SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 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 September 30,
2002
55,175,334
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(In millions of dollars, except share data)
NET SALES $ 1,306 $ 1,291 $ 3,698 $ 3,597
COST OF SALES 1,097 1,046 3,075 2,957
------- ------- ------- -------
Gross margin 209 245 623 640
------- ------- ------- -------
OPERATING EXPENSES
Marketing and administrative expenses 131 141 402 396
Science and technology expenses 10 10 30 30
Restructure costs (Note 4) 11 8 18 24
Chapter 11 related reorganization items (Note 1) 35 23 85 60
Owens Corning provision for asbestos litigation claims (Note 10) 1,381 (5) 1,376 (5)
Fibreboard provision for asbestos litigation claims (Note 10) 975 - 975 -
Other 8 5 6 32
------- ------- ------- -------
Total operating expenses 2,551 182 2,892 537
------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS (2,342) 63 (2,269) 103
OTHER
Cost of borrowed funds 5 4 13 11
Other - 4 - (2)
------- ------- ------- -------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES (2,347) 55 (2,282) 94
Provision for income taxes (Note 13) 10 26 40 46
------- ------- ------- -------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
EQUITY IN NET INCOME (LOSS) OF AFFILIATES (2,357) 29 (2,322) 48
Minority interest (2) (2) (3) (3)
Equity in net income (loss) of affiliates - - (4) 1
------- ------- ------- -------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (2,359) 27 (2,329) 46
Cumulative effect of change in accounting principle (Note 12) - - 441 -
------- ------- ------- -------
NET INCOME (LOSS) $(2,359) $ 27 $(2,770) $ 46
======= ======= ======= =======
The accompanying notes are an integral part of this statement.
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (LOSS) (continued)
(unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(In millions of dollars, except share data)
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share $ (42.84) $ .50 $ (50.31) $ .84
----------- -------- ---------- --------
Diluted net income (loss) per share $ (42.84) $ .46 $ (50.31) $ .77
----------- -------- ---------- --------
Weighted average number of common shares outstanding and common equivalent
shares during the period (in millions)
Basic 55.0 55.1 55.1 55.1
Diluted 55.0 59.9 55.1 60.0
The accompanying notes are an integral part of this statement.
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
September 30, December 31, September 30,
2002 2001 2001
---- ---- ----
(In millions of dollars)
ASSETS
CURRENT
Cash and cash equivalents $ 686 $ 764 $ 551
Receivables 570 417 597
Inventories (Note 6) 493 437 480
Deferred income taxes -- 1 5
Income tax receivable 2 5 5
Other current assets 21 25 22
------- ------- -------
Total current 1,772 1,649 1,660
------- ------- -------
OTHER
Insurance for asbestos litigation claims (Note 10) 4 4 4
Restricted cash - asbestos and insurance related
(Note 10) 165 169 171
Restricted cash, securities and other - Fibreboard
(Notes 10 and 11) 1,335 1,284 1,285
Deferred income taxes 1,247 1,187 1,037
Goodwill (Note 12) 122 610 618
Investments in affiliates 52 48 50
Other noncurrent assets 235 247 359
------- ------- -------
Total other 3,160 3,549 3,524
------- ------- -------
PLANT AND EQUIPMENT, at cost
Land 68 67 68
Buildings and leasehold improvements 683 669 666
Machinery and equipment 3,129 2,854 2,866
Construction in progress 160 256 172
------- ------- -------
4,040 3,846 3,772
Less - accumulated depreciation (2,140) (2,003) (1,984)
------- ------- -------
Net plant and equipment 1,900 1,843 1,788
------- ------- -------
TOTAL ASSETS $ 6,832 $ 7,041 $ 6,972
======= ======= =======
The accompanying notes are an integral part of this statement.
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (continued)
(unaudited)
September 30, December 31, September 30,
2002 2001 2001
---- ---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars)
- ------------------------------------
CURRENT
Accounts payable and accrued liabilities $ 724 $ 740 $ 678
Short-term debt 43 43 43
Long-term debt - current portion 65 66 65
------- ------- -------
Total current 832 849 786
------- ------- -------
LONG-TERM DEBT (Note 5) 68 5 6
------- ------- -------
OTHER
Other employee benefits liability 358 331 330
Pension plan liability 318 291 38
Other 113 141 127
------- ------- -------
Total other 789 763 495
------- ------- -------
LIABILITIES SUBJECT TO COMPROMISE (Note 1) 9,238 6,804 6,817
------- ------- -------
COMMITMENTS AND CONTINGENCIES
(Notes 1, 9 and 10)
COMPANY OBLIGATED SECURITIES OF ENTITIES
HOLDING SOLELY PARENT DEBENTURES -
SUBJECT TO COMPROMISE 200 200 200
------- ------- -------
MINORITY INTEREST 48 37 40
------- ------- -------
STOCKHOLDERS' EQUITY
Common stock 695 697 697
Deficit (4,727) (1,957) (1,950)
Accumulated other comprehensive loss (308) (355) (115)
Other (3) (2) (4)
------- ------- -------
Total stockholders' equity (4,343) (1,617) (1,372)
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,832 $ 7,041 $ 6,972
======= ======= =======
The accompanying notes are an integral part of this statement.
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
-------------
2002 2001
---- ----
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net income (loss) $(2,770) $ 46
Reconciliation of net cash provided by operating activities
Noncash items:
Provisions for asbestos litigation claims 2,356 -
Provision for depreciation and amortization 180 161
Provision for deferred income taxes 5 40
Cumulative effect of accounting change 441 -
Other 44 69
Increase in receivables (154) (123)
Increase in inventories (44) (21)
Increase (decrease) in accounts payable and accrued liabilities (43) 125
Decrease in restricted cash and other - asbestos-related (Note 10) 5 48
Change in liabilities subject to compromise (Note 1) (2) (97)
Proceeds from insurance for asbestos litigation claims,
excluding Fibreboard 5 5
Pension fund contribution - (176)
Other 63 37
------- -------
Net cash flow from operations $ 86 $ 114
------- -------
NET CASH FLOW FROM INVESTING
Additions to plant and equipment $ (171) $ (133)
Investment in subsidiaries, net of cash acquired (Note 5) (10) -
Proceeds from the sale of affiliate or business (Note 5) 10 20
Other (1) (2)
------- -------
Net cash flow from investing $ (172) $ (115)
------- -------
The accompanying notes are an integral part of this statement.
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(unaudited)
Nine Months Ended
September 30,
-------------
2002 2001
---- ----
(In millions of dollars)
NET CASH FLOW FROM FINANCING
Other additions to long-term debt - 17
Other reductions to long-term debt (2) (4)
Net decrease in short-term debt - (7)
Subject to compromise (Note 1) 1 (4)
Other 1 (1)
----- -----
Net cash flow from financing $ - $ 1
----- -----
Effect of exchange rate changes on cash 8 1
----- -----
Net increase (decrease) in cash and cash equivalents (78) 1
Cash and cash equivalents at beginning of period 764 550
----- -----
Cash and cash equivalents at end of period $ 686 $ 551
===== =====
The accompanying notes are an integral part of this statement.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
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 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 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 November 26, 2002, and similarly extended
the Debtors' exclusive rights to solicit acceptances of a reorganization plan
from April 3, 2001 to January 28, 2003. 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 other
interest 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.
In this regard, at a status conference on the Chapter 11 Cases held on September
20, 2002, the District Court requested that the Debtors submit a plan of
reorganization by October 31, 2002, or risk the shortening or non-extension of
their exclusivity period for filing a plan of reorganization. The District Court
has subsequently indicated that the deadline for submission might be extended
until the latter part of November 2002. As a result of the District Court's
request, the Debtors, the creditors' committees, the futures representative, and
other parties in interest have increased the pace of their discussions and
negotiations, including the exchange of information, concerning their respective
positions on the appropriate terms of a plan of reorganization. Owens Corning
intends to comply with the request of the District Court by submitting a plan of
reorganization to the District Court either in conjunction with one or more of
the creditor constituencies as plan proponents or, alternatively, with no plan
proponent other than the Debtors. Because discussions and negotiations among the
various creditor constituencies and the Debtors are ongoing, Owens Corning is
unable to predict the terms of such a plan of reorganization or whether such
plan will be supported by one or more of the creditor constituencies.
Owens Corning believes that it is likely that the terms, conditions and
provisions of any plan or plans of reorganization initially filed or submitted
by it will be the subject of continuing negotiations or litigation to resolve
differences among the creditor constituencies as to their treatment.
Accordingly, Owens Corning is unable to predict at this time what the treatment
of creditors and equity holders of the respective Debtors will ultimately be
under any plan or plans of reorganization finally confirmed. However, it is
likely that any plan or plans will 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. In
addition,
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
Owens Corning believes it is likely that any such plan or plans will 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 ultimately
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 or modified
by order of, or subject to review and approval by, the Bankruptcy Court. The
outcome of such challenges and other actions, if any, may have an impact on the
treatment of various claims under 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 ultimately be under any such plan or plans with respect to
(1) the guarantees issued by certain of Owens Corning's U.S. subsidiaries,
including Owens-Corning Fiberglas Technology Inc. ("OCFT") and IPM Inc., a
Non-Debtor Subsidiary that holds Owens Corning's ownership interest in a
majority of Owens Corning's foreign subsidiaries ("IPM"), with respect to Owens
Corning's $1.8 billion pre-petition bank credit facility (the "Pre-Petition
Credit Facility", which is in default) or (2) OCFT's license agreements with
Owens Corning and Exterior Systems, Inc., an indirect wholly-owned subsidiary of
Owens Corning ("Exterior"), pursuant to which OCFT licenses intellectual
property to Owens Corning and Exterior.
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. Based on information now available to Owens Corning, it
appears unlikely that there will be sufficient assets to satisfy all of the
Debtors' pre-petition liabilities. In addition, the pre-petition creditors of
some Debtors may be treated differently than those of other Debtors. Based on
the Debtors' known assets and known and currently estimated liabilities
(including the asbestos liabilities described more fully in Note 10), it is
likely that pre-petition creditors generally will receive under a plan or plans
less than 100% of the face value of their claims, and that the interests of
Owens Corning's equity security holders will be substantially diluted or
cancelled in whole or in part. As noted above, it is not otherwise possible at
this time to predict the outcome of the Chapter 11 Cases, the effect of the
Administrative Consolidation, the final terms and provisions of any plan or
plans of reorganization, or the ultimate effect of the Chapter 11 reorganization
process on the claims of the creditors of the Debtors or the interests of the
Debtors' respective 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.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
Bar Dates for Filing Claims
GENERAL BAR DATE
In connection with the Chapter 11 Cases, the Bankruptcy Court set April 15, 2002
as the last date by which holders of certain pre-petition claims against the
Debtors must file their claims (the "General Bar Date"). The General Bar Date
does not apply to asbestos-related personal injury claims and asbestos-related
wrongful death claims (other than claims for contribution, indemnity,
reimbursement, or subrogation). Any holder of a claim that was required to file
a claim by the General Bar Date and did not do so will be barred from asserting
such claim against any of the Debtors and will not participate in any
distribution in any of the Chapter 11 Cases on account of such claim.
Approximately 24,000 proofs of claim (including late-filed claims), totaling
approximately $16.0 billion, alleging a right to payment from a Debtor were
filed with the Bankruptcy Court in response to the General Bar Date. Owens
Corning is investigating these claims to determine their validity. The
Bankruptcy Court will ultimately determine liability amounts that will be
allowed for these claims in the Chapter 11 Cases.
In its initial review of the filed claims, Owens Corning has identified
approximately 15,000 claims, totaling approximately $8.3 billion, which it
believes should be disallowed by the Bankruptcy Court, primarily because they
appear to be duplicate claims or claims that are not related to the indicated
Debtor (the "Objectionable Claims"). Owens Corning likely will file objections
to these Objectionable Claims. While the Bankruptcy Court will ultimately
determine liability amounts, if any, that will be allowed as part of the Chapter
11 Cases, Owens Corning believes that all or substantially all of these claims
will be disallowed.
In addition to the Objectionable Claims described above, at September 30, 2002,
the remaining filed proofs of claim included approximately 9,000 claims,
totaling approximately $7.7 billion, as follows:
- - Approximately 2,900 claims, totaling approximately $1.4 billion, associated
with asbestos-related contribution, indemnity, reimbursement, or
subrogation claims. Owens Corning will address all asbestos-related
personal injury and wrongful death claims in the future as part of the
Chapter 11 Cases. Please see Note 10 for additional information concerning
asbestos-related liabilities.
- - Approximately 600 claims, totaling approximately $0.7 billion, alleging
asbestos-related property damage. Most of these claims were submitted with
insufficient documentation to assess their validity. Owens Corning expects
to vigorously defend any asserted asbestos-related property damage claims
in the Bankruptcy Court. Based upon its historic experience in respect of
asbestos-related property damage claims, Owens Corning does not anticipate
significant liability from any such claims.
- - Approximately 5,500 claims, totaling approximately $5.6 billion, alleging
rights to payment for financing, environmental, trade debt and other
matters (the "General Claims"). The Company has previously recorded
approximately $3.7 billion in liabilities for these claims. Based upon the
claims information submitted, the General Claims with the largest variance
from the recorded amounts are: claims by the United States Department of
Treasury, totaling approximately $530 million, in connection with taxes
(see discussion under the heading "Tax Claim" in Note 10 to the
Consolidated Financial Statements); a contingent claim for approximately
$458 million by the Pension Benefit Guaranty Corporation, as described more
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
fully under the heading "PBGC Claim" in Note 10 to the Consolidated
Financial Statements; claims for contract rejections, totaling
approximately $310 million, of which approximately $250 million are
protective claims covering contracts which have not been rejected by the
Debtors as of September 30, 2002; a $275 million class action claim
involving alleged problems with a specialty roofing product, which claim
Owens Corning does not believe is meritorious based upon its historic
experience with servicing its warranty program for such product; and
environmental claims, totaling approximately $244 million.
Owens Corning has recorded liability amounts for those claims that can be
reasonably estimated and which it believes are probable of being allowed by the
Bankruptcy Court. At this time, it is impossible to reasonably estimate the
value of all the claims that will ultimately be allowed by the Bankruptcy Court,
due to the uncertainties of the Chapter 11 process, the in-progress state of
Owens Corning's investigation of submitted claims, and the lack of documentation
submitted in support of many claims. Owens Corning continues to evaluate claims
filed in the Chapter 11 Cases and will make such adjustments as may be
appropriate. Any such adjustments could be material to the Company's
consolidated financial position and results of operations in any given period.
For a discussion of liability amounts in respect of asbestos personal injury
claims, see Note 10 to the Consolidated Financial Statements.
