptcy Code provides that, if certain specified
conditions are satisfied, a court may issue a supplemental permanent injunction
barring the assertion of asbestos-related claims or demands against the
reorganized company and channeling those claims to an independent trust.
Owens Corning is unable to predict at this time what treatment will be accorded
under any such reorganization plan or plans to inter-company indebtedness,
licenses, transfers of goods and services and other inter-company and
intra-company arrangements, transactions and relationships that were entered
into prior to the Petition Date. These arrangements, transactions and
relationships may be challenged by various parties in the Chapter 11 Cases and
the outcome of those challenges, if any, may have an impact on the treatment of
various claims under such plan or plans. For example, Owens Corning is unable to
predict at this time what the treatment will be under any such plan or plans
with respect to (1) the guaranties issued by certain of Owens Corning's U.S.
subsidiaries, including Owens-Corning Fiberglas Technology Inc. ("OCFT") and
IPM, Inc. ("IPM", a Non-Debtor Subsidiary that holds Owens Corning's ownership
interest in a majority of Owens Corning's foreign subsidiaries), with respect to
Owens Corning's $1.8 billion pre-petition bank credit facility (the
"Pre-Petition Credit Facility" which is now in default) or (2) OCFT's license
agreements with Owens Corning and Exterior Systems, Inc., a wholly-owned
subsidiary of Owens Corning ("Exterior"), pursuant to which OCFT licenses
intellectual property to Owens Corning and Exterior.
The Bankruptcy Court may confirm a plan of reorganization only upon making
certain findings required by the Bankruptcy Code, and a plan may be confirmed
over the dissent of non-accepting creditors and equity security holders if
certain requirements of the Bankruptcy Code are met. The payment rights and
other entitlements of pre-petition creditors and Owens Corning's shareholders
may be substantially altered by any plan or plans of reorganization confirmed in
the Chapter 11 Cases. There is no assurance that there will be sufficient assets
to satisfy the Debtors' pre-petition liabilities in whole or in part, and the
pre-petition creditors of some Debtors may be treated differently than those of
other Debtors.
- 9 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
Pre-petition creditors may receive under a plan or plans less than 100% of the
face value of their claims, and the interests of Owens Corning's equity security
holders may be substantially diluted or cancelled in whole or in part. As noted
above, it is not possible at this time to predict the outcome of the Chapter 11
Cases, the terms and provisions of any plan or plans of reorganization, or the
effect of the Chapter 11 reorganization process on the claims of the creditors
of the Debtors or the interests of Owens Corning's equity security holders.
Financial Statement Presentation
- --------------------------------
The accompanying Consolidated Financial Statements have been prepared in
accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," and on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Filing, such realization of assets and liquidation
of liabilities are subject to uncertainty. While operating as
debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code,
and subject to Bankruptcy Court approval or otherwise as permitted in the
ordinary course of business, the Debtors, or some of them, may sell or otherwise
dispose of assets and liquidate or settle liabilities for amounts other than
those reflected in the Consolidated Financial Statements. Further, a plan of
reorganization could materially change the amounts and classifications reported
in the consolidated historical financial statements.
Substantially all of the Company's pre-petition debt is now in default due to
the Filing. As described below, the accompanying Consolidated Financial
Statements present the Debtors' pre-petition debt under the caption "Liabilities
Subject to Compromise." This includes debt under the Pre-Petition Credit
Facility and approximately $1.4 billion of other outstanding debt. As required
by SOP 90-7, the Company, beginning in the fourth quarter of 2000, recorded the
Debtors' pre-petition debt instruments at the allowed amount, as defined by SOP
90-7.
As reflected in the Consolidated Financial Statements, "Liabilities Subject to
Compromise" refer to Debtors' liabilities incurred prior to the commencement of
the Chapter 11 Cases. The amounts of the various liabilities that are subject to
compromise are set forth below following the debtor-in-possession financial
statements. These amounts represent Owens Corning's estimate of known or
potential pre-petition claims to be resolved in connection with the Chapter 11
Cases. Such claims remain subject to future adjustments. Adjustments may result
from (1) negotiations; (2) actions of the Bankruptcy Court; (3) further
developments with respect to disputed claims; (4) rejection of executory
contracts and unexpired leases; (5) the determination as to the value of any
collateral securing claims; (6) proofs of claim; or (7) other events. Payment
terms for these amounts will be established in connection with the Chapter 11
Cases.
Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with
the Bankruptcy Court setting forth the assets and liabilities of the Debtors as
of the date of the Filing. Differences between amounts recorded by the Debtors
and claims filed by creditors will be investigated and resolved as part of the
proceedings in the Chapter 11 Cases. No bar dates have been set for the filing
of proofs of claim against the Debtors. Accordingly, the ultimate number and
allowed amount of such claims are not presently known.
The Debtors have received approval from the Bankruptcy Court to pay or otherwise
honor certain of their pre-petition obligations, including employee wages,
- 10 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
salaries, benefits and other employee obligations, pre-petition claims of
critical vendors, and certain other pre-petition claims including certain
customer program and warranty claims.
Since the Petition Date, contractual interest expense not accrued or recorded on
pre-petition debt totaled $102 million, of which $50 million relates to the
quarter ended March 31, 2001.
At March 31, 2001, the Company had $454 million of Cash and Cash Equivalents (of
which approximately $42 million is subject to an administrative freeze pending
the resolution of certain alleged set-off rights which, upon approval of the
Bankruptcy Court, may be exercised by certain pre-petition lenders). In
addition, in connection with the Filing, the Debtors obtained a $500 million
debtor-in-possession credit facility from a group of lenders led by Bank of
America, N.A. (the "DIP Financing"). At March 31, 2001, this facility had not
been utilized except for approximately $18 million of standby letters of credit
and similar uses.
As a consequence of the Filing and the impact of certain provisions of the
Company's DIP Financing and in a cash management order entered by the Bankruptcy
Court, the Company and its subsidiaries are now subject to certain restrictions,
including on their ability to pay dividends and to transfer cash and other
assets to each other and to their affiliates.
The Company believes, based on information presently available to it, that cash
available from operations and the DIP Financing will provide sufficient
liquidity to allow it to continue as a going concern for the foreseeable future.
However, the ability of the Company to continue as a going concern (including
its ability to meet post-petition obligations of the Debtors and to meet
obligations of the Non-Debtor Subsidiaries) and the appropriateness of using the
going concern basis for its financial statements are dependent upon, among other
things, (i) the Company's ability to comply with the terms of the DIP Financing
and any cash management order entered by the Bankruptcy Court in connection with
the Chapter 11 Cases, (ii) the ability of the Company to maintain adequate cash
on hand, (iii) the ability of the Company to generate cash from operations, (iv)
the ability of the Non-Debtor Subsidiaries to obtain necessary financing, (v)
confirmation of a plan or plans of reorganization under the Bankruptcy Code, and
(vi) the Company's ability to achieve profitability following such confirmation.
Debtor-In-Possession Financial Statements
- -----------------------------------------
The condensed financial statements of the Debtors are presented as follows:
- 11 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION STATEMENT OF INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 2001
2001
----
(In millions of dollars)
NET SALES $ 916
COST OF SALES 794
-----------
Gross margin 122
-----------
OPERATING EXPENSES
Marketing and administrative expenses 111
Science and technology expenses 9
Restructure costs (Note 4) 3
Chapter 11 reorganization items (Note 1) 21
Other (Including interest income from non-Debtors $14 million) 13
------------
Total operating expenses 157
-----------
LOSS FROM OPERATIONS (35)
OTHER
Cost of borrowed funds 6
Other (Note 13) (4)
-------------
LOSS BEFORE CREDIT FOR INCOME TAXES (37)
Credit for income taxes (12)
------------
LOSS BEFORE EQUITY IN NET INCOME OF AFFILIATES (25)
Equity in net income of affiliates 2
------------
NET LOSS $ (23)
===========
The accompanying notes are an integral part of this statement.
- 12 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION BALACNE SHEET
March 31, December 31,
2001 2000
---- ----
(In millions of dollars)
ASSETS
- ------
CURRENT
Cash and cash equivalents $ 374 $ 461
Receivables, net 444 338
Receivables - non-debtors 680 672
Inventories 387 347
Deferred income taxes 4 4
Income tax receivable 4 31
Other current assets 23 18
------------ ----------
Total current 1,916 1,871
---------- -------
OTHER
Insurance for asbestos litigation claims (Note 12) 59 59
Restricted cash and other - asbestos related (Note 12) 115 164
Restricted cash, securities and other - Fibreboard (Notes 12
and 13) 1,259 1,274
Deferred income taxes 1,052 1,058
Goodwill, net 528 530
Investments in affiliates 22 38
Investments in non-debtor subsidiaries 739 745
Other noncurrent assets 213 209
----------- ---------
Total other 3,987 4,077
---------- -------
PLANT AND EQUIPMENT, at cost
Land 40 34
Buildings and leasehold improvements 524 522
Machinery and equipment 2,100 2,078
Construction in progress 230 259
----------- ---------
2,894 2,893
Less: Accumulated depreciation (1,508) (1,502)
----------- -------
Net plant and equipment 1,386 1,391
---------- --------
TOTAL ASSETS $ 7,289 $ 7,339
========= =======
The accompanying notes are an integral part of this statement.
- 13 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION BALANCE SHEET
March 31, December 31,
2001 2000
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars)
- ------------------------------------
CURRENT
Accounts payable and accrued liabilities $ 393 $ 320
Accounts payable and accrued liabilities - non-debtors 47 46
Long-term debt - current portion - 1
------------ -----------
Total current 440 367
--------- ---------
OTHER
Other employee benefits liability 311 308
Pension plan liability 70 68
Other 113 96
--------- ----------
Total other 494 472
--------- ---------
LIABILITIES SUBJECT TO COMPROMISE 7,495 7,623
STOCKHOLDERS' EQUITY
Common stock 698 699
Deficit (1,824) (1,807)
Accumulated other comprehensive loss (12) (12)
Other (2) (3)
------------ ----------
Total stockholders' equity (1,140) (1,123)
--------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,289 $ 7,339
======== =======
The accompanying notes are an integral part of this statement.
- 14 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2001
2001
----
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net loss $ (23)
Reconciliation of net cash provided by operating activities
Noncash items:
Provision for depreciation and amortization 38
Credit for deferred income taxes 12
Other 35
Increase in receivables (116)
Increase in inventories (41)
Increase in accounts payable and accrued liabilities 50
Decrease in restricted cash and other - asbestos related 49
Decrease in restricted cash, securities and other - Fibreboard 35
Change in liabilities subject to compromise (117)
Other 29
----------
Net cash flow from operations $ (49)
----------
NET CASH FLOW FROM INVESTING
Additions to plant and equipment $ (42)
Other 5
-----------
Net cash flow from investing $ (37)
----------
The accompanying notes are an integral part of this statement.
