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 September 30, 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 September 30,
2001
55,342,340
- 2 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(In millions of dollars, except share data)
NET SALES $ 1,291 $ 1,281 $ 3,597 $ 3,833
COST OF SALES 1,046 1,036 2,957 3,003
--------- -------- --------- --------
Gross margin 245 245 640 830
---------- --------- ---------- ---------
OPERATING EXPENSES
Marketing and administrative expenses 141 143 396 437
Science and technology expenses 10 13 30 42
Restructure costs (Note 4) 8 6 24 6
Chapter 11 related reorganization items (Note 1) 23 - 60 -
Provision for asbestos litigation claims (Note 12) (5) - (5) 790
Other 5 3 32 7
------------ ----------- ----------- -----------
Total operating expenses 182 165 537 1,282
---------- --------- ---------- --------
INCOME (LOSS) FROM OPERATIONS 63 80 103 (452)
OTHER
Cost of borrowed funds (Note 1) 4 55 11 149
Other 4 - (2) -
----------- ----------- ---------- -----------
INCOME (LOSS) BEFORE PROVISION (CREDIT)
FOR INCOME TAXES 55 25 94 (601)
Provision (credit) for income taxes (Note 6) 26 10 46 (244)
---------- --------- ----------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST
AND EQUITY IN NET INCOME (LOSS) OF
AFFILIATES 29 15 48 (357)
Minority Interest (2) (3) (3) (6)
Equity in net income (loss) of affiliates - 2 1 -
------------ --------- ------------ -----------
NET INCOME (LOSS) $ 27 $ 14 $ 46 $ (363)
========== ========= ========== =========
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share $ .50 $ .25 $ .84 $ (6.64)
---------- --------- ---------- ----------
Diluted net income (loss) per share $ .46 $ .25 $ .77 $ (6.64)
---------- --------- ---------- ----------
Weighted average number of common shares outstanding and common equivalent
shares during the period (in millions)
Basic 55.1 55.0 55.1 54.8
Diluted 59.9 55.5 60.0 54.8
The accompanying notes are an integral part of this statement.
- 3 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
September 30, December 31, September 30,
2001 2000 2000
---- ---- ----
(In millions of dollars)
ASSETS
- ------
CURRENT
Cash and cash equivalents $ 551 $ 550 $ 378
Restricted cash (Note 12) - - 100
Restricted cash and securities - Fibreboard -
current portion (Note 12) - - 850
Receivables 597 488 507
Inventories (Note 7) 480 469 532
Insurance for asbestos litigation claims -
current portion (Note 12) - - 33
Deferred income taxes 5 6 181
Income tax receivable 5 31 4
Other current assets 22 20 25
------------ ------------- -----------
Total current 1,660 1,564 2,610
---------- ----------- ---------
OTHER
Insurance for asbestos litigation claims
(Note 12) 4 59 59
Restricted cash - asbestos-related (Note 12) 171 164 44
Restricted cash, securities and other - Fibreboard
(Notes 12 and 13) 1,285 1,274 395
Deferred income taxes 1,037 1,075 828
Goodwill 618 636 649
Investments in affiliates 50 62 87
Other noncurrent assets 359 257 273
----------- ------------ ----------
Total other 3,524 3,527 2,335
---------- ----------- ---------
PLANT AND EQUIPMENT, at cost
Land 68 60 58
Buildings and leasehold improvements 666 663 672
Machinery and equipment 2,866 2,717 2,547
Construction in progress 172 327 360
---------- ------------ ----------
3,772 3,767 3,637
Less - accumulated depreciation (1,984) (1,946) (1,944)
---------- ------------ ----------
Net plant and equipment 1,788 1,821 1,693
---------- ----------- ---------
TOTAL ASSETS $ 6,972 $ 6,912 $ 6,638
========= ========== =========
The accompanying notes are an integral part of this statement.
- 4 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (continued)
(unaudited)
September 30, December 31, September 30,
2001 2000 2000
---- ---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars)
- ------------------------------------
CURRENT
Accounts payable and accrued liabilities $ 678 $ 491 $ 696
Reserve for asbestos litigation claims - current portion
(Note 12) - - 1,250
Asbestos-related liabilities - Fibreboard - current portion
(Note 13) - - 850
Short-term debt 43 50 56
Long-term debt - current portion 65 68 2,733
---------- ----------- --------
Total current 786 609 5,585
--------- ---------- --------
LONG-TERM DEBT 6 7 32
----------- ------------ ----------
OTHER
Reserve for asbestos litigation claims (Note 12) - - 980
Asbestos-related liabilities - Fibreboard (Note 13) - - 395
Other employee benefits liability 330 322 322
Pension plan liability 38 75 41
Other 127 124 337
---------- ---------- --------
Total other 495 521 2,075
---------- ---------- -------
LIABILITIES SUBJECT TO COMPROMISE (Note 1) 6,817 6,935 -
--------- --------- ----------
COMMITMENTS AND CONTINGENCIES
COMPANY OBLIGATED SECURITIES OF ENTITIES
HOLDING SOLELY PARENT DEBENTURES -
SUBJECT TO COMPROMISE 200 200 195
--------- ---------- --------
MINORITY INTEREST 40 39 47
---------- ----------- ---------
STOCKHOLDERS' EQUITY
Common stock 697 699 700
Deficit (1,950) (1,996) (1,884)
Accumulated other comprehensive income (115) (97) (103)
Other (4) (5) (9)
------------ ------------- -----------
Total stockholders' equity (1,372) (1,399) (1,296)
--------- ---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,972 $ 6,912 $ 6,638
======== ======== ========
The accompanying notes are an integral part of this statement.
- 5 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net income (loss) $ 27 $ 14 $ 46 $ (363)
Reconciliation of net cash provided by
operating activities
Noncash items:
Provision for asbestos litigation claims - - - 790
Provision for depreciation and
amortization 51 44 161 137
Provision (credit) for deferred income
taxes 12 (1) 40 (289)
Other - noncash items 39 9 69 (23)
(Increase) decrease in receivables 29 (1) (123) (215)
(Increase) decrease in inventories 7 15 (21) (105)
Increase (decrease) in accounts payable
and accrued liabilities 47 17 125 (43)
Change in liabilities subject to
compromise, net (Note 1) (1) - (97) -
(Increase) decrease in restricted cash -
asbestos-related (Note 12) (1) 106 48 (144)
Proceeds from insurance for asbestos
litigation claims, excluding Fibreboard
(Note 12) - - - 347
Payments for asbestos litigation claims,
excluding Fibreboard (Note 12) - (176) - (540)
Pension fund contribution (150) - (176) -
Other 24 (34) 42 4
------------ ---------- ----------- -----------
Net cash flow from operations $ 84 $ (7) $ 114 $ (444)
----------- ----------- ---------- ---------
NET CASH FLOW FROM INVESTING
Additions to plant and equipment (50) (113) (133) (278)
Investment in subsidiaries, net of cash
acquired - - - (4)
Proceeds from the sale of affiliate or
business (Note 5) - - 20 193
Other (4) 1 (2) (35)
------------- ---------- ---------- ----------
Net cash flow from investing $ (54) $ (112) $ (115) $ (124)
------------ --------- ----------- ---------
The accompanying notes are an integral part of this statement.