ASBESTOS BAR DATE
As indicated above, the General Bar Date does not apply to asbestos-related
personal injury claims and asbestos-related wrongful death claims (other than
claims for contribution, indemnity, reimbursement, or subrogation). A bar date
for filing proofs of claim against the Debtors with respect to asbestos-related
personal injury claims and asbestos-related wrongful death claims has not been
set. Despite this, approximately 2,900 proofs of claim (in addition to claims
described above under "General Bar Date"), totaling approximately $2.2 billion,
with respect to asbestos-related personal injury or wrongful death were filed
with the Bankruptcy Court in response to the General Bar Date. Of these claims,
Owens Corning has identified approximately 1,100, totaling approximately $0.5
billion, as Objectionable Claims. Of the remaining claims, Owens Corning
believes that a substantial majority represented claimants that had previously
asserted asbestos-related claims against the Company. Owens Corning will address
all asbestos-related personal injury and wrongful death claims in the future as
part of the Chapter 11 Cases. Please see Note 10 to the Consolidated Financial
Statements for additional information concerning asbestos-related liabilities.
Avoidance Actions
Under the Bankruptcy Code, October 4, 2002 was the deadline by which the
Debtors, on behalf of the bankruptcy estates, could bring adversary actions
seeking the return of potentially avoidable transfers made by the Debtors to
certain parties within a prescribed period prior to the commencement of the
Chapter 11 proceedings. As part of their review of potentially avoidable
transactions, the Debtors (1) negotiated tolling agreements with some of the
recipients of the preferential transfers in order to toll the time period in
which to bring an avoidance action; (2) determined not to prosecute certain of
those potential avoidance actions that were not the subject of tolling
agreements; and (3) instituted, prior to the October 4, 2002 deadline, a total
of 19 adversarial actions, including 3 preference actions, 1 turnover action,
and 15 avoidance actions, as described further below. All such actions were
commenced in the USBC.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
Among the parties who were identified by the Debtors as having received
potentially avoidable transfers were (a) 12 present and former officers that
received certain pre-petition incentive payments exceeding a threshold in the
aggregate per officer; (b) one director that received a pre-petition pension
payment; and (c) a joint venture affiliate of the Company that received
approximately $3.8 million in the one-year period prior to the commencement of
the Chapter 11 proceedings.
The Debtors have executed tolling agreements with all 12 present and former
officers, the director and the affiliate of the Company, as well as with certain
other parties identified as having received potentially avoidable transfers.
The additional actions were commenced against various other defendants seeking,
among other things, (a) avoidance of certain guarantees and certain preferential
payments made in connection with Owens Corning's Pre-Petition Credit Facility;
(b) the return of up to approximately $515 million paid by the Company to
shareholders of Fibreboard in connection with the Company's purchase of
Fibreboard in 1997 (the "FBD Shareholder Action"); (c) the return of up to
approximately $61.8 million paid by the Company to shareholders in dividends in
the period 1996 through 2000 (the "Dividend Action"); and (d) the return of
approximately $133 million paid by the Company to Bank of America Corp. in
connection with Owens Corning's purchase of Fibreboard in 1997. Both the FBD
Shareholder Action and the Dividend Action are defendant class actions.
Separately, and at the request of the Debtors' Official Creditors' Committee and
the direction of the Bankruptcy Court, the Debtors either obtained tolling
agreements from, or filed actions against, approximately 115 law firms that
entered into NSP or non-NSP agreements (see Note 10) with the Debtors on behalf
of claimants asserting asbestos-related personal injury or wrongful death
claims. Lawsuits were brought against the 11 law firms that did not sign tolling
agreements, seeking two forms of relief: (a) first, a declaratory judgment as to
whether payments made, or obligations incurred, under NSP and non-NSP agreements
were in exchange for reasonably equivalent value; and (b) second, in the event
reasonably equivalent value was not received, the recovery or avoidance of
payments made and obligations incurred under the relevant NSP and non-NSP
agreements pursuant to applicable state and federal fraudulent conveyance law.
The Official Creditors' Committee was named as a defendant in such lawsuits,
solely with respect to the declaratory relief sought.
By motion filed on or about October 16, 2002, the Debtors sought an order of the
Bankruptcy Court staying all of the foregoing litigation pending its disposition
in a plan of reorganization. No ruling has as yet been made on such motion.
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 September 30, 2002, contractual interest expense not
accrued or recorded on pre-petition debt totaled $329 million, of which $35
million relates to the third quarter of 2002, $106 million relates to the first
nine months of 2002, and $42 million and $134 million, respectively, relate to
the corresponding periods of 2001.
- 14 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
At September 30, 2002, the Company had $686 million of Cash and Cash Equivalents
(of which approximately $4 million was subject to administrative freeze pending
the resolution of certain alleged set-off rights by certain pre-petition
lenders). During the second quarter of 2002, the Bankruptcy Court approved a
settlement reached with certain pre-petition lenders covering approximately $36
million of funds previously subject to administrative freeze (of which
approximately $32 million was previously reflected in cash and cash
equivalents). Under this settlement, approximately $18 million of the funds were
released from administrative freeze and the remainder was retained by the
lenders to offset certain pre-petition indebtedness.
In connection with the Filing, the Debtors obtained a $500 million
debtor-in-possession credit facility from a group of lenders led by Bank of
America, N.A. (the "DIP Financing"), which currently expires November 15, 2002.
The Debtors have reached agreement with the lenders to renew the DIP Financing
for an additional term of two years, with a reduced maximum availability of $250
million. This renewal is subject to Bankruptcy Court approval, which is expected
prior to the current expiration. There were no borrowings outstanding under the
DIP Financing at September 30, 2002, however, approximately $56 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, and
to renew the DIP Financing as described above, (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.
- 15 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
Financial Statement Presentation
The Company's Consolidated Financial Statements have been prepared in accordance
with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," and on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. However, as a
result of the Filing, such realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as debtors-in-possession under the
protection of Chapter 11 of the Bankruptcy Code, and subject to Bankruptcy Court
approval or otherwise as permitted in the ordinary course of business, the
Debtors, or some of them, may sell or otherwise dispose of assets and liquidate
or settle liabilities for amounts other than those reflected in the Consolidated
Financial Statements. Further, a plan of reorganization could materially change
the amounts and classifications reported in the consolidated historical
financial statements.
Substantially all of the Company's pre-petition debt is now in default due to
the Filing. As described below, the accompanying Consolidated Financial
Statements present the Debtors' pre-petition debt under the caption "Liabilities
Subject to Compromise". This includes debt under the Pre-Petition Credit
Facility and approximately $1.4 billion of other outstanding debt. As required
by SOP 90-7, at the Petition Date the Company recorded the Debtors' pre-petition
debt instruments at the allowed amount, as defined by SOP 90-7.
As reflected in the Consolidated Financial Statements, "Liabilities Subject to
Compromise" refer to Debtors' liabilities incurred prior to the commencement of
the Chapter 11 Cases. The amounts of the various liabilities that are subject to
compromise are set forth below following the debtor-in-possession financial
statements. These amounts represent Owens Corning's estimate of known or
potential pre-petition claims to be resolved in connection with the Chapter 11
Cases. Such claims remain subject to future adjustments. Adjustments may result
from (1) negotiations; (2) actions of the Bankruptcy Court; (3) further
developments with respect to disputed claims; (4) rejection of executory
contracts and unexpired leases; (5) the determination as to the value of any
collateral securing claims; (6) proofs of claim; or (7) other events. Payment
terms for these amounts will be established in connection with the Chapter 11
Cases.
In this respect, the Company's Consolidated Financial Statements, and the
condensed financial statements presented below, reflect charges to income of
$1.381 billion for Owens Corning and $975 million for Fibreboard during the
quarterly period ended September 30, 2002, in connection with asbestos-related
liabilities. Please see Note 10 to the Consolidated Financial Statements.
Debtor-In-Possession Financial Statements
The condensed financial statements of the Debtors are presented below. These
statements reflect the financial position and results of operations of the
combined Debtor entities, including certain amounts and activities between
Debtors and non-debtor entities of Owens Corning that are eliminated in the
Consolidated Financial Statements. Certain reclassifications to 2001 have been
made between Debtor and non-debtor entities to conform with the classifications
used in 2002.
- 16 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION STATEMENT OF INCOME (LOSS)
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
NET SALES $ 1,161 $ 1,143 $ 3,271 $ 3,139
COST OF SALES 1,005 953 2,800 2,663
------- ------- ------- -------
Gross margin 156 190 471 476
------- ------- ------- -------
OPERATING EXPENSES
Marketing and administrative expenses 120 129 368 356
Science and technology expenses 9 9 26 27
Restructure costs 11 5 16 14
Chapter 11 related reorganization items 35 23 85 60
Owens Corning provision for asbestos litigation claims
(Note 10) 1,381 (5) 1,376 (5)
Fibreboard provision for asbestos litigation claims
(Note 10) 975 - 975 -
Other (Including interest income from non-debtors of $14
million in the third quarter and $42 million for the nine
months ended 2002 and 2001) (22) (31) (71) (71)
------- ------- ------- -------
Total operating expenses 2,509 130 2,775 381
------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS (2,353) 60 (2,304) 95
OTHER
Cost of borrowed funds 1 1 4 (1)
Other - 4 - (2)
------- ------- ------- -------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (2,354) 55 (2,308) 98
Provision for income taxes 4 25 27 46
------- ------- ------- -------
INCOME (LOSS) BEFORE EQUITY IN NET INCOME
(LOSS) OF AFFILIATES (2,358) 30 (2,335) 52
Equity in net income (loss) of affiliates 3 (1) (2) (1)
------- ------- ------- -------
NET INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (2,355) 29 (2,337) 51
------- ------- ------- -------
Cumulative effect of change in accounting principle - - 409 -
------- ------- ------- -------
NET INCOME (LOSS) $(2,355) $ 29 $(2,746) $ 51
======= ======= ======= =======
- 17 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION BALANCE SHEET
September 30, December 31, September 30,
2002 2001 2001
---- ---- ----
(In millions of dollars)
ASSETS
- ------
CURRENT
Cash and cash equivalents $ 486 $ 605 $ 431
Receivables 475 315 439
Receivables - non-debtors 879 849 744
Inventories 373 311 349
Deferred income taxes 4 4 4
Income tax receivable 2 4 4
Other current assets 20 25 20
------- ------- -------
Total current 2,239 2,113 1,991
------- ------- -------
OTHER
Insurance for asbestos litigation claims 4 4 4
Restricted cash and other - asbestos and insurance 165 169 171
related
Restricted cash, securities and other - Fibreboard 1,335 1,284 1,285
Deferred income taxes 1,180 1,143 1,001
Goodwill, net 54 513 520
Investments in affiliates 17 34 33
Investments in non-debtor subsidiaries 757 758 736
Other noncurrent assets 123 138 309
------- ------- -------
Total other 3,635 4,043 4,059
------- ------- -------
PLANT AND EQUIPMENT, at cost
Land 41 41 41
Buildings and leasehold improvements 523 533 526
Machinery and equipment 2,383 2,194 2,196
Construction in progress 91 217 153
------- ------- -------
3,038 2,985 2,916
Less - accumulated depreciation (1,642) (1,548) (1,527)
------- ------- -------
Net plant and equipment 1,396 1,437 1,389
------- ------- -------
TOTAL ASSETS $ 7,270 $ 7,593 $ 7,439
======= ======= =======
- 18 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION BALANCE SHEET (continued)
September 30, December 31, September 30,
2002 2001 2001
---- ---- ----
(In millions of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT
Accounts payable and accrued liabilities $ 583 $ 589 $ 509
Accounts payable and accrued liabilities - non-debtors 17 12 7
Long-term debt - current portion -- 1 --
------- ------- -------
Total current 600 602 516
------- ------- -------
OTHER
Other employee benefits liability 345 318 316
Pension plan liability 280 264 32
Other 89 110 103
------- ------- -------
Total other 714 692 451
------- ------- -------
LIABILITIES SUBJECT TO COMPROMISE 9,964 7,565 7,532
STOCKHOLDERS' EQUITY
Common stock 695 697 697
Deficit (4,488) (1,742) (1,744)
Accumulated other comprehensive loss (212) (219) (11)
Other (3) (2) (2)
------- ------- -------
Total stockholders' equity (4,008) (1,266) (1,060)
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,270 $ 7,593 $ 7,439
======= ======= =======
- 19 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION STATEMENT OF CASH FLOWS
Nine Months Ended
September 30,
-------------
2002 2001
---- ----
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net income (loss) $(2,746) $ 52
Reconciliation of net cash provided by (used in) operating activities
Noncash items:
Provision for asbestos litigation claims 2,356 -
Provision for depreciation and amortization 139 115
Provision for deferred income taxes 14 61
Cumulative effect of accounting change 409 -
Other 39 71
Increase in receivables (198) (186)
Increase in inventories (63) (4)
Increase (decrease) in accounts payable and accrued liabilities (58) 100
Decrease in restricted cash and other - asbestos-related 5 48
Change in liabilities subject to compromise (2) (97)
Proceeds from insurance for asbestos litigation claims,
excluding Fibreboard 5 -
Pension fund contribution - (176)
Other 89 88
------- -------
Net cash flow from operations $ (11) $ 72
------- -------
NET CASH FLOW FROM INVESTING
Additions to plant and equipment $ (119) $ (113)
Investment in subsidiaries, net of cash acquired (1) -
Proceeds from sale of business 10 -
Other - (1)
------- -------
Net cash flow from investing $ (110) $ (114)
------- -------
- 20 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
OWENS CORNING AND SUBSIDIARIES
DEBTOR-IN-POSSESSION STATEMENT OF CASH FLOWS (continued)
Nine Months Ended
September 30,
-------------
2002 2001
---- ----
(In millions of dollars)
NET CASH FLOW FROM FINANCING
Net additions to long-term credit facilities - 17
Subject to compromise 1 (4)
Other reductions to long-term debt - -
Other 1 (1)
----- -----
Net cash flow from financing $ 2 $ 12
----- -----
Net decrease in cash and cash equivalents (119) (30)
Cash and cash equivalents at beginning of period 605 461
----- -----
Cash and cash equivalents at end of period $ 486 $ 431
===== =====
- 21 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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:
September 30, December 31, September 30,
2002 2001 2001
---- ---- ----
(In millions of dollars)
Accounts payable $ 196 $ 195 $ 193
Accrued interest payable 40 40 40
Accrued liabilities 39 36 47
Debt 2,854 2,843 2,843
Income taxes payable 235 209 209
Reserve for asbestos litigation claims - Owens Corning 3,564 2,197 2,200
Reserve for asbestos-related claims - Fibreboard 2,310 1,284 1,285
------ ------ ------
Total consolidated 9,238 6,804 6,817
Payables to non-debtors 726 761 715
------ ------ ------
Total debtor $9,964 $7,565 $7,532
====== ====== ======
The amounts for Chapter 11 related reorganization items in the Consolidated and
Debtor-in-Possession Statements of Income (Loss) consist of the following:
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(In millions of dollars)
Professional fees $ 17 $ 15 $ 52 $ 49
Payroll and compensation 6 9 18 21
Interest income (3) (5) (7) (15)
Other, net 15 4 22 5
---- ---- ---- ----
Total $ 35 $ 23 $ 85 $ 60
==== ==== ==== ====
- 22 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 reported financial information about each of these two
reportable segments below on a basis that is used internally for evaluating
segment performance and deciding how to allocate resources to those segments.
