SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 2002
Commission File No. 1-3660
Owens Corning
One Owens Corning Parkway
Toledo, Ohio 43659
Area Code (419) 248-8000
A Delaware Corporation
I.R.S. Employer Identification No. 34-4323452
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / X / No / /
Shares of common stock, par value $.10 per share, outstanding at March 31, 2002
55,329,036
- 2 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(unaudited)
Quarter Ended
March 31,
---------
2002 2001
---- ----
(In millions of dollars,
except share data)
NET SALES $ 1,107 $ 1,067
COST OF SALES 935 896
------------ ------------
Gross margin 172 171
------------ ------------
OPERATING EXPENSES
Marketing and administrative expenses 127 127
Science and technology expenses 10 10
Restructure costs (Note 4) 8 9
Chapter 11 related reorganization items (Note 1) 25 21
Other (1) 21
------------- ------------
Total operating expenses 169 188
------------ ------------
INCOME (LOSS) FROM OPERATIONS 3 (17)
OTHER
Cost of borrowed funds (Note 1) 4 4
Other - (4)
------------ -------------
LOSS BEFORE PROVISION (CREDIT) FOR
INCOME TAXES (1) (17)
Provision (credit) for income taxes - (5)
------------ -------------
LOSS BEFORE MINORITY INTEREST AND
EQUITY IN NET INCOME (LOSS) OF AFFILIATES (1) (12)
Minority interest - -
Equity in net income (loss) of affiliates (5) 2
------------- ------------
NET LOSS $ (6) $ (10)
============= =============
NET LOSS PER COMMON SHARE
Basic net loss per share $ (.11) $ (.19)
------------- -------------
Diluted net loss per share $ (.11) $ (.19)
------------- -------------
Weighted average number of common shares outstanding and common equivalent
shares during the period (in millions)
Basic 55.1 55.0
Diluted 55.1 55.0
The accompanying notes are an integral part of this statement.
- 3 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
March 31, December 31,
2002 2001
---- ----
ASSETS (In millions of dollars)
- ------
CURRENT
Cash and cash equivalents $ 561 $ 764
Receivables 530 417
Inventories (Note 6) 435 437
Deferred income taxes 1 1
Income tax receivable 10 5
Other current assets 20 25
--------------- -------------
Total current 1,557 1,649
--------------- -------------
OTHER
Insurance for asbestos litigation claims (Note 10) 4 4
Restricted cash - asbestos and insurance-related (Note 10) 162 169
Restricted cash, securities and other - Fibreboard (Notes 10 and 11) 1,282 1,284
Deferred income taxes 1,188 1,187
Goodwill (Note 12) 612 610
Investments in affiliates 59 48
Other noncurrent assets 244 247
--------------- -------------
Total other 3,551 3,549
--------------- -------------
PLANT AND EQUIPMENT, at cost
Land 66 67
Buildings and leasehold improvements 639 669
Machinery and equipment 2,854 2,854
Construction in progress 257 256
--------------- -------------
3,816 3,846
Less - Accumulated depreciation (1,996) (2,003)
---------------- --------------
Net plant and equipment 1,820 1,843
--------------- -------------
TOTAL ASSETS $ 6,928 $ 7,041
=============== =============
The accompanying notes are an integral part of this statement.
- 4 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (continued)
(unaudited)
March 31, December 31,
2002 2001
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars)
- ------------------------------------
CURRENT
Accounts payable and accrued liabilities $ 628 $ 740
Short-term debt 43 43
Long-term debt - current portion 66 66
------------ -------------
Total current 737 849
------------ -------------
LONG-TERM DEBT 4 5
------------ -------------
OTHER
Other employee benefits liability 344 331
Pension plan liability 296 291
Other 141 141
------------ -------------
Total other 781 763
------------ -------------
LIABILITIES SUBJECT TO COMPROMISE (Note 1) 6,790 6,804
------------ -------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 9 and 10)
COMPANY-OBLIGATED SECURITIES OF ENTITIES HOLDING SOLELY PARENT
DEBENTURES - SUBJECT TO COMPROMISE 200 200
------------ -------------
MINORITY INTEREST 31 37
------------ -------------
STOCKHOLDERS' EQUITY
Common stock 697 697
Deficit (1,963) (1,957)
Accumulated other comprehensive loss (347) (355)
Other (2) (2)
------------- --------------
Total stockholders' equity (1,615) (1,617)
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,928 $ 7,041
============ =============
The accompanying notes are an integral part of this statement.
- 5 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Quarter Ended
March 31,
---------
2002 2001
---- ----
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net loss $ (6) $ (10)
Reconciliation of net cash used in operating activities
Noncash items:
Provision for depreciation and amortization 47 54
Provision (credit) for deferred income taxes (2) 12
Other 16 23
Increase in receivables (126) (127)
Increase in inventories - (51)
Increase (decrease) in accounts payable and accrued liabilities (119) 28
Decrease in restricted cash and other - asbestos related (Note 10) 7 49
Change in liabilities subject to compromise (Note 1) (4) (82)
Other 15 31
------------ ------------
Net cash flow from operations $ (172) $ (73)
------------- -------------
NET CASH FLOW FROM INVESTING
Additions to plant and equipment $ (39) $ (42)
Proceeds from the sale of affiliate or business (Note 5) 10 20
Other (1) 5
------------- ------------
Net cash flow from investing $ (30) $ (17)
------------- -------------
NET CASH FLOW FROM FINANCING
Other reductions to long-term debt $ (1) $ (1)
Net decrease in short-term debt - (2)
Other 1 (1)
------------ -------------
Net cash flow from financing $ - $ (4)
------------ -------------
Effect of exchange rate changes on cash (1) (2)
------------- -------------
Net decrease in cash and cash equivalents (203) (96)
Cash and cash equivalents at beginning of period 764 550
------------ ------------
Cash and cash equivalents at end of period $ 561 $ 454
============ ============
The accompanying notes are an integral part of this statement.
- 6 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11
On October 5, 2000 (the "Petition Date"), Owens Corning and the 17 United States
subsidiaries listed below (collectively, the "Debtors") filed voluntary
petitions for relief (the "Filing") under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "USBC"). The Debtors are currently operating
their businesses as debtors-in-possession in accordance with provisions of the
Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the "Chapter
11 Cases") are being jointly administered under Case No. 00-3837 (JKF). The
Chapter 11 Cases do not include other United States subsidiaries of Owens
Corning or any of its foreign subsidiaries (collectively, the "Non-Debtor
Subsidiaries"). 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 10 to the
Consolidated Financial Statements.
In late 2001, the asbestos-related Chapter 11 cases pending in the District of
Delaware (the Chapter 11 Cases of Owens Corning and the cases of Armstrong World
Industries, Inc., W. R. Grace & Co., Federal-Mogul Global, Inc., and USG
Corporation) were ordered transferred to the United States District Court for
the District of Delaware (the "District Court") before Judge Alfred M. Wolin to
facilitate development and implementation of a coordinated plan for management
(the "Administrative Consolidation"). The District Court has entered an order
referring the Chapter 11 Cases back to the USBC, where they were previously
pending, subject to its ongoing right to withdraw such referral with respect to
any proceedings or issues (the applicable court from time to time responsible
for any particular aspect of the Chapter 11 Cases being hereinafter referred to
as the "Bankruptcy Court"). Owens Corning is unable to predict what impact the
Administrative Consolidation will have on the timing, outcome or other aspects
of the Chapter 11 Cases.
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.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
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 will file such a plan or plans, or that such plan or plans will
be confirmed by the Bankruptcy Court and consummated. Owens Corning is unable to
predict what impact the Administrative Consolidation will have on the timing of
the Debtors' filing or confirmation of such plan or plans or its effect, if any,
on the terms thereof.
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 subsequent action, the Bankruptcy Court has
extended such exclusivity period until August 30, 2002, and similarly extended
the Debtors' exclusive rights to solicit acceptances of a reorganization plan
from April 3, 2001 to October 31, 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
payments and other obligations in respect thereof may be restricted by order
- 8 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
of, or subject to review and approval by, the Bankruptcy Court. The outcome of
such challenges and other actions, if any, may have an impact on the treatment
of various claims under such plan or plans and on the respective assets,
liabilities and results of operations of Owens Corning and its subsidiaries. For
example, Owens Corning is unable to predict at this time what the treatment will
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 effect of the Administrative Consolidation,
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.
Bar Dates for Filing Claims
- ---------------------------
In connection with the Chapter 11 Cases, the Bankruptcy Court set April 15, 2002
as the last date by which holders of pre-petition claims against the Debtors
must file their claims. Any holder of a claim that was required to file a claim
by such date and did not do so will be barred from asserting such claim against
any of the Debtors and will not participate in any distribution in any of the
Chapter 11 Cases on account of such claim. Such deadline to file claims does not
apply to asbestos-related personal injury claims and asbestos-related wrongful
death claims (other than claims for contribution, indemnity, reimbursement, or
subrogation). A bar date for filing proofs of claim against the Debtors with
respect to asbestos-related personal injury claims and asbestos-related wrongful
death claims has not been set. Because the Debtors have not completed evaluation
of the results of the April 15, 2002 bar date and the asbestos bar date has not
yet been set, the ultimate number and allowed amount of such claims are not
presently known.
- 9 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
Certain Post-petition Matters
- -----------------------------
The Debtors have received approval from the Bankruptcy Court to pay or otherwise
honor certain of their pre-petition obligations, including employee wages,
salaries, benefits and other employee obligations, pre-petition claims of
critical vendors, and certain other pre-petition claims including certain
customer program and warranty claims.
As a result of the Filing, contractual interest expense has not been accrued or
recorded on pre-petition debt of the Debtors since the Petition Date. From the
Petition Date through March 31, 2002, contractual interest expense not accrued
or recorded on pre-petition debt totaled $258 million, of which $36 million
relates to the first quarter of 2002 and $50 million relates to the first
quarter of 2001.