- 6 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(In millions of dollars)
NET CASH FLOW FROM FINANCING
Net additions to long-term credit facilities $ - $ (7) $ - $ 948
Other additions to long-term debt 1 - 17 22
Other reductions to long-term debt (2) (1) (4) (84)
Net decrease in short-term debt (2) 13 (7) 4
Subject to compromise (Note 1) - - (4) -
Dividends paid - (4) - (12)
Other - - (1) -
----------- ------------ ------------ -----------
Net cash flow from financing (3) 1 1 878
----------- ----------- ----------- --------
Effect of exchange rate changes on cash 4 (1) 1 (2)
---------- ------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents 31 (119) 1 308
Cash and cash equivalents at beginning of
period 520 497 550 70
--------- --------- -------- ---------
Cash and cash equivalents at end of period $ 551 $ 378 $ 551 $ 378
======== ========= ======== ========
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. In addition, the Bankruptcy Court has appointed James J.
McMonagle as legal representative for the class of future asbestos claimants
against one or more of the Debtors. The two committees and the futures
representative will have the right to be heard on all matters that come before
the Bankruptcy Court. Owens Corning expects that these committees and the
futures representative 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
- 8 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
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. By order, the Bankruptcy Court has extended such
exclusivity period until February 2, 2002, and similarly extended the Debtors'
exclusive rights to solicit acceptances of a reorganization plan from April 3,
2001 to April 3, 2002. If the Debtors fail to file a plan of reorganization
prior to the ultimate expiration of the exclusivity period, 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., a Non-Debtor Subsidiary that holds Owens Corning's ownership interest
in a majority of Owens Corning's foreign subsidiaries ("IPM"), 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
- 9 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
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.
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.
- 10 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
The Debtors have received approval from the Bankruptcy Court to pay or otherwise
honor certain of their pre-petition obligations, including employee wages,
salaries, benefits and other employee obligations, pre-petition claims of
critical vendors, and certain other pre-petition claims including certain
customer program and warranty claims.
From the Petition Date through September 30, 2001, contractual interest expense
not accrued or recorded on pre-petition debt totaled $190 million, of which $139
million relates to 2001 and $43 million relates to the quarter ended September
30, 2001.
At September 30, 2001, the Company had $551 million of Cash and Cash Equivalents
(of which approximately $39 million was subject to administrative freeze pending
the resolution of certain alleged set-off rights 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 September 30, 2001, this
facility had not been utilized except for approximately $32 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 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 maintain profitability following such
confirmation.
Debtor-In-Possession Financial Statements
- -----------------------------------------
The condensed financial statements of the Debtors are presented below. These
statements reflect the financial position and results of operations of the
combined Debtor entities, including certain amounts and activities between
Debtors and non-debtor entities of Owens Corning which are eliminated in the
consolidated financial statements.
- 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
for the QUARTER AND NINE MONTHS ended September 30, 2001
2001
----
Quarter Ended Nine Months Ended
September 30 September 30
------------ ------------
(In millions of dollars)
NET SALES $ 1,143 $ 3,139
COST OF SALES 953 2,663
----------- -----------
Gross margin 190 476
----------- ------------
OPERATING EXPENSES
Marketing and administrative expenses 129 356
Science and technology expenses 9 27
Restructure costs (Note 4) 5 14
Chapter 11 reorganization items (Note 1) 23 60
Proceeds from asbestos litigation claims (5) (5)
Other (Including interest income from non-debtors of $14 million
in the third quarter and $42 million for the nine months ended) (31) (71)
------------ -------------
Total operating expenses 130 381
----------- -----------
INCOME FROM OPERATIONS 60 95
OTHER
Cost of borrowed funds 1 (1)
Other (Note 13) 4 (2)
------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES 55 98
Provision for income taxes 25 46
------------ ------------
INCOME BEFORE EQUITY IN NET INCOME (LOSS) OF
AFFILIATES 30 52
Equity in net income (loss) of affiliates (1) -
------------- -------------
NET INCOME $ 29 $ 52
=========== ===========
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 Balance Sheet
September 30, December 31,
2001 2000
---- ----
(In millions of dollars)
ASSETS
- ------
CURRENT
Cash and cash equivalents $ 431 $ 461
Receivables - debtors, net 439 338
Receivables - non-debtors 744 672
Inventories 349 347
Deferred income taxes 4 4
Income tax receivable 4 31
Other current assets 20 18
------------ ----------
Total current 1,991 1,871
---------- -------
OTHER
Insurance for asbestos litigation claims (Note 12) 4 59
Restricted cash and other - asbestos-related (Note 12) 171 164
Restricted cash, securities and other - Fibreboard (Notes
12 and 13) 1,285 1,274
Deferred income taxes 1,001 1,058
Goodwill, net 520 530
Investments in affiliates 29 38
Investments in non-debtor subsidiaries 736 745
Other noncurrent assets 309 209
----------- ---------
Total other 4,055 4,077
---------- -------
PLANT AND EQUIPMENT, at cost
Land 41 34
Buildings and leasehold improvements 526 522
Machinery and equipment 2,196 2,078
Construction in progress 153 259
----------- ---------
2,916 2,893
Less: Accumulated depreciation (1,527) (1,502)
----------- -------
Net plant and equipment 1,389 1,391
---------- --------
TOTAL ASSETS $ 7,435 $ 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
September 30, December 31,
2001 2000
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars)
- ------------------------------------
CURRENT
Accounts payable and accrued liabilities - debtor $ 509 $ 320
Accounts payable and accrued liabilities - non-debtors 7 46
Long-term debt - current portion - 1
------------ -----------
Total current 516 367
---------- ---------
OTHER
Other employee benefits liability 316 308
Pension plan liability 32 68
Other 103 96
---------- ----------
Total other 451 472
---------- ---------
LIABILITIES SUBJECT TO COMPROMISE 7,532 7,623
STOCKHOLDERS' EQUITY
Common stock 697 699
Deficit (1,748) (1,807)
Accumulated other comprehensive loss (11) (12)
Other (2) (3)
------------- ----------
Total stockholders' equity (1,064) (1,123)
---------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,435 $ 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 AND NINE MONTHS ended September 30, 2001
2001
----
Quarter Nine Months
Ended Ended
September 30 September 30
------------ -------------
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net income $ 29 $ 52
Reconciliation of net cash provided by operating activities
Noncash items:
Provision for depreciation and amortization 37 115
Credit for deferred income taxes 21 61
Other 26 71
Increase (decrease) in receivables 16 (186)
Increase (decrease) in inventories 7 (4)
Increase in accounts payable and accrued liabilities 38 100
(Increase) decrease in restricted cash and other -
asbestos-related (1) 48
Change in liabilities subject to compromise, net (1) (97)
Pension fund contribution (150) (176)
Other 28 88
--------- ----------
Net cash flow from operations 50 72
--------- ----------
NET CASH FLOW FROM INVESTING
Additions to plant and equipment (38) (113)
Other (3) (1)
----------- ----------
Net cash flow from investing (41) (114)
---------- ---------
NET CASH FLOW FROM FINANCING
Net additions to long-term credit facilities - 17
Subject to compromise - (4)
Other - (1)
----------- ----------
Net cash flow from financing $ - $ 12
---------- --------
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 quarter and Nine months ended September 30, 2001
Quarter Ended Nine Months Ended
September 30 September 30
------------ ------------
(In millions of dollars)
Net increase (decrease) in cash and cash equivalents $ 9 $ (30)
Cash and cash equivalents at beginning of period 422 461
----------- -----------
Cash and cash equivalents at end of period $ 431 $ 431
========== ==========
The amounts subject to compromise in the Consolidated and Debtor-in-Possession
Balance Sheets consist of the following items:
September 30, December 31,
2001 2000
---- ----
(amounts in millions)
Accounts payable $ 193 $ 255
Accrued interest payable 40 39
Accrued liabilities 47 74
Debt 2,843 2,832
Income taxes payable 209 212
Reserve for asbestos litigation claims - Owens Corning (Note 12) 2,200 2,249
Reserve for asbestos related liabilities - Fibreboard