Quarter Ended Nine Months Ended
September 30, September 30,
------------ -------------
NET SALES 2002 2001 2002 2001
---- ---- ---- ----
(In millions of dollars)
Reportable Segments
Building Materials Systems
United States $ 909 $ 893 $2,560 $2,424
Europe - 1 2 4
Canada and other 54 49 137 131
------ ------ ------ ------
Total Building Materials Systems 963 943 2,699 2,559
------ ------ ------ ------
Composite Solutions
United States 225 228 642 639
Europe 77 76 236 266
Canada and other 41 44 121 133
------ ------ ------ ------
Total Composite Solutions 343 348 999 1,038
------ ------ ------ ------
Total reportable segments $1,306 $1,291 $3,698 $3,597
====== ====== ====== ======
External Customer Sales by Geographic Region
United States $1,134 $1,121 $3,202 $3,063
Europe 77 77 238 270
Canada and other 95 93 258 264
------ ------ ------ ------
Net sales $1,306 $1,291 $3,698 $3,597
====== ====== ====== ======
- 23 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2. SEGMENT DATA (continued)
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
INCOME FROM OPERATIONS 2002 2001 2002 2001
---- ---- ---- ----
(In millions of dollars)
Reportable Segments
Building Materials Systems
United States $ 77 $ 78 $ 190 $ 150
Europe 1 - 1 -
Canada and other 8 5 17 9
------- ------- ------- -------
Total Building Materials Systems 86 83 208 159
------- ------- ------- -------
Composite Solutions
United States 9 36 23 94
Europe 6 7 22 31
Canada and other 6 4 17 16
------- ------- ------- -------
Total Composite Solutions 21 47 62 141
------- ------- ------- -------
Total reportable segments $ 107 $ 130 $ 270 $ 300
======= ======= ======= =======
Geographic Regions
United States $ 86 $ 114 $ 213 $ 244
Europe 7 7 23 31
Canada and other 14 9 34 25
------- ------- ------- -------
Total reportable segments $ 107 $ 130 $ 270 $ 300
======= ======= ======= =======
Reconciliation to Consolidated Income Before
Provision for Income Taxes
Restructuring and other charges (44) (35) (53) (94)
Chapter 11 related reorganization items (35) (23) (85) (60)
Provision for asbestos litigation claims (2,356) 5 (2,351) 5
General corporate expense (14) (14) (50) (48)
Cost of borrowed funds (5) (4) (13) (11)
Other - (4) - 2
------- ------- ------- -------
Consolidated income (loss) before provision for
income taxes $(2,347) $ 55 $(2,282) $ 94
======= ======= ======= =======
- 24 -
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
Third Quarter 2002
In the third quarter of 2002, certain previously announced restructuring
programs continued throughout the period. In addition, a strategic review of the
Company's businesses resulted in additional restructuring charges. The Company
recorded approximately $44 million in pretax charges in the third quarter of
2002. These pretax charges were comprised of an $11 million pretax charge to
restructure costs (classified as a separate component of operating expenses in
the Consolidated Statement of Income (Loss)) and a charge of $33 million to cost
of sales. The $11 million restructure charge represents $3 million for severance
costs associated with the elimination of approximately 215 positions, primarily
impacting manufacturing and administrative personnel in the US, of which
approximately 57 were actually terminated as of September 30, 2002. The
remaining $8 million represents charges for the closing of non-strategic
businesses and associated facilities, which consisted mainly of non-cash asset
write-downs to fair values and exit cost liabilities.
The $33 million charge to cost of sales mainly includes a charge of $30 million
to write down a group of assets within the Company's Building Materials Systems
segment to estimated realizable value. The assets are being marketed for sale
and accordingly a valuation of the future cash flows of the assets was completed
using assumptions consistent with current market conditions. The Company's
ultimate decisions and actions regarding these assets require approval by the
Bankruptcy Court and, due to uncertainties in the valuations performed around
future market conditions and bankruptcy court proceedings, it is possible that
the estimate of fair value may materially change in the future. In addition,
various parties-in-interest may perform their own valuations of these assets and
such valuations may differ significantly from the Company's estimate of fair
value. The remaining $3 million charge represents charges associated with the
Company's plan to realign its Newark, Ohio manufacturing facility and various
costs. The realignment plan for the Newark facility was announced in the third
quarter of 2000 and is anticipated to be complete in the fourth quarter of 2002.
Second Quarter 2002
During the second quarter of 2002, certain restructuring programs put into place
during 2000 and 2001 continued due to the timing of events in these programs.
The combination of these continued restructuring programs led to the Company
recording approximately $3 million in a pretax credit in the second quarter of
2002. This pretax credit was comprised of a $5 million pretax credit to other
operating expense, a $1 million pretax credit to restructure costs (classified
as a separate component of operating expenses in the Consolidated Statement of
Income (Loss)), and a $3 million pretax charge to cost of sales. The credit to
other operating expense included a credit for the settlement of certain funds
subject to an administrative freeze that were previously estimated to be
unrealizable (See Note 1). The rights to these funds were originally transferred
to the Company as part of the sale of the Company's 40% interest in Alcopor
Owens
- 25 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued)
Corning (See Note 5). The credit to restructure costs included adjustments for a
reduction in the number of positions to be eliminated as part of the restructure
charge taken during 2001 (see below). The charge to cost of sales included
charges associated with the Company's previously announced plan to realign its
Newark, Ohio manufacturing facility and a write down to inventory mainly to
reflect updated estimates of the net realizable value.
First Quarter 2002
In response to the slowed economy and to the declining margins in the composites
business, the Company 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., which was adjusted to 218 in the second quarter of 2002 (see
above), of which approximately 210 were actually terminated as of September 30,
2002. The primary groups impacted include manufacturing and administrative
personnel. As of September 30, 2002, approximately $5 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 realignment at 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 fourth 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.
The $26 million charge for restructuring included $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., of which approximately 450 were actually terminated as of September 30,
2002. 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 September 30,
2002, approximately $19 million has been paid and charged against this reserve.
- 26 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued)
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 and used 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 September 30, 2002:
Total Liability at
Original Payments/ September 30,
(In millions of dollars) Liability Adjustments 2002
--------- ----------- ----
Personnel Costs $ 49 $(39) $ 10
Facility and Business Exit Costs 6 (4) 2
---- ---- ----
Total $ 55 $(43) $ 12
---- ---- ----
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.
- 27 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. ACQUISITIONS AND DIVESTITURES OF BUSINESSES
Acquisitions
On June 25, 2002, the Company received Bankruptcy Court approval to consummate
the restructuring of the Company's Indian joint venture, Owens-Corning (India)
Limited ("OCIL"), a producer of composite material. As part of the
restructuring, the Company, through its wholly-owned subsidiary, IPM Inc.,
contributed approximately $3 million of cash into OCIL and the Company agreed to
allow a guarantee claim in the amount of approximately $19 million in its
Chapter 11 proceedings in respect of OCIL's junior debt. In addition, OCIL's
senior debt maturities were extended, and its junior debt was converted to
approximately $7 million of redeemable convertible debentures. Through these
restructuring efforts the Company's ownership interest in OCIL increased from
approximately 50% to approximately 60%. The Company consolidated OCIL on July 1,
2002 when the restructuring was consummated by all of the parties to the
restructuring and approved by the Indian Government, at which time the allowed
claim of approximately $19 million was added to amounts Subject to Compromise.
The Company accounted for this transaction under the purchase method of
accounting, whereby the assets acquired and liabilities assumed, including
approximately $58 million of senior debt (consisting of approximately $34
million of debentures due in 2009 at a variable interest rate and approximately
$24 million of debentures due in 2009 at a fixed interest rate of 10%) and
approximately $7 million of redeemable convertible debentures, were recorded at
their fair values and the results of operations were consolidated from that
date. The $19 million allowed claim was recorded at its estimated fair value of
approximately $6 million as an additional investment in OCIL and the difference
of approximately $13 million was recorded as reorganization expense in the
Company's consolidated statement of income (loss). Prior to July 1, 2002, the
Company accounted for this joint venture under the equity method. The proforma
effect of this acquisition on revenues and earnings was not material.
Divestitures
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. In
addition, during the second quarter of 2002, the Company recognized a pretax
gain of approximately $4 million related to the settlement of certain funds
subject to an administrative freeze that were previously determined to be
unrealizable. The rights to these funds were originally transferred to the
Company as part of the sale (see Note 4).
- 28 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
6. INVENTORIES
Inventories are summarized as follows:
September 30, December 31,
2002 2001
---- ----
(In millions of dollars)
Finished goods $ 406 $ 378
Materials and supplies 183 150
----- -----
FIFO inventory 589 528
Less: reduction to LIFO basis (96) (91)
----- -----
Total inventory $ 493 $ 437
===== =====
Approximately $152 million and $120 million of total inventories were valued
using the LIFO method at September 30, 2002 and December 31, 2001, respectively.
7. COMPREHENSIVE INCOME
The Company's comprehensive income for the quarters ended September 30, 2002 and
2001 was a loss of $2.347 billion and income of $34 million, respectively. The
Company's other 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
The following table reconciles the weighted average number of shares used in the
basic earnings per share calculation to the weighted average number of shares
used to compute diluted earnings per share.
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(In millions of dollars, except share data)
Net income (loss) used for basic and diluted
earnings per share $ (2,359) $ 27 $ (2,770) $ 46
======== ======== ======== ========
Weighted average number of shares
outstanding used for basic earnings per
share (thousands) 55,047 55,079 55,055 55,064
-------- -------- -------- --------
Deferred awards (thousands) - 290 - 323
-------- -------- -------- --------
Shares from assumed conversion of
preferred securities (thousands) - 4,566 - 4,566
-------- -------- -------- --------
Weighted average number of shares
outstanding and common equivalent
shares used for diluted earnings per
share (thousands) 55,047 59,935 55,055 59,953
======== ======== ======== ========
- 29 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
8. EARNINGS PER SHARE (continued)
For the quarter and nine months ended September 30, 2002, the number of shares
used in the calculation of diluted earnings per share did not include 24
thousand common equivalent shares of deferred awards and 4,566 thousand common
equivalent shares from assumed conversion of preferred securities due to their
anti-dilutive effect.
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.
The Company enters into various types of derivative financial instruments to
manage its foreign currency exchange risk, interest rate risk, and commodity
risks, as indicated in the following table.
Notional Amount Notional Amount
September 30, 2002 December 31, 2001
------------------ -----------------
(In millions of dollars)
Forward currency exchange contracts $ 56 $ 30
Interest rate swaps 30 19
Commodity future contracts 350,000 MMBTU per month 540,000 MMBTU per month
for two months for nine months
Foreign Currency Exchange Risk and Interest Rate Risk Management
The Company enters into forward currency exchange contracts to manage its
exposure against foreign currency fluctuations on certain assets and liabilities
denominated in foreign currencies. In the third quarter of 2002, the Company
entered into 4 contracts that exchanged approximately 8 million British pounds
sterling to euros, 50 million Norwegian krone to U.S. dollars, and 1 million
U.S. dollars to euros. As of September 30, 2002 the Company had 5 forward
currency exchange contracts that exchanged approximately 8 million British
pounds sterling to euros, 50 million Norwegian krone to euros, and 3 million
U.S. dollars to euros. As of December 31, 2001, the Company had 2 forward
currency exchange contracts that exchanged 75 million Norwegian krone to euros
and approximately 4 million U.S. dollars to euros. These contracts are
considered highly effective hedges, as the gains or losses on the contracts
substantially offset the gain or loss from currency value fluctuations. The
Company accounts for the contracts as fair value hedges and changes in the fair
value are recorded in the Consolidated Statement of Income (Loss), the effect of
which was not material during any period.
- 30 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
In the second quarter of 2002, the Company entered into forward exchange
contracts to manage its exposure against foreign currency fluctuations on
certain purchases of inventories in foreign currencies. The contracts entered
into consisted of 35 forward currency exchange contracts that exchanged
approximately 17 million U.S. dollars to euros, 6 million British pounds
sterling to euros, 35 million Swedish krone to euros, 126 million Norwegian
krone to euros, and 14 million U.S. dollars to Canadian dollars. As of September
30, 2002 the Company had 15 forward currency exchange contracts that exchanged
approximately 7 million U.S. dollars to euros, 3 million British pounds sterling
to euros, 15 million Swedish krone to euros, 54 million Norwegian krone to
euros, and 6 million U.S. dollars to Canadian dollars. These contracts are
considered highly effective hedges, as the gains or losses on the contracts
substantially offset the gain or loss from currency value fluctuations. The
Company accounts for the contracts as cash flow hedges and changes in the fair
market value are recorded in other comprehensive income (loss), except to the
extent of ineffectiveness, which is recorded as other income in the Consolidated
Statement of Income (Loss). As of September 30, 2002, accumulated other
comprehensive income (loss) related to these contracts was a loss of
approximately $1 million, and the ineffectiveness recorded as other income
(loss) 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. During the third quarter the Company entered into a new
contract that exchanged approximately 83 million renminbi against 10 million
U.S. Dollars, which remained outstanding at September 30, 2002. These contracts
effectively extended the hedge of U.S. dollar denominated debt entered into in
2001. These contracts are considered highly effective hedges, as the gains or
losses on the contracts substantially offset the gain or loss from currency
value fluctuations. The Company accounts for the contracts as fair value hedges
and changes in the fair value are recorded in the Consolidated Statement of
Income (Loss), the effect of which was not material during any period.
During 2001 and the first three quarters 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, an equivalent amount
of Brazilian real was swapped into U.S. dollars at a U.S. dollar interest rate
with matching investment amounts and maturity dates. The purpose of these swap
contracts is to reduce the impact of changes in the Brazilian real and U.S.
dollar exchange rates. At September 30, 2002, there were 31 such cross-currency
interest rate swap contracts outstanding at a notional amount of $30 million
U.S. dollars. At December 31, 2001, there were 18 such cross-currency interest
rate swap contracts outstanding at a notional amount of $19 million U.S.
dollars.
- 31 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
Commodity Risk Management
During 2001, the Company entered into a swap contract for 4,860,000 MMBTU's of
natural gas to hedge its exposure to fluctuating commodity prices. The contract
expired during the third quarter of 2002. At December 31, 2001, accumulated
other comprehensive income (loss) related to the contract was a loss of
approximately $2 million and the ineffectiveness recorded as other income (loss)
was not material. During the second quarter of 2002 the Company entered into an
additional swap agreement for 2,100,000 MMBTU's of natural gas. This contract is
accounted for as a cash flow hedge and changes in the fair market value are
recorded in other comprehensive income (loss), except to the extent of
ineffectiveness which is recorded as other income in the Consolidated Statement
of Income (Loss). At September 30, 2002, the accumulated other comprehensive
income related to the contract was approximately $1 million and the
ineffectiveness recorded as other income (loss) was not material.