- 15 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
2001
----
(In millions of dollars)
NET CASH FLOW FROM FINANCING
Other $ (1)
----------
Net cash flow from financing $ (1)
----------
Net decrease in cash and cash equivalents $ (87)
Cash and cash equivalents at beginning of period 461
----------
Cash and cash equivalents at end of period $ 374
==========
The amounts subject to compromise in the Consolidated and Debtor-in-Possession
Balance Sheets consist of the following items:
March 31, December 31,
2001 2000
---- ----
(amounts in millions)
Accounts payable $ 212 $ 255
Accrued interest payable 40 39
Accrued liabilities 65 74
Debt 2,827 2,832
Income taxes payable 209 212
Reserve for asbestos litigation claims - Owens Corning (Note 12) 2,200 2,249
Reserve for asbestos litigation claims - Fibreboard
(Notes 12 and 13) 1,259 1,274
---------- ---------
Total consolidated 6,812 6,935
Payables to non-debtors 683 688
----------- ----------
Total debtor $ 7,495 $ 7,623
========= ========
The amounts for reorganizational items in the Consolidated and
Debtor-in-Possession Income Statements consist of the following for the quarter
ended March 31:
2001
----
(amounts in millions)
Professional fees $ 18
Payroll and compensation 7
Interest income (5)
Litigation related expenses and other 1
-------
Total $ 21
=======
- 16 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SEGMENT DATA
During 2000, the Company realigned its internal operating segments. Following
this realignment, the Company reviewed its segments in accordance with SFAS 131
and concluded that the aggregation of its operating segments into two reportable
segments was still appropriate. As a result of this realignment, intersegment
transactions no longer exist between reportable segments. Net sales and income
from operations have been restated for all periods presented to reflect this
change.
Quarter Ended
March 31,
---------
NET SALES 2001 2000
---- ----
(In millions of dollars)
Reportable Operating Segments
- -----------------------------
Building Materials Systems
United States $ 785 $ 929
Europe 2 57
Canada and other 36 42
----------- -----------
Total Building Materials Systems $ 823 $ 1,028
----------- -----------
Composite Systems
United States 101 100
Europe 100 85
Canada and other 43 44
----------- -----------
Total Composite Systems 244 229
----------- -----------
Total Reportable Operating Segments $ 1,067 $ 1,257
=========== ===========
External Customer Sales by Geographic Region
- --------------------------------------------
United States $ 886 $ 1,029
Europe 102 142
Canada and other 79 86
----------- -----------
Net Sales $ 1,067 $ 1,257
=========== ===========
- 17 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2. SEGMENT DATA (continued)
Quarter Ended
March 31,
---------
INCOME (LOSS) FROM OPERATIONS 2001 2000
---- ----
(In millions of dollars)
Reportable Operating Segments
- -----------------------------
Building Materials Systems
United States $ 22 $ 91
Europe - 1
Canada and other 1 4
----------- ----------
Total Building Materials Systems 23 96
----------- ----------
Composite Systems
United States 17 29
Europe 13 -
Canada and other 5 6
----------- ----------
Total Composite Systems 35 35
----------- ----------
Total Reportable Operating Segments $ 58 $ 131
=========== ==========
Geographic Regions
- ------------------
United States $ 39 $ 120
Europe 13 1
Canada and other 6 10
----------- ----------
Total Reportable Operating Segments $ 58 $ 131
=========== ==========
Reconciliation to Consolidated Income (Loss) Before
- ---------------------------------------------------
Provision (Credit) for Income Taxes
-----------------------------------
Restructuring and other charges (42) (11)
Chapter 11 related reorganization items (21) -
Loss on sale of affiliate or business - (5)
General corporate expense (12) (10)
Cost of borrowed funds (4) (42)
Other 4 -
----------- ----------
Consolidated Income (Loss) Before Provision (Credit)
for Income Taxes $ (17) $ 63
============ ==========
- 18 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
3. GENERAL
The financial statements included in this Report are condensed and unaudited,
pursuant to certain Rules and Regulations of the Securities and Exchange
Commission, but include, in the opinion of the Company, adjustments necessary
for a fair statement of the results for the periods indicated, which, however,
are not necessarily indicative of results which may be expected for the full
year.
In connection with the condensed financial statements and notes included in this
Report, reference is made to the financial statements and notes thereto
contained in the Company's 2000 Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission.
4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES
During the first quarter of 2001, the Company continued to experience the impact
of a soft overall economy, primarily in the building materials industries, which
resulted in a continued review of overhead and other related cost structures. As
a result of this review, the Company recorded $42 million in pretax charges to
income from operations for restructuring and other charges. This charge was
comprised of a $9 million pretax restructure charge, $2 million pretax loss from
assets held for sale, and $31 million in other pretax charges. The $9 million
restructure charge has been classified as a separate component of operating
expenses on the Company's Consolidated Statement of Income (Loss) and
represented severance costs associated with the elimination of approximately 130
positions, primarily in the U.S. The primary groups affected included
manufacturing and administrative personnel. As of March 31, 2001, approximately
$1 million has been paid and charged against the reserve for personnel
reductions. The $2 million pretax loss from assets held for sale represented the
results of operations for the Company's investments in its Pipe joint ventures
and subsidiaries on a held-for-sale basis for the first quarter of 2001. This
sale was completed in February 2001, subject to final regulatory approval (see
Note 5).
The $31 million in other pretax charges was comprised of $10 million of asset
impairments, principally the write-down of equipment, $4 million to write down
inventory to reflect updated estimates of the net realizable value and carrying
amounts of certain inventories, $4 million of payroll-related charges associated
with the realignment of the Newark, Ohio manufacturing facility, and various
other charges totaling $13 million. This $31 million pretax charge was accounted
for as an $18 million charge to cost of sales and a $13 million charge to other
operating expenses.
During 2000, the Company recorded pretax charges of $229 million for
restructuring and other activities as a result of its reassessment of business
strategies with respect to investments in certain ventures, facilities and
overhead expenditures. The $229 million pretax charge was comprised of a $32
million charge associated with the restructuring of the Company's business
segments and $197 million of other charges, the majority of which represented
impairments of long-lived assets. In addition, the Company recorded a $6 million
pretax credit to minority interest resulting from charges related to a
majority-owned consolidated subsidiary. The components of the restructuring
charge include $16 million for personnel reductions, $10 million for the
divestiture of non-strategic businesses and facilities, and $6 million for asset
impairments associated with the planned closing of two lines at the Newark, Ohio
manufacturing facility. This represented the first phase of the Company's plan
to realign operations at the Newark facility.
The $197 million of other charges was comprised of $95 million of asset
impairments, a $6 million charge for a settlement loss associated with one of
- 19 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued)
our U.S. pension plans, and $96 million of charges focused on improving business
operations. The $95 million of asset impairments included: 1) $54 million to
write-down the Company's investment and related assets in Alcopor Owens Corning,
a building materials joint venture in Europe, to estimated fair value on a held
for sale basis; 2) $12 million to write-down the Company's investment in the
majority owned, consolidated venture in South Africa, on a held-in-use basis
based upon management's analysis of current and expected future financial
results and constraints on the Company's ability to fund future significant
capital investments in this subsidiary as a consequence of the bankruptcy
filing. The $12 million charge was offset by a $6 million credit to record the
minority owner's share, recorded in the minority interest line on the
Consolidated Statement of Income (Loss); 3) $8 million to write-down to fair
value the Company's investments in its Pipe joint ventures and subsidiaries on a
held for sale basis. The sale of a majority of the investments and subsidiaries
held for sale was completed in February 2001, subject to final regulatory
approval; 4) $10 million to write-down the equity investment in ImproveNet, due
to a significant decrease in market value which management believes is other
than temporary; and 5) $11 million associated with asset impairments within our
Cultured Stone and other businesses.
The $96 million charge consisted of $43 million to write-down inventory made
obsolete by changes in the Company's manufacturing and marketing strategies; $19
million to write-down equipment and receivables; $15 million to increase
warranty reserves due to general changes in estimates associated with these
reserves; and various other charges totaling $19 million recorded as other
operating expenses. As of March 31, 2001, approximately $9 million has been paid
and charged against the reserve for personnel reductions.
During 1997 and 1998, the Company recorded pretax charges totaling $386 million
for restructuring and other actions to implement a program to close
manufacturing facilities, enhance manufacturing productivity and reduce
overhead. Of the total pretax charge of $386 million, $143 million was recorded
in the fourth quarter of 1997 and the remaining $243 million was recorded during
1998.
The $386 million pretax charge was comprised of a $185 million charge associated
with the restructuring of the Company's business segments and a $201 million
charge associated with asset impairments, including investments in certain
affiliates. The components of the restructuring charge include $115 million for
personnel reductions; $68 million for the divestiture of non-strategic
businesses and facilities, of which $52 million represented non-cash asset
revaluations and $16 million represented exit cost liabilities, primarily for
leased warehouse and office facilities that were vacated; 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 market demands. As of March 31, 2001, approximately $104 million
has been paid and charged against the reserve for personnel reductions,
representing the elimination of approximately 2,450 employees, the majority of
whose severance payments were made over the course of 1998 and 1999, and
approximately $13 million has been charged against exit cost liabilities.
The following table summarizes the status of the liabilities from the 1997,
1998, 2000 and 2001 restructure program described above, including cumulative
spending and adjustments and the remaining balance as of March 31, 2001:
- 20 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued)
Liability at
Original Total March 31,
Liability Payments 2001
--------- -------- ----
(In millions of dollars)
Personnel costs $ 140 $ (114) $ 26
Facility and business exit costs 20 (14) 6
Other 2 (2) -
------- --------- ---------
Total $ 162 $ (130) $ 32
======= ========= =========
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.
5. ACQUISITIONS AND DIVESTITURES OF BUSINESSES
During the first quarter of 2001, the Company completed the sale of the majority
of its Engineered Pipe Business, a producer of glass-reinforced plastic pipe
with operations mostly in Europe, subject to final regulatory approval. Net
proceeds from the sale were $22 million, of which $20 million was received in
the first quarter of 2001, which approximated book value.
During the first quarter of 2000, the Company completed the sale of the assets
of Falcon Foam, a producer of foam insulation in Michigan and California. Net
proceeds from the sale were $50 million and resulted in a pretax loss of
approximately $5 million including transaction costs. This net loss was recorded
as other operating expenses on the consolidated statement of income.
6. INCOME TAXES
The reconciliation between the U.S. federal statutory rate and the Company's
effective income tax rate is:
Quarter Ended March 31,
2001 2000
---- ----
U.S. federal statutory rate (35)% 35%
State and local income taxes (5) 2
Special tax election (a) - (18)
Interest 6 -
Foreign tax rate differences - 1
Other 2 -
-------- -------
Effective tax rate (32)% 20%
======== =======
(a) Represents the implementation of a tax strategy associated with one of our foreign subsidiaries.
- 21 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
7. INVENTORIES
Inventories are summarized as follows:
March 31, December 31,
2001 2000
---- ----
(In millions of dollars)
Finished goods $ 436 $ 397
Materials and supplies 168 165
--------- ----------
FIFO inventory 604 562
Less: reduction to LIFO basis (94) (93)
---------- ------------
Total inventory $ 510 $ 469
======== ==========
Approximately $192 million and $300 million of total inventories were valued
using the LIFO method at March 31, 2001 and December 31, 2000, respectively.
