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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 June 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 June 30, 2002
55,178,803
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(In millions of dollars, except share data)
NET SALES $ 1,285 $ 1,239 $ 2,392 $ 2,306
COST OF SALES 1,043 1,014 1,978 1,910
-------- -------- -------- --------
Gross margin 242 225 414 396
-------- -------- -------- --------
OPERATING EXPENSES
Marketing and administrative expenses 144 128 271 255
Science and technology expenses 10 10 20 20
Restructure costs (Note 4) (1) 7 7 16
Chapter 11 related reorganization items (Note 1) 25 17 50 38
Other (6) 6 (7) 27
--------- -------- --------- --------
Total operating expenses 172 168 341 356
-------- -------- -------- --------
INCOME FROM OPERATIONS 70 57 73 40
OTHER
Cost of borrowed funds 4 4 8 8
Other - (2) - (6)
-------- --------- -------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 66 55 65 38
Provision for income taxes 30 25 30 19
-------- -------- -------- --------
INCOME BEFORE MINORITY INTEREST AND EQUITY
IN NET INCOME (LOSS) OF AFFILIATES 36 30 35 19
Minority interest (1) (1) (1) (2)
Equity in net income (loss) of affiliates 1 - (4) 2
-------- -------- --------- --------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 36 29 30 19
Cumulative effect of change in accounting principle (Note 12) - - 441 -
-------- -------- -------- --------
NET INCOME (LOSS) $ 36 $ 29 $ (411) $ 19
======== ======== ========= ========
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share $ .65 $ .53 $ (7.47) $ .34
-------- -------- --------- --------
Diluted net income (loss) per share $ .60 $ .49 $ (7.47) $ .32
-------- -------- --------- --------
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 59.8 59.9 55.1 60.0
The accompanying notes are an integralpart of this statement.
- 3 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
June 30, December 31, June 30,
2002 2001 2001
---- ---- ----
(In millions of dollars)
ASSETS
CURRENT
Cash and cash equivalents $ 553 $ 764 $ 520
Receivables 585 417 618
Inventories (Note 6) 450 437 485
Deferred income taxes 1 1 5
Income tax receivable 5 5 5
Other current assets 25 25 26
------- ------- -------
Total current 1,619 1,649 1,659
------- ------- -------
OTHER
Insurance for asbestos litigation claims
(Note 10) 4 4 59
Restricted cash - asbestos-related (Note 10) 164 169 115
Restricted cash, securities and other -
Fibreboard (Notes 10 and 11) 1,312 1,284 1,271
Deferred income taxes 1,219 1,187 1,047
Goodwill (Note 12) 124 610 627
Investments in affiliates 63 48 56
Other noncurrent assets 246 247 259
------- ------- -------
Total other 3,132 3,549 3,434
------- ------- -------
PLANT AND EQUIPMENT, at cost
Land 68 67 66
Buildings and leasehold improvements 653 669 663
Machinery and equipment 3,031 2,854 2,810
Construction in progress 168 256 226
------- ------- -------
3,920 3,846 3,765
Less - accumulated depreciation (2,053) (2,003) (1,983)
------- ------- -------
Net plant and equipment 1,867 1,843 1,782
------- ------- -------
TOTAL ASSETS $ 6,618 $ 7,041 $ 6,875
======= ======= =======
The accompanying notes are an integral part of this statement.
- 4 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (continued)
(unaudited)
June 30, December 31, June 30,
2002 2001 2001
---- ---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars)
- ------------------------------------
CURRENT
Accounts payable and accrued liabilities $ 639 $ 740 $ 599
Short-term debt 45 43 45
Long-term debt - current portion 65 66 67
------- ------- -------
Total current 749 849 711
------- ------- -------
LONG-TERM DEBT 4 5 7
------- ------- -------
OTHER
Other employee benefits liability 351 331 327
Pension plan liability 301 291 57
Other 148 141 135
------- ------- -------
Total other 800 763 519
------- ------- -------
LIABILITIES SUBJECT TO COMPROMISE (Note 1) 6,800 6,804 6,805
------- ------- -------
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 35 37 39
------- ------- -------
STOCKHOLDERS' EQUITY
Common stock 696 697 697
Deficit (2,368) (1,957) (1,977)
Accumulated other comprehensive loss (298) (355) (122)
Other - (2) (4)
------- ------- -------
Total stockholders' equity (1,970) (1,617) (1,406)
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,618 $ 7,041 $ 6,875
======= ======= =======
The accompanying notes are an integral part of this statement.