Other Financial Instruments with Off-Balance-Sheet Risk
As of September 30, 2002 and December 31, 2001, the Company was contingently
liable for guarantees of indebtedness owed by certain unconsolidated affiliates
of approximately $7 million and $38 million, respectively. As of September 30,
2002, and December 31, 2001, approximately $5 million and $34 million,
respectively, of such indebtedness was alleged to be in default as a result of
the Filing. Included in such indebtedness as of December 31, 2001 was
approximately $19 million owed by Owens-Corning (India) Limited, which was
consolidated during the third quarter of 2002 (see Note 5). Subject to the
foregoing, the Company is of the opinion that its unconsolidated affiliates will
be able to perform under their respective payment obligations in connection with
such guaranteed indebtedness and that no payments will be required and no losses
will be incurred by the Company under such guarantees.
There is no market for the guarantees of indebtedness discussed above and they
were issued without explicit cost. Therefore, it is not practicable to establish
their fair value.
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.
During the second quarter of 2002, Owens Corning completed a comprehensive
reconciliation of personal injury asbestos claims against it (and Fibreboard,
see Item B below) in light of currently available information. As a result, it
was able to update certain information below concerning settled and pending
claims. Owens Corning cautions, however, that it has limited information about
many of such claims, and the actual numbers remain subject to adjustment.
- 32 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
Prior to October 5, 2000, when the Debtors, including Fibreboard (see Item B
below), filed voluntary petitions for relief under Chapter 11 of the United
States Bankruptcy Code, the vast majority of asserted asbestos personal injury
claims were in the process of being resolved through the National Settlement
Program described below. As a result of the Filing, all pre-petition asbestos
claims and pending litigation against the Debtors, including without limitation
claims arising under the National Settlement Program, were automatically stayed
(see Note 1). Owens Corning expects that all pending and future asbestos claims
against Owens Corning and Fibreboard will be resolved pursuant to a plan or
plans of reorganization. Owens Corning is unable to determine at this time
whether asbestos-related claims asserted against Fibreboard will be treated in
the same manner as those asserted against Owens Corning in any such plan or
plans.
As discussed more fully below under the heading "Reserve", Owens Corning's (and
Fibreboard's) total liability for asbestos claims will ultimately 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.
National Settlement Program Claims
Beginning in late 1998, Owens Corning implemented a National Settlement Program
("NSP") to resolve personal injury asbestos claims through settlement agreements
with individual plaintiffs' law firms. The NSP was intended to better manage the
asbestos liabilities of Owens Corning and Fibreboard (see Item B below), and to
help Owens Corning better predict the timing and amount of indemnity payments
for both pending and future asbestos claims.
The number of law firms participating in the NSP expanded from approximately 50
when the NSP was established to approximately 120 as of the Petition Date. Each
of these participating law firms agreed to a long-term settlement agreement
which varied by firm ("NSP Agreement") extending through at least 2008 which
provided for the resolution of their existing asbestos claims, including unfiled
claims pending with the participating law firm at the time it entered into an
NSP Agreement ("Initial Claims"). The NSP agreements also established procedures
and fixed payments for resolving without litigation claims against either Owens
Corning or Fibreboard, or both, arising after a participating firm entered into
an NSP Agreement ("Future Claims").
Settlement amounts for both Initial Claims and Future Claims were negotiated
with each firm participating in the NSP, and each firm was to communicate with
its respective clients to obtain authority to settle individual claims. Payments
to individual claimants were to vary based on a number of factors, including the
type and severity of disease, age and occupation. All such payments were subject
to delivery of satisfactory evidence of a qualifying medical condition and
exposure to Owens Corning's and/or Fibreboard's products, delivery of customary
releases by each claimant, and other conditions. Certain claimants settling
non-malignancy claims with Owens Corning and/or Fibreboard were entitled to an
agreed pre-determined amount of additional compensation if they later developed
a more severe asbestos-related medical condition.
- 33 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
As to Future Claims, each participating NSP firm agreed (consistent with
applicable legal requirements) to recommend to its future clients, based on
appropriately exercised professional judgment, to resolve their asbestos
personal injury claims against Owens Corning and/or Fibreboard through an
administrative processing arrangement, rather than litigation. In the case of
Future Claims involving non-malignancy, claimants were required to present
medical evidence of functional impairment, as well as the product exposure
criteria and other requirements set forth above, to be entitled to compensation.
As of the Petition Date, the NSP covered approximately 239,000 Initial Claims,
approximately 150,000 of which had satisfied all conditions to final settlement,
including receipt of executed releases, or other resolution (the "Final NSP
Settlements") at an average cost per claim of approximately $9,300. As of the
Petition Date, approximately 89,000 of such Final NSP Settlements had been paid
in full or otherwise resolved, and approximately 61,000 were unpaid in whole or
in part. As of such date, the remaining balance payable under NSP Agreements in
connection with these unpaid Final NSP Settlements was approximately $510
million. Through the Petition Date, Owens Corning had received approximately
6,000 Future Claims under the NSP.
At this time, Owens Corning is unable to predict the manner in which the NSP
Agreements and the resolution of claims thereunder will ultimately be treated
under the terms of any plan or plans of reorganization.
Non-NSP Claims
As of the Petition Date, approximately 29,000 asbestos personal injury claims
were pending against Owens-Corning outside the NSP. This compares to
approximately 25,000 such claims pending on December 31, 1999. The information
needed for a critical evaluation of pending claims, including the nature and
severity of disease and definitive identifying information concerning claimants,
typically becomes available only through the discovery process or as a result of
settlement negotiations, which often occur years after particular claims are
filed. As a result, Owens Corning has limited information about many of such
claims.
Owens Corning resolved (by settlement or otherwise) approximately 10,000
asbestos personal injury claims outside the NSP during 1998, 5,000 such claims
during 1999 and 3,000 such claims during 2000 prior to the Petition Date. The
average cost of resolution was approximately $35,900 per claim for claims
resolved during 1998, $34,600 per claim for claims resolved during 1999, and
$44,800 per claim for claims resolved during 2000 prior to the Petition Date. As
a rule, these claims were settled as they were scheduled for trial, and they
typically involved more serious injuries and diseases. Accordingly, Owens
Corning does not believe that such average costs of resolution are
representative of the value of the non-NSP claims then pending against the
Company.
At this time, Owens Corning is unable to predict the manner in which non-NSP
claims will ultimately be treated under the terms of any plan or plans of
reorganization.
- 34 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
Asbestos-Related Payments
As a result of the Filing, Owens Corning has not made any asbestos-related
payments since the Petition Date except for approximately $20 million paid on
its behalf by third parties pursuant to appeal bonds issued prior to the
Petition Date. During 1999 and 2000 (prior to the Petition Date), Owens Corning
(excluding Fibreboard) made asbestos-related payments falling within four major
categories: (1) Settlements in respect of verdicts incurred or claims resolved
prior to the implementation of the NSP ("Pre-NSP Settlements"); (2) NSP
settlements; (3) Non-NSP settlements covering cases not resolved by the NSP; and
(4) Defense, claims processing and administrative expenses, as follows:
2000 (through
1999 October 4, 2000)
---- ----------------
(In millions of dollars)
Pre-NSP Settlements $170 $ 51
NSP Settlements 570 538
Non-NSP Settlements 30 42
Defense, Claims Processing and Administrative Expenses 90 54
---- ----
$860 $685
==== ====
All amounts discussed above are before tax and application of insurance
recoveries.
Prior to the Petition Date, Owens Corning deposited certain amounts in escrow
accounts to facilitate claims processing under the NSP ("Administrative
Deposits"). Amounts deposited into escrow in Administrative Deposits during a
reporting period are included in the payments shown for NSP Settlements during
the period. At September 30, 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 ultimately be under the terms
of any plan or plans of reorganization. However, in 2001, the holder of
approximately $49 million of Undistributed Administrative Deposits for Owens
Corning (and approximately $28 million of similar Undistributed Administrative
Deposits for Fibreboard) filed a motion with the Bankruptcy Court requesting an
order authorizing distribution of the deposits it holds ("Subject Deposits") to
the escrow beneficiaries. As the result of hearings held on June 20 and July 22,
2002, the Bankruptcy Court has ruled that escrow beneficiaries that had received
both written notice of approval for payment and an initial payment from the
Subject Deposits prior to the Petition Date would be entitled to receive their
remaining payments (plus post-judgment interest after June 20, 2002) from the
principal of the Subject Deposits, with the balance of the Subject Deposits, if
any, plus any other investment proceeds to be returned to Owens Corning (or
Fibreboard, as appropriate) as contributor of the deposits. The creditors'
committee representing unsecured creditors and the representative for the class
of future asbestos claimants have each filed a notice of appeal from the order.
- 35 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
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 has been no action
on these bills during 2002. If Congressional action on such bills is not
completed prior to the adjournment of the current Congress (expected shortly),
the bills will lapse and similar legislation will be considered in the next
Congress only if newly introduced. Consequently, 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.
- 36 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
Insurance
As of September 30, 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 June 30, 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."
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
- 37 -
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 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.
The Chapter 11 Cases have significantly increased the inherent difficulties and
uncertainties involved in estimating the number and cost of resolution of
present and future asbestos-related claims against Owens Corning and will likely
have the effect of increasing the number and ultimate cost of resolution of such
claims substantially. In particular, the status of the NSP Agreements and the
ultimate treatment of pending and future claims thereunder will depend on the
outcome of negotiations among the various constituencies in the Chapter 11 Cases
and determinations by the Bankruptcy Court as to the issues involved, none of
which can be predicted at this time. The uncertainties associated with the
status of the NSP Agreements and the treatment of claims thereunder include the
following:
- - It is possible that one or more constituencies in the Chapter 11 Cases may
seek to set aside the NSP Agreements on various grounds. In any event, it
is highly uncertain how any plan or plans of reorganization will ultimately
treat the various types of NSP claims, including without limitation claims
with no evidence of significant medical impairment, or whether such
unimpaired claims will be treated as allowed claims thereunder.
- 38 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
- - 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.
- - Owens Corning anticipates that the number and estimated aggregate value of
allowed future claims will ultimately be determined either as a result of
negotiations involving the legal representative for the class of future
asbestos claimants and the other interested constituencies or, if
necessary, by the Bankruptcy Court. It is not possible to predict the
outcome of such negotiations, or Bankruptcy Court determination, at this
time.
In connection with the negotiation of a plan or plans of reorganization, a
number of interested constituencies, including the representatives of the
pre-petition and future asbestos claimants and other pre-petition creditors,
have developed or will develop analyses of liability for both pre-petition and
future asbestos claims. Owens Corning and Fibreboard will also utilize their own
analyses in the negotiation process. Such analyses by the Debtors and other
interested constituencies will also be required in connection with the
establishment, as part of the plan of reorganization, of a Section 524(g) trust
for the benefit of asbestos claimants. Based on facts currently known to it,
including positions that have been articulated by various interested
constituencies, Owens Corning believes that the estimates included in most or
all such analyses will vary substantially from the amounts of Owens Corning's
and Fibreboard's respective asbestos reserves in prior periods, and will also
vary substantially from one another, for a number of reasons.
First, such analyses will not involve the same type of estimation process
required in connection with the preparation of financial statements under
generally accepted accounting principles. In general, such accounting principles
require accruals with respect to contingent liabilities (including asbestos
liabilities) only to the extent that such liabilities are both probable and
reasonably estimable. With respect to such liabilities that are probable as to
which a reasonable estimate can be made only in terms of a range (with no point
within the range determined to be more probable than any other point in such
range), such accounting principles require only the accrual of the amount
representing the low point in such range.
- 39 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
In contrast, analyses prepared by interested constituencies in asbestos-related
bankruptcy cases customarily cover potential liabilities over a 50 year period
(at the end of which it is anticipated that potential asbestos claimants would
in any event have died as a result of other non-asbestos-related causes). Owens
Corning believes that any such analyses, and any assumptions utilized in the
preparation of such analyses, are inherently speculative for a number of
reasons, including the variables and uncertainties described in this Note.
Moreover, because such analyses are prepared solely for use in the negotiation
of a plan of reorganization, they naturally reflect the respective interests of
the different constituencies putting them forward. Certain constituencies, for
example, may have an interest in presenting an analysis that estimates such
liability at the highest level that can arguably be justified; others may have
an interest in estimating such liability at the lowest possible level; while
others may have an interest in estimating such liability at a point between the
two extremes, in an effort to achieve consensus in the negotiation of the plan
of reorganization. In addition, interested constituencies in Owens Corning's
bankruptcy proceedings may also take into account the implications of any such
analyses prepared for use in Owens Corning's bankruptcy proceedings on their
position in one or more of the other asbestos-related bankruptcy cases pending
in the District of Delaware or elsewhere.
None of the creditor constituencies has yet made available to Owens Corning any
such analysis of liability for pre-petition or future asbestos claims. However,
based upon its recent discussions and negotiations with representatives of the
creditor constituencies, Owens Corning believes that most, if not all, of these
creditor analyses associated with the resolution of Owens Corning's and
Fibreboard's asbestos-related liabilities in the context of the Chapter 11
proceedings are likely to be well in excess of Owens Corning's and Fibreboard's
historic asbestos-related reserves. For example, Owens Corning believes that it
is likely that one or more of such creditor constituencies will take the
position for purposes of the negotiation of a plan or plans of reorganization
that the aggregate amount of pre-petition and future asbestos claims for Owens
Corning and Fibreboard, on a combined net present value basis, may exceed $15
billion. In addition, in October 2002, Owens Corning and Fibreboard completed
their own analyses of liability for purposes of facilitating plan discussions,
which, as to future asbestos claims, were prepared by an outside consultant
experienced in estimating asbestos-related claims in asbestos-related
bankruptcies. These analyses indicate net present values for pre-petition and
future asbestos claims of Owens Corning and Fibreboard combined of approximately
$5.874 billion, if NSP settlement values are assumed, and $8.547 billion, if
5-year historical settlement values for Owens Corning and Fibreboard,
respectively, are used. Based upon these analyses and the information derived
from Owens Corning's recent discussions and negotiations with the various
creditor constituencies concerning their relative positions on the terms of an
acceptable plan of reorganization, Owens Corning has decided to increase its and
Fibreboard's aggregate asbestos-related reserve to the lower of the two net
present value numbers indicated by Owens Corning's and Fibreboard's analyses.
Consequently, Owens Corning has increased its reserves for the period ended
September 30, 2002 through charges to income of $1.381 billion for Owens Corning
asbestos-related liabilities and $975 million for Fibreboard asbestos-related
liabilities, for an aggregate charge of $2.356 billion. As a result of the
increases in the reserves, Owens Corning's and Fibreboard's asbestos-related
reserves as of September 30, 2002 were $3.564 billion and $2.310 billion,
respectively, for an aggregate reserve of $5.874 billion. In addition, Owens
Corning notes that, since the reserve for Fibreboard asbestos-related
liabilities exceeds the funds held in the Fibreboard Settlement Trust, the
residual amount payable to charity under the terms of the Trust (see Note 11)
has been reduced to zero as of September 30, 2002.