8. CONSOLIDATED STATEMENT OF CASH FLOWS
Cash payments (refunds) for income taxes and cost of borrowed funds are
summarized as follows:
Quarter Ended March 31,
2001 2000
---- ----
(In millions of dollars)
Income taxes $(38) $(44)
Cost of borrowed funds (Note 1) 2 41
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
9. COMPREHENSIVE INCOME
The Company's comprehensive income for the quarters ended March 31, 2001 and
2000 was a loss of $37 million and income of $34 million, respectively. The
Company's comprehensive income includes net income, currency translation
adjustments, and deferred gains and losses on certain hedging transactions to
record at fair value.
- 22 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. EARNINGS PER SHARE
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.
Quarter Ended March 31,
2001 2000
---- ----
(In millions of dollars, except share data)
Net income (loss) used for basic earnings per share $ (10) $ 48
Net income effect of assumed conversion of
preferred securities - 2
----------- -------------
Net income (loss) used for diluted earnings per share $ (10) $ 50
============ =============
Weighted average number of shares outstanding
used for basic earnings per share (thousands) 55,042 54,590
Deferred awards and stock options - 598
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) 55,042 59,754
============ =============
11. DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Company implemented Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). This statement and its interpretations establish
accounting and reporting standards requiring derivative instruments (including
certain derivative instruments embedded in other contracts) to be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The impact of adoption at January 1, 2001 did not have a material effect in the
Consolidated Statement of Income (Loss) and resulted in other comprehensive
income of approximately $1 million.
12. CONTINGENT LIABILITIES
Asbestos Liabilities
- --------------------
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD)
Numerous claims have been asserted against Owens Corning alleging personal
injuries arising from inhalation of asbestos fibers. Virtually all of these
claims arise out of Owens Corning's manufacture, distribution, sale or
installation of an asbestos-containing calcium silicate, high temperature
insulation product, the manufacture and distribution of which was discontinued
in 1972. Owens Corning received approximately 18,000 asbestos personal injury
claims during 2000, approximately 32,000 such claims during 1999 and
approximately 69,000 such claims during 1998.
- 23 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES (continued)
Prior to October 5, 2000, when the Debtors, including Fibreboard (see Item B
below), filed voluntary petitions for relief under Chapter 11 of the United
States Bankruptcy Code, the vast majority of asserted asbestos personal injury
claims were in the process of being resolved through the National Settlement
Program described below. As a result of the Filing, all pre-petition asbestos
claims and pending litigation against the Debtors, including without limitation
claims arising under the National Settlement Program, were automatically stayed
(see Note 1). Owens Corning expects that all pending and future asbestos claims
against Owens Corning and Fibreboard will be resolved pursuant to a plan or
plans of reorganization. Owens Corning is unable to determine at this time
whether asbestos-related claims asserted against Fibreboard will be treated in
the same manner as those asserted against Owens Corning in any such plan or
plans.
National Settlement Program
- ---------------------------
Beginning in late 1998, Owens Corning implemented a National Settlement Program
("NSP") to resolve personal injury asbestos claims through settlement agreements
with individual plaintiffs' law firms. The NSP was intended to better manage the
asbestos liabilities of Owens Corning and Fibreboard (see Item B below), and to
help Owens Corning better predict the timing and amount of indemnity payments
for both pending and future asbestos claims.
The number of law firms participating in the NSP expanded from approximately 50
when the NSP was established to approximately 120 as of the Petition Date. Each
of these participating law firms agreed to a long-term settlement agreement
which varied by firm ("NSP Agreement") extending through at least 2008 which
provided for the resolution of their existing asbestos claims, including unfiled
claims pending with the participating law firm at the time it entered into an
NSP Agreement ("Initial Claims"). The NSP agreements also established procedures
and fixed payments for resolving without litigation claims against either Owens
Corning or Fibreboard, or both, arising after a participating firm entered into
an NSP Agreement ("Future Claims").
Terms and Conditions of NSP Agreements
- --------------------------------------
Settlement amounts for both Initial Claims and Future Claims were negotiated
with each firm participating in the NSP, and each firm was to communicate with
its respective clients to obtain authority to settle individual claims. Payments
to individual claimants were to vary based on a number of factors, including the
type and severity of disease, age and occupation. All such payments were subject
to delivery of satisfactory evidence of a qualifying medical condition and
exposure to Owens Corning's and/or Fibreboard's products, delivery of customary
releases by each claimant, and other conditions. Certain claimants settling
non-malignancy claims with Owens Corning and/or Fibreboard were entitled to an
agreed pre-determined amount of additional compensation if they later developed
a more severe asbestos-related medical condition.
As to Future Claims, each participating NSP firm agreed (consistent with
applicable legal requirements) to recommend to its future clients, based on
appropriately exercised professional judgment, to resolve their asbestos
personal injury claims against Owens Corning and/or Fibreboard through an
administrative processing arrangement, rather than litigation. In the case of
Future Claims involving non-malignancy, claimants were required to present
medical evidence of functional impairment, as well as the product exposure
criteria and other requirements set forth above, to be entitled to compensation.
- 24 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES (continued)
Owens Corning and Fibreboard (see Item B below) each retained 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 rejected
and ultimately opted out of such agreement. Opt out procedures were specified in
the settlement agreements, and provided for mediation and further negotiation
before a claimant could pursue his or her case in the court system. Through the
Petition Date, fewer than 300 claimants had elected to reject the original
settlement proposal, and to mediate under the terms of the NSP Agreement.
As of the Petition Date, the NSP covered approximately 240,000 Initial Claims,
approximately 147,000 of which had satisfied all conditions to final settlement,
including receipt of executed releases, or other resolution (the "Final NSP
Settlements") at an average cost per claim of approximately $9,000. As of the
Petition Date, approximately 83,000 of such Final NSP Settlements had been paid
in full or otherwise resolved, and approximately 64,000 were unpaid in whole or
in part. As of such date, the remaining balance payable under NSP Agreements in
connection with these unpaid Final NSP Settlements was approximately $560
million. Through the Petition Date, Owens Corning had received approximately
3,800 Future Claims under the NSP.
At this time, Owens Corning is unable to predict the manner in which the NSP
Agreements and the resolution of claims thereunder will be treated under the
terms of any plan or plans of reorganization.
Non-NSP Claims
- --------------
As of the Petition Date, approximately 36,000 asbestos personal injury claims
were pending against Owens Corning outside the NSP. This compares to
approximately 25,300 such claims pending on December 31, 1999. The information
needed for a critical evaluation of pending claims, including the nature and
severity of disease and definitive identifying information concerning claimants,
typically becomes available only through the discovery process or as a result of
settlement negotiations, which often occur years after particular claims are
filed. As a result, Owens Corning has limited information about many of such
claims, and the actual number of pending claims may vary from the numbers
indicated.
Owens Corning resolved (by settlement or otherwise) approximately 10,200
asbestos personal injury claims outside the NSP during 1998, 4,800 such claims
during 1999 and 3,100 such claims during 2000 prior to the Petition Date. The
average cost of resolution was approximately $35,900 per claim for claims
resolved during 1998, $34,600 per claim for claims resolved during 1999, and
$44,800 per claim for claims resolved during 2000 prior to the Petition Date. As
a rule, these claims were settled as they were scheduled for trial, and they
typically involved more serious injuries and diseases. Accordingly, Owens
Corning does not believe that such average costs of resolution are
representative of the value of the non-NSP claims then pending against the
Company.
At this time, Owens Corning is unable to predict the manner in which non-NSP
claims will be treated under the terms of any plan or plans of reorganization.
Asbestos-Related Payments
- -------------------------
As a result of the Filing, Owens Corning has not made any asbestos-related
payments since the Petition Date. During 1999 and 2000 (prior to the Petition
Date), Owens Corning (excluding Fibreboard) made asbestos-related payments
falling within four major categories: (1) Settlements in respect of verdicts
- 25 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES (continued)
incurred or claims resolved prior to the implementation of the NSP ("Pre-NSP
Settlements"); (2) NSP settlements; (3) Non-NSP settlements covering cases not
resolved by the NSP; and (4) Defense, claims processing and administrative
expenses, as follows:
(In millions of dollars)
2000 (through
1999 October 4, 2000)
---- ----------------
Pre-NSP Settlements $ 170 $ 51
NSP Settlements 570 538
Non-NSP Settlements 30 42
Defense, Claims Processing and Administrative Expenses 90 54
------- --------
$ 860 $ 685
======= ========
Prior to the Petition Date, Owens Corning deposited certain amounts in escrow
accounts to facilitate claims processing under the NSP ("Administrative
Deposits"). Amounts deposited into escrow in Administrative Deposits during a
reporting period are included in the payments shown for NSP Settlements during
the period. At March 31, 2001, approximately $115 million of Administrative
Deposits previously made by Owens Corning had not been finally distributed to
claimants ("Undistributed Administrative Deposits") and, accordingly, are
reflected in Owens Corning's consolidated balance sheet as restricted assets
(under the caption "Restricted cash and other - asbestos related") and have not
been subtracted from Owens Corning's reserve for asbestos personal injury claims
(discussed below). At this time, Owens Corning is unable to predict what the
treatment of funds held in Undistributed Administrative Deposits will be under
the terms of any plan or plans of reorganization.
Owens Corning notes that its Undistributed Administrative Deposits (and Owens
Corning's reserve for asbestos personal injury claims) at March 31, 2001,
reflect a reduction of $49 million from the amounts reported at December 31,
2000. The reduction is attributable to information received during 2001 from the
holders of Administrative Deposits concerning distributions from such Deposits
prior to the Petition Date.
All amounts discussed above are before tax and application of insurance
recoveries.
Tax Legislation
- ---------------
On April 4, 2001, the United States House of Representatives introduced proposed
legislation (HR 1412, also known as the Asbestos Tax Fairness Act) to exempt
income earned by qualifying asbestos-related settlement funds, including
qualifying trusts established under Section 524(g) of the Bankruptcy Code, from
federal income tax. The exemption from income tax would benefit the Fibreboard
Settlement Trust (described below) by having the effect of enlarging the corpus
of the trust through tax-free income accumulation. In addition, the legislation
would allow asbestos defendants to carry-back net operating losses ("NOLs")
created by asbestos payments to the years in which the products containing
asbestos were produced or distributed (and to each subsequent year) in order to
obtain a refund of federal income taxes paid in those periods. In the case of
Owens Corning, this would entitle the Company to carry-back its NOLs to the
early 1950s. The bill has strong bipartisan support in the form of 72 original
cosponsors, including a majority of the members of the House Ways and Means
- 26 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES (continued)
Committee. However, there can be no assurance that any such legislation will be
ultimately enacted. Moreover, as a result of the Filing, there is uncertainty
regarding the impact of the proposed tax legislation on the Debtors' respective
estates.