At March 31, 2002, the Company had $561 million of Cash and Cash Equivalents (of
which approximately $38 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"), which currently expires November 15, 2002.
There were no borrowings outstanding under the DIP facility at March 31, 2002,
however, approximately $42 million of the availability under this credit
facility was utilized as a result of the issuance of standby letters of credit
and similar uses.
As a consequence of the Filing and the impact of certain provisions of the
Company's DIP Financing and in a cash management order entered by the Bankruptcy
Court, the Company and its subsidiaries are now subject to certain restrictions,
including on their ability to pay dividends and to transfer cash and other
assets to each other and to their affiliates.
The Company believes, based on information presently available to it, that its
cash and cash equivalents, cash available from operations, and the DIP Financing
will provide sufficient liquidity to allow it to continue as a going concern for
the foreseeable future. However, the ability of the Company to continue as a
going concern (including its ability to meet post-petition obligations of the
Debtors and to meet obligations of the Non-Debtor Subsidiaries) and the
appropriateness of using the going concern basis for its financial statements
are dependent upon, among other things, (i) the Company's ability to comply with
the terms of the DIP Financing and any cash management order entered by the
Bankruptcy Court from time to time in connection with the Chapter 11 Cases, (ii)
the ability of the Company to maintain adequate cash on hand, (iii) the ability
of the Company to generate cash from operations, (iv) the ability of the
Non-Debtor Subsidiaries to obtain necessary financing, (v) confirmation of a
plan or plans of reorganization under the Bankruptcy Code, and (vi) the
Company's ability to maintain profitability following such confirmation.
Financial Statement Presentation
- --------------------------------
The Company's Consolidated Financial Statements have been prepared in accordance
with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," and on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. However, as a
result of the Filing, such realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as debtors-in-possession under the
- 10 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
protection of Chapter 11 of the Bankruptcy Code, and subject to Bankruptcy Court
approval or otherwise as permitted in the ordinary course of business, the
Debtors, or some of them, may sell or otherwise dispose of assets and liquidate
or settle liabilities for amounts other than those reflected in the Consolidated
Financial Statements. Further, a plan of reorganization could materially change
the amounts and classifications reported in the consolidated historical
financial statements.
Substantially all of the Company's pre-petition debt is now in default due to
the Filing. As described below, the accompanying Consolidated Financial
Statements present the Debtors' pre-petition debt under the caption "Liabilities
Subject to Compromise". This includes debt under the Pre-Petition Credit
Facility and approximately $1.4 billion of other outstanding debt. As required
by SOP 90-7, at the Petition Date the Company recorded the Debtors' pre-petition
debt instruments at the allowed amount, as defined by SOP 90-7.
As reflected in the Consolidated Financial Statements, "Liabilities Subject to
Compromise" refer to Debtors' liabilities incurred prior to the commencement of
the Chapter 11 Cases. The amounts of the various liabilities that are subject to
compromise are set forth below following the debtor-in-possession financial
statements. These amounts represent Owens Corning's estimate of known or
potential pre-petition claims to be resolved in connection with the Chapter 11
Cases. Such claims remain subject to future adjustments. Adjustments may result
from (1) negotiations; (2) actions of the Bankruptcy Court; (3) further
developments with respect to disputed claims; (4) rejection of executory
contracts and unexpired leases; (5) the determination as to the value of any
collateral securing claims; (6) proofs of claim; or (7) other events. Payment
terms for these amounts will be established in connection with the Chapter 11
Cases.
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 (LOSS)
FOR THE QUARTERS ENDED MARCH 31, 2002 AND 2001
2002 2001
---- ----
(In millions of dollars)
NET SALES $ 973 $ 916
COST OF SALES 849 794
--------- -----------
Gross margin 124 122
--------- -----------
OPERATING EXPENSES
Marketing and administrative expenses 116 111
Science and technology expenses 9 9
Restructure costs 6 3
Chapter 11 related reorganization items 25 21
Other (Including interest income from non-Debtors of $14
million in 2002 and 2001) (27) 13
---------- -----------
Total operating expenses 129 157
--------- -----------
LOSS FROM OPERATIONS (5) (35)
OTHER
Cost of borrowed funds 2 6
Other - (4)
--------- ------------
LOSS BEFORE CREDIT FOR INCOME TAXES (7) (37)
Credit for income taxes (2) (12)
---------- ------------
INCOME (LOSS) BEFORE EQUITY IN NET INCOME OF AFFILIATES (5) (25)
Equity in net income of affiliates (5) 2
---------- ----------
NET LOSS $ (10) $ (23)
========== ===========
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION BALANCE SHEET
March 31, December 31,
2002 2001
---- ----
(In millions of dollars)
ASSETS
- ------
CURRENT
Cash and cash equivalents $ 415 $ 605
Receivables, net 432 315
Receivables - non-debtors 820 849
Inventories 317 311
Deferred income taxes 4 4
Income tax receivable 10 4
Other current assets 19 25
-------- ---------
Total current 2,017 2,113
-------- ---------
OTHER
Insurance for asbestos litigation claims 4 4
Restricted cash and other - asbestos related 162 169
Restricted cash, securities and other - Fibreboard 1,282 1,284
Deferred income taxes 1,140 1,143
Goodwill, net 514 513
Investments in affiliates 25 29
Investments in non-debtor subsidiaries 757 758
Other noncurrent assets 137 138
--------- ---------
Total other 4,021 4,038
-------- --------
PLANT AND EQUIPMENT, at cost
Land 40 41
Buildings and leasehold improvements 508 533
Machinery and equipment 2,219 2,194
Construction in progress 222 217
--------- ---------
2,989 2,985
Less: Accumulated depreciation (1,562) (1,548)
--------- ---------
Net plant and equipment 1,427 1,437
-------- --------
TOTAL ASSETS $ 7,465 $ 7,588
======== ========
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION BALANCE SHEET
March 31, December 31,
2002 2001
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars)
- ------------------------------------
CURRENT
Accounts payable and accrued liabilities $ 496 $ 589
Accounts payable and accrued liabilities - non-debtors 17 12
Long-term debt - current portion 1 1
--------- ------------
Total current 514 602
--------- ------------
OTHER
Other employee benefits liability 331 318
Pension plan liability 270 264
Other 110 110
--------- ------------
Total other 711 692
--------- ------------
LIABILITIES SUBJECT TO COMPROMISE 7,521 7,565
STOCKHOLDERS' EQUITY
Common stock 697 697
Deficit (1,757) (1,747)
Accumulated other comprehensive loss (219) (219)
Other (2) (2)
---------- ------------
Total stockholders' equity (1,281) (1,271)
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,465 $ 7,588
========= ===========
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2001
2002 2001
---- ----
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net loss $ (10) $ (23)
Reconciliation of net cash provided by operating activities
Noncash items:
Provision for depreciation and amortization 36 38
Provision (credit) for deferred income taxes (3) 12
Other 13 35
Increase in receivables (127) (116)
Increase in inventories (6) (41)
Increase (decrease) in accounts payable and accrued liabilities (104) 50
Decrease in restricted cash and other - asbestos related 7 49
Change in liabilities subject to compromise (4) (82)
Other 30 29
--------- ----------
Net cash flow from operations $ (168) $ (49)
--------- ----------
NET CASH FLOW FROM INVESTING
Additions to plant and equipment $ (31) $ (42)
Proceeds from sale of affiliate or business 10 -
Other - 5
-------- ----------
Net cash flow from investing $ (21) $ (37)
--------- ----------
NET CASH FLOW FROM FINANCING
Other $ (1) $ (1)
--------- ----------
Net cash flow from financing $ (1) $ (1)
--------- ----------
Net decrease in cash and cash equivalents $ (190) $ (87)
Cash and cash equivalents at beginning of period 605 461
-------- ---------
Cash and cash equivalents at end of period $ 415 $ 374
======== =========
- 15 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
The amounts subject to compromise in the Consolidated and Debtor-in-Possession
Balance Sheets consist of the following items:
March 31, December 31,
2002 2001
---- ----
(In millions of dollars)
Accounts payable $ 197 $ 195
Accrued interest payable 40 40
Accrued liabilities 36 36
Debt 2,843 2,843
Income taxes payable 202 209
Reserve for asbestos litigation claims - Owens Corning 2,190 2,197
Reserve for asbestos litigation claims - Fibreboard 1,282 1,284
------- --------
Total consolidated 6,790 6,804
Payables to non-debtors 731 761
------- --------
Total debtor $ 7,521 $ 7,565
======= ========
The amounts for Chapter 11 related reorganization items in the Consolidated and
Debtor-in-Possession Income Statements consist of the following for the quarters
ended March 31:
2002 2001
---- ----
(In millions of dollars)
Professional fees $ 18 $ 18
Payroll and compensation 6 7
Interest income (2) (5)
Other, net 3 1
------- -------
Total $ 25 $ 21
======= =======
- 16 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SEGMENT DATA
During 2002, the Company realigned its internal operating segments. Following
this realignment, the Company reviewed its segments in accordance with SFAS No.
131 and concluded that the aggregation of its operating segments into two
reportable segments was still appropriate, however, certain components within
the segments have changed. Net sales and income from operations have been
restated for all periods presented to reflect this change.
The Company has identified two reportable segments and has reported financial
information about each of these segments below on a basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to those segments.