- 40 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
Ultimately, Owens Corning's (and Fibreboard's) total liability for asbestos
claims will be finally determined after a lengthy period of negotiations and, if
necessary, by the Bankruptcy Court, taking into account numerous factors not
present in 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 September 30, 2002, as a result of the increase in such reserve 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 3.00
In connection with this asbestos reserve, Owens Corning notes that:
- - The "Unpaid Final Settlements" component represented the remaining
estimated cost for all asbestos personal injury claims pending against
Owens Corning which were subject to final settlement agreements for which
releases from claimants were obtained, and under which all other conditions
to settlement had been satisfied, as of the Petition Date.
- - The "Other Pending and Future Claims" component represented the estimated
cost of resolving, through the Chapter 11 process, (i) asbestos personal
injury claims pending against Owens Corning which were subject to
resolution under NSP Agreements but for which releases were not obtained
from claimants prior to the Petition Date; (ii) all other asbestos personal
injury claims pending against Owens Corning which were not subject to any
settlement agreement; and (iii) future asbestos personal injury claims
against Owens Corning made after the Petition Date.
Owens Corning believes that its reserve for asbestos claims represents at least
a minimum in a range of possible outcomes of the plan negotiation process as to
the amount of its total liability for asbestos-related claims against it as
determined through the Chapter 11 process. Given the nature of the Chapter 11
proceedings, described above, Owens Corning cautions that the total
asbestos-related liability ultimately established in the Chapter 11 proceedings
may be either higher or lower than the Company's reserve. Owens Corning notes
that it expects an ongoing high level of negotiations and information exchanges
with the various creditor constituencies and other parties for the duration of
the Chapter 11 proceedings. Owens Corning will continue to review its asbestos
reserve on a periodic basis and make such adjustments as may be appropriate.
However, it is possible that Owens Corning will not be in a position to conclude
that a further revision to the reserve is appropriate until additional
significant developments occur during the course of the Chapter 11 Cases,
including resolution by negotiation or the Bankruptcy Court of its total
liability for asbestos claims. Any such revision could, however, be material to
the Company's consolidated financial position and results of operations in any
given period.
- 41 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING)
Prior to 1972, Fibreboard manufactured insulation products containing asbestos.
Fibreboard has since been named as defendant in many thousands of personal
injury claims for injuries allegedly caused by asbestos exposure. Fibreboard
received approximately 22,000 asbestos personal injury claims during 2000. Prior
to the Petition Date, the vast majority of Fibreboard asbestos personal injury
claims were in the process of being resolved through the NSP, as described
below. As a result of the Filing, all pre- petition asbestos claims and pending
litigation against the Debtors were automatically stayed (see Note 1). Owens
Corning expects that all pending and future asbestos claims against Owens
Corning and Fibreboard will be resolved pursuant to a plan or plans of
reorganization. Owens Corning is unable to determine at this time whether
asbestos-related claims asserted against Fibreboard will be treated in the same
manner as those asserted against Owens Corning in any such plan or plans.
National Settlement Program Claims
Fibreboard is a participant in the NSP and is a party to the NSP Agreements
discussed in Item A. The NSP Agreements became effective as to Fibreboard in the
fourth quarter of 1999, when the Insurance Settlement (discussed below) became
effective. The NSP Agreements settled asbestos personal injury claims that had
been filed against Fibreboard by participating plaintiffs' law firms and claims
that could have been filed against Fibreboard by such firms following the
lifting, in the third quarter of 1999, of an injunction which had barred the
filing of asbestos personal injury claims against Fibreboard.
As of the Petition Date, the NSP covered approximately 206,000 Initial Claims
against Fibreboard, approximately 118,000 of which had satisfied all conditions
to final settlement, including receipt of executed releases, or other resolution
as Final NSP Settlements at an average cost per claim of approximately $7,400.
As of the Petition Date, approximately 62,000 of such Final NSP Settlements had
been paid in full or otherwise resolved and approximately 56,000 were unpaid in
whole or in part. As of such date, the remaining balance payable under NSP
Agreements in connection with these unpaid Final NSP Settlements was
approximately $330 million. The NSP Agreements also provided for the resolution
of Future Claims against Fibreboard through the administrative processing
arrangement described in Item A. Through the Petition Date, Fibreboard had
received approximately 6,000 Future Claims under the NSP.
At this time, Owens Corning is unable to predict the manner in which the NSP
Agreements and the resolution of Fibreboard claims thereunder will ultimately be
treated under the terms of any plan or plans of reorganization.
Non-NSP Claims
As of the Petition Date, approximately 9,000 asbestos personal injury claims
were pending against Fibreboard outside the NSP. This compares to approximately
1,000 such claims pending on December 31, 1999. Fibreboard resolved (by
settlement or otherwise) approximately 2,000 asbestos personal injury claims
outside the NSP during 2000 prior to the Petition Date at an average cost of
resolution of approximately $45,000 per claim. Generally, these claims were
settled as they were scheduled for trial, and they typically involved more
serious injuries and diseases. Accordingly, Owens Corning does not believe that
such average costs of resolution are representative of the value of the non-NSP
claims then pending against Fibreboard.
At this time, Owens Corning is unable to predict the manner in which Fibreboard
non-NSP claims will ultimately be treated under the terms of any plan or plans
of reorganization.
- 42 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
Insurance Settlement
In 1993, Fibreboard and two of its insurers, Continental Casualty Company
("Continental") and Pacific Indemnity Company ("Pacific"), entered into the
Insurance Settlement. The Insurance Settlement became effective in the fourth
quarter of 1999, is final and is not subject to appeal.
Since 1993, Continental and Pacific paid, either directly or through an escrow
account funded by them, for substantially all settlements of asbestos claims
reached prior to the initiation of the NSP. Under the Insurance Settlement,
Continental and Pacific provided $1.873 billion during the fourth quarter of
1999 to fund costs of resolving pending and future Fibreboard asbestos-related
liabilities, whether under the NSP, in the tort system, or otherwise.
As of September 30, 2002, the Insurance Settlement funds were held in and
invested by the Fibreboard Settlement Trust. As of that date, $1.208 billion
(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. Based on currently available information, Owens Corning does not
believe that any such assets will remain for distribution at the conclusion of
the Chapter 11 Cases.
Funds held in the Fibreboard Settlement Trust and Fibreboard's Undistributed
Administrative Deposits are reflected on Owens Corning's consolidated balance
sheet as restricted assets. At September 30, 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 ultimately be under
the terms of any plan or plans of reorganization.
Asbestos-Related Payments
As a result of the Filing, Fibreboard has not made any asbestos-related payments
since the Petition Date. During 2000 (prior to the Petition Date), gross
payments for asbestos-related claims against Fibreboard, all of which were
paid/reimbursed by the Fibreboard Settlement Trust, fell within four major
categories, as follows:
2000 (through October 4, 2000)
------------------------------
(In millions of dollars)
Pre-NSP Settlements $ 29
NSP Settlements 705
Non-NSP Settlements 41
Defense, Claims Processing and Administrative Expenses 45
-----
$ 820
The payments for NSP Settlements include Administrative Deposits during the
reporting period in respect of Fibreboard claims.
- 43 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
Reserve
Owens Corning estimates a reserve for Fibreboard in accordance with generally
accepted accounting principles to reflect asbestos-related liabilities. As of
June 30, 2002, a reserve of approximately $1.3 billion in respect of these
liabilities (which included an amount for residual obligations to charity as
described below) 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." Owens Corning notes that
these liabilities 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
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 ultimately be under the terms of any plan or plans of reorganization.
- 44 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
At September 30, 2002, as a result of the increase in such reserve referred to
in Item A 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 1.90
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, through the Chapter 11 process, (i) asbestos personal
injury claims pending against Fibreboard which were subject to resolution
under NSP Agreements but for which releases were not obtained from
claimants prior to the Petition Date; (ii) all other asbestos personal
injury claims pending against Fibreboard which were not subject to any
settlement agreement; and (iii) future asbestos personal injury claims
against Fibreboard made after the Petition Date.
Owens Corning believes that Fibreboard's reserve for asbestos claims represents
at least a minimum in a range of possible outcomes of the plan negotiation
process as to the amount of Fibreboard's total liability for asbestos-related
claims against it as determined through the Chapter 11 process. Given the nature
of the Chapter 11 proceedings, described above, Owens Corning cautions that the
total asbestos-related liability ultimately established in the Chapter 11
proceedings may be either higher or lower than Fibreboard's reserve. Owens
Corning notes that it expects an ongoing high level of negotiations and
information exchanges with the various creditor constituencies and other parties
for the duration of the Chapter 11 proceedings. Owens Corning will continue to
review Fibreboard's asbestos reserve on a periodic basis and make such
adjustments as may be appropriate. However, it is possible that Owens Corning
will not be in a position to conclude that a further revision to the reserve is
appropriate until significant additional developments occur during the course of
the Chapter 11 Cases, including resolution by negotiation or the Bankruptcy
Court of Fibreboard's total liability for asbestos claims. Any such revision
could, however, be material to the Company's consolidated financial position and
results of operations in any given period.
Other Matters
SECURITIES LITIGATION
On or about April 30, 2001, certain of the Company's current and former
directors and officers, as well as certain underwriters, were named as
defendants in a lawsuit captioned John Hancock Life Insurance Company, et al. v.
Goldman, Sachs & Co., et al. in the United States District Court for the
District of Massachusetts. An amended complaint was filed by the plaintiffs on
or about July 5, 2001. Owens Corning is not named in the lawsuit. The suit
purports to be a securities class action on behalf of purchasers of certain
unsecured debt securities of Owens Corning in offerings occurring on or about
April 30, 1998 and
- 45 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
July 23, 1998. The complaint alleges that the registration statements pursuant
to which the offerings were made contained untrue and misleading statements of
material fact and omitted to state material facts which were required to be
stated therein and which were necessary to make the statements therein not
misleading, in violation of sections 11, 12(a)(2) and 15 of the Securities Act
of 1933. The amended complaint seeks an unspecified amount of damages or, where
appropriate, rescission of the plaintiffs' purchases. The defendants filed a
motion to dismiss the action on November 20, 2001. A hearing was held on this
motion on April 11, 2002, and the Court issued a decision denying the motion on
August 26, 2002. The Company believes that the claim is without merit. The named
defendants in this proceeding have each filed contingent indemnification claims
with respect to this litigation against Owens Corning pursuant to the General
Bar Date process described below.
GENERAL BAR DATE CLAIMS
In connection with the Chapter 11 Cases, the Bankruptcy Court set April 15, 2002
as the last date by which holders of certain pre-petition claims against the
Debtors must file their claims (the "General Bar Date"). The General Bar Date
does not apply to asbestos-related personal injury claims and asbestos-related
wrongful death claims (other than claims for contribution, indemnity,
reimbursement, or subrogation). Approximately 24,000 proofs of claim (including
the claims described below under the headings "PBGC Claim" and "Tax Claim"),
totaling approximately $16.0 billion, alleging a right to payment from a Debtor
were filed with the Bankruptcy Court in response to the General Bar Date. For
further information concerning these claims, please see Note 1, under the
heading "General Bar Date".
PBGC CLAIM
In connection with the General Bar Date described above, the Pension Benefit
Guaranty Corporation ("PBGC"), an agency of the United States, has filed a
claim, in the amount of approximately $458 million, in connection with statutory
liability for unfunded benefit liabilities of the Owens Corning Merged
Retirement Plan (the "Pension Plan"). The claim states that it is contingent
upon termination of the Pension Plan. Since Owens Corning does not anticipate
that the Debtors' plan or plans of reorganization will provide for termination
of the Pension Plan, it believes that this claim ultimately will become moot.
TAX CLAIM
Owens Corning's federal income tax returns typically are audited by the Internal
Revenue Service ("IRS") in multi-year audit cycles. The audit for the years
1992-1995 was completed in late 2000. Due to the Filing, the IRS also
accelerated and completed the audit for the years ended 1996-1999 by March of
2001. As the result of these audits and unresolved issues from prior audit
cycles, the IRS is asserting claims for approximately $390 million in income
taxes plus interest of approximately $175 million.
Pending audit of Owens Corning's federal income tax return for the year 2000,
the IRS has also filed a protective claim in the amount of approximately $50
million, covering a tax refund received by Owens Corning for such year, plus
interest.
As described in Note 1, under the heading "General Bar Date", the United States
Department of Treasury has filed proofs of claim, totaling approximately $530
million, in connection with these tax claims.
- 46 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
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.
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 September 30, 2002, the Insurance Settlement funds were held in and
invested by the Fibreboard Settlement Trust (the "Trust"). On an ongoing basis,
the funds held in the Trust will be subject to investment earnings/losses and
will be reduced if and as applied to satisfy Fibreboard asbestos-related
liabilities. Under the terms of the Trust, any Trust assets that ultimately are
not used to fund Fibreboard's asbestos-related liabilities must be distributed
to charity. Based on currently available information, Owens Corning does not
believe that any such assets will remain for distribution at the conclusion of
the Chapter 11 cases.
The Trust is a qualified settlement fund for federal income tax purposes, and is
taxed separately from Owens Corning on its net taxable income, after deduction
for related administrative expenses. 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, or the effect of the Asbestos Tax Fairness Bill (if
enacted), will ultimately be under the terms of any plan or plans of
reorganization.
General Accounting Treatment
The assets of the Trust are comprised of cash and marketable securities
(collectively, the "Trust Assets") and, with Fibreboard's Undistributed
Administrative Deposits, are reflected on Owens Corning's consolidated balance
sheet as restricted assets. At September 30, 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 September 30, 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." Owens Corning notes that these liabilities 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. Based on currently available information,
Owens Corning does not believe that any such assets will remain for distribution
at the conclusion of the Chapter 11 Cases. At September 30, 2002, as a result of
the increase in such reserve referred to in Note 10, the Consolidated Financial
Statements reflect Fibreboard's reserve for asbestos litigation claims at $2.310
billion, with no residual obligation to charity.
- 47 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. FIBREBOARD SETTLEMENT TRUST (continued)
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 September 30, 2002 and December 31, 2001, substantially all marketable
securities were classified as "available for sale".
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.
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. Cost for purposes of computing realized gains/losses is determined using
the specific identification method.
Prior to and during the third quarter of 2002, the residual liability that may
be paid to charity increased/decreased, with the related decrease/increase to
other comprehensive income within stockholders' equity, net of tax and other
expense/income on the consolidated statement of income. As of September 30,
2002, the liability that may be paid to charity was reclassified to the Trust
Assets as the liability for asbestos litigation claims exceeded the Trust
Assets.