Other Asbestos-Related Litigation
- ---------------------------------
As previously reported, the Company believes that it has spent significant
amounts to resolve claims of asbestos claimants whose injuries were caused or
exacerbated by cigarette smoking. Owens Corning and Fibreboard are pursuing
litigation against tobacco companies (discussed below) to obtain payment of
monetary damages (including punitive damages) for payments made by Owens Corning
and Fibreboard to asbestos claimants who developed smoking related diseases.
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 June 2001 trial date previously set for this action has been
continued indefinitely by the court. See Part II, Item 5, below. 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. The July 2001 trial date previously set for
this action has been continued indefinitely at the request of the Company. There
can be no assurance that either case will go to trial or be successful.
Insurance
- ---------
As of March 31, 2001, Owens Corning's financial statements reflect $59 million
in unexhausted insurance coverage (net of deductibles and self-insured
retentions) under its liability insurance policies applicable to asbestos
personal injury claims. Most 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. Owens Corning is actively pursuing non-products insurance
recoveries under these policies. The amount and timing of recoveries from excess
level policies will depend on subsequent negotiations and/or proceedings.
Reserve
- -------
Owens Corning estimates a reserve in accordance with generally accepted
accounting principles to reflect asbestos-related liabilities that have been
asserted or are probable of assertion, in which liabilities are probable and
reasonably estimable. This reserve was established initially through a charge to
income in 1991, with additional charges to income of $1.1 billion in 1996, $1.4
billion in 1998, and $1.0 billion in 2000.
As of March 31, 2001, a reserve of approximately $2.2 billion in respect of
Owens Corning's asbestos-related liabilities was one of the items included in
Owens Corning's consolidated balance sheet under the category "Liabilities
Subject to Compromise." For periods prior to the Petition Date, these
liabilities were reflected as current or other liabilities (depending on the
period in which payment was expected) under the category "Reserve for asbestos
litigation claims."
- 27 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES (continued)
The approximate balances of the components of the reserve at September 30, 2000
(the ending date of the last reporting period preceding the Petition Date) were:
September 30, 2000
------------------
(In billions of dollars)
NSP backlog $ 1.10
Non-NSP backlog 0.30
Future Claims 0.70
Defense, Claims Processing and Administrative Expenses 0.10
In connection with this asbestos reserve, Owens Corning notes that:
- - The "NSP backlog" component represented the remaining estimated cost of
resolving Initial Claims under the NSP.
- - The "Non-NSP backlog" component represented the estimated cost of
resolving asbestos personal injury claims pending against Owens Corning
outside the NSP.
- - The "Future claims" component represented the estimated cost of resolving
(i) Future Claims under the NSP and (ii) non-NSP claims subsequently
made.
As Owens Corning has discussed in previous public filings, any estimate of its
liabilities for pending and expected future asbestos claims is subject to
considerable uncertainty because such liabilities are influenced by numerous
variables that are inherently difficult to predict. As discussed further below,
such uncertainties significantly increased as a result of the Chapter 11 Cases.
Prior to the Petition Date, such variables included, among others, the cost of
resolving pending non-NSP claims; the disease mix and severity of disease of
pending NSP claims; the number, severity of disease, and jurisdiction of claims
filed in the future (especially the number of mesothelioma claims); how many
future claimants were covered by an NSP Agreement; the extent, if any, to which
individual claimants exercised a right to opt out of an NSP Agreement and/or
engage counsel not participating in the NSP; the extent, if any, to which
counsel not bound by an NSP Agreement undertook the representation of asbestos
personal injury plaintiffs against Owens Corning; the extent, if any, to which
Owens Corning exercised its right to terminate one or more of the NSP Agreements
due to excessive opt-outs or for other reasons; and Owens Corning's success in
controlling the costs of resolving future non-NSP claims.
The Chapter 11 Cases significantly increase the inherent difficulties and
uncertainties involved in estimating the number and cost of resolution of
present and future asbestos-related claims against Owens Corning and may have
the effect of increasing the number and ultimate cost of resolution of such
claims, perhaps substantially. In particular, the status of the NSP Agreements
and the treatment of pending and future claims thereunder will depend on the
outcome of negotiations among the various constituencies in the Chapter 11 Cases
and determinations by the Bankruptcy Court as to the issues involved, none of
which can be predicted at this time. The uncertainties associated with the
status of the NSP Agreements and the treatment of claims thereunder include the
following:
- 28 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES (continued)
- - It is possible that one or more constituencies in the Chapter 11 Cases
may seek to set aside the NSP Agreements on various grounds. In any
event, it is highly uncertain how any plan or plans of reorganization
will treat the various types of NSP claims, including without
limitation claims with no evidence of significant medical impairment,
or whether such unimpaired claims will be treated as allowed claims
thereunder.
- - The settlement values for specified categories of disease set forth in
the NSP Agreements were established by arms-length negotiations with
the participating law firms in circumstances very different from those
prevailing in the Chapter 11 Cases. The settlement values available to
individual claimants under the arrangements to be included in any plan
or plans of reorganization may vary substantially from those
contemplated by the NSP Agreements. Because Owens Corning's estimate of
liabilities in respect of non-NSP claims assumed payment of settlement
values similar to those contained in the NSP Agreements, such estimate
is subject to similar uncertainty.
Additional uncertainties raised by the Chapter 11 Cases include the following:
- - As a result of the Filing, all of the holders of pre-petition asbestos
claims against Owens Corning or Fibreboard will be required to comply
with formal proof of claim requirements in order to have their claims
taken into account as allowed claims. Moreover, the Filing, including
the significant publicity associated with the Chapter 11 Cases and
notices required by the Bankruptcy Code that must be given to creditors
and other parties in interest, has significantly increased the inherent
difficulties and uncertainties involved in estimating the number and
cost of resolution of not only pre-petition claims but also additional
claims that may be asserted in the course of the Chapter 11 Cases.
Among other things, it is not possible to predict at this time how many
proofs of claim will be timely filed, how many proofs of claim will
represent allowed claims, or the aggregate value of such allowed
claims.
- - Owens Corning anticipates that the number and estimated aggregate value
of allowed future claims will be determined as a result of negotiations
involving a legal representative for the class of future asbestos
claimants and the other interested constituencies, or if necessary, by
the Bankruptcy Court. It is not possible to predict the outcome of such
negotiations at this time.
Ultimately, Owens Corning's (and Fibreboard's) total liability for asbestos
claims will be determined after a lengthy period of negotiations and, if
necessary, by the Bankruptcy Court following the bar date for submission of
proofs of claim, taking into account numerous factors not present in Owens
Corning's pre-petition environment. Such factors include the claims of competing
creditor groups as to the appropriate treatment of their allowed claims in the
plan or plans of reorganization, the size of the total asbestos liability, the
total number of present asbestos claims allowed and the total amount of future
asbestos claims allowed.
At March 31, 2001, as a result of the Filing and the uncertainties referred to
above, the approximate balances of the components of Owens Corning's
asbestos-related reserve were:
Balance
-------
(In billions of dollars)
Unpaid Final Settlements (NSP and other) $ 0.70
Other Pending and Future Claims 1.50
- 29 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES (continued)
In connection with this asbestos reserve, Owens Corning notes that:
- - The "Unpaid Final Settlements" component represented the remaining
estimated cost for all asbestos personal injury claims pending against
Owens Corning which were subject to final settlement agreements for
which releases from claimants were obtained, and under which all other
conditions to settlement had been satisfied, as of the Petition Date.
- - The "Other Pending and Future Claims" component represented the
estimated cost of resolving (i) asbestos personal injury claims pending
against Owens Corning which were subject to resolution under NSP
Agreements but for which releases were not obtained from claimants
prior to the Petition Date; (ii) all other asbestos personal injury
claims pending against Owens Corning which were not subject to any
settlement agreement; and (iii) future asbestos personal injury claims
against Owens Corning made after the Petition Date.
Owens Corning will continue to review its asbestos reserve on a periodic basis
and make such adjustments as may be appropriate. However, it is possible that
Owens Corning will not be in a position to conclude that a revision to the
reserve is appropriate until significant developments occur during the course of
the Chapter 11 Cases, including resolution of the uncertainties described above.
Any such revision could, however, be material to the Company's consolidated
financial position and results of operations in any given period.
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING)
Prior to 1972, Fibreboard manufactured 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. Fibreboard
received approximately 21,600 asbestos personal injury claims during 2000. Prior
to the Petition Date, the vast majority of Fibreboard asbestos personal injury
claims were in the process of being resolved through the NSP, as described
below. As a result of the Filing, all pre-petition asbestos claims and pending
litigation against the Debtors were automatically stayed (see Note 1). Owens
Corning expects that all pending and future asbestos claims against Owens
Corning and Fibreboard will be resolved pursuant to a plan or plans of
reorganization. Owens Corning is unable to determine at this time whether
asbestos-related claims asserted against Fibreboard will be treated in the same
manner as those asserted against Owens Corning in any such plan or plans.
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 settled asbestos personal injury claims that had
been filed against Fibreboard by participating plaintiffs' law firms and claims
that could have been filed against Fibreboard by such firms following the
lifting, in the third quarter of 1999, of an injunction which had barred the
filing of asbestos personal injury claims against Fibreboard.
As of the Petition Date, the NSP covered approximately 212,000 Initial Claims
against Fibreboard, approximately 115,000 of which had satisfied all conditions
- 30 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES (continued)
to final settlement, including receipt of executed releases, or other resolution
as Final NSP Settlements at an average cost per claim of approximately $7,500.
As of the Petition Date, approximately 55,000 of such Final NSP Settlements had
been paid in full or otherwise resolved and approximately 60,000 were unpaid in
whole or in part. As of such date, the remaining balance payable under NSP
Agreements in connection with these unpaid Final NSP Settlements was
approximately $380 million. The NSP Agreements also provided for the resolution
of Future Claims against Fibreboard through the administrative processing
arrangement described in Item A. Through the Petition Date, Fibreboard had
received approximately 3,800 Future Claims under the NSP.
At this time, Owens Corning is unable to predict the manner in which the NSP
Agreements and the resolution of Fibreboard claims thereunder will be treated
under the terms of any plan or plans of reorganization.
Non-NSP Claims
- --------------
As of the Petition Date, approximately 15,000 asbestos personal injury claims
were pending against Fibreboard outside the NSP. This compares to approximately
1,000 such claims pending on December 31, 1999. Fibreboard resolved (by
settlement or otherwise) approximately 2,300 asbestos personal injury claims
outside the NSP during 2000 prior to the Petition Date at an average cost of
resolution of approximately $45,000 per claim. Generally, these claims were
settled as they were scheduled for trial, and they typically involved more
serious injuries and diseases. Accordingly, Owens Corning does not believe that
such average costs of resolution are representative of the value of the non-NSP
claims then pending against Fibreboard.
At this time, Owens Corning is unable to predict the manner in which Fibreboard
non-NSP claims will be treated under the terms of any plan or plans of
reorganization.
Insurance Settlement
- --------------------
In 1993, Fibreboard and two of its insurers, Continental Casualty Company
("Continental") and Pacific Indemnity Company ("Pacific"), entered into the
Insurance Settlement. The Insurance Settlement became effective in the fourth
quarter of 1999, is final and is not subject to appeal.