Quarter Ended
March 31,
---------
2002 2001
NET SALES ---- ----
(In millions of dollars)
Reportable Segments
- --------------------
Building Materials Systems
United States $ 764 $ 693
Europe 1 2
Canada and other 34 36
----------- -----------
Total Building Materials Systems $ 799 $ 731
----------- -----------
Composite Solutions
United States 191 193
Europe 80 100
Canada and other 37 43
----------- -----------
Total Composite Solutions $ 308 336
----------- -----------
Total Reportable Segments $ 1,107 $ 1,067
=========== ===========
External Customer Sales by Geographic Region
- --------------------------------------------
United States $ 955 $ 886
Europe 81 102
Canada and other 71 79
----------- -----------
Net Sales $ 1,107 $ 1,067
=========== ===========
- 17 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2. SEGMENT DATA (continued)
Quarter Ended
March 31,
---------
2002 2001
INCOME (LOSS) FROM OPERATIONS ---- ----
(In millions of dollars)
Reportable Segments
- -------------------
Building Materials Systems
United States $ 33 $ 20
Europe - -
Canada and other 2 1
----------- -----------
Total Building Materials Systems 35 21
----------- -----------
Composite Solutions
United States - 19
Europe 12 13
Canada and other 3 5
----------- -----------
Total Composite Solutions 15 37
----------- -----------
Total Reportable Segments $ 50 $ 58
=========== ============
Geographic Regions
- ------------------
United States 33 $ 39
Europe 12 13
Canada and other 5 6
----------- -----------
Total Reportable Segments $ 50 $ 58
=========== ===========
Reconciliation to Consolidated Loss Before
- ------------------------------------------
Provision (Credit) for Income Taxes
-----------------------------------
Restructuring and other charges (12) (42)
Chapter 11 related reorganization items (25) (21)
General corporate expense (10) (12)
Cost of borrowed funds (4) (4)
Other - 4
----------- -----------
Consolidated Loss Before Provision (Credit)
for Income Taxes $ (1) $ (17)
============ ============
- 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 2001 Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission.
4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES
First Quarter 2002
- ------------------
In response to the slowed economy and to the declining margins in the composites
business, the Company has continued to assess cost structures of certain
businesses and facilities as well as overhead expenditures for the entire
company. In addition, certain restructuring programs put into place during 2000
and 2001 continued in the first quarter of 2002 due to the timing of events in
these programs. The combination of these continued restructuring programs and
the continued assessment of the businesses led to the Company recording
approximately $12 million in pretax charges in the first quarter of 2002. These
pretax charges were comprised of an $8 million pretax restructure charge and $4
million of pretax other charges. The restructure charge represents severance
costs associated with the elimination of approximately 230 positions, primarily
in the U.S. The primary groups impacted include manufacturing and administrative
personnel. As of March 31, 2002, approximately $1 million has been paid and
charged against the reserve. The restructure charge has been classified as a
separate component of operating expenses on the Company's Consolidated Statement
of Income (Loss).
The $4 million in pretax other charges included $2 million in charges associated
with the Company's previously announced plan to realign its Newark, Ohio
manufacturing facility and various other charges totaling $2 million. The
realignment plan for the Newark facility was announced in the third quarter of
2000 and is anticipated to be complete in the second quarter of 2002. As work
progresses on the facility, costs are recorded as they are incurred. The $4
million pretax charge was accounted for as a $5 million charge to cost of sales
and a $1 million credit to other operating expenses.
2001 Charges
- ------------
The Company spent a significant amount of time reviewing its cost structures in
2001 as a response to the impact of the weaker economy. This review led to the
Company recording approximately $140 million in pretax charges during 2001,
comprised of a $26 million pretax restructure charge and $114 million of pretax
other charges. The $114 million of pretax other charges was accounted for as a
$79 million pretax charge to cost of sales and a $35 million pretax charge to
other operating expense. The Company recorded $46 million in the fourth quarter,
$35 million in the third quarter, $17 million in the second quarter and $42
million in the first quarter.
- 19 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued)
The $26 million charge for restructuring represents $21 million for severance
costs associated with the elimination of approximately 460 positions, primarily
impacting manufacturing and administrative personnel in the U.S., Canada and the
U.K. The remaining $5 million represented a charge for the divestiture of
non-strategic businesses and facilities, which consisted mainly of non-cash
asset write-downs to fair value and exit cost liabilities. As of March 31, 2002,
approximately $18 million has been paid and charged against this reserve.
The $114 million of other charges included $29 million in costs related to the
realignment of the Newark manufacturing facility; $39 million of asset
impairments mainly associated with the building materials business, principally
to write-down assets to net estimated fair value on a held in use basis in
certain manufacturing facilities due to changes in the Company's manufacturing
and marketing strategies; $6 million to write down inventory mainly to reflect
updated estimates of the net realizable value; $4 million to write-down the
Company's investment and related assets in Alcopor Owens Corning, a producer of
insulation products in Europe and the United Kingdom, to net realizable value
(the sale of the Company's investment in this joint venture was completed in the
fourth quarter of 2001); a $2 million pretax loss from assets held for sale
which represented the results of operations for the Company's investments in its
Pipe joint ventures and subsidiaries on a held-for-sale basis (the sale was
completed in February 2001); and various other charges totaling $34 million.
The following table summarizes the status of the liabilities from the 2000, 2001
and 2002 restructure programs described above, including cumulative spending and
adjustments and the remaining balance as of March 31, 2002:
Liability at
Original Total March 31,
(In millions of dollars) Liability Payments 2002
--------- -------- ----
Personnel Costs $ 45 $ (33) $ 12
Facility and Business Exit Costs 4 (3) 1
------ -------- ---------
Total $ 49 $ (36) $ 13
====== ======== =========
During 1997 and 1998, the Company implemented a restructuring program related to
closing manufacturing locations and reducing overhead. As of March 31, 2002,
approximately $15 million in reserves remain and are primarily related to
ongoing personnel severance costs in Europe.
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.
- 20 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. DIVESTITURES OF BUSINESSES
During the first quarter of 2001, the Company completed the sale of the majority
of its Engineered Pipe Business, a producer of glass-reinforced plastic pipe
with operations mostly in Europe. Net proceeds from the sale were $22 million,
of which $20 million was received in the first quarter of 2001, which
approximated book value.
During the fourth quarter of 2001, the Company sold its remaining 40% interest
in Alcopor Owens Corning, an unconsolidated joint venture. Net proceeds from the
divestiture were approximately $23 million, of which approximately $9 million
remained in escrow at December 31, 2001 and was received in January 2002.
6. INVENTORIES
Inventories are summarized as follows:
March 31, December 31,
2002 2001
---- ----
(In millions of dollars)
Finished goods $ 365 $ 378
Materials and supplies 163 150
------- -------
FIFO inventory 528 528
Less: reduction to LIFO basis (93) (91)
------- -------
Total inventory $ 435 $ 437
======= =======
Approximately $125 million and $120 million of total inventories were valued
using the LIFO method at March 31, 2002 and December 31, 2001, respectively.
7. COMPREHENSIVE INCOME
The Company's comprehensive income for the quarters ended March 31, 2002 and
2001 was income of $3 million and a loss of $37 million, respectively. The
Company's comprehensive income includes net income, currency translation
adjustments, minimum pension liability adjustments, and deferred gains and
losses on certain hedging transactions to record at fair value.
8. EARNINGS PER SHARE
For the quarters ended March 31, 2002 and 2001, net losses of $6 million and $10
million, respectively, were used for both basic and diluted earnings per share.
For the same periods, 55,087 and 55,042, respectively, were used for weighted
average number of shares outstanding for both basic and diluted earnings per
share.
Due to their anti-dilutive effect, diluted shares outstanding during 2002 and
2001 excluded approximately 4.6 million common shares from the potential
conversion of preferred securities and approximately 300 and 400 thousand,
respectively, non-vested restricted shares and deferred awards.
- 21 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is a party to financial instruments in the normal course of business
to reduce exposure to fluctuating foreign currency exchange rates, interest
rates, and commodity prices. The Company is exposed to credit loss in the event
of nonperformance by the other parties to the financial instruments described
below. However, the Company does not anticipate nonperformance by the other
parties. The Company does not engage in trading activities with these financial
instruments and does not generally require collateral or other security to
support these financial instruments. The amounts of derivatives summarized in
the foreign currency exchange risk and interest rate risk management section
below do not generally represent the amounts exchanged by the parties and, thus,
are not a measure of the exposure of the Company through its use of derivatives.
The amounts exchanged were calculated on the basis of the notional amounts and
the other terms of the derivatives, which relate to interest rates, exchange
rates, securities prices or financial indices.
Foreign Currency Exchange Risk and Interest Rate Risk Management
- ----------------------------------------------------------------
The Company enters into various types of derivative financial instruments to
manage its foreign currency exchange risk and interest rate risk, as indicated
in the following table.
Notional Amount Notional Amount
March 31, 2002 December 31, 2001
-------------- -----------------
(In millions of dollars)
Forward currency exchange contracts $ 40 $ 30
Interest rate swaps 17 19
Commodity future contract 540,000 MMBTU -
per month
The Company enters into forward currency exchange contracts to manage its
exposure against foreign currency fluctuations on certain assets and liabilities
denominated in foreign currencies. As of March 31, 2002 the Company had 3
forward currency exchange contracts that exchanged approximately 3 million U.S.
dollars to euros, 75 million Norwegian krone to euros and 11 million euros to
pounds sterling. As of December 31, 2001, the Company had 2 forward currency
exchange contracts that exchanged 75 million Norwegian krone and approximately
14 million euros. These transactions are considered a natural hedge, as the gain
or loss on the hedge offsets the gain or loss from currency value fluctuations.
The Company has elected not to apply hedge accounting for these transactions,
but rather mark the contracts to market through the statement of income, the
effect of which was not material.
During 2001, the Company also entered into a foreign currency exchange contract
to reduce its exposure to certain U.S. dollar denominated debt instruments in
China. The 2001 contract, which matured in the first quarter of 2002, exchanged
approximately 83 million Chinese renminbi against approximately 10 million U.S.
dollars. During the first quarter of 2002 the Company entered into a new
contract that exchanged 83 million Chinese renminbi against approximately 10
million U.S. dollars. This contract effectively extended the hedge of U.S.
dollar denominated debt entered into in 2001. These transactions are considered
natural hedges, as the gains or losses on the hedges offset the gain or loss
from currency value fluctuations. The Company has elected not to apply hedge
accounting, but rather mark the contracts to market through the statement of
income, the effect of which was not material.