Results for the Periods Ended September 30, 2002 and 2001
During the third quarters of 2002 and 2001, Trust Assets generated
interest/dividend earnings of approximately $14 million and $13 million
respectively ($40 million and $42 million, respectively, for the first nine
months of the year), which have been recorded as an increase in the carrying
amount of the assets on Owens Corning's consolidated balance sheet and as other
income on the consolidated statement of income. During each of the periods ended
September 30, 2002 and 2001, this income was offset by an equal charge to other
expense, which represented 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 third quarter of 2002 or 2001. However, approximately
$1 million was paid during the second quarter of 2002 and $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. During the third quarter of 2001, approximately $11 million was
paid for taxes related to earnings of the Trust. The sale of securities during
the third quarter of 2002 resulted in a realized loss of $1 million, while there
was a realized gain of less than $1 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 September 30, 2002 and 2001, the fair market value adjustment for those
securities designated as available for sale resulted in an unrealized gain of
approximately $21 million and $11 million, respectively. These amounts have been
reflected in the Company's consolidated balance sheet as a change to the
carrying amount of the asset and to other comprehensive income. These amounts
have also been reflected as a change to the liability to charity, with a
corresponding effect to other comprehensive income.
At September 30, 2002, the fair value of Trust Assets and Administrative
Deposits was $1.335 billion, which was comprised of Trust Assets of $1.226
billion of marketable securities and $18 million of outstanding payables and
Administrative Deposits of $127 million.
- 48 -
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 September 30, 2002 and December
31, 2001 are as follows:
September 30, 2002
------------------
Gross Unrealized Gross Unrealized
Cost Gain Loss Fair Value
---- ---- ---- ----------
(In millions of dollars)
Municipal Bonds $1,173 $ 21 $ - $1,194
Corporate Bonds 9 - - 9
Mutual Funds 23 - - 23
------ ------ -------- ------
Total $1,205 $ 21 $ - $1,226
====== ====== ======== ======
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
September 30, 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.
September 30, 2002 December 31, 2001
------------------ -----------------
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
(In millions of dollars)
Due within one year $ 141 $ 141 $ 91 $ 91
Due after one year through five years 758 775 679 679
Due after five years through ten years 156 159 171 171
Due after ten years 150 151 228 228
--------- --------- --------- ---------
Total $ 1,205 $ 1,226 $ 1,169 $ 1,169
========= ========= ========= =========
- 49 -
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
nine months ended September 30, 2002:
Interest Unrealized Realized
Balance and Gain/ Gain/ Balance
12/31/01 Dividends (Loss) (Loss) Provision Other Payments 9/30/02
-------- --------- ------ ------ --------- ----- -------- -------
Assets
Cash (payable for purchase of securities) $ (18) $ - $ - $ - $ - $ - $ - $ (18)
Marketable securities:
Available for sale 1,169 40 21 (2) - - (2) 1,226
------- ------- ------- ------- ------- ------- ------- -------
Total Trust assets 1,151 40 21 (2) - - (2) 1,208
------- ------- ------- ------- ------- ------- ------- -------
Administrative Deposits 133 - - - - (6) - 127
------- ------- ------- ------- ------- ------- ------- -------
Total assets $ 1,284 $ 40 $ 21 $ (2) $ - $ (6) $ (2) $ 1,335
======= ======= ======= ======= ======= ======= ======= =======
Liabilities
Asbestos litigation claims $ 1,213 $ - $ - $ - $ 1,103 $ (6) $ - $ 2,310
Charity 71 40 21 (2) (128) - (2) -
------- ------- ------- ------- ------- ------- ------- -------
Total liabilities 1,284 40 21 (2) 975 (6) (2) 2,310
Liabilities in excess of Trust Assets - $ - $ - $ - $ (975) $ - $ - $ (975)
------- ------- ------- ------- ------- ------- ------- -------
Total liabilities $ 1,284 $ 40 $ 21 $ (2) $ - $ (6) $ (2) $ 1,335
======= ======= ======= ======= ======= ======= ======= =======
- 50 -
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), which
it will use to account for goodwill and other intangibles in the future. SFAS
No. 142 eliminates the amortization of goodwill and indefinite-lived intangible
assets; identifiable intangible assets with a determinable useful life will
continue to be amortized. SFAS No. 142 requires an annual review for impairment
using a fair value methodology.
The Company applied SFAS No. 142 beginning in the first quarter of 2002, which
required the Company to cease amortizing goodwill and indefinite-lived
intangibles. The Company has no indefinite-lived intangibles, separately
identified. In addition, the Company tested goodwill for impairment using the
two-step process prescribed in SFAS No. 142. The first step is a screen for
potential impairment. The second step, which is performed on those reporting
units determined to have potential impairment based on the first step, measures
the amount of the impairment, if any. The results of the first step indicated
that the carrying values of some reporting units exceeded the corresponding fair
values, which were determined based on the discounted estimated future cash
flows of the reporting units. In the second step, the implied fair value of
goodwill of these reporting units was determined through the allocation of the
fair value to the underlying assets and liabilities. The January 1, 2002
carrying value of the goodwill in these reporting units exceeded their implied
fair value by $491 million, resulting in a non-cash charge of $491 million ($441
million net of tax). This charge was determined during the second quarter of
2002 and, as required by SFAS No. 142, was recorded as a cumulative effect of a
change in accounting principle in the first quarter of 2002. The goodwill
recorded in the December 31, 2001 financial statements, which included the $491
million described above, was supported by the undiscounted estimated future cash
flow of the related operations in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of".
To maintain a consistent basis for measurement of performance, the Company
reclassified previously reported segment information related to goodwill and
total assets to correspond to the earnings measurements by which the businesses
are evaluated. Accordingly, approximately $15 million of goodwill as of January
1, 2002, was reclassified to the Building Materials Systems segment from the
Composite Solutions segment. Previously reported segment information has been
revised to reflect this change (see Note 2).
The changes in goodwill by segment during the quarter and nine months ended
September 30, 2002, were as follows:
Quarter Ended September 30, 2002
--------------------------------
Foreign Exhange Balance at
Balance at Exchange and September 30,
June 30, 2002 Reallocation Other 2002
------------- ------------ ----- ----
(In millions of dollars)
Composite Solutions $ 18 $ - $ - $ 18
Building Materials Systems 106 - (2) 104
-------- ------- ------ -------
Total $ 124 $ - $ (2) $ 122
======== ======= ====== =======
- 51 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. GOODWILL AND OTHER INTANGIBLES (continued)
Nine Months Ended September 30, 2002
------------------------------------
Effect of Foreign Balance at
Balance at Adopting SFAS Exchange September 30,
December 31, 2001 No. 142 Reallocation and Other 2002
----------------- ------- ------------ --------- ----
(In millions of dollars)
Composite Solutions $ 33 $ - $ (15) $ - $ 18
Building Materials 577 (491) 15 3 104
----- ----- ----- ----- -----
Total $ 610 $(491) $ - $ 3 $ 122
===== ===== ===== ===== =====
SFAS No. 142 does not provide for restatement of our results of operations for
periods ending prior to January 1, 2002. A reconciliation of the previously
reported net income and earnings per share as if SFAS No. 142 had been adopted
prior to January 1, 2001 is presented as follows:
Quarter Ended
-------------
September 30, 2002 September 30, 2001
------------------ ------------------
(In millions of dollars, except per share data)
Net income (loss):
Reported net income (loss) $ (2,359) $ 27
Add back goodwill amortization, net of tax - 4
--------- ------
Adjusted net income (loss) $ (2,359) $ 31
========= ======
Basic earnings (loss) per share:
As reported $ (42.84) $ .50
Add back goodwill amortization, net of tax - .07
--------- ------
Adjusted basic earnings (loss) per share $ (42.84) $ .57
========= ======
Diluted earnings (loss) per share:
As reported $ (42.84) $ .46
Add back goodwill amortization, net of tax - .06
--------- ------
Adjusted diluted earnings (loss) per share $ (42.84) $ .52
========= ======
- 52 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. GOODWILL AND OTHER INTANGIBLES (continued)
Nine Months Ended
-----------------
September 30, 2002 September 30, 2001
------------------ ------------------
(In millions of dollars, except per share data)
Net income (loss):
Reported net income (loss) $ (2,770) $ 46
Add back cumulative effect of change in
accounting principle, net of tax 441 -
Add back goodwill amortization, net of tax - 11
--------- ------
Adjusted net income (loss) $ (2,329) $ 57
========= ======
Basic earnings (loss) per share:
As reported $ (50.31) $ .84
Add back cumulative effect of change in
accounting principle, net of tax 8.01 -
Add back goodwill amortization, net of tax - .20
--------- ------
Adjusted basic earnings (loss) per share $ (42.30) $ 1.04
========= ======
Diluted earnings (loss) per share:
As reported $ (50.31) $ .77
Add back cumulative effect of change in
accounting principle, net of tax 8.01 -
Add back goodwill amortization, net of tax - .18
--------- ------
Adjusted diluted earnings (loss) per share $ (42.30) $ .95
========= ======
All of the Company's acquired other intangible assets are subject to
amortization. Other intangible asset amortization expense was approximately $1
million in the third quarter of 2002 and 2001. The Company estimates that
amortization of intangibles will be approximately $3 million for each of the
next five years. The components of other intangible assets are as follows:
September 30, 2002
------------------
Weighted Average Gross Carrying Accumulated
Lives Amount Amortization
----- ------ ------------
(In millions of dollars)
Contract-based 6 $ 3 $ (1)
Technology-based 22 17 (9)
Marketing-related 6 13 (8)
------ -------
$ 33 $ (18)
====== =======
13. INCOME TAXES
In the third quarter of 2002, the Company increased its asbestos-related
reserves through charges to income of $1.381 billion for Owens Corning
asbestos-related liabilities and $975 million for Fibreboard asbestos-related
liabilities, for an aggregate charge of $2.356 billion (See Note 10). In
connection with such charges, management evaluated the amount of deferred tax
assets attributable to such charges and also assessed the likelihood of
realization of such deferred tax assets in light of the Company's financial
position and the Chapter 11 proceedings. As the result of such assessment,
management determined that, as of September 30, 2002, a valuation allowance was
required for the full amount of such attributable deferred tax assets. As a
result, no tax benefit was recorded in connection with the third quarter 2002
asbestos-related charges discussed above.
- 53 -
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 and energy costs, residential construction activity,
mortgage interest rate movements, achievement of expected cost reductions,
developments in and the outcome of the Chapter 11 proceedings described below,
and general economic conditions.
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.
- 54 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 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 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 November 26, 2002, and similarly extended
the Debtors' exclusive rights to solicit acceptances of a reorganization plan
from April 3, 2001 to January 28, 2003. 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 other
interest 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.
In this regard, at a status conference on the Chapter 11 Cases held on September
20, 2002, the District Court requested that the Debtors submit a plan of
reorganization by October 31, 2002, or risk the shortening or non-extension of
their exclusivity period for filing a plan of reorganization. The District Court
has subsequently indicated that the deadline for submission might be extended
until the latter part of November 2002. As a result of the District Court's
request, the Debtors, the creditors' committees, the futures representative, and
other parties in interest have increased the pace of their discussions and
negotiations, including the exchange of information, concerning their respective
positions on the appropriate terms of a plan of reorganization. Owens Corning
intends to comply with the request of the District Court by submitting a plan of
reorganization to the District Court either in conjunction with one or more of
the creditor constituencies as plan proponents or, alternatively, with no plan
proponent other than the Debtors. Because discussions and negotiations among the
various creditor constituencies and the Debtors are ongoing, Owens Corning is
unable to predict the terms of such a plan of reorganization or whether such
plan will be supported by one or more of the creditor constituencies.
- 55 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Owens Corning believes that it is likely that the terms, conditions and
provisions of any plan or plans of reorganization initially filed or submitted
by it will be the subject of continuing negotiations or litigation to resolve
differences among the creditor constituencies as to their treatment.
Accordingly, Owens Corning is unable to predict at this time what the treatment
of creditors and equity holders of the respective Debtors will ultimately be
under any plan or plans of reorganization finally confirmed. However, it is
likely that any plan or plans will 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. In
addition, Owens Corning believes it is likely that any such plan or plans will
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 ultimately
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 or modified
by order of, or subject to review and approval by, the Bankruptcy Court. The
outcome of such challenges and other actions, if any, may have an impact on the
treatment of various claims under 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 ultimately be under any such plan or plans with respect to
(1) the guarantees issued by certain of Owens Corning's U.S. subsidiaries,
including Owens-Corning Fiberglas Technology Inc. ("OCFT") and IPM Inc., a
Non-Debtor Subsidiary that holds Owens Corning's ownership interest in a
majority of Owens Corning's foreign subsidiaries ("IPM"), with respect to Owens
Corning's $1.8 billion pre-petition bank credit facility (the "Pre-Petition
Credit Facility", which is in default) or (2) OCFT's license agreements with
Owens Corning and Exterior Systems, Inc., an indirect wholly-owned subsidiary of
Owens Corning ("Exterior"), pursuant to which OCFT licenses intellectual
property to Owens Corning and Exterior.
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. Based on information now available to Owens Corning, it
appears unlikely that there will be sufficient assets to satisfy all of the
Debtors' pre-petition liabilities. In addition, the pre-petition creditors of
some Debtors may be treated differently than those of other Debtors. Based on
the Debtors' known assets and known and currently estimated liabilities
(including the asbestos liabilities described more fully in Note 10 to the
Consolidated Financial Statements), it is likely that pre-petition creditors
generally will receive under a plan or plans less than 100% of the face value of
their claims, and that the interests of Owens Corning's equity security holders
will be substantially diluted or cancelled in whole or in part. As noted above,
it is not otherwise possible at this time to predict the outcome of the Chapter
11 Cases, the effect of the Administrative Consolidation, the final terms and
provisions of any plan or plans of reorganization, or the ultimate effect of the
Chapter 11 reorganization process on the claims of the creditors of the Debtors
or the interests of the Debtors' respective equity security holders.
- 56 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with
the Bankruptcy Court setting forth the assets and liabilities of the Debtors as
of the date of the Filing. Differences between amounts recorded by the Debtors
and claims filed by creditors will be investigated and resolved as part of the
proceedings in the Chapter 11 Cases.
Bar Dates for Filing Claims
GENERAL BAR DATE
In connection with the Chapter 11 Cases, the Bankruptcy Court set April 15, 2002
as the last date by which holders of certain pre-petition claims against the
Debtors must file their claims (the "General Bar Date"). The General Bar Date
does not apply to asbestos-related personal injury claims and asbestos-related
wrongful death claims (other than claims for contribution, indemnity,
reimbursement, or subrogation). Any holder of a claim that was required to file
a claim by the General Bar Date and did not do so will be barred from asserting
such claim against any of the Debtors and will not participate in any
distribution in any of the Chapter 11 Cases on account of such claim.
Approximately 24,000 proofs of claim (including late-filed claims), totaling
approximately $16.0 billion, alleging a right to payment from a Debtor were
filed with the Bankruptcy Court in response to the General Bar Date. Owens
Corning is investigating these claims to determine their validity. The
Bankruptcy Court will ultimately determine liability amounts that will be
allowed for these claims in the Chapter 11 Cases.