(Notes 12 and 13) 1,285 1,274
--------- ---------
Total consolidated 6,817 6,935
Payables to non-debtors 715 688
---------- ----------
Total debtor $ 7,532 $ 7,623
======== ========
The amounts for reorganizational items in the Consolidated and
Debtor-in-Possession Income Statements consist of the following for the quarter
and nine months ended September 30:
Quarter Ended Nine Months Ended
September 30 September 30
------------ ------------
(amounts in millions)
Professional fees $ 15 $ 49
Payroll and compensation 9 21
Interest income (5) (15)
Litigation related expenses and other 4 5
------------ ----------
Total $ 23 $ 60
========== =========
- 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 Nine Months Ended
September 30, September 30,
------------- -------------
NET SALES 2001 2000 2001 2000
---- ---- ---- ----
(In millions of dollars)
Reportable Operating Segments
- -----------------------------
Building Materials Systems
United States $ 1,024 $ 994 $ 2,769 $ 2,901
Europe 2 1 5 89
Canada and other 50 53 134 143
----------- --------- ----------- ---------
Total Building Materials Systems 1,076 1,048 2,908 3,133
----------- ------- ----------- --------
Composite Systems
United States 96 104 293 309
Europe 76 85 266 256
Canada and other 43 44 130 135
----------- --------- ----------- --------
Total Composite Systems 215 233 689 700
----------- -------- ----------- --------
Total Reportable Operating Segments $ 1,291 $ 1,281 $ 3,597 $ 3,833
=========== ======= =========== =======
External Customer Sales by Geographic
- -------------------------------------
Region
------
United States $ 1,120 $ 1,098 $ 3,062 $ 3,210
Europe 78 86 271 345
Canada and other 93 97 264 278
----------- --------- ----------- ---------
Net Sales $ 1,291 $ 1,281 $ 3,597 $ 3,833
=========== ======= =========== =======
- 17 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2. SEGMENT DATA (continued)
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(In millions of dollars)
INCOME (LOSS) FROM OPERATIONS
Reportable Operating Segments
- -----------------------------
Building Materials Systems
United States $ 92 $ 73 $ 180 $ 285
Europe - - - 2
Canada and other 5 12 9 26
---------- --------- ---------- ----------
Total Building Materials Systems 97 85 189 313
--------- --------- --------- ---------
Composite Systems
United States 21 5 63 54
Europe 8 7 32 10
Canada and other 4 4 16 16
----------- ----------- --------- ---------
Total Composite Systems 33 16 111 80
---------- ----------- -------- ---------
Total Reportable Operating Segments $ 130 $ 101 $ 300 $ 393
-------- --------- -------- --------
Geographic Regions
- ------------------
United States $ 113 $ 78 $ 243 $ 339
Europe 8 7 32 12
Canada and other 9 16 25 42
---------- ---------- --------- ---------
Total Reportable Operating Segments $ 130 $ 101 $ 300 $ 393
======== ========= ======== ========
Reconciliation to Consolidated Income
Before Provision for Income Taxes
Restructuring and other charges (35) - (94) -
Chapter 11 related reorganization items (23) - (60) -
Provision for asbestos litigation claims 5 - 5 (790)
General corporate income (expense) (14) (21) (48) (55)
Cost of borrowed funds (4) (55) (11) (149)
Other (4) - 2 -
----------- ------------ ---------- -----------
Consolidated Income (Loss) Before
Provision (Credit) for Income Taxes $ 55 $ 25 $ 94 $ (601)
========= ---------- ======== --------
- 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
2001 Charges
- ------------
Third Quarter 2001
- ------------------
During the third quarter of 2001, the Company continued to experience the
effects of an overall slowed economy in both the building materials and
composite materials industries. While sales were flat with a year ago and
margins showed slight improvements due to some productivity gains and material
cost deflation, the Company continues to review its cost structures in light of
economic forecasts. As a result, the Company recorded a $35 million pretax
charge to income from operations for restructuring and other charges. This
charge was comprised of an $8 million pretax restructure charge and $27 million
in pretax other charges. The restructure charge has been classified as a
separate component of operating expenses on the Company's Consolidated Statement
of Income (Loss) and represents severance costs associated with the elimination
of approximately 160 positions, primarily in the U.S. and the U.K. The primary
groups impacted included manufacturing and administrative personnel. As of
September 30, 2001, approximately $5 million has been paid and charged against
this reserve.
The $27 million in pretax other charges included: 1) $15 million in costs
associated with the Company's previously announced plan to realign its Newark,
Ohio manufacturing facility; 2) $4 million to write-down the Company's
investment and related assets in Alcopor Owens Corning, a building materials
joint venture in Europe, to net realizable value. The Company reached an
agreement to sell its interest in Alcopor Owens Corning and the proceeds were
placed in escrow. This transaction received final approval from the Bankruptcy
Court on October 29, 2001 (see Note 5); and 3) various other charges totaling $8
million. This $27 million pretax charge was accounted for as a $19 million
charge to cost of sales and an $8 million charge to other operating expenses.
Second Quarter 2001
- -------------------
During the second quarter of 2001, the Company recorded $17 million in pretax
charges for restructuring and other charges as a result of the continued impact
of a soft overall economy. This charge was comprised of a $7 million pretax
restructure charge and $10 million in pretax other charges. The $7 million
restructure charge represented $5 million for the divestiture of non-strategic
businesses and facilities, consisting mainly of non-cash asset write-downs to
fair value and exit cost liabilities, and a $2 million charge for severance
costs associated with the elimination of approximately 25 positions, primarily
in the U.K. The primary groups affected included manufacturing and
administrative personnel. As of September 30, 2001, approximately $1 million has
been paid and charged against the reserve for personnel reductions.
- 19 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued)
The $10 million in pretax other charges included $4 million in costs related to
the Company's continuing plan for the realignment of the Newark, Ohio facility,
$2 million to write-down inventory made obsolete by changes in the Company's
manufacturing and marketing strategies, and various other charges totaling $4
million. This $10 million pretax charge was accounted for as an $8 million
charge to cost of sales and a $2 million charge to other operating expenses.
First Quarter 2001
- ------------------
During the first quarter of 2001, the Company recorded $42 million in pretax
charges for restructuring and other charges as a result of the impact of a soft
overall economy. The $42 million pretax 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 pretax restructure charge
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 September 30, 2001,
approximately $2 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.
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 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.
2000 Charges
- ------------
During 2000, the Company recorded pretax charges of $229 million for
restructuring and other activities as a result of its reassessment of business
strategies with respect to investments in certain ventures, facilities and
overhead expenditures. The $229 million pretax charge was comprised of a $32
million charge associated with the restructuring of the Company's business
segments and $197 million of other charges, the majority of which represented
impairments of long-lived assets. In addition, the Company recorded a $6 million
pretax credit to minority interest resulting from charges related to a
majority-owned consolidated subsidiary. The components of the restructuring
charge included $16 million for personnel reductions, $10 million for the
divestiture of non-strategic businesses and facilities, and $6 million for asset
impairments associated with the planned closing of two lines at the Company's
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
Owens Corning's U.S. pension plans, and $96 million of charges focused on
improving business operations. The $95 million of asset impairments included: 1)
$54 million charge 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
- 20 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued)
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 investments in the Company's 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, with final
approval obtained in June, 2001, at which time cash proceeds were released from
escrow; 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 the
Company's 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 September 30, 2001, approximately $13 million has been
paid and charged against the reserve for personnel reductions and approximately
$2 million has been charged against exit cost liabilities.