- 22 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
During 2001 and the first quarter of 2002, the Company invested excess cash in
South America in Brazilian certificates of deposit, treasury bonds and
debentures. At the same time these investments were made, the Brazilian real
were swapped into U.S. dollars at a U.S. dollar interest rate with perfectly
matching investment amounts and maturity dates. The purpose of these hedges is
to reduce the impact of changes in the Brazilian real and U.S. dollar exchange
rates. At March 31, 2002, there were 14 such cross-currency interest rate swaps
outstanding at a notional amount of $17 million U.S. dollars. At December 31,
2001, there were 18 such cross-currency interest rate swaps outstanding at a
notional amount of $19 million U.S. dollars.
During 2001, the Company entered into a swap agreement for approximately 5
million MMBTU's of natural gas to hedge its exposure to fluctuating commodity
prices. The swap is a cash flow hedge and changes in the fair market value are
recorded in other comprehensive income (loss), except to the extent of
inefficiencies which are recorded as other income in the statement of income. At
March 31, 2002, the accumulated other comprehensive income (loss) related to the
swap was income of approximately $2 million and the inefficiency recorded as
other income (loss) was not material. At December 31, 2001, accumulated other
comprehensive income (loss) related to the swap was a loss of approximately $2
million and the inefficiency recorded as other income (loss) was not material.
Other Financial Instruments with Off-Balance-Sheet Risk
- -------------------------------------------------------
As of March 31, 2002 and December 31, 2001, the Company is contingently liable
for guarantees of indebtedness owed by certain unconsolidated affiliates of
approximately $28 million and $38 million, respectively. As of March 31, 2002,
and December 31, 2001, approximately $23 and $34 million, respectively, of such
indebtedness was alleged to be in default as a result of the Filing. The
affiliate that owed approximately $19 million of such indebtedness is in
negotiations with its lenders and other parties, including Owens Corning,
concerning the status of this indebtedness. Depending on the outcome of such
negotiations, it is possible that the lender will attempt to enforce the related
guarantee against Owens Corning. Any such claim would constitute a liability
subject to compromise, since the claim would relate to a pre-petition obligation
of Owens Corning, and may give rise to a loss of up to the full amount of the
claim. Subject to the foregoing uncertainties, the Company is of the opinion
that its other unconsolidated affiliates will be able to perform under their
respective payment obligations in connection with such guaranteed indebtedness
and that no payments will be required and no losses will be incurred by the
Company under such guarantees.
As of March 31, 2002 and December 31, 2001, the Company is contingently liable
for guarantees of indebtedness owed by certain unconsolidated affiliates. There
is no market for these guarantees and they were issued without explicit cost.
Therefore, it is not practicable to establish their fair value.
- 23 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. 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 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
- 24 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
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-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
- 25 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
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 $14 million paid on
its behalf by third parties pursuant to appeal bonds issued prior to the
Petition Date. During 1999 and 2000 (prior to the Petition Date), Owens Corning
(excluding Fibreboard) made asbestos-related payments falling within four major
categories: (1) Settlements in respect of verdicts incurred or claims resolved
prior to the implementation of the NSP ("Pre-NSP Settlements"); (2) NSP
settlements; (3) Non-NSP settlements covering cases not resolved by the NSP; and
(4) Defense, claims processing and administrative expenses, as follows:
2000 (through
1999 October 4, 2000)
---- ----------------
(In millions of dollars)
Pre-NSP Settlements $ 170 $ 51
NSP Settlements 570 538
Non-NSP Settlements 30 42
Defense, Claims Processing and Administrative Expenses 90 54
------- -------
$ 860 $ 685
======= =======
Prior to the Petition Date, Owens Corning deposited certain amounts in escrow
accounts to facilitate claims processing under the NSP ("Administrative
Deposits"). Amounts deposited into escrow in Administrative Deposits during a
reporting period are included in the payments shown for NSP Settlements during
the period. At March 31, 2002, approximately $106 million of Administrative
Deposits previously made by Owens Corning had not been finally distributed to
claimants ("Undistributed Administrative Deposits") and, accordingly, are
reflected in Owens Corning's consolidated balance sheet as restricted assets
(under the caption "Restricted cash - asbestos and insurance related") and have
not been subtracted from Owens Corning's reserve for asbestos personal injury
claims (discussed below).
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, in 2001, the holder of approximately
$49 million of Undistributed Administrative Deposits for Owens Corning (and
approximately $28 million of similar Undistributed Administrative Deposits for
Fibreboard) filed a motion with the Bankruptcy Court requesting an order
authorizing distribution of the deposits it holds to the escrow beneficiaries.
At a February 25, 2002 hearing on this motion, the Bankruptcy Court ruled that
escrow beneficiaries that had received both written notice of approval for
payment and an initial payment from the escrow deposits prior to the Petition
Date would be entitled to receive their remaining payments from the principal of
the escrow deposits, with the balance of the deposits, if any, plus any
investment proceeds to be returned to Owens Corning (or Fibreboard). The ruling
is subject to entry of a final order by the Bankruptcy Court and appeal by any
of the parties in interest.
- 26 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
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 strong bipartisan support for both bills, there can be no assurance
that any such legislation ultimately will be 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
leave to file an amended complaint in an existing action to add claims by Owens
Corning against seven tobacco companies and several other tobacco industry
defendants. On June 17, 2001, the Jefferson court entered an order dismissing
Owens Corning's case in response to the defendants' motion for summary judgment
on the basis that Owens Corning's injuries were indirect and thus too remote
under Mississippi law to allow recovery. The Company has appealed such dismissal
to the Supreme Court of Mississippi.
In addition to the Mississippi lawsuit, a lawsuit brought in December 1997 by
Owens Corning and Fibreboard is pending in the Superior Court for Alameda
County, California against the same tobacco companies. In August 2001, the
defendants filed motions to dismiss Owens Corning's and Fibreboard's claims on
the basis of the decision in the Mississippi lawsuit as well as California law.
As the result of a hearing on these motions on November 20, 2001, the California
court denied the motion to dismiss Fibreboard's claims on the basis of the
decision in the Mississippi lawsuit and otherwise stayed the proceeding pending
the outcome of the Mississippi suit.
- 27 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
Insurance
- ---------
As of March 31, 2002, Owens Corning's financial statements reflect $4 million in
unexhausted insurance coverage (net of deductibles and self-insured retentions)
under its liability insurance policies applicable to asbestos personal injury
claims. This amount represented unconfirmed potential non-products coverage with
excess level insurance carriers, as to which Owens Corning had estimated its
probable recoveries.
Owens Corning also has other unconfirmed potential non-products coverage with
excess level carriers. Owens Corning is actively pursuing non-products insurance
recoveries under these policies. In October, 2001, Owens Corning filed a lawsuit
in Lucas County, Ohio, against ten excess level carriers for declaratory relief
and damages for failure to make payments under its non-products insurance
coverage. The amount and timing of recoveries from excess level policies will
depend on the outcome of litigation or other proceedings, possible settlements
of those proceedings, or other negotiations.
As previously reported, late in the second quarter of 2001, Owens Corning
entered into a settlement agreement with one of its excess insurance carriers,
resolving a dispute concerning coverage from such insurer for non-products
asbestos-related personal injury claims. As a result, during the third quarter
of 2001, the carrier funded $55 million into an escrow account to be released in
conjunction with implementation of an approved plan of reorganization. The
escrowed funds plus earnings are reflected on Owens Corning's consolidated
balance sheet as restricted assets, under the category "Restricted cash -
asbestos and insurance related."
Reserve
- -------
Owens Corning estimates a reserve in accordance with generally accepted
accounting principles to reflect asbestos-related liabilities that have been
asserted or are probable of assertion, in which liabilities are probable and
reasonably estimable. This reserve was established initially through a charge to
income in 1991, with additional charges to income of $1.1 billion in 1996, $1.4
billion in 1998, and $1.0 billion in 2000.
As of March 31, 2002, 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."
- 28 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
The approximate balances of the components of the reserve at September 30, 2000
(the ending date of the last reporting period preceding the Petition Date) were:
September 30, 2000
------------------
(In billions of dollars)
NSP backlog $ 1.10
Non-NSP backlog 0.30
Future claims 0.70
Defense, Claims Processing and Administrative Expenses 0.10
In connection with this asbestos reserve, Owens Corning notes that:
- - The "NSP backlog" component represented the remaining estimated cost of
resolving Initial Claims under the NSP.
- - The "Non-NSP backlog" component represented the estimated cost of resolving
asbestos personal injury claims pending against Owens Corning outside the
NSP.
- - The "Future claims" component represented the estimated cost of resolving
(i) Future Claims under the NSP and (ii) non-NSP claims subsequently made.
As Owens Corning has discussed in previous public filings, any estimate of its
liabilities for pending and expected future asbestos claims is subject to
considerable uncertainty because such liabilities are influenced by numerous
variables that are inherently difficult to predict. As discussed further below,
such uncertainties significantly increased as a result of the Chapter 11 Cases.
Prior to the Petition Date, such variables included, among others, the cost of
resolving pending non-NSP claims; the disease mix and severity of disease of
pending NSP claims; the number, severity of disease, and jurisdiction of claims
filed in the future (especially the number of mesothelioma claims); how many
future claimants were covered by an NSP Agreement; the extent, if any, to which
individual claimants exercised a right to opt out of an NSP Agreement and/or
engage counsel not participating in the NSP; the extent, if any, to which
counsel not bound by an NSP Agreement undertook the representation of asbestos
personal injury plaintiffs against Owens Corning; the extent, if any, to which
Owens Corning exercised its right to terminate one or more of the NSP Agreements
due to excessive opt-outs or for other reasons; and Owens Corning's success in
controlling the costs of resolving future non-NSP claims.
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.
- 29 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (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:
- - The impact, if any, the Administrative Consolidation will have on the
timing, outcome or other aspects of the Chapter 11 Cases.
- - 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.