In its initial review of the filed claims, Owens Corning has identified
approximately 15,000 claims, totaling approximately $8.3 billion, which it
believes should be disallowed by the Bankruptcy Court, primarily because they
appear to be duplicate claims or claims that are not related to the indicated
Debtor (the "Objectionable Claims"). Owens Corning likely will file objections
to these Objectionable Claims. While the Bankruptcy Court will ultimately
determine liability amounts, if any, that will be allowed as part of the Chapter
11 Cases, Owens Corning believes that all or substantially all of these claims
will be disallowed.
In addition to the Objectionable Claims described above, at September 30, 2002,
the remaining filed proofs of claim included approximately 9,000 claims,
totaling approximately $7.7 billion, as follows:
- - Approximately 2,900 claims, totaling approximately $1.4 billion, associated
with asbestos-related contribution, indemnity, reimbursement, or
subrogation claims. Owens Corning will address all asbestos-related
personal injury and wrongful death claims in the future as part of the
Chapter 11 Cases. Please see Note 10 to the Consolidated Financial
Statements for additional information concerning asbestos-related
liabilities.
- - Approximately 600 claims, totaling approximately $0.7 billion, alleging
asbestos-related property damage. Most of these claims were submitted with
insufficient documentation to assess their validity. Owens Corning expects
to vigorously defend any asserted asbestos-related property damage claims
in the Bankruptcy Court. Based upon its historic experience in respect of
asbestos-related property damage claims, Owens Corning does not anticipate
significant liability from any such claims.
- - Approximately 5,500 claims, totaling approximately $5.6 billion, alleging
rights to payment for financing, environmental, trade debt and other
matters (the "General Claims"). The Company has previously recorded
approximately $3.7 billion in liabilities for these claims. Based upon the
claims information submitted, the General Claims with the largest variance
from the recorded amounts are: claims by the United States Department of
Treasury, totaling approximately $530 million, in connection with taxes
(see discussion under the heading "Tax Claim" in Note 10 to the
- 57 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Consolidated Financial Statements); a contingent claim for approximately
$458 million by the Pension Benefit Guaranty Corporation, as described more
fully under the heading "PBGC Claim" in Note 10 to the Consolidated
Financial Statements; claims for contract rejections, totaling
approximately $310 million, of which approximately $250 million are
protective claims covering contracts which have not been rejected by the
Debtors as of September 30, 2002; a $275 million class action claim
involving alleged problems with a specialty roofing product, which claim
Owens Corning does not believe is meritorious based upon its historic
experience with servicing its warranty program for such product; and
environmental claims, totaling approximately $244 million.
Owens Corning has recorded liability amounts for those claims that can be
reasonably estimated and which it believes are probable of being allowed by the
Bankruptcy Court. At this time, it is impossible to reasonably estimate the
value of all the claims that will ultimately be allowed by the Bankruptcy Court,
due to the uncertainties of the Chapter 11 process, the in-progress state of
Owens Corning's investigation of submitted claims, and the lack of documentation
submitted in support of many claims. Owens Corning continues to evaluate claims
filed in the Chapter 11 Cases and will make such adjustments as may be
appropriate. Any such adjustments could be material to the Company's
consolidated financial position and results of operations in any given period.
For a discussion of liability amounts in respect of asbestos personal injury
claims, see Note 10 to the Consolidated Financial Statements.
ASBESTOS BAR DATE
As indicated above, the General Bar Date does not apply to asbestos-related
personal injury claims and asbestos-related wrongful death claims (other than
claims for contribution, indemnity, reimbursement, or subrogation). A bar date
for filing proofs of claim against the Debtors with respect to asbestos-related
personal injury claims and asbestos-related wrongful death claims has not been
set. Despite this, approximately 2,900 proofs of claim (in addition to claims
described above under "General Bar Date"), totaling approximately $2.2 billion,
with respect to asbestos-related personal injury or wrongful death were filed
with the Bankruptcy Court in response to the General Bar Date. Of these claims,
Owens Corning has identified approximately 1,100, totaling approximately $0.5
billion, as Objectionable Claims, for which it will file a motion to dismiss. Of
the remaining claims, Owens Corning believes that a substantial majority
represented claimants that had previously asserted asbestos-related claims
against the Company. Owens Corning will address all asbestos-related personal
injury and wrongful death claims in the future as part of the Chapter 11 Cases.
Please see Note 10 to the Consolidated Financial Statements for additional
information concerning asbestos-related liabilities.
INCREASE IN ASBESTOS RESERVES
Owens Corning has reviewed its and Fibreboard's asbestos-related reserves in
light of recent developments, including information derived from Owens Corning's
recent discussions and negotiations with the various creditor constituencies
concerning their relative positions on an acceptable plan of reorganization and
information derived from Owens Corning's and Fibreboard's own analyses of
liability, prepared by an outside consultant for purposes of facilitating plan
discussions. As a result of this review, Owens Corning has increased its
reserves for the period ended September 30, 2002 through charges to income of
$1.381 billion for Owens Corning asbestos-related liabilities and $975 million
for Fibreboard asbestos-related liabilities, for an aggregate charge of $2.356
billion. As a result of the increases in the reserves, Owens Corning's and
Fibreboard's asbestos-related reserves as of September 30, 2002 were $3.564
billion and $2.310 billion, respectively, for an aggregate reserve of $5.874
billion. In addition, Owens Corning notes that, since the reserve for Fibreboard
asbestos-related liabilities exceeds the funds held in the Fibreboard Settlement
Trust, the residual amount payable to charity under the terms of the Trust (see
Note 11 to the Consolidated Financial Statements) has been reduced to zero as of
September 30, 2002. Please see Note 10 to the Consolidated Financial Statements
for additional information concerning asbestos-related liabilities.
- 58 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
Business Overview
Owens Corning is committed to continuing to invest in our businesses and to
provide quality products to our customers. The Company is committed to engaging
our employees to provide outstanding support for our customers and world-class
performance for our Company.
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. During the third quarter of 2002, the Company increased its investment
in Owens Corning (India) Limited, a producer of composite materials, to
approximately 60%.
Quarter and Nine Months Ended September 30, 2002
SALES AND PROFITABILITY FOR THE QUARTER ENDED SEPTEMBER 30, 2002
Net sales for the quarter ended September 30, 2002 were $1.306 billion, up 1%
from the third quarter of 2001 level of $1.291 billion, principally due to
higher volumes in U.S. Building Materials. Sales in the Building Materials
segment increased 2% to $963 million in the third quarter of 2002, compared to
$943 million in the third quarter of 2001, primarily due to volume increases in
the U.S. roofing and recreational vehicle markets. In the Composite Solutions
business, sales were $343 million during the third quarter of 2002, down 1% from
$348 million in 2001, primarily due to lower sales volume in the U.S. In total
for the Company, sales outside the U.S. represented 13% of total sales during
the third quarter of 2002 and 2001. Please see Note 2 to the Consolidated
Financial Statements for further details of segment sales. On a consolidated
basis, there was a more favorable currency translation impact on sales
denominated in foreign currencies during the third quarter of 2002 compared to
the third quarter of 2001. Gross margin for the quarters ended September 30,
2002 and 2001 was 16% and 19% of net sales, respectively.
On a comparative basis, income from operations decreased to a loss of $2.342
billion for the quarter ended September 30, 2002 from income of $63 million in
2001. This decrease was primarily due to the provision for asbestos litigation
claims taken in the third quarter of 2002. Other factors included higher Chapter
11 related costs and higher restructure and other charges partially offset by a
decrease in marketing and administrative expenses to $131 million in the third
quarter of 2002, compared to $141 million in the third quarter of 2001,
primarily as a result of cost saving initiatives implemented as part of the
Company's ongoing efforts to reduce cost. Please see the table below for further
details of these items. Further negatively impacting income from operations were
increased costs associated with post-retirement health and pension related
expenses, which were up approximately $9 million from the quarter ended
September 30, 2001, due mainly to changes in plan assumptions and prior declines
in plan asset values. The primary drivers of income from operations in our
business segments were lower price in our Composites business and U.S.
residential insulation markets, lower volume in our Composites business, and
higher material costs. These factors were partially offset by increased
manufacturing productivity, primarily in our insulation and vinyl siding
businesses, increases in both price and volume in our residential roofing
markets, and higher prices in our residential siding market. Please see Note 2
to the Consolidated Financial Statements for further details of segment income
from operations.
- 59 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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 in
the table below. Income from ongoing operations is not a recognized measurement
of results under accounting principles generally accepted in the United States,
and may not be consistent with similarly titled amounts of other companies. The
reconciliation from income from operations to income from ongoing operations is
as follows:
Quarter Ended
September 30,
-------------
(In millions of dollars)
2002 2001
---- ----
Reported income (loss) from operations $(2,342) $ 63
Restructure charges (See below) 11 8
Other charges in cost of sales and operating expenses
(See below) 33 27
Chapter 11 related reorganization items (See Note 1) 35 23
Proceeds from insurance for asbestos litigation claims,
excluding Fibreboard (See Note 10) - (5)
Provision for asbestos litigation claims (See Note 10) 2,356 -
------- -------
Income from ongoing operations $ 93 $ 116
======= =======
For the quarter ended September 30, 2002, Owens Corning reported a net loss of
$2.359 billion, or $(42.84) per share on a diluted basis, compared to net income
of $27 million, or $.46 per share on a diluted basis, for the quarter ended
September 30, 2001. Cost of borrowed funds was $5 million and $4 million,
respectively, for the referenced quarters (from the Petition Date through
September 30, 2002, contractual interest expense not accrued or recorded on
pre-petition debt totaled $329 million, of which $35 million relates to the
third quarter of 2002 and $42 million relates to the third quarter of 2001
(please see Note 1 to the Consolidated Financial Statements)).
SALES AND PROFITABILITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Net sales for the nine months ended September 30, 2002 were $3.698 billion, up
3% from the $3.597 billion reported for the first nine months of 2001,
principally due to higher volumes in U.S. Building Materials partially offset by
lower volume in the European composite market.
On a comparative basis, income from operations for the nine months ended
September 30, 2002 was a loss of $2.269 billion compared to income of $103
million for 2001. This decrease was primarily due to the provision for asbestos
litigation claims taken in the third quarter of 2002. Other factors included
lower restructure and other charges, partially offset by an increase in Chapter
11 related costs. Please see the table below for further details of these items.
Further negatively impacting income from operations were increased costs
associated with post-retirement health and pension related expenses, which were
up approximately $27 million from the nine months ended September 30, 2001, due
mainly to changes in plan assumptions and prior declines in plan asset values.
Factors affecting income from operations in our business segments include sales
volume and price decreases in our Composites business, partially offset by sales
volume increases primarily in our roofing and siding businesses. Please see Note
2 to the Consolidated Financial Statements for further details of segment income
from operations.
- 60 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The reconciliation from income from operations to income from ongoing operations
(see description above) is as follows:
Nine Months Ended
September 30,
-------------
(In millions of dollars)
2002 2001
---- ----
Reported income (loss) from operations $(2,269) $ 103
Restructure charges (See below) 18 24
Other charges in cost of sales and operating expenses
(See below) 35 70
Chapter 11 related reorganization items (See Note 1) 85 60
Proceeds from insurance for asbestos litigation claims,
excluding Fibreboard (See Note 10) (5) (5)
Provision for asbestos litigation claims (See Note 10) 2,356 -
------- -------
Income from ongoing operations $ 220 $ 252
======= =======
The net loss for the nine months ended September 30, 2002 was $2.770 billion, or
$(50.31) per share on a diluted basis, compared to net income of $46 million or
$.77 per share on a diluted basis for the same period in 2001. In addition to
the asbestos-related charges, results for the nine months ended September 30,
2002 reflect a non-cash charge of $491 million ($441 million net of tax) as the
result of the implementation of SFAS No. 142 (see discussion below under
"Accounting Changes"). Cost of borrowed funds was $13 million and $11 million,
respectively, for the referenced periods of 2002 and 2001 (contractual interest
expense not accrued or recorded on pre-petition debt totaled $106 million for
the nine months ended September 30, 2002 and $134 million for the nine months
ended September 30, 2001 (please see Note 1 to the Consolidated Financial
Statements)).
RESTRUCTURING OF OPERATIONS AND OTHER CHARGES
Ongoing Business Review
In connection with the Chapter 11 proceedings and the development of a plan or
plans of reorganization, the Company has initiated a comprehensive strategic
review of its businesses. During the course of that review, the Company
anticipates that additional restructuring and similar charges, including asset
impairment and wind-up costs, may be identified and recorded during the fourth
quarter of 2002 and periods beyond. Such charges could be material to the
consolidated financial position and results of operations of the Company in any
given period. In addition, Owens Corning notes that certain of its businesses
are operated wholly or in part through subsidiary entities. To the extent that
any restructuring or similar charges impact such subsidiary entities, the
financial condition or results of operations of such subsidiary entities, and
potentially other entities holding obligations of such subsidiary entities, may
be adversely impacted, perhaps materially.
Third Quarter 2002
In the third quarter of 2002, certain previously announced restructuring
programs continued throughout the period. In addition, a strategic review of the
Company's businesses resulted in additional restructuring charges. The Company
recorded approximately $44 million in pretax charges in the third quarter of
2002. These pretax charges were comprised of an $11 million pretax charge to
restructure costs (classified as a separate component of operating expenses in
the Consolidated Statement of Income (Loss)) and a charge of $33 million to cost
of sales. The $11 million restructure charge represents $3 million for severance
- 61 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
costs associated with the elimination of approximately 215 positions, primarily
impacting manufacturing and administrative personnel in the US, of which
approximately 57 were actually terminated as of September 30, 2002. The
remaining $8 million represents charges for the closing of non-strategic
businesses and associated facilities, which consisted mainly of non-cash asset
write-downs to fair values and exit cost liabilities.
The $33 million charge to cost of sales mainly includes a charge of $30 million
to write down a group of assets within the Company's Building Materials Systems
segment to estimated realizable value. The groups of assets are being marketed
for sale and accordingly a valuation of the future cash flows of the assets was
completed using assumptions consistent with current market conditions. The
Company's ultimate decisions and actions regarding these assets require approval
by the Bankruptcy Court and, due to uncertainties in the valuations performed
around future market conditions and bankruptcy court proceedings, it is possible
that the estimate of fair value may materially change in the future. In
addition, various parties-in-interest may perform their own valuations of these
assets and such valuations may differ significantly from the Company's estimate
of fair value. The remaining $3 million charge represents charges associated
with the Company's plan to realign its Newark, Ohio manufacturing facility and
various costs. The realignment plan for the Newark facility was announced in the
third quarter of 2000 and is anticipated to be complete in the fourth quarter of
2002.
Second Quarter 2002
During the second quarter of 2002, certain restructuring programs put into place
during 2000 and 2001 continued due to the timing of events in these programs.