- 5 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
2002 2001
---- ----
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net income (loss) $(411) $ 19
Reconciliation of net cash provided by (used in)
operating activities
Noncash items:
Provision for depreciation and amortization 95 110
Provision for deferred income taxes 20 28
Cumulative effect of accounting change 441 -
Other 23 30
Increase in receivables (174) (152)
Increase in inventories (6) (28)
Increase (decrease) in accounts payable and
accrued liabilities (119) 78
Decrease in restricted cash and other -
asbestos-related (Note 10) 6 49
Change in liabilities subject to compromise (Note 1) (2) (96)
Proceeds from insurance for asbestos litigation
claims, excluding Fibreboard 5 -
Other 17 (8)
----- -----
Net cash flow from operations $(105) $ 30
----- -----
NET CASH FLOW FROM INVESTING
Additions to plant and equipment $(104) $ (83)
Investment in subsidiaries, net of cash acquired (4) -
Proceeds from the sale of affiliate or business (Note 5) 10 20
Other (1) 1
----- -----
Net cash flow from investing $ (99) $ (62)
----- -----
The accompanying notes are an integral part of this statement.
- 6 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(unaudited)
Six Months Ended
June 30,
2002 2001
---- ----
(In millions of dollars)
NET CASH FLOW FROM FINANCING
Net additions to long-term credit facilities $ - $ 17
Other reductions to long-term debt (2) (2)
Net increase (decrease) in short-term debt 2 (4)
Subject to compromise (Note 1) (18) (4)
Other 1 (1)
----- -----
Net cash flow from financing $ (17) $ 6
----- -----
Effect of exchange rate changes on cash 10 (4)
----- -----
Net increase (decrease) in cash and cash equivalents (211) (30)
Cash and cash equivalents at beginning of period 764 550
----- -----
Cash and cash equivalents at end of period $ 553 $ 520
===== =====
The accompanying notes are an integral part of this statement.
- 7 -
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.
- 8 -
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 as to
when the Debtors will file such a plan or plans, or that such plan or plans will
be confirmed by the Bankruptcy Court and consummated. Owens Corning is unable to
predict what impact the Administrative Consolidation will have on the timing of
the Debtors' filing or confirmation of such plan or plans or its effect, if any,
on the terms thereof.
As provided by the Bankruptcy Code, the Debtors initially had the exclusive
right to propose a plan of reorganization for 120 days following the Petition
Date, until February 2, 2001. By subsequent action, the Bankruptcy Court has
extended such exclusivity period until August 30, 2002, and similarly extended
the Debtors' exclusive rights to solicit acceptances of a reorganization plan
from April 3, 2001 to October 31, 2002. If the Debtors fail to file a plan of
reorganization prior to the ultimate expiration of the exclusivity period, or if
such plan is not accepted by the requisite numbers of creditors and equity
holders entitled to vote on the plan, other parties in interest in the Chapter
11 Cases may be permitted to propose their own plan(s) of reorganization for the
Debtors.
Owens Corning is unable to predict at this time what the treatment of creditors
and equity holders of the respective Debtors will be under any proposed plan or
plans of reorganization. Such plan or plans may provide, among other things,
that all present and future asbestos-related liabilities of Owens Corning and
Fibreboard will be discharged and assumed and resolved by one or more
independently administered trusts established in compliance with Section 524(g)
of the Bankruptcy Code. Such plan or plans may also provide for the issuance of
an injunction by the Bankruptcy Court pursuant to Section 524(g) of the
Bankruptcy Code that will enjoin actions against the reorganized Debtors for the
purpose of, directly or indirectly, collecting, recovering or receiving payment
of, on, or with respect to any claims resulting from asbestos-containing
products allegedly manufactured, sold or installed by Owens Corning or
Fibreboard, which claims will be paid in whole or in part by one or more Section
524(g) trusts. Similar plans of reorganization have been confirmed in the
Chapter 11 cases of other companies involved in asbestos-related litigation.
Section 524(g) of the Bankruptcy Code provides that, if certain specified
conditions are satisfied, a court may issue a supplemental permanent injunction
barring the assertion of asbestos-related claims or demands against the
reorganized company and channeling those claims to an independent trust.