- 30 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
- - 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 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, 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, the
total amount of future asbestos claims allowed, and the impact of the
Administrative Consolidation.
At March 31, 2002, 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) $ 0.60
Other Pending and Future Claims 1.60
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.
- 31 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
Owens Corning will continue to review its asbestos reserve on a periodic basis
and make such adjustments as may be appropriate. However, it is possible that
Owens Corning will not be in a position to conclude that a revision to the
reserve is appropriate until significant developments occur during the course of
the Chapter 11 Cases, including resolution of the uncertainties described above.
Any such revision could, however, be material to the Company's consolidated
financial position and results of operations in any given period.
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING)
Prior to 1972, Fibreboard manufactured insulation products containing asbestos.
Fibreboard has since been named as defendant in many thousands of personal
injury claims for injuries allegedly caused by asbestos exposure. Fibreboard
received approximately 21,600 asbestos personal injury claims during 2000. Prior
to the Petition Date, the vast majority of Fibreboard asbestos personal injury
claims were in the process of being resolved through the NSP, as described
below. As a result of the Filing, all pre-petition asbestos claims and pending
litigation against the Debtors were automatically stayed (see Note 1). Owens
Corning expects that all pending and future asbestos claims against Owens
Corning and Fibreboard will be resolved pursuant to a plan or plans of
reorganization. Owens Corning is unable to determine at this time whether
asbestos-related claims asserted against Fibreboard will be treated in the same
manner as those asserted against Owens Corning in any such plan or plans.
National Settlement Program
- ---------------------------
Fibreboard is a participant in the NSP and is a party to the NSP Agreements
discussed in Item A. The NSP Agreements became effective as to Fibreboard in the
fourth quarter of 1999, when the Insurance Settlement (discussed below) became
effective. The NSP Agreements settled asbestos personal injury claims that had
been filed against Fibreboard by participating plaintiffs' law firms and claims
that could have been filed against Fibreboard by such firms following the
lifting, in the third quarter of 1999, of an injunction which had barred the
filing of asbestos personal injury claims against Fibreboard.
As of the Petition Date, the NSP covered approximately 212,000 Initial Claims
against Fibreboard, approximately 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.
- 32 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
Non-NSP Claims
- --------------
As of the Petition Date, approximately 15,000 asbestos personal injury claims
were pending against Fibreboard outside the NSP. This compares to approximately
1,000 such claims pending on December 31, 1999. Fibreboard resolved (by
settlement or otherwise) approximately 2,300 asbestos personal injury claims
outside the NSP during 2000 prior to the Petition Date at an average cost of
resolution of approximately $45,000 per claim. Generally, these claims were
settled as they were scheduled for trial, and they typically involved more
serious injuries and diseases. Accordingly, Owens Corning does not believe that
such average costs of resolution are representative of the value of the non-NSP
claims then pending against Fibreboard.
At this time, Owens Corning is unable to predict the manner in which Fibreboard
non-NSP claims will be treated under the terms of any plan or plans of
reorganization.
Insurance Settlement
- --------------------
In 1993, Fibreboard and two of its insurers, Continental Casualty Company
("Continental") and Pacific Indemnity Company ("Pacific"), entered into the
Insurance Settlement. The Insurance Settlement became effective in the fourth
quarter of 1999, is final and is not subject to appeal.
Since 1993, Continental and Pacific paid, either directly or through an escrow
account funded by them, for substantially all settlements of asbestos claims
reached prior to the initiation of the NSP. Under the Insurance Settlement,
Continental and Pacific provided $1,873 million during the fourth quarter of
1999 to fund costs of resolving pending and future Fibreboard asbestos-related
liabilities, whether under the NSP, in the tort system, or otherwise.
As of March 31, 2002, the Insurance Settlement funds were held in and invested
by the Fibreboard Settlement Trust. As of that date, $1,155 million (net of
outstanding payables) was held in the Fibreboard Settlement Trust and $127
million was held in Undistributed Administrative Deposits in respect of
Fibreboard claims. On an ongoing basis, the funds held in the Fibreboard
Settlement Trust will be subject to investment earnings/losses and will be
reduced if and as applied to satisfy asbestos-related liabilities. Under the
terms of the Fibreboard Settlement Trust, any of such assets that ultimately are
not used to fund Fibreboard's asbestos-related liabilities must be distributed
to charity. It will not be known whether any such assets will remain for
distribution until the conclusion of the Chapter 11 Cases.
Funds held in the Fibreboard Settlement Trust and Fibreboard's Undistributed
Administrative Deposits are reflected on Owens Corning's consolidated balance
sheet as restricted assets. At March 31, 2002, these assets were reflected as
non-current assets, under the category "Restricted cash, securities and other -
Fibreboard." See Note 11 for additional information concerning the Fibreboard
Settlement Trust.
At this time, Owens Corning is unable to predict what the treatment of funds
held in the Fibreboard Settlement Trust and in Undistributed Administrative
Deposits in respect of Fibreboard claims (see Item A) will be under the terms of
any plan or plans of reorganization.
- 33 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
Asbestos-Related Payments
- -------------------------
As a result of the Filing, Fibreboard has not made any asbestos-related payments
since the Petition Date. During 2000 (prior to the Petition Date), gross
payments for asbestos-related claims against Fibreboard, all of which were
paid/reimbursed by the Fibreboard Settlement Trust, fell within four major
categories, as follows:
2000 (through October 4, 2000)
------------------------------
(In millions of dollars)
Pre-NSP Settlements $ 29
NSP Settlements 705
Non-NSP Settlements 41
Defense, Claims Processing and Administrative Expenses 45
-------
$ 820
=======
The payments for NSP Settlements include Administrative Deposits during the
reporting period in respect of Fibreboard claims.
Reserve
- -------
Owens Corning estimates a reserve for Fibreboard in accordance with generally
accepted accounting principles to reflect asbestos-related liabilities. As of
March 31, 2002, 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 11).
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
- 34 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
In connection with this asbestos reserve, Owens Corning notes that:
- - The "NSP backlog" component represented the remaining estimated cost of
resolving Initial Claims against Fibreboard under the NSP.
- - The "Non-NSP backlog" component represented the estimated cost of resolving
asbestos personal injury claims pending against Fibreboard outside the NSP.
- - The "Future claims" component represented the estimated cost of resolving
(i) Future Claims against Fibreboard under the NSP and (ii) non-NSP claims
subsequently made against Fibreboard.
As noted in Item A above as to Owens Corning, the estimate of Fibreboard's
liabilities for pending and expected future asbestos claims is subject to
considerable uncertainty because such liabilities are influenced by numerous
variables that are inherently difficult to predict, and such uncertainties
significantly increased as a result of the Filing, including those set forth in
Item A above. In addition, as noted above, at this time Owens Corning is unable
to predict what the treatment of funds held in the Fibreboard Settlement Trust
and in Undistributed Administrative Deposits in respect of Fibreboard claims
will be under the terms of any plan or plans of reorganization.
At March 31, 2002, as a result of the Filing and the uncertainties referred to
above, the approximate balances of the components of the Fibreboard
asbestos-related reserve were:
Balance
-------
(In billions of dollars)
Unpaid Final Settlements (NSP and other) $ 0.40
Other Pending and Future Claims 0.90
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 11).
- 35 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
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
of the Securities Act of 1933. The amended complaint seeks an unspecified amount
of damages or, where appropriate, rescission of the plaintiffs' purchases. The
defendants filed a motion to dismiss the action on November 20, 2001. A hearing
was held on this motion on April 11, 2002, and the Court has taken the matter
under advisement. 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 for the years ended 1996-1999 by March of
2001. As the result of these audits and unresolved issues from prior audit
cycles, the IRS is asserting claims for approximately $390 million in income
taxes plus interest of approximately $175 million.
Pending audit of Owens Corning's federal income tax return for the year 2000,
the IRS has also filed a protective claim in the amount of approximately $50
million, covering a tax refund received by Owens Corning for such year, plus
interest.
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.
- 36 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. FIBREBOARD SETTLEMENT TRUST
Under the Insurance Settlement described in Note 10, two of Fibreboard's
insurers provided $1.873 billion during the fourth quarter of 1999 to fund the
costs of resolving pending and future Fibreboard asbestos-related liabilities.
As of March 31, 2002, the Insurance Settlement funds were held in and invested
by the Fibreboard Settlement Trust (the "Trust"). On an ongoing basis, the funds
held in the Trust will be subject to investment earnings/losses and will be
reduced if and as applied to satisfy Fibreboard asbestos-related liabilities.
Under the terms of the Trust, any Trust assets that ultimately are not used to
fund Fibreboard's asbestos-related liabilities must be distributed to charity.
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 10, 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.
General Accounting Treatment
- ----------------------------
The assets of the Trust are comprised of cash and marketable securities
(collectively, the "Trust Assets") and, with Fibreboard's Undistributed
Administrative Deposits, are reflected on Owens Corning's consolidated balance
sheet as restricted assets. At March 31, 2002, these assets were reflected as
non-current assets, under the category "Restricted cash, securities and other -
Fibreboard." Owens Corning estimates a reserve for Fibreboard in accordance with
generally accepted accounting principles to reflect asbestos-related liabilities
(see Note 10, Part B). As of March 31, 2002, these liabilities were one of the
items included in Owens Corning's consolidated balance sheet under the category
"Liabilities Subject to Compromise." For periods prior to the Petition Date,
they were reflected as current or other liabilities (depending on the period in
which payment was expected) under the category "Asbestos-related liabilities -
Fibreboard." These liabilities (including any reserve for the charitable
remainder) are always at least equal to the funds held in the Trust and
Fibreboard's Undistributed Administrative Deposits since, under the terms of the
Trust, the funds held in the Trust must be expended either in connection with
Fibreboard's asbestos-related liabilities, or to satisfy the obligation under
the Trust to distribute to charity the assets, if any, remaining in the Trust
after satisfaction of all such liabilities. It will not be known whether any
such assets will remain for distribution until the conclusion of the Chapter 11
Cases. At March 31, 2002, the Consolidated Financial Statements reflect
Fibreboard's liabilities for asbestos litigation claims at $1.208 billion, with
a residual obligation to charity of $74 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. At March 31, 2002 and December 31, 2001, substantially all marketable
securities were classified as "available for sale".