The combination of these continued restructuring programs led to the Company
recording approximately $3 million in a pretax credit in the second quarter of
2002. This pretax credit was comprised of a $5 million pretax credit to other
operating expense, a $1 million pretax credit to restructure costs (classified
as a separate component of operating expenses in the Consolidated Statement of
Income (Loss)), and a $3 million pretax charge to cost of sales. The credit to
other operating expense included a credit for the settlement of certain funds
subject to an administrative freeze that were previously estimated to be
unrealizable (See Note 1). The rights to these funds were originally transferred
to the Company as part of the sale of the Company's 40% interest in Alcopor
Owens Corning (See Note 5). The credit to restructure costs included adjustments
for a reduction in the number of positions to be eliminated as part of the
restructure charge taken during 2001 (see below). The charge to cost of sales
included charges associated with the Company's previously announced plan to
realign its Newark, Ohio manufacturing facility and a write down to inventory
mainly to reflect updated estimates of the net realizable value.
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., which was adjusted to approximately 218 in the second quarter of
2002 (see above) of which approximately 210 were actually terminated as of
September 30, 2002. The primary groups impacted include manufacturing and
administrative personnel. As of September 30, 2002, approximately $5 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).
- 62 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The $4 million in pretax other charges included $2 million in charges associated
with the Company's previously announced realignment at 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 fourth 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.
The $26 million charge for restructuring included $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., of which approximately 450 were actually terminated as of September 30,
2002. 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 September 30,
2002, approximately $19 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.
INCOME TAXES
The Company currently projects that its effective tax rate for the full year
2002 will be (3%), compared to 55% for the full year 2001. In the third quarter
of 2002, the Company increased its asbestos-related reserves through charges to
income of $1.381 billion for Owens Corning asbestos-related liabilities and $975
million for Fibreboard asbestos-related liabilities, for an aggregate charge of
$2.356 billion (See Note 10 to the Consolidated Financial Statements). In
connection with such charges, management evaluated the amount of deferred tax
assets attributable to such charges and also assessed the likelihood of
realization of such deferred tax assets in light of the Company's financial
position and the Chapter 11 proceedings. As the result of such assessment,
management determined that, as of September 30, 2002, a valuation allowance was
required for the full amount of such attributable deferred tax assets. As a
result, no tax benefit was recorded in connection with the third quarter 2002
asbestos-related charges discussed above.
- 63 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS
Cash flow from operations was $86 million in the nine months ended September 30,
2002, compared to $114 million for the nine months ended September 30, 2001. The
decrease in cash flow from operations in 2002 is primarily attributable to
working capital items, including the cash flow effect of a decrease in accounts
payable and accrued liabilities of $43 million in the nine months ended
September 30, 2002 compared to an increase of $125 million in the same period of
2001. The effects of the changes in these items largely offset the net effects
of higher pension fund contributions during 2001.
Total inventories at September 30, 2002 increased by $56 million from the
December 31, 2001 level due largely to the seasonal build of inventories.
Receivables at September 30, 2002 were $570 million, a $153 million increase
over the December 31, 2001 level, attributable to the seasonal increase in
sales. At September 30, 2002, Owens Corning's net working capital was $940
million and the Company's current ratio was 2.13, compared to $800 million and
1.94, respectively, at December 31, 2001 and $874 million and 2.11,
respectively, at September 30, 2001.
Investing activities consumed $172 million of cash during the nine months ended
September 30, 2002, compared to $115 million in the same period of 2001. Capital
spending for property, plant and equipment, excluding acquisitions, for the nine
months was $171 million in 2002 and $133 million in 2001. We anticipate that
2002 spending for capital and investments will be approximately $250 million, a
portion of which is uncommitted. We expect that these expenditures will be
funded from the Company's operations and existing cash on hand.
Financing activities in the nine months ended September 30, 2002 resulted in no
change in cash, compared to an increase of $1 million during the same period in
2001. The results for 2002 reflect an allowed claim of approximately $19 million
in debt subject to compromise as part of our investment in Owens Corning (India)
Limited, which increased our ownership to approximately 60%, and an $18 million
application of funds previously subject to administrative freeze (see discussion
below) to satisfy certain pre-petition indebtedness. At September 30, 2002, we
had $2.854 billion of borrowings subject to compromise and $176 million of other
borrowings (of which $97 million were in default as a consequence of the Filing
and therefore classified as current on the Consolidated Balance Sheet). At
September 30, 2001, we had $2.843 billion of borrowings subject to compromise
and $114 million of other borrowings (of which $97 million were in default as a
consequence of the Filing and therefore classified as current on the
Consolidated Balance Sheet).
At September 30, 2002, the Company had $686 million of Cash and Cash Equivalents
(of which approximately $4 million was subject to administrative freeze pending
the resolution of certain alleged set-off rights by certain pre-petition
lenders). During the second quarter of 2002, the Bankruptcy Court approved a
settlement reached with certain pre-petition lenders covering approximately $36
million of funds previously subject to administrative freeze (of which
approximately $32 million was previously reflected in cash and cash
equivalents). Under this settlement, the Company received approximately $18
million of the funds and the remainder was applied by the lenders to satisfy
certain pre-petition indebtedness.
The Company has significant liabilities related to pension plans for its
employees. The Company has reviewed its assumptions related to the valuation of
this liability, including the rate of return on pension plan assets and the
discount rate on the liability compared to actual results to date. The rate of
return and discount rate have been significantly lower than expected. This may
result in management changing its assumptions for 2003, which could materially
increase expense. In addition, the actual decrease in the market value of assets
during 2002 and lower interest rates may result in a material increase in the
Company's required contributions to the pension plans in future years.
- 64 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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.
The Debtors have reached agreement with the lenders to renew the DIP Financing
for an additional term of two years, with a reduced maximum availability of $250
million. This renewal is subject to Bankruptcy Court approval, which is expected
prior to the current expiration. There were no borrowings outstanding under the
DIP facility at September 30, 2002, however, approximately $56 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 and to renew the DIP
Financing as described above, (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, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), which
it will use to account for goodwill and other intangibles in the future. SFAS
No. 142 eliminates the amortization of goodwill and indefinite-lived intangible
assets; identifiable intangible assets with a determinable useful life will
continue to be amortized. SFAS No. 142 requires an annual review for impairment
using a fair value methodology.
The Company applied SFAS No. 142 beginning in the first quarter of 2002, which
required the Company to cease amortizing goodwill and indefinite-lived
intangibles. The Company has no indefinite-lived intangibles, separately
identified. In addition, the Company tested goodwill for impairment using the
two-step process prescribed in SFAS No. 142. The first step is a screen for
potential impairment. The second step, which is performed on those reporting
units determined to have potential impairment based on the first step, measures
the amount of the impairment, if any. The results of the first step indicated
that the carrying values of some reporting units exceeded the corresponding fair
values, which were determined based on the discounted estimated future cash
flows of the reporting units. In the second step, the implied fair value of
goodwill of these reporting units was determined through the allocation of the
fair value to the underlying assets and liabilities. The January 1, 2002
carrying value of the goodwill in these reporting units exceeded their implied
- 65 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
fair value by $491 million, resulting in a non-cash charge of $491 million ($441
million net of tax). This charge was determined during the second quarter of
2002 and, as required by SFAS No. 142, was recorded as a cumulative effect of a
change in accounting principle in the first quarter of 2002. The goodwill
recorded in the December 31, 2001 financial statements, which included the $491
million described above, was supported by the undiscounted estimated future cash
flow of the related operations in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of".
Determining the fair value of goodwill through the allocation of the fair value
to the underlying assets and liabilities requires management to make significant
assumptions, including but not limited to, projections of cash flow, discount
rate, and general market conditions. Management's judgments are based on
historical experience, market trends, economic trends, and other information.
While management believes their estimates based on the assumptions used are
reasonable, actual results could differ from these estimates.
To maintain a consistent basis for measurement of performance, the Company
reclassified previously reported segment information related to goodwill and
total assets to correspond to the earnings measurements by which the businesses
are evaluated. Accordingly, approximately $15 million of goodwill as of January
1, 2002, was reclassified to the Building Materials Systems segment from the
Composite Solutions segment. Previously reported segment information has been
revised to reflect this change (see Note 2 to the Consolidated Financial
Statements).
The changes in goodwill by segment during the quarter and nine months ended
September 30, 2002, were as follows:
Quarter Ended September 30, 2002
--------------------------------
Foreign Exhange Balance at
Balance at Exchange and September 30,
June 30, 2002 Reallocation Other 2002
------------- ------------ ----- ----
(In millions of dollars)
Composite Solutions $ 18 $ - $ - $ 18
Building Materials Systems 106 - (2) 104
-------- ------- ------ -------
Total $ 124 $ - $ (2) $ 122
======== ======= ====== =======
Nine Months Ended September 30, 2002
------------------------------------
Effect of Foreign Balance at
Balance at Adopting SFAS Exchange September 30,
December 31, 2001 No. 142 Reallocation and Other 2002
----------------- ------- ------------ --------- ----
(In millions of dollars)
Composite Solutions $ 33 $ - $ (15) $ - $ 18
Building Materials 577 (491) 15 3 104
----- ----- ----- ----- -----
Total $ 610 $(491) $ - $ 3 $ 122
===== ===== ===== ===== =====
- 66 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
SFAS No. 142 does not provide for restatement of our results of operations for
periods ending prior to January 1, 2002. A reconciliation of the previously
reported net income and earnings per share as if SFAS No. 142 had been adopted
prior to January 1, 2001 is presented as follows:
Quarter Ended
-------------
September 30, 2002 September 30, 2001
------------------ ------------------
(In millions of dollars, except per share data)
Net income (loss):
Reported net income (loss) $ (2,359) $ 27
Add back goodwill amortization, net of tax - 4
--------- ------
Adjusted net income (loss) $ (2,359) $ 31
========= ======
Basic earnings (loss) per share:
As reported $ (42.84) $ .50
Add back goodwill amortization, net of tax - .07
--------- ------
Adjusted basic earnings (loss) per share $ (42.84) $ .57
========= ======
Diluted earnings (loss) per share:
As reported $ (42.84) $ .46
Add back goodwill amortization, net of tax - .06
--------- ------
Adjusted diluted earnings (loss) per share $ (42.84) $ .52
========= ======
Nine Months Ended
-----------------
September 30, 2002 September 30, 2001
------------------ ------------------
(In millions of dollars, except per share data)
Net income (loss):
Reported net income (loss) $ (2,770) $ 46
Add back cumulative effect of change in
accounting principle, net of tax 441 -
Add back goodwill amortization, net of tax - 11
--------- ------
Adjusted net income (loss) $ (2,329) $ 57
========= ======
Basic earnings (loss) per share:
As reported $ (50.31) $ .84
Add back cumulative effect of change in
accounting principle, net of tax 8.01 -
Add back goodwill amortization, net of tax - .20
--------- ------
Adjusted basic earnings (loss) per share $ (42.30) $ 1.04
========= ======
Diluted earnings (loss) per share:
As reported $ (50.31) $ .77
Add back cumulative effect of change in
accounting principle, net of tax 8.01 -
Add back goodwill amortization, net of tax - .18
--------- ------
Adjusted diluted earnings (loss) per share $ (42.30) $ .95
========= ======
- 67 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
All of the Company's acquired other intangible assets are subject to
amortization. Other intangible asset amortization expense was approximately $1
million in the third quarter of 2002 and 2001. The Company estimates that
amortization of intangibles will be approximately $3 million for each of the
next five years. The components of other intangible assets are as follows:
September 30, 2002
------------------
Weighted Average Gross Carrying Accumulated
Lives Amount Amortization
----- ------ ------------
(In millions of dollars)
Contract-based 6 $ 3 $ (1)
Technology-based 22 17 (9)
Marketing-related 6 13 (8)
------ -------
$ 33 $ (18)
====== =======
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment of Disposal of Long-Lived
Assets". This Statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations,
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the disposal of
a segment of a business (as previously defined in that Opinion). This Statement
also amends ARB No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary.
Effective January 1, 2003, the Company will adopt Statement of Financial
Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002."
This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that Statement, FASB Statement No.
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This
Statement also rescinds FASB Statement No. 44, "Accounting for Intangible Assets
of Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The impact of adoption
has not yet been determined.
Effective January 1, 2003, the Company will adopt Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred. The accounting for similar events and circumstances will be the same,
thereby improving the comparability and representational faithfulness of
reported financial information. The impact of adoption has not yet been
determined.
- 68 -
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 September 30,
2002, a total of 56 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, for secondary aluminum smelting in March
2000, and for wet formed glass mat and metal coil coating in June, 2002. The
Company anticipates that other sources to be regulated will be asphalt
processing and roofing, open molded fiber-reinforced plastics, and large burners
and boilers. 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.
- 69 -
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 did not experience any significant changes in such exposures during
2002. 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,
which has not changed from the Company's objective used during 2001 and is not
expected to change in 2003.
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 average, minimum, and 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:
September 30, December 31,
2002 2001
---- ----
Risk Category Average Minimum Maximum Average Minimum Maximum
------- ------- ------- ------- ------- -------
(In millions of dollars)
Foreign currency $ - $ - $ - $ - $ - $ -
Interest rate $ 12 $ 11 $ 12 $ 12 $ 11 $ 13
Natural gas $ - $ - $ 1 $ 1 $ 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.
- 70 -
ITEM 4. CONTROLS AND PROCEDURES
CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date"). Based on
such evaluation, such officers have concluded that, as of the Evaluation Date,
the Company's disclosure controls and procedures are effective in alerting them
on a timely basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act.
CHANGES IN INTERNAL CONTROLS
Since the Evaluation Date, there have not been any significant changes in the
Company's internal controls or in other factors that could significantly affect
such controls.
- 71 -
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 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.
- 72 -
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. The Consolidated Financial Statements present pre-petition debt of
Non-Debtor Subsidiaries that is in default due to the Filing, in the amount of
approximately $97 million as of September 30, 2002, as current on the
Consolidated Balance Sheet.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter ended
September 30, 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 September 30, 2002, Owens Corning filed the
following current report on Form 8-K:
o Dated August 12, 2002, under Item 9, to submit sworn
statements pursuant to Securities and Exchange Commission
Order No. 4-460.
- 73 -
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: October 28, 2002 By: /s/ Michael H. Thaman
-------------------- ------------------------------
Michael H. Thaman
Chairman of the Board and
Chief Financial Officer
(as duly authorized officer)
Date: October 28, 2002 By: /s/ Charles E. Dana
-------------------- ------------------------------
Charles E. Dana
Vice President - Corporate
Controller and Global Sourcing
- 74 -
CERTIFICATION
I, David T. Brown, Chief Executive Officer of the registrant, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Owens Corning;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the report was being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
October 28, 2002
/s/ David T. Brown
- ------------------------------
David T. Brown
Chief Executive Officer
- 75 -
CERTIFICATION
I, Michael H. Thaman, Chief Financial Officer of the registrant, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Owens Corning;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the report was being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
October 28, 2002
/s/ Michael H. Thaman
- ------------------------------
Michael H. Thaman
Chief Financial Officer
- 76 -
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).
(99) Additional Exhibits
Subsidiaries of Owens Corning, as amended (filed herewith).
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer) (filed herewith).
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer) (filed herewith).