Owens Corning is unable to predict at this time what treatment will be accorded
under any such reorganization plan or plans to inter-company indebtedness,
licenses, transfers of goods and services and other inter-company and
intra-company arrangements, transactions and relationships that were entered
into prior to the Petition Date. These arrangements, transactions and
relationships may be challenged by various parties in the Chapter 11 Cases and
payments and other obligations in respect thereof may be
- 9 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
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 be under any such plan or plans with respect to (1)
the guaranties issued by certain of Owens Corning's U.S. subsidiaries, including
Owens-Corning Fiberglas Technology Inc. ("OCFT") and IPM Inc., a Non-Debtor
Subsidiary that holds Owens Corning's ownership interest in a majority of Owens
Corning's foreign subsidiaries ("IPM"), with respect to Owens Corning's $1.8
billion pre-petition bank credit facility (the "Pre-Petition Credit Facility"
which is now in default) or (2) OCFT's license agreements with Owens Corning and
Exterior Systems, Inc., a wholly-owned subsidiary of Owens Corning ("Exterior"),
pursuant to which OCFT licenses intellectual property to Owens Corning and
Exterior.
The Bankruptcy Court may confirm a plan of reorganization only upon making
certain findings required by the Bankruptcy Code, and a plan may be confirmed
over the dissent of non-accepting creditors and equity security holders if
certain requirements of the Bankruptcy Code are met. The payment rights and
other entitlements of pre-petition creditors and Owens Corning's shareholders
may be substantially altered by any plan or plans of reorganization confirmed in
the Chapter 11 Cases. There is no assurance that there will be sufficient assets
to satisfy the Debtors' pre-petition liabilities in whole or in part, and the
pre-petition creditors of some Debtors may be treated differently than those of
other Debtors. Pre-petition creditors may receive under a plan or plans less
than 100% of the face value of their claims, and the interests of Owens
Corning's equity security holders may be substantially diluted or cancelled in
whole or in part. As noted above, it is not possible at this time to predict the
outcome of the Chapter 11 Cases, the effect of the Administrative Consolidation,
the terms and provisions of any plan or plans of reorganization, or the effect
of the Chapter 11 reorganization process on the claims of the creditors of the
Debtors or the interests of Owens Corning's equity security holders.
Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with
the Bankruptcy Court setting forth the assets and liabilities of the Debtors as
of the date of the Filing. Differences between amounts recorded by the Debtors
and claims filed by creditors will be investigated and resolved as part of the
proceedings in the Chapter 11 Cases.
Bar Dates for Filing Claims
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 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 $15.8 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.
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
In its initial review of the filed claims, Owens Corning has identified
approximately 15,000 claims, totaling approximately $8.4 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 will file a motion to dismiss
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 June 30, 2002, the
remaining filed proofs of claim included approximately 9,000 claims, totaling
approximately $7.4 billion, as follows:
- - Approximately 2,900 claims, totaling approximately $1.2 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 $5.5 billion, alleging
rights to payment for financing, environmental, trade debt and other
matters (the "General Claims"). The Company has previously recorded
approximately $3.6 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
fully under the heading "PBGC Claim" in Note 10 to the Consolidated
Financial Statements; a $275 million class action claim involving alleged
problems with a specialty roofing product, which Owens Corning does not
believe is meritorious based upon its historic experience with servicing
its warranty program for such product; claims for contract rejections,
totaling approximately $260 million, of which approximately $200 million
are protective claims covering contracts which have not been rejected by
the Debtors as of June 30, 2002; 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.
- 11 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
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 2,700 proofs of claim (in addition to claims
described above under "General Bar Date"), totaling approximately $2.1 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 900, totaling approximately $0.4
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.
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 June 30, 2002, contractual interest expense not accrued or
recorded on pre-petition debt totaled $294 million, of which $35 million relates
to the second quarter of 2002, $71 million relates to the first six months of
2002, and $44 million and $93 million, respectively, relate to the same two
periods of 2001.
At June 30, 2002, the Company had $553 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.
In connection with the Filing, the Debtors obtained a $500 million
debtor-in-possession credit facility from a group of lenders led by Bank of
America, N.A. (the "DIP Financing"), which currently expires November 15, 2002.
There were no borrowings outstanding under the DIP facility at June 30, 2002,
however, approximately $54 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.
- 12 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued)
The Company believes, based on information presently available to it, that its
cash and cash equivalents, cash available from operations, and the DIP Financing
will provide sufficient liquidity to allow it to continue as a going concern for
the foreseeable future. However, the ability of the Company to continue as a
going concern (including its ability to meet post-petition obligations of the
Debtors and to meet obligations of the Non-Debtor Subsidiaries) and the
appropriateness of using the going concern basis for its financial statements
are dependent upon, among other things, (i) the Company's ability to comply with
the terms of the DIP Financing and any cash management order entered by the
Bankruptcy Court from time to time in connection with the Chapter 11 Cases, (ii)
the ability of the Company to maintain adequate cash on hand, (iii) the ability
of the Company to generate cash from operations, (iv) the ability of the
Non-Debtor Subsidiaries to obtain necessary financing, (v) confirmation of a
plan or plans of reorganization under the Bankruptcy Code, and (vi) the
Company's ability to maintain profitability following such confirmation.