- 37 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. FIBREBOARD SETTLEMENT TRUST (continued)
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 March 31, 2002
- --------------------------------------------
During the first quarter of 2002 and 2001, Trust Assets generated
interest/dividend earnings of approximately $13 million and $16 million,
respectively, which have been recorded as an increase in the carrying amount of
the assets on Owens Corning's consolidated balance sheet and as other income on
the consolidated statement of income. During each period, this income 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 for asbestos litigation claims
from the Trust during the first quarter of 2002 or 2001. However, approximately
$1 million was paid during the first quarter of 2002 for taxes related to
earnings of the Trust. This payment was funded by existing cash in the Trust or
proceeds from the sale of securities. The sale of securities during the first
quarter of 2002 resulted in a realized loss of less than $1 million, while there
was a realized gain of approximately $4 million in 2001. Realized gains or
losses from the sale of securities are reflected on the Company's financial
statements in the same manner as actual returns on Trust Assets, described
above.
At March 31, 2002 and 2001, the fair market value adjustment for those
securities designated as available for sale resulted in an unrealized loss of
approximately $9 million and an unrealized gain of less than $1 million,
respectively. These amounts have been reflected in the Company's consolidated
balance sheet as a change to the carrying amount of the asset and to other
comprehensive income. These amounts have also been reflected as a change to the
liability to charity, with a corresponding effect to other comprehensive income.
At March 31, 2002, the fair value of Trust Assets was $1.282 billion, which was
comprised of $1.173 billion of marketable securities, $18 million of outstanding
payables and $127 million of restricted cash, which represents undistributed
administrative deposits.
- 38 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. FIBREBOARD SETTLEMENT TRUST (continued)
The amortized cost, gross unrealized holding gains and losses and fair value of
the investment securities available for sale at March 31, 2002 and December 31,
2001 are as follows:
March 31, 2002
--------------
Gross Unrealized Gross Unrealized
Cost Gain Loss Fair Value
---- ---- ---- ----------
(In millions of dollars)
Municipal Bonds $ 1,138 $ - $ 9 $ 1,129
Mutual Funds 44 - - 44
---------- ------ ------- ----------
Total $ 1,182 $ - $ 9 $ 1,173
========== ====== ======= ==========
December 31, 2001
-----------------
Gross Unrealized Gross Unrealized
Cost Gain Loss Fair Value
---- ---- ---- ----------
(In millions of dollars)
Municipal Bonds $ 1,150 $ - $ - $ 1,150
Mutual Funds 19 - - 19
---------- ------ ------- -----------
Total $ 1,169 $ - $ - $ 1,169
========== ====== ======= ===========
Maturities of investment securities classified as available for sale at March
31, 2002 and December 31, 2001 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to recall or prepay obligations with or without call or prepayment
penalties.
March 31, 2002 December 31, 2001
-------------- -----------------
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
(In millions of dollars)
Due within one year $ 124 $ 124 $ 91 $ 91
Due after one year through five years 680 676 679 679
Due after five years through ten years 160 156 171 171
Due after ten years 218 217 228 228
--------- ---------- ------- -------
Total $ 1,182 $ 1,173 $ 1,169 $ 1,169
========= ========== ======= =======
- 39 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. FIBREBOARD SETTLEMENT TRUST (continued)
The table below summarizes Trust and Administrative Deposits activity for the
quarter ended March 31, 2002:
Interest Unrealized Net Sales Realized
Balance and Gain/ of Gain/ Balance
12/31/01 Dividends (Loss) Securities (Loss) Other Payments 3/31/02
-------- --------- ------ ---------- ------ ----- -------- -------
Assets
- ------
Cash (payable for purchase of securities) $ (18) $ - $ - $ - $ - $ - $ - $ (18)
Restricted Cash 133 - - - - (6) - 127
Marketable Securities:
Available for Sale 1,169 13 (9) - - 1 (1) 1,173
-------- ------- -------- ------ ---- ---- ------- -------
Total Assets $ 1,284 $ 13 $ (9) $ - $ - $ (5) $ (1) $ 1,282
======== ======= ======== ====== ==== ===== ======= =======
Liabilities
- -----------
Asbestos Litigation Claims $ 1,213 $ - $ - $ - $ - $ (5) $ - $ 1,208
Charity 71 13 (9) - - - (1) 74
-------- ------- -------- ------ ---- ----- ------- -------
Total Liabilities $ 1,284 $ 13 $ (9) $ - $ - $ (5) $ (1) $ 1,282
======== ======= ======== ====== ==== ===== ======= =======
- 40 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. GOODWILL AND OTHER INTANGIBLES
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS
No. 142 eliminates the amortization of goodwill and indefinite-lived intangible
assets and initiates an annual review for impairment. Identifiable intangible
assets with a determinable useful life will continue to be amortized. The
Company applied SFAS No. 142 beginning in the first quarter of 2002. The Company
tested goodwill for impairment using the two-step process prescribed in SFAS No.
142. The first step is a screen for potential impairment, while the second step
measures the amount of the impairment, if any. The Company has performed the
first of the required impairment tests of goodwill as of January 1, 2002 in the
first quarter of 2002. It is likely that between $450 and $500 million of the
goodwill related to Building Materials Systems will be impaired using the
impairment test required by SFAS No. 142. As of March 31, 2002, the Company has
net unamortized goodwill of $612 million. The Company plans to complete the
measurement of the impairment loss in the second quarter of 2002 and will
address the tax implications, if any, on this impairment loss at that time. When
the measurement is completed in the second quarter, the impairment that is
required to be recognized when adopting SFAS No. 142 will be reflected as a
cumulative effect of a change in accounting principle as of January 1, 2002.
As required by SFAS No. 142, the results of the prior year's quarter have not
been restated. A reconciliation of the previously reported net loss and loss per
share as if SFAS No. 142 had been adopted as of January 1, 2001 is presented as
follows:
Three months ended
March 31, 2002 March 31, 2001
` -------------- --------------
(In millions of dollars, except per share data)
Net income (loss):
Reported net loss $ (6) $ (10)
Add back goodwill amortization, net of tax - 3
------ ------
Adjusted net loss $ (6) $ (7)
======= =======
Basic and diluted earnings (loss) per share:
As Reported $ (.11) $ (.19)
Add back goodwill amortization, net of tax - .05
------ ------
Adjusted basic and diluted loss per share $ (.11) $ (.14)
======= =======
All of the Company's acquired intangible assets are subject to amortization.
Intangible asset amortization expense was approximately $1 million in the first
quarter of 2002 and 2001. The Company estimates that amortization of intangibles
will be $3 million for each of the next 5 years. The components of intangible
assets are as follows:
March 31, 2002
--------------
Weighted Average Gross Carrying Accumulated
Lives Amount Amortization
----- ------ ------------
(In millions of dollars)
Contract-based 6 $ 2 $ -
Technology-based 22 17 (7)
Marketing-related 6 13 (7)
---- ------
$ 32 $ (14)
==== ======
- 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 "USBC"). The Debtors are currently operating
their businesses as debtors-in-possession in accordance with provisions of the
Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the "Chapter
11 Cases") are being jointly administered under Case No. 00-3837 (JKF). The
Chapter 11 Cases do not include other United States subsidiaries of Owens
Corning or any of its foreign subsidiaries (collectively, the "Non-Debtor
Subsidiaries"). 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 10 to the
Consolidated Financial Statements.
- 42 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In late 2001, the asbestos-related Chapter 11 cases pending in the District of
Delaware (the Chapter 11 Cases of Owens Corning and the cases of Armstrong World
Industries, Inc., W. R. Grace & Co., Federal-Mogul Global, Inc., and USG
Corporation) were ordered transferred to the United States District Court for
the District of Delaware (the "District Court") before Judge Alfred M. Wolin to
facilitate development and implementation of a coordinated plan for management
(the "Administrative Consolidation"). The District Court has entered an order
referring the Chapter 11 Cases back to the USBC, where they were previously
pending, subject to its ongoing right to withdraw such referral with respect to
any proceedings or issues (the applicable court from time to time responsible
for any particular aspect of the Chapter 11 Cases being hereinafter referred to
as the "Bankruptcy Court"). Owens Corning is unable to predict what impact the
Administrative Consolidation will have on the timing, outcome or other aspects
of the Chapter 11 Cases.
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 will file such a plan or plans, or that such plan or plans will
be confirmed by the Bankruptcy Court and consummated. Owens Corning is unable to
predict what impact the Administrative Consolidation will have on the timing of
the Debtors' filing or confirmation of such plan or plans or its effect, if any,
on the terms thereof.
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 subsequent action, the Bankruptcy Court has
extended such exclusivity period until August 30, 2002, and similarly extended
the Debtors' exclusive rights to solicit acceptances of a reorganization plan
from April 3, 2001 to October 31, 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.
- 43 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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
payments and other obligations in respect thereof may be restricted by order of,
or subject to review and approval by, the Bankruptcy Court. The outcome of such
challenges and other actions, if any, may have an impact on the treatment of
various claims under such plan or plans and on the respective assets,
liabilities and results of operations of Owens Corning and its subsidiaries. For
example, Owens Corning is unable to predict at this time what the treatment will
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 effect of the Administrative Consolidation,
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.
- 44 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with
the Bankruptcy Court setting forth the assets and liabilities of the Debtors as
of the date of the Filing. Differences between amounts recorded by the Debtors
and claims filed by creditors will be investigated and resolved as part of the
proceedings in the Chapter 11 Cases.