1997 and 1998 Charges
- ---------------------
During 1997 and 1998, the Company recorded pretax charges of $386 million for
restructuring and her 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 included $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 September 30, 2001, approximately $105
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
and 2000/2001 restructure program described above, including cumulative spending
and adjustments and the remaining balance as of September 30, 2001:
Liability at
Original Total September 30,
(In millions of dollars) Liability Payments 2001
--------- -------- ----
Personnel Costs $ 150 $ (126) $ 24
Facility and Business Exit Costs 20 (15) 5
Other 2 (2) -
---------- ----------- -----------
Total $ 172 $ (143) $ 29
======= ========= =========
- 21 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued)
The Company continually evaluates whether events and circumstances have occurred
that indicate that the carrying amount of certain long-lived assets is
recoverable. When factors indicate that a long-lived asset should be evaluated
for possible impairment, the Company uses an estimate of the expected
undiscounted cash flows to be generated by the asset to determine whether the
carrying amount is recoverable or if impairment exists. When it is determined
that an impairment exists, the Company uses the fair market value of the asset,
usually measured by the discounted cash flows to be generated by the asset, to
determine the amount of the impairment to be recorded in the financial
statements.
5. ACQUISITIONS AND DIVESTITURES OF BUSINESSES
In September, 2001, the Company reached agreement to sell its 40% interest in
Alcopor Owens Corning, an unconsolidated joint venture. Net proceeds of
approximately $23 million were placed in escrow. This transaction received final
approval from the Bankruptcy Court on October 29, 2001. The Company reduced its
investment in the joint venture to net realizable value during the third quarter
of 2001. See Note 4 to the Consolidated Financial Statements. As part of the
divestiture, the Company will be obligated to fund certain U.K. pension
obligations. The amount of the contribution will be actuarially determined as of
the closing date and is dependent on fair market value of the pension plan
assets at that time. The contribution is not expected to exceed the proceeds
from the sale.
During the first quarter of 2001, the Company completed the sale of the majority
of its Engineered Pipe Business, a producer of glass-reinforced plastic pipe
with operations mostly in Europe. Net proceeds from the sale were $22 million,
substantially all of which was received in the first quarter of 2001.
On May 31, 2000, the Company completed the sale of its European Building
Materials business to Alcopor Owens Corning. Proceeds from the sale, net of the
Company's $34 million cash infusion into the joint venture, were $177 million.
In connection with this transaction, the joint venture assumed $62 million of
debt from Owens Corning and the Company incurred fees of approximately $6
million, resulting in net cash proceeds of approximately $109 million. A pretax
gain of approximately $5 million, including a $54 million write-off of goodwill,
was realized from the sale. This pretax gain was recorded as a reduction of
other operating expenses on the consolidated statement of income.
The results of operations of the European Building Materials business are
reflected in the Company's consolidated statement of income through the period
ending May 31, 2000. For the nine months ended September 30, 2000, the European
Building Materials business recorded sales of approximately $88 million, and
income from operations of approximately $1 million. Effective May 31, 2000, the
Company accounted for its ownership interest in Alcopor Owens Corning under the
equity method. Please see Note 1 to the Consolidated Financial Statements.
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
(Loss).
- 22 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
6. INCOME TAXES
The reconciliation between the U.S. federal statutory rate and the Company's
effective income tax rate is:
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
U.S. federal statutory rate 35% 35% 35% (35%)
State and local income taxes 1 (3) 1 (5)
Operating losses of foreign subsidiaries - 11 - 1
Special tax election (a) - - - (2)
Interest 6 - 8 -
Foreign tax rate differences 2 (1) 2 -
Other 4 - 3 -
------- ------- ------- --------
Effective tax rate 48% 42% 49% (41%)
======= ====== ======= =======
(a) Represents the implementation of a tax strategy associated with one of our
foreign subsidiaries.
7. INVENTORIES
September 30, 2001 December 31, 2000
------------------ -----------------
(In millions of dollars)
Inventories are summarized as follows:
Finished goods $ 414 $ 397
Materials and supplies 164 165
--------- ---------
FIFO inventory 578 562
Less: Reduction to LIFO basis (98) (93)
----------- -----------
Total Inventory $ 480 $ 469
========= =========
Approximately $138 million and $300 million of total inventories were valued
using the LIFO method at September 30, 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 Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(In millions of dollars)
Income taxes $ 5 $ 5 $ (27) $ (30)
Cost of borrowed funds 3 54 6 154
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
- 23 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. COMPREHENSIVE INCOME
The Company's comprehensive income for the quarters ended September 30, 2001 and
2000 was income of $34 million and a loss of $14 million, respectively. For the
nine months ended September 30, 2001 and 2000, comprehensive income was income
of $28 million and a loss of $415 million, respectively. The Company's
comprehensive income includes net income (loss), currency translation
adjustments, and deferred gains and losses on certain hedging transactions.
The comprehensive loss for the nine months ended September 30, 2000 includes a
reclassification from other comprehensive income to net income of approximately
$13 million. This reclassification reflects the expense recognition of currency
translation adjustments resulting from the sale of the European Building
Materials business to Alcopor Owens Corning in May, 2000 (see Note 5).
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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
(In millions of dollars, except share data)
Net income (loss) used for
basic earnings per share $ 27 $ 14 $ 46 $ (363)
Net income effect of
assumed conversion of
preferred securities - - - -
--------------- ---------- ------------ -----------
Net income used for diluted
earnings per share $ 27 $ 14 $ 46 $ (363)
============= ======== ========== =========
Weighted average number of
shares outstanding used for
basic earnings per share
(thousands) 55,079 55,008 55,064 54,759
Deferred awards (thousands) 290 457 323 -
Shares from assumed
conversion of preferred
securities (thousands) 4,566 - 4,566 -
------------ ----------- --------- -----------
Weighted average number of
shares outstanding and
common equivalent shares
used for diluted earnings per
share (thousands) 59,935 55,465 59,953 54,759
=========== ======= ======== =======
- 24 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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.
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
- 25 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
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.
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 148,000 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 88,000 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 $539
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
- 26 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
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 except for approximately $13 million paid on
its behalf by third parties pursuant to appeal bonds issued prior to the
Petition Date. During 1999 and 2000 (prior to the Petition Date), Owens Corning
(excluding Fibreboard) made asbestos-related payments falling within four major
categories: (1) Settlements in respect of verdicts incurred or claims resolved
prior to the implementation of the NSP ("Pre-NSP Settlements"); (2) NSP
settlements; (3) Non-NSP settlements covering cases not resolved by the NSP; and
(4) Defense, claims processing and administrative expenses, as follows:
(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 September 30, 2001, approximately $115 million of Administrative
Deposits previously made by Owens Corning had not been finally distributed to
- 27 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
claimants ("Undistributed Administrative Deposits") and, accordingly, are
reflected in Owens Corning's consolidated balance sheet as restricted assets
(under the caption "Restricted cash - 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. However, one of the holders of Undistributed
Administrative Deposits for Owens Corning (and similar deposits for Fibreboard)
has filed a motion with the Bankruptcy Court requesting an order authorizing
distribution of the deposits it holds to the escrow beneficiaries. The
Bankruptcy Court has scheduled a hearing on this motion for November 28, 2001.
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
Committee.
On June 14, 2001, a companion bill identical to HR 1412 was introduced in the
United States Senate (S 1048). This bill also has strong bipartisan support.
Despite the foregoing developments, 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 even if such legislation were enacted.