Financial Statement Presentation
The Company's Consolidated Financial Statements have been prepared in accordance
with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," and on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. However, as a
result of the Filing, such realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as debtors-in-possession under the
protection of Chapter 11 of the Bankruptcy Code, and subject to Bankruptcy Court
approval or otherwise as permitted in the ordinary course of business, the
Debtors, or some of them, may sell or otherwise dispose of assets and liquidate
or settle liabilities for amounts other than those reflected in the Consolidated
Financial Statements. Further, a plan of reorganization could materially change
the amounts and classifications reported in the consolidated historical
financial statements.
Substantially all of the Company's pre-petition debt is now in default due to
the Filing. As described below, the accompanying Consolidated Financial
Statements present the Debtors' pre-petition debt under the caption "Liabilities
Subject to Compromise". This includes debt under the Pre-Petition Credit
Facility and approximately $1.4 billion of other outstanding debt. As required
by SOP 90-7, at the Petition Date the Company recorded the Debtors' pre-petition
debt instruments at the allowed amount, as defined by SOP 90-7.
As reflected in the Consolidated Financial Statements, "Liabilities Subject to
Compromise" refer to Debtors' liabilities incurred prior to the commencement of
the Chapter 11 Cases. The amounts of the various liabilities that are subject to
compromise are set forth below following the debtor-in-possession financial
statements. These amounts represent Owens Corning's estimate of known or
potential pre-petition claims to be resolved in connection with the Chapter 11
Cases. Such claims remain subject to future adjustments. Adjustments may result
from (1) negotiations; (2) actions of the Bankruptcy Court; (3) further
developments with respect to disputed claims; (4) rejection of executory
contracts and unexpired leases; (5) the determination as to the value of any
collateral securing claims; (6) proofs of claim; or (7) other events. Payment
terms for these amounts will be established in connection with the Chapter 11
Cases.
Debtor-In-Possession Financial Statements
The condensed financial statements of the Debtors are presented below. These
statements reflect the financial position and results of operations of the
combined Debtor entities, including certain amounts and activities between
Debtors and non-debtor entities of Owens Corning which are eliminated in the
Consolidated Financial Statements.
- 13 -
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 Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(In millions of dollars)
NET SALES $ 1,137 $ 1,080 $ 2,110 $ 1,996
COST OF SALES 946 916 1,795 1,710
-------- --------- -------- ---------
Gross margin 191 164 315 286
-------- --------- -------- ---------
OPERATING EXPENSES
Marketing and administrative expenses 132 116 248 227
Science and technology expenses 8 9 17 18
Restructure costs (1) 6 5 9
Chapter 11 related reorganization items 25 17 50 38
Other (Including interest income from non-debtors of $14
million in the second quarter and $28 million for the six
months ended 2002 and 2001) (27) (54) (54) (41)
--------- ---------- --------- ----------
Total operating expenses 137 94 266 251
-------- --------- -------- ---------
INCOME FROM OPERATIONS 54 70 49 35
OTHER
Cost of borrowed funds 1 (8) 3 (2)
Other - (2) - (6)
-------- ---------- -------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 53 80 46 43
Provision for income taxes 25 32 23 20
-------- --------- -------- ---------
INCOME BEFORE EQUITY IN NET INCOME (LOSS)
OF AFFILIATES 28 48 23 23
Equity in net income (loss) of affiliates - (1) (5) 1
-------- ---------- --------- ---------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 28 47 18 24
-------- --------- -------- ---------
Cumulative effect of change in accounting principle - - 409 -
------- -------- -------- --------
NET INCOME (LOSS) $ 28 $ 47 $ (391) $ 24
======= ======== ========= ========
- 14 -
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
June 30, December 31, June 30,
2002 2001 2001
---- ---- ----
(In millions of dollars)
ASSETS
CURRENT
Cash and cash equivalents $ 373 $ 605 $ 422
Receivables 572 315 468