Since 1993, Continental and Pacific paid, either directly or through an escrow
account funded by them, for substantially all settlements of asbestos claims
reached prior to the initiation of the NSP. Under the Insurance Settlement,
Continental and Pacific provided $1,873 million during the fourth quarter of
1999 to fund costs of resolving pending and future asbestos claims, whether
under the NSP, in the tort system, or otherwise.
As of March 31, 2001, the Insurance Settlement funds were held in and invested
by the Fibreboard Settlement Trust. As of that date, $1,124 million (net of
outstanding payables) was held in the Fibreboard Settlement Trust and $135
million was held in Undistributed Administrative Deposits in respect of
Fibreboard claims. On an ongoing basis, the funds held in the Fibreboard
Settlement Trust will be subject to investment earnings/losses and will be
reduced if and as applied to satisfy asbestos-related liabilities. Under the
terms of the Fibreboard Settlement Trust, any of such assets that ultimately are
not used to fund Fibreboard's asbestos-related liabilities must be distributed
- 31 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES (continued)
to charity. It will not be known whether any such assets will remain for
distribution until the conclusion of the Chapter 11 Cases.
Funds held in the Fibreboard Settlement Trust and Fibreboard's Undistributed
Administrative Deposits are reflected on Owens Corning's consolidated balance
sheet as restricted assets. At March 31, 2001, these assets were reflected as
non-current assets, denoted "Restricted cash, securities and other -
Fibreboard." See Note 13 for additional information concerning the Fibreboard
Settlement Trust.
Owens Corning notes that Fibreboard's Undistributed Administrative Deposits (and
Fibreboard's reserve for asbestos personal injury claims (discussed below)) at
March 31, 2001, reflect a reduction of $35 million from the amounts reported at
December 31, 2000. The reduction is attributable to information received during
2001 from the holders of Administrative Deposits concerning distributions from
such Deposits prior to the Petition Date.
At this time, Owens Corning is unable to predict what the treatment of funds
held in the Fibreboard Settlement Trust and in Undistributed Administrative
Deposits in respect of Fibreboard claims will be under the terms of any plan or
plans of reorganization.
Asbestos-Related Payments
- -------------------------
As a result of the Filing, Fibreboard has not made any asbestos-related payments
since the Petition Date. During 2000 (prior to the Petition Date), gross
payments for asbestos-related claims against Fibreboard, all of which were
paid/reimbursed by the Fibreboard Settlement Trust, fell within four major
categories, as follows:
(In millions of dollars)
2000 (through October 4, 2000)
------------------------------
Pre-NSP Settlements $ 29
NSP Settlements 705
Non-NSP Settlements 41
Defense, Claims Processing and
Administrative Expenses 45
---------
$ 820
The payments for NSP Settlements include Administrative Deposits during the
reporting period in respect of Fibreboard claims.
Reserve
- -------
Owens Corning estimates a reserve for Fibreboard in accordance with generally
accepted accounting principles to reflect asbestos-related liabilities. As of
March 31, 2001, a reserve of approximately $1.25 billion in respect of these
liabilities was one of the items included in Owens Corning's consolidated
balance sheet under the category "Liabilities Subject to Compromise." For
periods prior to the Petition Date, they were reflected as current or other
liabilities (depending on the period in which payment was expected) under the
category "Asbestos-related liabilities - Fibreboard." These liabilities
(including any reserve for the charitable remainder) are always at least equal
- 32 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES (continued)
to the funds held in the Fibreboard Settlement Trust and Fibreboard's
Undistributed Administrative Deposits since, under the terms of the Trust, 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 (see Note 13).
The approximate balances of the components of the Fibreboard asbestos-related
reserve at September 30, 2000 (the ending date of the last reporting period
preceding the Petition Date) were:
September 30, 2000
------------------
(In billions of dollars)
NSP backlog $ 0.80
Non-NSP backlog 0.10
Future Claims 0.30
Defense, Claims Processing and Administrative Expenses 0.05
In connection with this asbestos reserve, Owens Corning notes that:
- - The "NSP backlog" component represented the remaining estimated cost of
resolving Initial Claims against Fibreboard under the NSP.
- - The "Non-NSP backlog" component represented the estimated cost of
resolving asbestos personal injury claims pending against Fibreboard
outside the NSP.
- - The "Future claims" component represented the estimated cost of
resolving (i) Future Claims against Fibreboard under the NSP and (ii)
non-NSP claims subsequently made against Fibreboard.
As noted in Item A above as to Owens Corning, the estimate of Fibreboard's
liabilities for pending and expected future asbestos claims is subject to
considerable uncertainty because such liabilities are influenced by numerous
variables that are inherently difficult to predict, and such uncertainties
significantly increased as a result of the Filing including those set forth in
Item A above. In addition, as noted above, at this time Owens Corning is unable
to predict what the treatment of funds held in the Fibreboard Settlement Trust
and in Undistributed Administrative Deposits in respect of Fibreboard claims
will be under the terms of any plan or plans of reorganization.
At March 31, 2001, as a result of the Filing and the uncertainties referred to
above, the approximate balances of the components of the Fibreboard
asbestos-related reserve were:
Balance
-------
(In billions of dollars)
Unpaid Final Settlements (NSP and other) $0.40
Other Pending and Future Claims 0.85
In connection with this asbestos reserve, Owens Corning notes that:
- 33 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES (continued)
- The "Unpaid Final Settlements" component represented the remaining
estimated cost for all asbestos personal injury claims pending against
Fibreboard which were subject to final settlement agreements for which
releases from claimants were obtained, and under which all other
conditions to settlement had been satisfied, as of the Petition Date.
- The "Other Pending and Future Claims" component represented the
estimated cost of resolving (i) asbestos personal injury claims pending
against Fibreboard which were subject to resolution under NSP
Agreements but for which releases were not obtained from claimants
prior to the Petition Date; (ii) all other asbestos personal injury
claims pending against Fibreboard which were not subject to any
settlement agreement; and (iii) future asbestos personal injury claims
against Fibreboard made after the Petition Date.
Owens Corning will continue to review Fibreboard's asbestos reserve on a
periodic basis and make such adjustments as may be appropriate. However, it is
possible that Owens Corning will not be in a position to conclude that a
revision to the reserve is appropriate until significant developments occur
during the course of the Chapter 11 Cases, including resolution of the
uncertainties described above. Any such revision could, however, be material to
the Company's consolidated financial position and results of operations in any
given period.
Non-Asbestos Litigation
- -----------------------
On or about April 30, 2001, certain of the Company's current and former
directors and officers, as well as certain underwriters, were named as
defendants in a lawsuit captioned John Hancock Life Insurance Company, et al. v.
Goldman, Sachs & Co., et al. in the United States District Court for the
District of Massachusetts. Owens Corning is not named in the lawsuit. The suit
purports to be a securities class action on behalf of purchasers of certain
unsecured debt securities of Owens Corning in an offering occurring on or about
April 30, 1998. The complaint alleges that the registration statement pursuant
to which the offering was made contained untrue and misleading statements of
material fact and omitted to state material facts which were required to be
stated therein and which were necessary to make the statements therein not
misleading, in violation of sections 11, 12(a)(2) and 15 of the Securities Act
of 1933. The complaint seeks an unspecified amount of damages or, where
appropriate, rescission of the plaintiffs' purchases. The Company believes that
the claim is without merit.
13. FIBREBOARD SETTLEMENT TRUST
Under the Insurance Settlement described in Note 12, two of Fibreboard's
insurers provided $1.873 billion during the fourth quarter of 1999 to fund the
costs of resolving pending and future asbestos claims. As of March 31, 2001, the
Insurance Settlement funds were held in and invested by the Fibreboard
Settlement Trust (the "Trust"). On an ongoing basis, the funds held in the Trust
will be subject to investment earnings/losses and will be reduced if and as
applied to satisfy Fibreboard asbestos-related liabilities. Under the terms of
the Trust, any Trust assets that ultimately are not used to fund Fibreboard's
asbestos-related liabilities must be distributed to charity.
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. While there can be no assurance that the
proposed Asbestos Tax Fairness Bill discussed in Note 12, Item A, will be
- 34 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13. FIBREBOARD SETTLEMENT TRUST (continued)
enacted by Congress, such legislation would benefit the Trust during the
pendency of the Chapter 11 proceedings by eliminating the tax on income, thereby
enlarging the corpus of the Trust through tax-free income accumulation.
At this time, Owens Corning is unable to predict what the treatment of the
Fibreboard Settlement Trust will be under the terms of any plan or plans of
reorganization.
General Accounting Treatment
- ----------------------------
The assets of the Trust are comprised of cash and marketable securities
(collectively, the "Trust Assets") and, with Fibreboard's Undistributed
Administrative Deposits, are reflected on Owens Corning's consolidated balance
sheet as restricted assets. At March 31, 2001, these assets were reflected as
non-current assets, denoted "Restricted cash, securities and other -
Fibreboard." Owens Corning estimates a reserve for Fibreboard in accordance with
generally accepted accounting principles to reflect asbestos-related liabilities
(see Note 12, Part B). As of March 31, 2001, these liabilities were one of the
items included in Owens Corning's consolidated balance sheet under the category
"Liabilities Subject to Compromise." For periods prior to the Petition Date,
they were reflected as current or other liabilities (depending on the period in
which payment was expected) under the category "Asbestos-related liabilities -
Fibreboard." These liabilities (including any reserve for the charitable
remainder) are always at least equal to the funds held in the Trust and
Fibreboard's Undistributed Administrative Deposits since, under the terms of the
Trust, 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. It will not be known whether any
such assets will remain for distribution until the conclusion of the Chapter 11
Cases. At March 31, 2001, the Consolidated Financial Statements reflect
Fibreboard's asbestos-related liabilities at $1.215 billion, with a residual
obligation to charity of $44 million.
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 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 that may 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.
- 35 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13. FIBREBOARD SETTLEMENT TRUST (continued)
The residual liability that may 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.
Results for the Period Ending March 31, 2001
- --------------------------------------------
During the first quarter of 2001 and 2000 respectively, Trust Assets generated
interest/dividend earnings of approximately $16 million and $20 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 an increase in the residual liability to
charity.
Payments for asbestos litigation claims from the Trust during the first quarter
of 2000, were approximately $385 million. As a result of the Filing, there were
no payments from the Trust during the first quarter of 2001. The sale of
securities during the first quarter of 2001 and 2000 resulted in a realized gain
of approximately $4 million and less than $1 million, respectively. Realized
gains or losses from the sale of securities are reflected on the Company's
financial statements in the same manner as actual returns on Trust Assets,
described above.
At March 31, 2001 and 2000, the fair market value adjustment for those
securities designated as available for sale resulted in an unrealized gain of
less than $1 million and an unrealized gain of approximately $1 million,
respectively. These amounts have been reflected in the Company's consolidated
balance sheet as a change to the carrying amount of the asset and to other
comprehensive income. These amounts have also been reflected as a change to the
liability to charity, with a corresponding effect to other comprehensive income.