Other Asbestos-Related Litigation
- ---------------------------------
As previously reported, the Company believes that it has spent significant
amounts to resolve claims of asbestos claimants whose injuries were caused or
exacerbated by cigarette smoking. Owens Corning and Fibreboard are pursuing
litigation against tobacco companies (discussed below) to obtain payment of
monetary damages (including punitive damages) for payments made by Owens Corning
and Fibreboard to asbestos claimants who developed smoking related diseases.
There can be no assurance that any such litigation will go to trial or be
successful.
In October 1998, the Circuit Court for Jefferson County, Mississippi granted
- 28 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
leave to file an amended complaint in an existing action to add claims by Owens
Corning against seven tobacco companies and several other tobacco industry
defendants. On June 17, 2001, the Jefferson court entered an order dismissing
Owens Corning's case in response to the defendants' motion for summary judgment
on the basis that Owens Corning's injuries were indirect and thus too remote
under Mississippi law to allow recovery. The Company has appealed such dismissal
to the Supreme Court of Mississippi.
In addition to the Mississippi lawsuit, a lawsuit brought in December 1997 by
Owens Corning and Fibreboard is pending in the Superior Court for Alameda
County, California against the same tobacco companies. The defendants have filed
motions to dismiss Owens Corning's and Fibreboard's claims on the basis of the
decision in the Mississippi lawsuit as well as California law. A hearing on
these motions is set for November 20, 2001.
Insurance
- ---------
As previously reported, late in the second quarter of 2001, Owens Corning
entered into a settlement agreement with one of its excess insurance carriers,
resolving a dispute concerning coverage from such insurer for non-products
asbestos-related personal injury claims. The Bankruptcy Court approved such
settlement in July. As a result, during the third quarter of 2001, the carrier
funded $55 million into an escrow account to be released in conjunction with
implementation of an approved plan of reorganization, and the Company's recorded
insurance asset was reduced. The escrowed funds plus earnings are reflected on
Owens Corning's consolidated balance sheet as restricted assets, under the
category "Restricted cash - asbestos-related". During the third quarter of 2001,
Owens Corning also received an additional $5 million payment in respect of a
previous settlement with a bankrupt insurance carrier. This amount was recorded
as pre-tax income in the third quarter.
As of September 30, 2001, Owens Corning's financial statements reflect $4
million in unexhausted insurance coverage (net of deductibles and self-insured
retentions) under its liability insurance policies applicable to asbestos
personal injury claims. This amount represented unconfirmed potential
non-products coverage with excess level insurance carriers, as to which Owens
Corning had estimated its probable recoveries.
Owens Corning also has other unconfirmed potential non-products coverage with
excess level carriers. Owens Corning is actively pursuing non-products insurance
recoveries under these policies. In October, 2001, Owens Corning filed a lawsuit
in Lucas County, Ohio, against ten excess level carriers for declaratory relief
and damages for failure to make payments under its non-products insurance
coverage. The amount and timing of recoveries from excess level policies will
depend on the outcome of litigation or other proceedings, possible settlements
of those proceedings, or other negotiations.
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.
- 29 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
As of September 30, 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."
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 $ 1.1
Non-NSP backlog 0.3
Future Claims 0.7
Defense, Claims Processing and Administrative Expenses 0.1
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.
As one example of the difficulties inherent in estimating future asbestos
claims, Owens Corning notes that the Manville Personal Injury Settlement Trust,
a trust established to settle asbestos claims against Johns Manville
Corporation, announced in June 2001 that it was reducing its initial settlement
distributions by fifty percent on the basis of the continued record pace of
asbestos claim filings and the prediction of its consultants that the trust
might receive 1.5 to 2.5 million additional claims.
- 30 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
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:
- - 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 file proofs
of claim in the form and manner prescribed by the Bankruptcy Court. The
filing of a proof of claim will be a precondition to any pre-petition claim
being considered for payment as an allowed claim. 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 the legal representative for the class of future asbestos
claimants and the other interested constituencies or, if necessary, by the
Bankruptcy Court. It is not possible to predict the outcome of such
negotiations at this time. In connection with such negotiations, it is
anticipated that a number of interested constituencies, including the
representatives of the pre-petition and future asbestos claimants and other
pre-petition creditors, will develop analyses of liability for both
pre-petition and future asbestos claims. Owens Corning
- 31 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
and Fibreboard will also prepare analyses for use in the negotiation
process. Such analyses are also required in connection with the
establishment, as part of the plan of reorganization, of a Section 524(g)
trust for the benefit of asbestos claimants. These analyses could vary
substantially from one another and from the amounts of Owens Corning's and
Fibreboard's existing reserves. Such analyses will be prepared solely for
use in the negotiation of a plan of reorganization and will not involve the
same type of estimation process required in connection with the preparation
of financial statements under generally accepted accounting principles.
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 September 30, 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) $ 0.6
Other Pending and Future Claims 1.6
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.
- 32 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
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 116,000 of which had satisfied all conditions
to final settlement, including receipt of executed releases, or other resolution
as Final NSP Settlements at an average cost per claim of approximately $7,500.
As of the Petition Date, approximately 61,000 of such Final NSP Settlements had
been paid in full or otherwise resolved and approximately 55,000 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 $357 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.
- 33 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued)
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 September 30, 2001, the Insurance Settlement funds were held in and
invested by the Fibreboard Settlement Trust. As of that date, $1,150 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
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 September 30, 2001, these assets were reflected
as non-current assets, under the category "Restricted cash, securities and other
- - Fibreboard." See Note 13 for additional information concerning the Fibreboard
Settlement Trust.
At this time, Owens Corning is unable to predict what the treatment of funds
held in the Fibreboard Settlement Trust and in Undistributed Administrative
Deposits in respect of Fibreboard claims 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
- 34 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued)
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
September 30, 2001, a reserve of approximately $1.3 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
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.
- 35 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued)
At September 30, 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) $0.4
Other Pending and Future Claims 0.9
In connection with this asbestos reserve, Owens Corning notes that:
- - The "Unpaid Final Settlements" component represented the remaining
estimated cost for all asbestos personal injury claims pending against
Fibreboard which were subject to final settlement agreements for which
releases from claimants were obtained, and under which all other conditions
to settlement had been satisfied, as of the Petition Date.
- - The "Other Pending and Future Claims" component represented the estimated
cost of resolving (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. This component also included the residual obligation to charity under
the Fibreboard Settlement Trust (see Note 13).
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 Liabilities
- ------------------------
Securities Litigation
- ---------------------
On or about April 30, 2001, certain of the Company's current and former
directors and officers, as well as certain underwriters, were named as
defendants in a lawsuit captioned John Hancock Life Insurance Company, et al. v.
Goldman, Sachs & Co., et al. in the United States District Court for the
District of Massachusetts. An amended complaint was filed by the plaintiffs on
or about July 5, 2001. Owens Corning is not named in the lawsuit. The suit
purports to be a securities class action on behalf of purchasers of certain
unsecured debt securities of Owens Corning in offerings occurring on or about
April 30, 1998 and July 23, 1998. The complaint alleges that the registration
statements pursuant to which the offerings were made contained untrue and
misleading statements of material fact and omitted to state material facts which
were required to be stated therein and which were necessary to make the
statements therein not misleading, in violation of sections 11, 12(a)(2) and 15
- 36 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued)
of the Securities Act of 1933. The amended complaint seeks an unspecified amount
of damages or, where appropriate, rescission of the plaintiffs' purchases. The
Company believes that the claim is without merit.
Tax Claim
- ---------
Owens Corning's federal income tax returns typically are audited by the Internal
Revenue Service ("IRS") in multi-year audit cycles. The audit for the years
1992-1995 was completed in late 2000. Due to the Filing, the IRS also
accelerated and completed the audit of the years 1996-1999 by March of 2001. As
the result of these audits and unresolved issues from prior audit cycles, the
IRS is asserting claims for approximately $390 million in income taxes plus
interest of approximately $175 million.