Bar Dates for Filing Claims
- ---------------------------
In connection with the Chapter 11 Cases, the Bankruptcy Court set April 15, 2002
as the last date by which holders of pre-petition claims against the Debtors
must file their claims. Any holder of a claim that was required to file a claim
by such date and did not do so will be barred from asserting such claim against
any of the Debtors and will not participate in any distribution in any of the
Chapter 11 Cases on account of such claim. Such deadline to file claims does not
apply to asbestos-related personal injury claims and asbestos-related wrongful
death claims (other than claims for contribution, indemnity, reimbursement, or
subrogation). A bar date for filing proofs of claim against the Debtors with
respect to asbestos-related personal injury claims and asbestos-related wrongful
death claims has not been set. Because the Debtors have not completed evaluation
of the results of the April 15, 2002 bar date and the asbestos bar date has not
yet been set, 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, (ii) targeting growth markets and (iii) forming strategic
alliances and partnerships to complement our existing businesses. We are
committed to taking full advantage of e-Business opportunities. We are also
expanding our role as a service provider by offering complementary services in
order to meet all of our consumers' needs. In the Composite Solutions 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 first quarter
of 2001, the Company completed the sale of the majority of its Engineered Pipe
Business, a producer of glass-reinforced plastic pipe. During the fourth quarter
of 2001, the Company completed the sale of its remaining 40% interest in Alcopor
Owens Corning, a producer of insulation products in Europe and the United
Kingdom.
Quarter Ended March 31, 2002
- ----------------------------
Sales and Profitability
- -----------------------
Net sales for the quarter ended March 31, 2002 were $1.107 billion, up 4% from
the first quarter 2001 level of $1.067 billion, principally due to higher
volumes in U.S. Building Materials partially offset by declines in the European
composite market. In the Building Materials business, sales during the first
quarter of 2002 reflect volume increases in U.S. residential insulation, window
distribution and roofing markets. In the Composite Solutions business, sales
reflect price decreases primarily in the U.S. and volume decreases primarily in
Europe. On a consolidated basis, there was an unfavorable currency translation
impact on sales denominated in foreign currencies during the first quarter of
2002 compared to the first quarter of 2001. Please see Note 2 to the
Consolidated Financial Statements.
- 45 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Sales outside the U.S. represented 14% of total sales during the first quarter
of 2002, compared to 17% during the first quarter of 2001. The decline in
non-U.S. sales is primarily due to decreases in composite materials in Europe as
well as in the Canadian market. Gross margin for each of the quarters ended
March 31, 2002 and 2001 was 16% of net sales. Marketing and administrative
expenses stayed flat in the first quarter of 2002 compared to 2001, $127 million
for both periods.
For the quarter ended March 31, 2002, Owens Corning reported a net loss of $6
million, or $.11 per share, compared to a loss of $10 million, or $.19 per
share, for the quarter ended March 31, 2001. Cost of borrowed funds was $4
million for each of the referenced quarters (from the Petition Date through
March 31, 2002, contractual interest expense not accrued or recorded on
pre-petition debt totaled $258 million, of which $36 million relates to the
first quarter of 2002 and $50 million relates to the first quarter of 2001
(please see Note 1 to the Consolidated Financial Statements)). On a pre-tax
basis, Owens Corning reported income of $3 million from operations in the first
quarter of 2002 compared to a loss of $17 million in the same period of 2001.
When adjusted for the costs of restructuring and other charges and Chapter 11
related expenditures, Owens Corning generated $40 million in income from ongoing
operations in the first quarter of 2002, compared to $46 million for the first
quarter of 2001.
Quarter Ended
March 31,
---------
(In millions of dollars)
2002 2001
---- ----
Reported income (loss) from operations $ 3 $ (17)
Restructure and other charges 12 42
Chapter 11 related reorganization items 25 21
------ ------
Income from ongoing operations $ 40 $ 46
====== ======
Income from ongoing operations is a measurement utilized by management for
evaluating the results of the Company. It is provided to give an indication of
the performance of the Company after taking into account the items detailed
above. Income from ongoing operations is not a recognized measurement of results
under accounting principles generally accepted in the United States.
On a comparative basis, the decline from 2001 reflects price decreases in
insulation and composites, increased material and energy costs and higher
operating expenses. These factors were offset slightly by an increase in
volumes, primarily in roofing and vinyl products.
Restructuring of Operations and Other Charges
- ---------------------------------------------
First Quarter 2002
- ------------------
In response to the slowed economy and to the declining margins in the composites
business, the Company has continued to assess cost structures of certain
businesses and facilities as well as overhead expenditures for the entire
company. In addition, certain restructuring programs put into place during 2000
and 2001 continued in the first quarter of 2002 due to the timing of events in
these programs. The combination of these continued restructuring programs and
the continued assessment of the businesses led to the Company recording
approximately $12 million in pretax charges in the first quarter of 2002. These
pretax charges were comprised of an $8 million pretax restructure charge and $4
million pretax other charges. The restructure charge represents severance costs
associated with the elimination of approximately 230 positions, primarily in the
U.S. The primary groups impacted include manufacturing and administrative
personnel. As of March 31, 2002, approximately $1 million has been paid and
charged against the reserve. The restructure charge has been classified as a
- 46 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
separate component of operating expenses on the Company's Consolidated Statement
of Income (Loss).
The $4 million in pretax other charges included $2 million in charges associated
with the Company's previously announced plan to realign its Newark, Ohio
manufacturing facility and various other charges totaling $2 million. The
realignment plan for the Newark facility was announced in the third quarter of
2000 and is anticipated to be complete in the second quarter of 2002. As work
progresses on the facility, costs are recorded as they are incurred. The $4
million pretax charge was accounted for as a $5 million charge to cost of sales
and a $1 million credit to other operating expenses.
Due to the timing of events, we anticipate that additional restructuring and
other charges will be recorded during 2002.
2001 Charges
- ------------
The Company spent a significant amount of time reviewing its cost structures in
2001 as a response to the impact of the weaker economy. This review led to the
Company recording approximately $140 million in pretax charges during 2001,
comprised of a $26 million pretax restructure charge and $114 million of pretax
other charges. The $114 of pretax other charges was accounted for as a $79
million pretax charge to cost of sales and a $35 million pretax charge to other
operating expense. The Company recorded $46 million in the fourth quarter, $35
million in the third quarter, $17 million in the second quarter and $42 million
in the first quarter.
The $26 million charge for restructuring represents $21 million for severance
costs associated with the elimination of approximately 460 positions, primarily
impacting manufacturing and administrative personnel in the U.S., Canada and the
U.K. The remaining $5 million represented a charge for the divestiture of
non-strategic businesses and facilities, which consisted mainly of non-cash
asset write-downs to fair value and exit cost liabilities. As of March 31, 2002,
approximately $18 million has been paid and charged against this reserve.
The $114 million of other charges included $29 million in costs related to the
realignment of the Newark manufacturing facility; $39 million of asset
impairments mainly associated with the building materials business, principally
to write-down assets to net estimated fair value on a held in use basis in
certain manufacturing facilities due to changes in the Company's manufacturing
and marketing strategies; $6 million to write down inventory mainly to reflect
updated estimates of the net realizable value; $4 million to write-down the
Company's investment and related assets in Alcopor Owens Corning, a producer of
insulation products in Europe and the United Kingdom, to net realizable value
(the sale of the Company's investment in this joint venture was completed in the
fourth quarter of 2001); a $2 million pretax loss from assets held for sale
which represented the results of operations for the Company's investments in its
Pipe joint ventures and subsidiaries on a held-for-sale basis (the sale was
completed in February 2001); and various other charges totaling $34 million.
Building Materials Systems
- --------------------------
In the Building Materials Systems segment, sales increased 9%, to $799 million,
in the first quarter of 2002 compared to the first quarter of 2001. This
increase in sales resulted mostly from increased volume attributable to all U.S.
businesses, particularly roofing and vinyl products. Building Materials Systems
sales also reflect a slight price decrease in the U.S. insulation markets.
Income from operations was $35 million during the first quarter of 2002,
compared to $21 million in the same period in 2001. Income from operations in
the first quarter of 2002 reflects the volume increases described above as well
as improved gross margins. Please see Note 2 to the Consolidated Financial
Statements.
- 47 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Composite Solutions
- -------------------
In the Composite Solutions segment, sales were down 8%, to $308 million, during
the first quarter of 2002 compared to the first quarter of 2001, primarily due
to price and volume decreases. Price decreases were most significant in the
U.S., however, all markets were impacted. Volume decreases in Europe were
partially offset by increases in the U.S. The currency translation impact on
sales denominated in foreign currencies was unfavorable during the first quarter
of 2002 compared to 2001. Income from operations was $15 million in the first
quarter of 2002, compared to $37 million in the same period of 2001, with most
of the decline attributable to the U.S. The decrease in income from operations
resulted from the price decreases mentioned above, and lost productivity in the
reinforcement glass and solutions market primarily caused by decreased demand.
Please see Note 2 to the Consolidated Financial Statements.
Income Taxes
- ------------
The Company currently projects that its effective tax rate for the full year
2002 will be 55%, consistent with full year 2001.
LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS
Cash flow from operations was negative $172 million for the quarter ended March
31, 2002, compared to negative $73 million for the quarter ended March 31, 2001.
The decrease in cash flow from operations in 2002 is primarily attributable to a
decrease in accounts payable and accrued liabilities during the first quarter of
2002 compared with increases in these amounts during the first quarter of 2001
from the abnormally low levels that existed at year-end 2000 as a result of the
Filing. In addition, during the first quarter of 2002, there was minimal cash
usage for inventory, compared to $51 million of cash usage in the first quarter
of 2001. This favorable variance, in part, reflects increased sales in the first
quarter of 2002.
Inventories at March 31, 2002 decreased by $2 million from the December 31, 2001
level. Receivables at March 31, 2002 were $530 million, a $113 million increase
over the December 31, 2001 level, attributable to the seasonal increase in
sales. At March 31, 2002, Owens Corning's net working capital was $820 million
and our current ratio was 2.10, compared to $800 million and 1.94, respectively,
at December 31, 2001 and $947 million and 2.46, respectively, at March 31, 2001.