At March 31, 2001, the fair value of Trust Assets was $1.259 billion, which was
comprised of $1.158 billion of marketable securities, $34 million of outstanding
payables and $135 million of restricted cash, which represents undistributed
administrative deposits.
The amortized cost, gross unrealized holding gains and losses and fair value of
the investment securities available for sale at March 31, 2001 and December 31,
2000 are as follows:
March 31, 2001
--------------
Amortized Gross Unrealized Gross Unrealized
Cost Gain Loss Fair Value
--------- ---------------- --------------- ----------
(In millions of dollars)
Corporate Bonds $ 8 $ - $ - $ 8
Corporate Notes 16 - - 16
Municipal Bonds 1,091 - - 1,091
Mutual Funds 30 - - 30
US Government Bonds 13 - - 13
---------- ------------- ---------- ----------
Total $ 1,158 $ - $ - $ 1,158
========== ============= ========== ==========
- 36 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13. FIBREBOARD SETTLEMENT TRUST (continued)
December 31, 2000
-----------------
Amortized Gross Unrealized Gross Unrealized
Cost Gain Loss Fair Value
--------- ---------------- ---------------- ----------
(In millions of dollars)
Corporate Bonds $ 148 $ - $ - $ 148
Corporate Notes 449 1 - 450
Municipal Bonds 284 - - 284
Mutual Funds 116 - - 116
Time Deposits 37 - - 37
US Government Bonds 57 - - 57
-------- ------------ ---------- ---------
Total $ 1,091 $ 1 $ - $ 1,092
======== ============ ========== =========
Maturities of investment securities classified as available for sale at March
31, 2001 and December 31, 2000 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.
March 31, 2001 December 31, 2000
-------------- -----------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
(In millions of dollars)
Due within one year $ 48 $ 48 $ 656 $ 656
Due after one year through five years 428 428 2 2
Due after five years through ten years 243 243 51 51
Due after ten years 439 439 382 383
-------- -------- -------- --------
Total $ 1,158 $ 1,158 $ 1,091 $ 1,092
======== ======== ======== ========
- 37 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13. FIBREBOARD SETTLEMENT TRUST (continued)
The table below summarizes Trust and Administrative Deposits activity for the
quarter ended March 31, 2001:
Interest Unrealized Net Sales Realized
Balance and Gain/ of Gain/ Balance
12/31/00 Dividends (Loss) Securities (Loss) Adjustments Other Payments 03/31/01
-------- --------- -------- ---------- --------- ----------- ----- -------- --------
Assets
- ------
Cash $ 12 $ - $ - $ (46) $ - $ - $ - $ - $ (34)
Restricted Cash 170 - - - - - (35) - 135
Marketable Securities:
Available for Sale 1,092 16 - 46 4 - - - 1,158
------ ----- ----- ------- ------ ------ ---- ------ --------
Total Assets $1,274 $ 16 $ - $ - $ 4 $ - $(35) $ - $ 1,259
====== ===== ===== ======= ====== ====== ==== ====== ========
Liabilities
- -----------
Asbestos Litigation
Claims $1,250 $ - $ - $ - $ - $ - $(35) $ - $ 1,215
Charity 24 16 - - 4 - - - 44
------ ----- ----- ------- ------ ------ ---- ------ --------
Total Liabilities $1,274 $ 16 $ - $ - $ 4 $ - $(35) $ - $ 1,259
====== ===== ===== ======= ====== ====== ==== ====== =======
- 38 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(All per share information in Item 2 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, material costs, construction activity, interest rate movements,
issues involving implementation of new business systems, achievement of expected
cost reductions, developments in and the outcome of the Chapter 11 proceedings
described below, and general economic conditions.
GENERAL
Voluntary Petition for Relief Under Chapter 11
- ----------------------------------------------
On October 5, 2000 (the "Petition Date"), Owens Corning and the 17 United States
subsidiaries listed below (collectively, the "Debtors"), filed voluntary
petitions for relief (the "Filing") under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). The Debtors are currently
operating their businesses as debtors-in-possession in accordance with
provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors
(collectively, the "Chapter 11 Cases") are being jointly administered under Case
No. 00-3837 (JKF). The Chapter 11 Cases do not include other United States
subsidiaries of Owens Corning or any of its foreign subsidiaries (collectively,
the "Non-Debtor Subsidiaries"). The subsidiary Debtors that filed Chapter 11
petitions for relief are:
CDC Corporation Integrex Testing Systems LLC
Engineered Yarns America, Inc. HOMExperts LLC
Falcon Foam Corporation Jefferson Holdings, Inc.
Integrex Owens-Corning Fiberglas Technology Inc.
Fibreboard Corporation Owens Corning HT, Inc.
Exterior Systems, Inc. Owens-Corning Overseas Holdings, Inc.
Integrex Ventures LLC Owens Corning Remodeling Systems, LLC
Integrex Professional Services LLC Soltech, Inc.
Integrex Supply Chain Solutions LLC
The Debtors filed for relief under Chapter 11 to address the growing demands on
Owens Corning's cash flow resulting from its multi-billion dollar asbestos
liability. This liability is discussed in greater detail in Note 12 to the
Consolidated Financial Statements.
Consequence of Filing
- ---------------------
As a consequence of the Filing, all pending litigation against the Debtors is
stayed automatically by section 362 of the Bankruptcy Code and, absent further
order of the Bankruptcy Court, no party may take any action to recover on
pre-petition claims against the Debtors. In addition, pursuant to section 365 of
the Bankruptcy Code, the Debtors may reject or assume pre-petition executory
- 39 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
contracts and unexpired leases, and other parties to contracts or leases that
are rejected may assert rejection damages claims as permitted by the Bankruptcy
Code.
Two creditors' committees, one representing asbestos claimants and the other
representing unsecured creditors, have been appointed as official committees in
the Chapter 11 Cases and, in accordance with the provisions of the Bankruptcy
Code, will have the right to be heard on all matters that come before the
Bankruptcy Court. Owens Corning expects that the appointed committees, together
with a legal representative of future asbestos claimants to be appointed by the
Bankruptcy Court, will play important roles in the Chapter 11 Cases and the
negotiation of the terms of any plan or plans of reorganization.
Owens Corning anticipates that substantially all liabilities of the Debtors as
of the date of the Filing will be resolved under one or more Chapter 11 plans of
reorganization to be proposed and voted on in the Chapter 11 Cases in accordance
with the provisions of the Bankruptcy Code. Although the Debtors intend to file
and seek confirmation of such a plan or plans, there can be no assurance as to
when the Debtors will file such a plan or plans, or that such plan or plans will
be confirmed by the Bankruptcy Court and consummated.
As provided by the Bankruptcy Code, the Debtors initially had the exclusive
right to propose a plan of reorganization for 120 days following the Petition
Date, until February 2, 2001. On January 17, 2001, the Bankruptcy Court extended
such exclusivity period until August 2, 2001, and similarly extended the
Debtors' exclusive rights to solicit acceptances of a reorganization plan from
April 3, 2001 to October 3, 2001. If the Debtors fail to file a plan of
reorganization during such period or any extension thereof, or if such plan is
not accepted by the requisite numbers of creditors and equity holders entitled
to vote on the plan, other parties in interest in the Chapter 11 Cases may be
permitted to propose their own plan(s) of reorganization for the Debtors.
Owens Corning is unable to predict at this time what the treatment of creditors
and equity holders of the respective Debtors will be under any proposed plan or
plans of reorganization. Such plan or plans may provide, among other things,
that all present and future asbestos-related liabilities of Owens Corning and
Fibreboard will be discharged and assumed and resolved by one or more
independently administered trusts established in compliance with Section 524(g)
of the Bankruptcy Code. Such plan or plans may also provide for the issuance of
an injunction by the Bankruptcy Court pursuant to Section 524(g) of the
Bankruptcy Code that will enjoin actions against the reorganized Debtors for the
purpose of, directly or indirectly, collecting, recovering or receiving payment
of, on, or with respect to any claims resulting from asbestos-containing
products allegedly manufactured, sold or installed by Owens Corning or
Fibreboard, which claims will be paid in whole or in part by one or more Section
524(g) trusts. Similar plans of reorganization have been confirmed in the
Chapter 11 cases of other companies involved in asbestos-related litigation.
Section 524(g) of the Bankruptcy Code provides that, if certain specified
conditions are satisfied, a court may issue a supplemental permanent injunction
barring the assertion of asbestos-related claims or demands against the
reorganized company and channeling those claims to an independent trust.
Owens Corning is unable to predict at this time what treatment will be accorded
under any such reorganization plan or plans to inter-company indebtedness,
licenses, transfers of goods and services and other inter-company and
intra-company arrangements, transactions and relationships that were entered
into prior to the Petition Date. These arrangements, transactions and
relationships may be challenged by various parties in the Chapter 11 Cases and
the outcome of those challenges, if any, may have an impact on the treatment of
various claims under such plan or plans. For example, Owens Corning is unable to
predict at this time what the treatment will be under any such plan or plans
with respect to (1) the guaranties issued by certain of Owens Corning's U.S.
subsidiaries, including Owens-Corning Fiberglas Technology Inc.
- 40 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
("OCFT") and IPM, Inc. ("IPM", a Non-Debtor Subsidiary that holds Owens
Corning's ownership interest in a majority of Owens Corning's foreign
subsidiaries), with respect to Owens Corning's $1.8 billion pre-petition bank
credit facility (the "Pre-Petition Credit Facility" which is now in default) or
(2) OCFT's license agreements with Owens Corning and Exterior Systems, Inc., a
wholly-owned subsidiary of Owens Corning ("Exterior"), pursuant to which OCFT
licenses intellectual property to Owens Corning and Exterior.
The Bankruptcy Court may confirm a plan of reorganization only upon making
certain findings required by the Bankruptcy Code, and a plan may be confirmed
over the dissent of non-accepting creditors and equity security holders if
certain requirements of the Bankruptcy Code are met. The payment rights and
other entitlements of pre-petition creditors and Owens Corning's shareholders
may be substantially altered by any plan or plans of reorganization confirmed in
the Chapter 11 Cases. There is no assurance that there will be sufficient assets
to satisfy the Debtors' pre-petition liabilities in whole or in part, and the
pre-petition creditors of some Debtors may be treated differently than those of
other Debtors. Pre-petition creditors may receive under a plan or plans less
than 100% of the face value of their claims, and the interests of Owens
Corning's equity security holders may be substantially diluted or cancelled in
whole or in part. As noted above, it is not possible at this time to predict the
outcome of the Chapter 11 Cases, the terms and provisions of any plan or plans
of reorganization, or the effect of the Chapter 11 reorganization process on the
claims of the creditors of the Debtors or the interests of Owens Corning's
equity security holders.
Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with
the Bankruptcy Court setting forth the assets and liabilities of the Debtors as
of the date of the Filing. Differences between amounts recorded by the Debtors
and claims filed by creditors will be investigated and resolved as part of the
proceedings in the Chapter 11 Cases. No bar dates have been set for the filing
of proofs of claim against the Debtors. Accordingly, the ultimate number and
allowed amount of such claims are not presently known.