Pending audit of Owens Corning's federal income tax return for the year 2000,
the IRS has also filed a protective claim in the amount of approximately $50
million, covering a tax refund received by Owens Corning for such year, plus
interest.
In accordance with generally accepted accounting principles, Owens Corning
maintains tax reserves to cover audit issues. While Owens Corning believes that
the existing reserves are appropriate in light of the audit issues involved, its
defenses, its prior experience in resolving audit issues, and its ability to
realize certain challenged deductions in subsequent tax returns if the IRS were
successful, there can be no assurance that such reserves will be sufficient.
Owens Corning will continue to review its tax reserves on a periodic basis and
make such adjustments as may be appropriate. Any such revision could be material
to the Company's consolidated financial position and results of operations in
any given period.
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 September 30, 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
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.
- 37 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13. FIBREBOARD SETTLEMENT TRUST (continued)
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 September 30, 2001, these assets were reflected
as non-current assets, under the category "Restricted cash, securities and other
- - Fibreboard." Owens Corning estimates a reserve for Fibreboard in accordance
with generally accepted accounting principles to reflect asbestos-related
liabilities (see Note 12, Part B). As of September 30, 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 September 30, 2001, the Consolidated Financial Statements reflect
Fibreboard's liabilities for asbestos litigation claims at $1.215 billion, with
a residual obligation to charity of $70 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.
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 September 30, 2001
- ------------------------------------------------
Trust Assets generated interest/dividend earnings of approximately $13 million
and $15 million, respectively, during the third quarter of 2001 and 2000 ($42
million and $53 million, respectively, for the first nine months of the year),
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
- 38 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13. FIBREBOARD SETTLEMENT TRUST (continued)
Consolidated Statement of Income (Loss). This income, however, has been offset
by an equal charge to other expense, which represents an increase in the
residual liability to charity.
As a result of the Filing, there were no payments from the Trust during the
first half of 2001. However, in the third quarter of 2001, approximately $11
million was paid for taxes related to earnings of the Trust. Payments for
asbestos litigation claims from the Trust during the third quarter of 2000 were
approximately $186 million, and totaled $820 million for the year. As the result
of the sale of securities, the Trust realized a gain of less than $1 million
during the third quarter of 2001, compared to a gain of approximately $1 million
during the same period of 2000 (for the first nine months of such years, the
Trust realized gains of approximately $4 million and $2 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 September 30, 2001 and 2000, the fair market value adjustment for those
securities designated as available for sale resulted in an unrealized gain of
approximately $11 million and $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 September 30, 2001, the fair value of Trust Assets was $1.285 billion, which
was comprised of $1.168 billion of marketable securities, $18 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 September 30, 2001 and December
31, 2000 are as follows:
September 30, 2001
------------------
Amortized Gross Unrealized Gross Unrealized
Cost Gain Loss Fair Value
---- ---- ---- ----------
(In millions of dollars)
Municipal Bonds $ 1,151 $ 11 $ - $ 1,162
Mutual Funds 2 - - 2
US Government Bonds 4 - - 4
---------- ----------- ----------- ----------
Total $ 1,157 $ 11 $ - $ 1,168
- 39 -
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
September 30, 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.
September 30, 2001 December 31, 2000
------------------ -----------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
(In millions of dollars)
Due within one year $ 37 $ 37 $ 656 $ 656
Due after one year through five years 581 589 2 2
Due after five years through ten years 219 221 51 51
Due after ten years 320 321 382 383
--------- --------- --------- ---------
Total $ 1,157 $ 1,168 $ 1,091 $ 1,092
- 40 -
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
period ended September 30, 2001:
<c> <c>
Interest Unrealized Net Sales Realized
Balance and Gain/ of Gain/ Balance
12/31/00 Dividends (Loss) Securities (Loss) Other Payments 9/30/01
-------- --------- ------ ---------- ------ ----- -------- -------
Assets
- ------
Cash $ 12 $ - $ - $ (30) $ - $ - $ - $ (18)
Restricted
Cash 170 - - - - (35) - 135
Marketable
Securities:
Available
for Sale 1,092 42 11 30 4 - (11) 1,168
--------- -------- ---------- ----------- --------- -------- ------------ -------
Total Assets $ 1,274 $ 42 $ 11 $ - $ 4 $ (35) $ (11) $ 1,285
======== ======== ========= ============ ========= ======== =========== =======
Liabilities
- -----------
Asbestos
Litigation
Claims $ 1,250 $ - $ - $ - $ - $ (35) $ - $ 1,215
Charity 24 42 11 - 4 - (11) 70
---------- -------- ---------- ------------ --------- -------- ------------ -------
Total
Liabilities $ 1,274 $ 42 $ 11 $ - $ 4 $ (35) $ (11) $ 1,285
======== ======== ========= ============ ========= ======== =========== =======
- 41 -
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
etitions 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
- 42 -
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. In addition, the Bankruptcy Court has appointed James J.
McMonagle as legal representative for the class of future asbestos claimants.
The two committees and the futures representative will have the right to be
heard on all matters that come before the Bankruptcy Court. Owens Corning
expects that these committees and the futures representative 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. By order, the Bankruptcy Court has extended such
exclusivity period until February 2, 2002, and similarly extended the Debtors'
exclusive rights to solicit acceptances of a reorganization plan from April 3,
2001 to April 3, 2002. If the Debtors fail to file a plan of reorganization
prior to the ultimate expiration of the exclusivity period, 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,
- 43 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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., a Non-Debtor Subsidiary that holds Owens Corning's ownership interest
in a majority of Owens Corning's foreign subsidiaries ("IPM"), 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 customers' 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. During the third quarter
of 2001, Owens Corning reached agreement to sell its 40% interest in Alcopor
Owens Corning, an unconsolidated joint venture. This transaction received final
- 44 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
approval from the Bankruptcy Court on October 29, 2001 (see Note 5). Also part
of this strategy was the sale of the Engineered Pipe Business during the first
quarter of 2001, the Falcon Foam business in the U.S. during the first quarter
of 2000, and the Building Materials business in Europe to Alcopor Owens Corning
in the second quarter of 2000. Please see Notes 2 and 5 to the Consolidated
Financial Statements.
As a result of significant increases in certain materials costs, increased
energy costs and a fall in demand for building materials associated with a
weakening economy, 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.
During the first nine months of 2001, the overall economy remained weak. The
weakened economy resulted in lower demands in both the Building Materials and
Composite Systems markets. In the third quarter, slightly improved demand for
Building Materials was offset by some price decline, resulting in flat sales for
the third quarter of 2001 compared to the third quarter of 2000. The Company had
some margin improvements attributable to productivity gains and material cost
deflation.
Quarter and Nine Months Ended September 30, 2001
- ------------------------------------------------
Sales and Profitability
- -----------------------
Net sales for the quarter ended September 30, 2001 were $1.291 billion, up
slightly from the third quarter 2000 level of $1.281 billion. The increase is
due primarily to increased volume in North American Building Materials
businesses, partially offset by decreased sales in the overall Composites
Systems business. In the Building Materials Systems business, sales during the
third quarter of 2001 reflect volume increases in U.S. Building Materials,
partially offset by price decreases in the U.S. insulation and roofing markets,
compared to the third quarter of 2000. In the Composite Systems business, sales
reflect volume decreases only partially offset by price increases compared to
the year earlier period. On a consolidated basis, the currency translation
impact of sales denominated in foreign currencies was unfavorable during the
third quarter of 2001 compared to the third quarter of 2000. Please see Notes 2
and 5 to the Consolidated Financial Statements.