Investing activities used $30 million of cash during first quarter 2002,
compared to $17 million in the same period of 2001. The first quarter of 2002
reflects $9 million received from the sale of our remaining interest in Alcopor
Owens Corning. The first quarter of 2001 includes $20 million received from the
sale of our Engineered Pipe Business. Capital spending for property, plant and
equipment, excluding acquisitions, in the first quarter was $39 million in 2002
and $42 million in 2001. We anticipate that 2002 capital spending, exclusive of
acquisitions, will be approximately $280 million, the majority of which is
uncommitted. We expect that funding for these expenditures will be from the
Company's operations, existing cash on hand and the credit availability from the
DIP Financing.
Financing activities in the first quarter of 2002 had no impact on cash compared
to a use of $4 million during the same period in 2001. At March 31, 2002, we had
$2.843 billion of borrowings subject to compromise and $113 million of other
borrowings (of which $96 million were in default as a consequence of the Filing
and therefore classified as current on the Consolidated Balance Sheet). At March
31, 2001, we had $2.827 billion of borrowings subject to compromise and $122
million of other borrowings (of which $94 million were in default as a
consequence of the Filing and therefore classified as current on the
Consolidated Balance Sheet).
- 48 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
At March 31, 2002, the Company had $561 million of Cash and Cash Equivalents (of
which approximately $38 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"), which currently expires November 15, 2002.
There were no borrowings outstanding under the DIP facility at March 31, 2002,
however, approximately $42 million of the availability under this credit
facility was utilized as a result of the issuance of standby letters of credit
and similar uses.
As a consequence of the Filing and the impact of certain provisions of the
Company's DIP Financing and in a cash management order entered by the Bankruptcy
Court, the Company and its subsidiaries are now subject to certain restrictions,
including on their ability to pay dividends and to transfer cash and other
assets to each other and to their affiliates.
The Company believes, based on information presently available to it, that its
cash and cash equivalents, cash available from operations and the DIP Financing
will provide sufficient liquidity to allow it to continue as a going concern for
the foreseeable future. However, the ability of the Company to continue as a
going concern (including its ability to meet post-petition obligations of the
Debtors and to meet obligations of the Non-Debtor Subsidiaries) and the
appropriateness of using the going concern basis for its financial statements
are dependent upon, among other things, (i) the Company's ability to comply with
the terms of the DIP Financing and any cash management order entered by the
Bankruptcy Court in connection with the Chapter 11 Cases, (ii) the ability of
the Company to maintain adequate cash on hand, (iii) the ability of the Company
to generate cash from operations, (iv) the ability of the Non-Debtor
Subsidiaries to obtain necessary financing, (v) confirmation of a plan or plans
of reorganization under the Bankruptcy Code, and (vi) the Company's ability to
achieve profitability following such confirmation.
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 adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS
No. 142 eliminates the amortization of goodwill and indefinite-lived intangible
assets and initiates an annual review for impairment. Identifiable intangible
assets with a determinable useful life will continue to be amortized. The
Company applied SFAS No. 142 beginning in the first quarter of 2002. The Company
tested goodwill for impairment using the two-step process prescribed in SFAS No.
142. The first step is a screen for potential impairment, while the second step
measures the amount of the impairment, if any. The Company has performed the
first of the required impairment tests of goodwill as of January 1, 2002 in the
first quarter of 2002. It is likely that between $450 and $500 million of the
goodwill related to Building Materials Systems will be impaired using the
impairment test required by SFAS No. 142. As of March 31, 2002, the Company has
net unamortized goodwill of $612 million. The Company plans to complete the
measurement of the impairment loss in the second quarter of 2002 and will
address the tax implications, if any, on this impairment loss at that time. When
the measurement is completed in the second quarter, the impairment that is
required to be recognized when adopting SFAS No. 142 will be reflected as a
cumulative effect of a change in accounting principle as of January 1, 2002.
- 49 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
As required by SFAS No. 142, the results of the prior year's quarter have not
been restated. A reconciliation of the previously reported net loss and loss per
share as if SFAS No. 142 had been adopted as of January 1, 2001 is presented as
follows:
Three months ended
March 31, 2002 March 31, 2001
-------------- --------------
(In millions of dollars, except per share data)
Net income (loss):
Reported net loss $ (6) $ (10)
Add back goodwill amortization, net of tax - 3
------ ------
Adjusted net loss $ (6) $ (7)
======= =======
Basic and diluted earnings (loss) per share:
As Reported $ (.11) $ (.19)
Add back goodwill amortization, net of tax - .05
------ ------
Adjusted basic and diluted loss per share $ (.11) $ (.14)
======= =======
All of the Company's acquired intangible assets are subject to amortization.
Intangible asset amortization expense was approximately $1 million in the first
quarter of 2002 and 2001. The Company estimates that amortization of intangibles
will be $3 million for each of the next 5 years. The components of intangible
assets are as follows:
March 31, 2002
--------------
Weighted Average Gross Carrying Accumulated
Lives Amount Amortization
----- ------ ------------
(In millions of dollars)
Contract-based 6 $ 2 $ -
Technology-based 22 17 (7)
Marketing-related 6 13 (7)
---- ------
$ 32 $ (14)
==== ======
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." This statement replaces SFAS No. 121. The new statement establishes a
single accounting model for long-lived assets to be disposed of by sale, and
requires companies to measure long-lived assets at the lower of fair value minus
cost to sell or the carrying value. There was no impact of adoption during the
first quarter of 2002.
Effective January 1, 2003, the Company will adopt Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations."
This statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made, while the associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The Company does not expect the effects of adoption to be
significant.
- 50 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Environmental Matters
- ---------------------
The Company has been deemed by the Environmental Protection Agency (EPA) to be a
Potentially Responsible Party (PRP) with respect to certain sites under the
Comprehensive Environmental Response, Compensation and Liability Act
(Superfund). The Company has also been deemed a PRP under similar state or local
laws. In other instances, other PRPs have brought suits against the Company as a
PRP for contribution under such federal, state or local laws. At December 31,
2001, a total of 54 such PRP designations remained unresolved by the Company.
The Company is also involved with environmental investigation or remediation at
a number of other sites at which it has not been designated a PRP.
The Company has established a $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.
- 51 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of changes in foreign currency exchange
rates, interest rates, and natural gas prices in the normal course of business.
The Company manages such exposures through the use of certain financial and
derivative financial instruments. The Company's objective with these instruments
is to reduce exposure to fluctuations in earnings and cash flows.
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.
The Company also enters into certain currency and interest rate swaps to protect
the carrying amount of its investments in certain foreign subsidiaries, to hedge
the principal and interest payments of certain debt instruments, and to manage
its exposure to fixed versus floating interest rates.
The Company also enters into cash-settled natural gas futures to protect against
changes in natural gas prices.
The Company's policy is to use foreign currency, interest rate, and natural gas
derivative financial instruments only to the extent necessary to manage
exposures as described above. The Company does not enter into such transactions
for speculative purposes.
The Company uses a variance-covariance Value at Risk (VAR) computation model to
estimate the potential loss in the fair value of the referenced financial
instruments. The VAR model uses historical foreign exchange, interest, and
natural gas 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 the Company would expect from adverse changes in foreign currency
exchange rates, interest rates or natural gas prices assuming a 95% confidence
level:
March 31, December 31,
Risk Category 2002 2001
------------- ---- ----
(In millions of dollars)
Foreign currency $ - $ -
Interest rate $ 9 $ 13
Natural gas $ 1 $ 1
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 10, 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 "USBC"). The Debtors are currently operating
their businesses as debtors-in-possession in accordance with provisions of the
Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the "Chapter
11 Cases") are being jointly administered under Case No. 00-3837 (JKF). The
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
In late 2001, the asbestos-related Chapter 11 cases pending in the District of
Delaware (the Chapter 11 Cases of Owens Corning and the cases of Armstrong World
Industries, Inc., W. R. Grace & Co., Federal-Mogul Global, Inc., and USG
Corporation) were ordered transferred to the United States District Court for
the District of Delaware (the "District Court") before Judge Alfred M. Wolin to
facilitate development and implementation of a coordinated plan for management
(the "Administrative Consolidation"). The District Court has entered an order
referring the Chapter 11 Cases back to the USBC, where they were previously
pending, subject to its ongoing right to withdraw such referral with respect to
any proceedings or issues (the applicable court from time to time responsible
for any particular aspect of the Chapter 11 Cases being hereinafter referred to
as the "Bankruptcy Court").
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. See Note
1, Voluntary Petition for Relief Under Chapter 11, to Owens Corning's
Consolidated Financial Statements above.
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.
- 53 -
PART II. OTHER INFORMATION (continued)
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, at the Petition Date the Company recorded the
Debtors' pre-petition debt instruments at the allowed amount, as defined by SOP
90-7.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter ended
March 31, 2002.
ITEM 5. OTHER INFORMATION
The Company does not elect to report any information under this Item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See Exhibit Index below, which is incorporated here by reference.
(b) Reports on Form 8-K.
During the quarter ended March 31, 2002, Owens Corning filed the
following current report on Form 8-K:
- Dated March 22, 2002, under Items 4 and 7, to report changes
in Owens Corning's certifying accountant.
- 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: May 10,2002 By: /s/ Michael H. Thaman
-------------------------- ---------------------------------------
Michael H. Thaman
Chairman of the Board and
Chief Financial Officer
(as duly authorized officer)
Date: May 10, 2002 By: /s/ Charles E. Dana
--------------------------- ---------------------------------------
Charles E. Dana
Vice President - Corporate
Controller and Global Sourcing
- 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).
(10) Material Contracts
Director's Charitable Award Program (incorporated herein by
reference to Exhibit (10) to Owens Corning's annual report on
Form 10-K (File No. 1-3660) for the year ended December 31,
2001).
(99) Additional Exhibits
Subsidiaries of Owens Corning, as amended (filed herewith).