RESULTS OF OPERATIONS
Business Overview
- -----------------
Owens Corning is committed to continuing to invest in our businesses and provide
quality products to our customers. In recent years, we have focused on
increasing sales and earnings by (i) achieving productivity improvements and
cost reductions in existing and acquired businesses, (ii) targeting growth
markets and (iii) forming strategic alliances and partnerships to complement our
existing businesses. We are committed to taking full advantage of e-Business
opportunities. We are also expanding our role as a service provider by offering
complementary services in order to meet all of our consumers' needs. 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.
Owens Corning's strategy also includes the divestiture of non-strategic
businesses and the realignment of existing businesses. This strategy resulted in
the sale of our Engineered Pipe Business during the first quarter of 2001,
subject to regulatory approval. In 2000, it included the sale of the Falcon Foam
business in the U.S. during the first quarter and the sale of our Building
Materials business in Europe to an unconsolidated joint venture in the second
quarter. Please see Notes 2 and 5 to the Consolidated Financial Statements.
During 2000, we experienced significant increases in certain of our costs,
particularly roofing and vinyl raw material costs, due to higher crude oil
- 41 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
prices and tight supply conditions for polyvinyl chloride (PVC), respectively.
Increased energy costs, reflecting changes in the availability of natural gas,
also contributed to cost increases during 2000. These increases, coupled with a
fall in demand for building materials, associated with a weakening economy,
significantly reduced our margins and income from operations for the second half
of the year.
As a result, during late 2000 we implemented the first phase of a strategic
restructuring program, which continues into 2001. The specific objectives of
this program are discussed in "Restructuring of Operations and Other Charges"
below and in Note 4 to the Consolidated Financial Statements.
Quarter Ended March 31, 2001
- ----------------------------
Sales and Profitability
Net sales for the quarter ended March 31, 2001 were $1.067 billion, down 15%
from the first quarter 2000 level of $1.257 billion, principally due to lower
revenue in the Building Materials business. Adjusted for the disposition of the
Falcon Foam and Building Materials Europe businesses, sales in 2001 reflect a
decrease of 11% compared to first quarter 2000. In the Building Materials
business, sales during the first quarter of 2001 reflect both volume and price
decreases in the U.S. insulation and roofing markets accompanied by volume
decreases in all other Building Materials businesses, particularly vinyl
products, compared to the first quarter of 2000. In the Composites business,
sales reflect price increases as well as slight volume increases in most
composites markets during the first quarter of 2001. On a consolidated basis,
there was a slightly unfavorable currency translation impact on sales
denominated in foreign currencies during the first quarter of 2001 compared to
the first quarter of 2000. Please see Note 2 to the Consolidated Financial
Statements.
Sales outside the U.S. represented 17% of total sales during the first quarter
of 2001, compared to 18% during the first quarter of 2000. The slight decline in
non-U.S. sales is primarily due to volume decreases in 2001 attributable to the
disposition of Building Materials Europe as well as declines in insulation and
vinyl products in the Canadian market. Gross margin for the quarter ended March
31, 2001 was 16% of net sales, down from 23% for the first quarter of 2000. The
decrease in gross margin percentage is attributable to the volume decreases
discussed above. Marketing and administrative expenses were $127 million during
the first quarter of 2001, compared to $148 million in the first quarter of
2000. The decrease is primarily attributable to cost cutting measures introduced
during the second half of 2000.
For the quarter ended March 31, 2001, Owens Corning reported a net loss of $10
million, or $.19 per share, compared to net income of $48 million, or $.84 per
share, for the quarter ended March 31, 2000. On a pre-tax basis, Owens Corning
reported a $17 million loss from operations in the first quarter of 2001. When
adjusted for the costs of restructuring and other charges and Chapter 11 related
expenditures, Owens Corning generated $46 million in income from operations
compared to $105 million for the first quarter of 2000. The loss in the first
quarter of 2001 reflects the price and volume decreases described above as well
as the impact of losses associated with the realignment of certain businesses in
the U.S. as described below in "restructuring and other charges." Cost of
borrowed funds during the first quarter of 2001 was $4 million, $38 million
lower than the first quarter 2000 level, due to the cessation of interest
(totaling $50 million during the quarter [please see Note 1 to the Consolidated
Financial Statements]) on most debt as a result of the Filing.
Building Materials Systems
- --------------------------
In the Building Materials Systems segment, sales decreased 20%, to $823 million,
- 42 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
in the first quarter of 2001 compared to the first quarter of 2000. Excluding
the sales related to the divestiture of Falcon Foam and Building Materials
Europe, sales were down 15%. This downturn in sales resulted mostly from
decreased volume attributable to all U.S. businesses, particularly roofing and
vinyl products. Building Materials Systems sales also reflect the price
decreases in the U.S. insulation markets. There was virtually no currency
translation impact on sales denominated in foreign currencies during the first
quarter of 2001. Income from operations was $23 million during the first quarter
of 2001, compared to $96 million in the same period in 2000. Income from
operations in the first quarter of 2001 reflects the volume and price decreases
described above. Please see Note 2 to the Consolidated Financial Statements.
Composite Systems
- -----------------
In the Composite Systems segment, sales were up 7%, to $244 million, during the
first quarter of 2001 compared to the first quarter of 2000, due to price and
volume increases. Price increases were effected in all markets, but were most
significant in Europe. Volume increases in Europe were partially offset by
decreases in the U.S. The currency translation impact on sales denominated in
foreign currencies was slightly favorable during the first quarter of 2001.
While income from operations was $35 million in the first quarter of both 2001
and 2000, results in 2001 reflect lower income in the U.S. offset by higher
income in Europe. Please see Note 2 to the Consolidated Financial Statements.
Accounting Changes
- ------------------
Effective January 1, 2001, we implemented Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). This statement and its interpretations establish
accounting and reporting standards requiring derivative instruments (including
certain derivative instruments embedded in other contracts) to be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The impact of adoption at January 1, 2001 did not have a material effect in the
Consolidated Statement of Income (Loss) and resulted in other comprehensive
income of approximately $1 million.
Restructuring of Operations and Other Charges
- ---------------------------------------------
During the first quarter of 2001, the Company continued to experience the impact
of a soft overall economy, primarily in the building materials industries, which
resulted in a continued review of overhead and other related cost structures. As
a result of this review, the Company recorded $42 million in pretax charges to
income from operations for restructuring and other charges. This charge was
comprised of a $9 million pretax restructure charge, $2 million pretax loss from
assets held for sale, and $31 million in other pretax charges. The $9 million
restructure charge has been classified as a separate component of operating
expenses on the Company's Consolidated Statement of Income (Loss) and
represented severance costs associated with the elimination of approximately 130
positions, primarily in the U.S. The primary groups affected included
manufacturing and administrative personnel. As of March 31, 2001, approximately
$1 million has been paid and charged against the reserve for personnel
reductions. The $2 million pretax loss from assets held for sale represented the
results of operations for the Company's investments in its Pipe joint ventures
and subsidiaries on a held-for-sale basis for the first quarter of 2001. This
sale was completed in February 2001, subject to final regulatory approval (see
Note 5).
The $31 million in other pretax charges was comprised of $10 million of asset
impairments, principally the write-down of equipment, $4 million to write down
inventory to reflect updated estimates of the net realizable value and carrying
amounts of certain inventories, $4 million of payroll-related charges associated
- 43 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
with the realignment of the Newark, Ohio manufacturing facility, and various
other charges totaling $13 million. This $31 million pretax charge was accounted
for as an $18 million charge to cost of sales and a $13 million charge to other
operating expenses.
During 2000, the Company recorded pretax charges of $229 million for
restructuring and other activities as a result of its reassessment of business
strategies with respect to investments in certain ventures, facilities and
overhead expenditures. The $229 million pretax charge was comprised of a $32
million charge associated with the restructuring of the Company's business
segments and $197 million of other charges, the majority of which represented
impairments of long-lived assets. In addition, the Company recorded a $6 million
pretax credit to minority interest resulting from charges related to a
majority-owned consolidated subsidiary. The components of the restructuring
charge include $16 million for personnel reductions, $10 million for the
divestiture of non-strategic businesses and facilities, and $6 million for asset
impairments associated with the planned closing of two lines at the Newark, Ohio
manufacturing facility. This represented the first phase of the Company's plan
to realign operations at the Newark facility.
The $197 million of other charges was comprised of $95 million of asset
impairments, a $6 million charge for a settlement loss associated with one of
our U.S. pension plans, and $96 million of charges focused on improving business
operations. The $95 million of asset impairments included: 1) $54 million to
write-down the Company's investment and related assets in Alcopor Owens Corning,
a building materials joint venture in Europe, to estimated fair value on a held
for sale basis; 2) $12 million to write-down the Company's investment in the
majority owned, consolidated venture in South Africa, on a held-in-use basis
based upon management's analysis of current and expected future financial
results and constraints on the Company's ability to fund future significant
capital investments in this subsidiary as a consequence of the bankruptcy
filing. The $12 million charge was offset by a $6 million credit to record the
minority owner's share, recorded in the minority interest line on the
Consolidated Statement of Income (Loss); 3) $8 million to write-down to fair
value the Company's investments in its Pipe joint ventures and subsidiaries on a
held for sale basis. The sale of a majority of the investments and subsidiaries
held for sale was completed in February 2001, subject to final regulatory
approval; 4) $10 million to write-down the equity investment in ImproveNet, due
to a significant decrease in market value which management believes is other
than temporary; and 5) $11 million associated with asset impairments within our
Cultured Stone and other businesses.
The $96 million charge consisted of $43 million to write-down inventory made
obsolete by changes in the Company's manufacturing and marketing strategies; $19
million to write-down equipment and receivables; $15 million to increase
warranty reserves due to general changes in estimates associated with these
reserves; and various other charges totaling $19 million recorded as other
operating expenses. As of March 31, 2001, approximately $9 million has been paid
and charged against the reserve for personnel reductions.
During 1997 and 1998, the Company recorded pretax charges totaling $386 million
for restructuring and other actions to implement a program to close
manufacturing facilities, enhance manufacturing productivity and reduce
overhead. Of the total pretax charge of $386 million, $143 million was recorded
in the fourth quarter of 1997 and the remaining $243 million was recorded during
1998.
The $386 million pretax charge was comprised of a $185 million charge associated
with the restructuring of the Company's business segments and a $201 million
charge associated with asset impairments, including investments in certain
affiliates. The components of the restructuring charge include $115 million for
personnel reductions; $68 million for the divestiture of non-strategic
businesses and facilities, of which $52 million represented non-cash asset
- 44 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
revaluations and $16 million represented exit cost liabilities, primarily for
leased warehouse and office facilities that were vacated; 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 market demands. As of March 31, 2001, approximately $104 million
has been paid and charged against the reserve for personnel reductions,
representing the elimination of approximately 2,450 employees, the majority of
whose severance payments were made over the course of 1998 and 1999, and
approximately $13 million has been charged against exit cost liabilities.
Due to timing of events, we anticipate that additional restructuring and other
charges will be recorded during 2001.
LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS
Cash flow from operations was negative $73 million for the quarter ended March
31, 2001, compared to negative $679 million for the quarter ended March 31,
2000. The improvement in cash flow from operations in 2001 is primarily
attributable to the stay of cash payments to asbestos claimants resulting from
the Filing. These payments totaled $467 million (including amounts deposited in
escrow accounts established to facilitate claims processing ("Administrative
Deposits")), net of insurance receipts, in the first quarter of 2000. Additional
contributors to the increase in cash flow during the first quarter of 2001
compared to the first quarter of 2000 are accounts payable and accrued
liabilities. Although the normal payment pattern is for the balance of these
items to decrease during the quarter, the balances at the end of 2000 were
abnormally low as the result of the Filing. Consequently, the balances increased
during the first quarter of 2001 as they built toward the normal seasonal
operating levels.
Inventories at March 31, 2001 increased by $41 million from the December 31,
2000 level, due largely to the seasonal build of inventories. Receivables at
March 31, 2001 were $597 million, a $109 million increase over the December 31,
2000 level, attributable to the seasonal increase in sales. At March 31, 2001,
Owens Corning's net working capital was $947 million and our current ratio was
2.46, compared to $955 million and 2.57, respectively, at December 31, 2000 and
negative $235 million and .91, respectively, at March 31, 2000. The change in
working capital and current ratio compared to March 31, 2000 is the direct
result of the Filing, which reclassified all liabilities of Debtors outstanding
at the date of the Filing to Liabilities Subject to Compromise. Please see Note
1 to the Consolidated Financial Statements.
At March 31, 2001, we had $2.827 billion of borrowings subject to compromise and
$74 million of other long-term borrowings (of which $64 million were in default
as a consequence of the Filing and therefore classified as current on the
Consolidated Balance Sheet). Long-term borrowings outstanding at March 31, 2000
were $2.567 billion.
At March 31, 2001, the Company had $454 million of Cash and Cash Equivalents (of
which approximately $42 million is subject to an administrative freeze pending
the resolution of certain alleged set-off rights which, upon approval of the
Bankruptcy Court, may be exercised by certain pre-petition lenders). In
addition, in connection with the Filing, the Debtors obtained a $500 million
debtor-in-possession credit facility from a group of lenders led by Bank of
America, N.A. (the "DIP Financing"). At March 31, 2001, this facility had not
been utilized except for approximately $18 million of standby letters of credit
and similar uses.
As a consequence of the Filing and the impact of certain provisions of the
Company's DIP Financing and in a cash management order entered by the Bankruptcy
- 45 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Court, the Company and its subsidiaries are now subject to certain restrictions,
including on their ability to pay dividends and to transfer cash and other
assets to each other and to their affiliates.
The Company believes, based on information presently available to it, that cash
available from operations and the DIP Financing will provide sufficient
liquidity to allow it to continue as a going concern for the foreseeable future.
However, the ability of the Company to continue as a going concern (including
its ability to meet post-petition obligations of the Debtors and to meet
obligations of the Non-Debtor Subsidiaries) and the appropriateness of using the
going concern basis for its financial statements are dependent upon, among other
things, (i) the Company's ability to comply with the terms of the DIP Financing
and any cash management order entered by the Bankruptcy Court in connection with
the Chapter 11 Cases, (ii) the ability of the Company to maintain adequate cash
on hand, (iii) the ability of the Company to generate cash from operations, (iv)
the ability of the Non-Debtor Subsidiaries to obtain necessary financing, (v)
confirmation of a plan or plans of reorganization under the Bankruptcy Code, and
(vi) the Company's ability to achieve profitability following such confirmation.
Capital spending for property, plant and equipment, excluding acquisitions, was
$42 million in the first quarter of 2001. We anticipate that 2001 capital
spending, exclusive of acquisitions and investments in affiliates, will be
approximately $300 million, the majority of which is uncommitted. We expect that
funding for these expenditures will be from our operations and the credit
availability from the DIP Financing.
Environmental Matters
- ---------------------
The Company 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). The Company has also been deemed a PRP under similar state or local
laws. In other instances, other PRPs have brought suits against the Company as a
PRP for contribution under such federal, state or local laws. During the first
quarter of 2001, we were not designated as a PRP for any additional sites, and
no cases were closed during this period. At March 31, 2001, a total of 43 such
PRP designations remained unresolved by the Company. The Company is also
involved with environmental investigation or remediation at a number of other
sites at which it has not been designated a PRP.
The Company has established a $27 million reserve for its Superfund (and similar
state, local and private action) contingent liabilities. Based upon information
presently available to the Company, and without regard to the application of
insurance, the Company believes 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 the
Company's 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. These
regulations will define the monitoring and control technology requirements for
new and existing facilities to which the specific standard applies. The Company
has determined the following regulations will apply and may potentially impact
its operations. In June 1999, the EPA issued regulations for wool fiberglass and
mineral wool production with compliance dates in 2002. During the first quarter
of 2000, EPA issued regulations for secondary aluminum smelting and
amino/phenolic resin production with compliance dates in 2003. During 2000, EPA
proposed regulations for metal coil coating and wet formed fiberglass mat
- 46 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
production, anticipating final issue in 2001. The EPA's currently announced
schedule is to propose regulations covering fiber-reinforced plastics production
and asphalt roofing and processing in 2001 and issue final regulations in 2002
with implementation as to existing sources up to three years thereafter. Based
on information now known to the Company, including the nature and limited number
of regulated materials it emits, the Company does not expect the Act to have a
materially adverse effect on the Company's results of operations, financial
condition or long-term liquidity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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
investments in certain foreign subsidiaries, to hedge the principal and interest
payments of certain debt instruments, and to manage its 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.
We use a variance-covariance Value at Risk (VAR) computation model to estimate
the potential loss in the fair value of its interest rate-sensitive financial
instruments and its 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:
March 31, December 31,
2001 2000
---- ----
Risk Category (In millions of dollars)
-------------
Foreign currency $ - $ 1
Interest rate $ 10 $ 8
Virtually all of the potential loss associated with interest rate risk is
attributable to fixed-rate long-term debt instruments. The potential loss,
identified above, includes interest on debt subject to compromise.
- 47 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 12, Contingent Liabilities, to Owens Corning's Consolidated Financial
Statements above, which is incorporated here by reference.
On October 5, 2000 (the "Petition Date"), Owens Corning and the 17 United States
subsidiaries listed below (collectively, the "Debtors"), filed voluntary
petitions for relief (the "Filing") under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). The Debtors are currently
operating their businesses as debtors-in-possession in accordance with
provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors
(collectively, the "Chapter 11 Cases") are being jointly administered under Case
No. 00-3837 (JKF). The subsidiary Debtors that filed Chapter 11 petitions for
relief are:
CDC Corporation Integrex Testing Systems LLC
Engineered Yarns America, Inc. HOMExperts LLC
Falcon Foam Corporation Jefferson Holdings, Inc.
Integrex Owens-Corning Fiberglas Technology Inc.
Fibreboard Corporation Owens Corning HT, Inc.
Exterior Systems, Inc. Owens-Corning Overseas Holdings, Inc.
Integrex Ventures LLC Owens Corning Remodeling Systems, LLC
Integrex Professional Services LLC Soltech, Inc.
Integrex Supply Chain Solutions LLC
The Company anticipates that substantially all liabilities of the Debtors as of
the date of the Filing will be resolved under one or more Chapter 11 plans of
reorganization to be proposed and voted on in the Chapter 11 Cases in accordance
with the provisions of the Bankruptcy Code. As a consequence of the Filing, all
pending litigation against the Debtors is stayed automatically by section 362 of
the Bankruptcy Code and, absent further order of the Bankruptcy Court, no party
may take action to recover on pre-petition claims against the Debtors. Please
see Note 1 to the Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As a consequence of the Filing and the impact of certain provisions of the
Company's DIP Financing and in a cash management order entered by the Bankruptcy
Court, the Company and its subsidiaries are now subject to certain restrictions,
including on their ability to pay dividends and to transfer cash and other
assets to each other and to their affiliates. See Note 1, Voluntary Petition for
Relief Under Chapter 11, to Owens Corning's Consolidated Financial Statements
above.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Substantially all of the Company's pre-petition debt is now in default due to
the Filing. See Note 1, Voluntary Petition for Relief Under Chapter 11, to Owens
Corning's Consolidated Financial Statements above. As described in Note 1, the
Consolidated Financial Statements present the Debtors' pre-petition debt under
the caption "Liabilities Subject to Compromise." This includes debt under the
Pre-Petition Credit Facility and approximately $1.4 billion of other outstanding
debt. As required by SOP 90-7, the Company, beginning in the fourth quarter of
2000, recorded the Debtors' pre-petition debt instruments at the allowed amount,
as defined by SOP 90-7.
- 48 -
PART II. OTHER INFORMATION (continued)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter ended
March 31, 2001.
ITEM 5. OTHER INFORMATION
On May 9, 2001, the Special Master in the Company's suit against tobacco
companies and other tobacco industry defendants in the Circuit Court for
Jefferson County, Mississippi ("Jefferson Court") submitted a Report and
Recommendation ("Report") to the Jefferson Court as to the disposition of
Defendants' Motion for Summary Judgment Based Upon Improper Aggregation
("Defendants' Motion"). The Report recommends that the Jefferson Court grant the
Defendants' Motion. A copy of the Report is included in this quarterly report on
Form 10-Q as Exhibit (99). The Jefferson Court has scheduled a "de novo" hearing
on the Report for May 24, 2001. If the Jefferson Court adopts the Special
Master's recommendations, Owens Corning's case would be dismissed, subject to
appeal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See Exhibit Index below, which is incorporated here by reference.
(b) Reports on Form 8-K.
During the quarter ended March 31, 2001, Owens Corning filed the
following current report on Form 8-K:
- Dated January 30, 2001, under Item 5, "Other Events and
Regulation FD Disclosure."
- 49 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Owens
Corning has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OWENS CORNING
Registrant
Date: May 15, 2001 By: /s/ Michael H. Thaman
--------------- -------------------------
Michael H. Thaman
Senior Vice President and
Chief Financial Officer
(as duly authorized officer)
Date: May 15, 2001 By: /s/ Deyonne F. Epperson
--------------- ---------------------------
Deyonne F. Epperson
Vice President and Controller
- 50 -
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 (incorporated herein by
reference to Exhibit (3) to Owens Corning's annual report on
Form 10-K (File No. 1-3660) for the year 1999).
(10) Material Contracts.
Owens Corning Senior Leader Emergence Incentive Plan (filed
herewith).
The following documents are 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, 2000:
- Standstill Agreement, dated as of January 30, 2001, between
Owens Corning and Owens-Corning Fiberglas Technology, Inc.
- Standstill Agreement dated as of January 30, 2001, between
Exterior Systems, Inc. and Owens-Corning Fiberglas
Technology, Inc.
(11) Statement re Computation of Per Share Earnings (filed herewith).
(99) Additional Exhibits.
Subsidiaries of Owens Corning, as amended (filed herewith).
Special Master's Report and Recommendation, dated May 9, 2001
(filed herewith).