Sales outside the U.S. represented 13% of total sales during the third quarter
of 2001, compared to 14% during the third quarter of 2000.
For the quarter ended September 30, 2001, Owens Corning reported net income of
$27 million, or $.46 per share, compared to $14 million, or $.25 per share, for
the quarter ended September 30, 2000. On a pre-tax basis, Owens Corning reported
income from operations of $63 million in the third quarter of 2001 compared to
$80 million for the same period in 2000. When adjusted for $35 million in costs
of restructuring and other charges, $23 million in Chapter 11 related
expenditures and $5 million in income from asbestos-related insurance
recoveries, Owens Corning generated $116 million in income from operations in
the third quarter of 2001, compared to $106 million for the third quarter of
2000 (adjusted for restructuring and other charges). Net income for third
quarter 2001 reflects increased gross margin and reduced operating costs as well
as the impact of the Company's ongoing review of its cost structures as
described below in "restructuring and other charges". Cost of borrowed funds
during the third quarter of 2001 was $4 million, $51 million lower than the
third quarter 2000 level, due to the cessation of interest (totaling $43 million
during the quarter, and $139 million year to date (please see Note 1 to the
Consolidated Financial Statements)) on most debt as a result of the Chapter 11
Filing.
- 45 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Marketing and administrative expenses were $141 million during the third quarter
of 2001, compared to $143 million in the third quarter of 2000.
Net sales for the nine months ended September 30, 2001 were $3.597 billion, down
6% from the $3.833 billion reported for the first nine months of 2000. The
decline reflects volume decreases across North American Building Materials
markets and the disposition of Building Materials Europe. Net income for the
nine months ended September 30, 2001 was $46 million, or $.77 per share,
compared to a net loss of $363 million, or $(6.64) per share, for the same
period in 2000. On a pre-tax basis, Owens Corning reported income from
operations of $103 million for the nine months ended September 30, 2001. When
adjusted for $94 million in costs of restructuring and other charges, $60
million in Chapter 11 related expenditures and $5 million in income from
asbestos-related insurance recoveries, Owens Corning generated $252 million in
income from operations in 2001 compared to $363 million in 2000 (adjusted for
asbestos-related charges and restructuring and other charges).
Building Materials Systems
- --------------------------
In the Building Materials Systems segment, sales increased 3%, to $1.076
billion, in the third quarter of 2001 compared to the third quarter of 2000.
This increase resulted primarily from slightly higher volume in U.S. Building
Materials. Income from operations was $97 million during the third quarter of
2001, up approximately 14% from the same period in 2000. The increase reflects
the combined effects of volume increases, raw material cost decreases and a
decline in energy costs from earlier in the year.
Composite Systems
- -----------------
In the Composite Systems segment, sales were down 7%, to $215 million, during
the third quarter of 2001 compared to the third quarter of 2000. This decline
reflects volume decreases partially offset by increases in price. Income from
operations was $33 million in the third quarter of 2001, compared to $16 million
in the prior-year period, as a result of increased gross margin due to process
improvements and reduction of manufacturing costs, price increases, and
continued focus on operating expenses.
Restructuring of Operations and Other Charges
- ---------------------------------------------
2001 Charges
- ------------
Third Quarter 2001
- ------------------
During the third quarter of 2001, the Company continued to experience the
effects of an overall slowed economy in both the building materials and
composite materials industries. While sales were flat with a year ago, margins
showed slight improvements due to some productivity gains and material cost
deflation. As a result, the Company recorded a $35 million pretax charge to
income from operations for restructuring and other charges. This charge was
comprised of an $8 million pretax restructure charge and $27 million in pretax
other charges. The restructure charge has been classified as a separate
component of operating expenses on the Company's Consolidated Statement of
Income (Loss) and represents severance costs associated with the elimination of
approximately 160 positions, primarily in the U.S. and the U.K. The primary
groups impacted included manufacturing and administrative personnel. As of
September 30, 2001, approximately $5 million has been paid and charged against
this reserve.
The $27 million in pretax other charges included: 1) $15 million in costs
associated with the Company's previously announced plan to realign its Newark,
- 46 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Ohio manufacturing facility; 2) $4 million to write-down the Company's
investment and related assets in Alcopor Owens Corning, a building materials
joint venture in Europe, to net realizable value. The Company reached an
agreement to sell its interest in Alcopor Owens Corning and the proceeds were
placed in escrow. This transaction received final approval from the Bankruptcy
Court on October 29, 2001 (see Note 5); and 3) various other charges totaling $8
million. This $27 million pretax charge was accounted for as a $19 million
charge to cost of sales and an $8 million charge to other operating expenses.
Second Quarter 2001
- -------------------
During the second quarter of 2001, the Company recorded $17 million in pretax
charges for restructuring and other charges as a result of the continued impact
of a soft overall economy. This charge was comprised of a $7 million pretax
restructure charge and $10 million in pretax other charges. The $7 million
restructure charge represented $5 million for the divestiture of non-strategic
businesses and facilities, consisting mainly of non-cash asset write-downs to
fair value and exit cost liabilities, and a $2 million charge for severance
costs associated with the elimination of approximately 25 positions, primarily
in the U.K. The primary groups affected included manufacturing and
administrative personnel. As of September 30, 2001, approximately $1 million has
been paid and charged against the reserve for personnel reductions.
The $10 million in pretax other charges included $4 million in costs related to
the Company's continuing plan for the realignment of the Newark, Ohio facility,
$2 million to write-down inventory made obsolete by changes in the Company's
manufacturing and marketing strategies, and various other charges totaling $4
million. This $10 million pretax charge was accounted for as an $8 million
charge to cost of sales and a $2 million charge to other operating expenses.
First Quarter 2001
- ------------------
During the first quarter of 2001, the Company recorded $42 million in pretax
charges for restructuring and other charges as a result of the impact of a soft
overall economy. The $42 million pretax 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 pretax restructure charge
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 September 30, 2001,
approximately $2 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.
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 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.
2000 Charges
- ------------
During 2000, the Company recorded pretax charges of $229 million for
restructuring and other activities as a result of its reassessment of business
strategies with respect to investments in certain ventures, facilities and
overhead expenditures. The $229 million pretax charge was comprised of a $32
- 47 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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 included $16 million for personnel reductions, $10 million for the
divestiture of non-strategic businesses and facilities, and $6 million for asset
impairments associated with the planned closing of two lines at the Company's
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
Owens Corning's U.S. pension plans, and $96 million of charges focused on
improving business operations. The $95 million of asset impairments included: 1)
$54 million charge 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 investments in the Company's 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, with final
approval obtained in June, 2001, at which time cash proceeds were released from
escrow; 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 the
Company's 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 September 30, 2001, approximately $13 million has been
paid and charged against the reserve for personnel reductions and approximately
$2 million has been charged against exit cost liabilities.
1997 and 1998 Charges
- ---------------------
During 1997 and 1998, the Company recorded pretax charges of $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 included $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 September 30, 2001, approximately $105
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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 $84 million for the quarter ended September 30,
2001, compared to negative $7 million for the quarter ended September 30, 2000.
Cash flow from operations in the third quarter of 2001 was favorably impacted by
increased net income, decreases in accounts receivable and other long term
assets and increases in accounts payable and accrued liabilities. Cash flow in
the third quarter of 2001 was negatively impacted by a contribution of $150
million to the Company's U.S. pension plans. Cash flow from operations for the
quarter ended September 30, 2000 included payments for asbestos litigation
claims net of proceeds from insurance of $70 million. As a result of the Filing,
cash payments to asbestos claimants are stayed. Cash flow in the third quarter
of 2000 also included $54 million of cost of borrowed funds. As a result of the
Filing, interest on the pre-petition debt of the Debtors is also stayed.
Inventories at September 30, 2001 were $480 million, $11 million more than the
December 31, 2000 level, due largely to the seasonal build of inventories.
Receivables at September 30, 2001 were $597 million, a $109 million increase
over the December 31, 2000 level, attributable to the seasonal increase in
sales. The increase in accounts payable and accrued liabilities from $491
million at December 31, 2000, to $678 million at September 30, 2001, reflects
typical payment patterns during the first nine months of 2001, as well as
improvements in payment terms initially adversely affected by the Filing.
At September 30, 2001, Owens Corning's net working capital was $874 million and
our current ratio was 2.11, compared to $955 million and 2.57, respectively, at
December 31, 2000 and negative $2.975 billion and .47, respectively, at
September 30, 2000. The change in working capital and current ratio at September
30, 2001 compared to September 30, 2000 is the direct result of the Filing,
which reclassified 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 September 30, 2001, the Company had $2.843 billion of borrowings subject to
compromise and $71 million of other long-term borrowings (of which $65 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
September 30, 2000 were $ 2.765 billion.
At September 30, 2001, the Company had $551 million of Cash and Cash Equivalents
(of which approximately $39 million was subject to administrative freeze pending
the resolution of certain alleged set-off rights 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 September 30, 2001, this
facility had not been utilized except for approximately $32 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
on their ability to pay dividends and to transfer cash and other assets to each
other and to their affiliates.
- 49 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Owens Corning maintains pension plans for certain of its salaried and hourly
employees. During the third quarter of 2001, the Company contributed $150
million to its U.S. plans, for a total year-to-date contribution of $176
million. The Company does not anticipate making additional contributions to its
U.S. plans during 2001.
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 maintain profitability following such
confirmation.
Capital spending for property, plant and equipment, excluding acquisitions, was
$50 million in the third quarter of 2001. Owens Corning anticipates that 2001
capital spending, exclusive of acquisitions and investments in affiliates, will
be approximately $285 million. We expect that funding for these expenditures
will be from our operations and the credit availability from the DIP Financing.
Accounting Changes
- ------------------
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.
Effective January 1, 2002, the Company will adopt Statements of Financial
Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and
Other Intangible Assets. The first of these statements requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. With the adoption of Statement 142, Goodwill is no longer
subject to amortization over its estimated useful life; rather it is subject to
an annual assessment for impairment charge. During the third and fourth quarters
of 2001, we are reviewing the impairment analysis set forth in Statement 142 and
assessing the impact of adoption. The Company recognizes approximately $18
million in annual Goodwill amortization.
Effective January 1, 2002, the Company will adopt Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This statement replaces FASB Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. The impact of adoption has not yet been determined.
Effective January 1, 2003, the Company will adopt Statement of Financial
Accounting Standards No. 143, Accounting for Asset Retirement Obligations. This
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
- 50 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
estimate of fair value can be made, while the associated asset retirement costs
are capitalized as part of the carrying amount of the long-lived asset. The
impact of adoption has not yet been determined.
Environmental Matters
- ---------------------
Owens Corning has been deemed by the Environmental Protection Agency (EPA) to be
a Potentially Responsible Party (PRP) with respect to certain sites under the
Comprehensive Environmental Response, Compensation and Liability Act
(Superfund). The Company has also been deemed a PRP under similar state or local
laws. In other instances, other PRPs have brought suits or claims against Owens
Corning as a PRP for contribution under such federal, state or local laws. At
September 30, 2001, a total of 51 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 Owens Corning has not been
designated a PRP.
The Company has established a $26 million reserve for our Superfund (and similar
state, local and private action) contingent liabilities. In connection with the
Filing, the Company has initiated a program to identify and discharge contingent
environmental liabilities as part of its plan or plans of reorganization. Under
the program, the Company will seek settlements, subject to approval of the
Bankruptcy Court, with various federal, state and local authorities, as well as
private claimants. The Company will continue to review its environmental reserve
in light of such program and make such adjustments as may be appropriate.
The 1990 Clean Air Act Amendments (Act) provide that the EPA will issue
regulations on a number of air pollutants over a period of years. The EPA issued
final regulations for wool fiberglass and mineral wool in June, 1999, for
amino/phenolic resin in January, 2000 and for secondary aluminum smelting in
March, 2000. The Company anticipates that other sources to be regulated will be
wet formed glass mat, asphalt processing and roofing, metal coil coating, and
open molded fiber-reinforced plastics. Based on information now known to the
Company, including the nature and limited number of regulated materials Owens
Corning emits, we do not expect the Act to have a materially adverse effect on
our 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. The Company manages
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.
The Company enters 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. Owens Corning also
enters 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 exposure to
fixed versus floating interest rates.
Owens Corning's policy is to use foreign currency and interest rate derivative
financial instruments only to the extent necessary to manage exposures as
described above. The Company does not enter into foreign currency or interest
rate derivative transactions for speculative purposes.
- 51 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company uses 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:
Risk Category September 30, 2001 December 31, 2000
------------- ------------------ -----------------
(In millions of dollars)
Foreign currency $ 1 $ 1
Interest rate $ 12 $ 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.
- 52 -
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.
- 53 -
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
September 30, 2001.
ITEM 5. OTHER INFORMATION
As a result of the Filing, the Debtors are required to file periodically with
the Bankruptcy Court certain financial information on an unconsolidated basis
for each of the Debtors. This information includes Statements of Financial
Affairs, Schedules and certain monthly operating reports (in forms prescribed by
the Federal Rules of Bankruptcy Procedure).
As part of these informational filings, the Debtors plan to file certain Amended
and Restated Schedules of Assets and Liabilities (the "Amended Schedules") with
the Bankruptcy Court on or about November 20, 2001.
The Debtors' informational filings with the Bankruptcy Court, including the
Amended Schedules when filed (collectively, the "Reports"), are available to the
public at the office of the Clerk of the Bankruptcy Court, 824 Market Street,
5th Floor, Wilmington, Delaware 19801. The Reports may also be obtained from a
document retrieval service, Lason, One Rodney Square, Suite 505, Wilmington,
Delaware 19801, telephone: (302) 426-1500. Certain of the Reports may be viewed
on the Internet at www.deb.uscourts.gov (Case No. 00-03837 (JKF)).
The Company cautions that the Reports are unaudited and subject to change, and
are not prepared for the purpose of providing the basis for an investment
decision relating to any of the securities of the Company or other Debtor, or
any other affiliate of the Company. For example, the Reports include certain
information concerning inter-company arrangements that were entered into prior
to the filing of the Bankruptcy Cases. Certain of these arrangements may be
challenged by various parties in the Bankruptcy Cases, and payments in respect
of certain of these arrangements may be restricted by order of, or subject to
review and approval by, the Bankruptcy Court. Such arrangements, and the manner
in which they are ultimately treated in the Bankruptcy Cases, may have a
material impact on the respective assets, liabilities and results of operations
of the Company and its subsidiaries.
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.
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 2001.
- 54 -
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: November 13, 2001 By: /s/ Michael H. Thaman
------------------------------ ----------------------------------------
Michael H. Thaman
Senior Vice President and
Chief Financial Officer
(as duly authorized officer)
Date: November 13, 2001 By: /s/ Deyonne F. Epperson
------------------------------ ----------------------------------------
Deyonne F. Epperson
Vice President and Controller
- 55 -
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).
(11) Statement re Computation of Per Share Earnings (filed herewith).
(99) Additional Exhibits
Subsidiaries of Owens Corning, as amended (filed herewith).