Receivables - non-debtors 757 849 739
Inventories 336 311 355
Deferred income taxes 4 4 4
Income tax receivable 4 4 4
Other current assets 24 25 25
------- ------- -------
Total current 2,070 2,113 2,017
------- ------- -------
OTHER
Insurance for asbestos litigation claims 4 4 59
Restricted cash and other - asbestos-related 164 169 115
Restricted cash, securities and other -
Fibreboard 1,312 1,284 1,271
Deferred income taxes 1,170 1,143 1,022
Goodwill, net 54 513 524
Investments in affiliates 16 29 27
Investments in non-debtor subsidiaries 757 758 736
Other noncurrent assets 138 138 215
------- ------- -------
Total other 3,615 4,038 3,969
------- ------- -------
PLANT AND EQUIPMENT, at cost
Land 40 41 40
Buildings and leasehold improvements 512 533 524
Machinery and equipment 2,349 2,194 2,140
Construction in progress 118 217 214
------- ------- -------
3,019 2,985 2,918
Less - accumulated depreciation (1,581) (1,548) (1,534)
------- ------- -------
Net plant and equipment 1,438 1,437 1,384
------- ------- -------
TOTAL ASSETS $ 7,123 $ 7,588 $ 7,370
======= ======= =======
- 15 -
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)
June 30, December 31, June 30,
2002 2001 2001
---- ---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars)
- ------------------------------------
CURRENT
Accounts payable and accrued liabilities $ 519 $ 589 $ 460
Accounts payable and accrued liabilities -
non-debtors 12 12 7
Long-term debt - current portion - 1 -
------- ------- -------
Total current 531 602 467
------- ------- -------
OTHER
Other employee benefits liability 338 318 313
Pension plan liability 273 264 51
Other 114 110 110
------- ------- -------
Total other 725 692 474
------- ------- -------
LIABILITIES SUBJECT TO COMPROMISE 7,526 7,565 7,522
STOCKHOLDERS' EQUITY
Common stock 697 697 699
Deficit (2,138) (1,747) (1,777)
Accumulated other comprehensive loss (217) (219) (11)
Other (1) (2) (4)
------- ------- -------
Total stockholders' equity (1,659) (1,271) (1,093)
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,123 $ 7,588 $ 7,370
======= ======= =======
- 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 CASH FLOWS
Six Months Ended
June 30,
2002 2001
---- ----
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net income (loss) $(391) $ 24
Reconciliation of net cash provided by (used in)
operating activities
Noncash items:
Provision for depreciation and amortization 71 78
Provision for deferred income taxes 23 40
Cumulative effect of accounting change 409 -
Other 18 44
Increase in receivables (174) (202)
Increase in inventories (27) (11)
Increase (decrease) in accounts payable and
accrued liabilities (126) 62
Decrease in restricted cash and other - asbestos-related 6 49
Change in liabilities subject to compromise (2) (96)
Proceeds from insurance for asbestos litigation claims,
excluding Fibreboard 5 -
Other 43 35
----- -----
Net cash flow from operations $(145) $ 23
----- -----
NET CASH FLOW FROM INVESTING
Additions to plant and equipment $ (78) $ (75)
Investment in subsidiaries, net of cash acquired (1) -
Proceeds from sale of business 10 -
Other - 1
----- -----
Net cash flow from investing $ (69) $ (74)
----- -----
- 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 STATEMENT OF CASH FLOWS (continued)
Six Months Ended
June 30,
2002 2001
---- ----
(In millions of dollars)
NET CASH FLOW FROM FINANCING
Net additions to long-term credit facilities - 17
Subject to compromise (18) (4)
Other reductions to long-term debt (1) -
Other $ 1 $ (1)
----- -----
Net cash flow from financing $ (18) $ 12
----- -----
Net decrease in cash and cash equivalents $(232) $ (39)
----- -----
Cash and cash equivalents at beginning of period 605 461
----- -----
Cash and cash equivalents at end of period $ 373 $ 422
===== =====
- 18 -
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:
June 30, December 31, June 30,
2002 2001 2001
---- ---- ----
(In millions of dollars)
Accounts payable $ 197 $ 195 $ 197
Accrued interest payable 40 40 40
Accrued liabilities 38 36 50
Debt 2,831 2,843 2,838
Income taxes payable 199 209 209
Reserve for asbestos litigation claims - Owens Corning 2,183 2,197 2,200
Reserve for asbestos-related claims - Fibreboard 1,312 1,284 1,271
---------- --------- ----------
Total consolidated 6,800 6,804 6,805
Payables to non-debtors 726 761 717
---------- --------- ----------
Total debtor $ 7,526 $ 7,565 $ 7,522
========== ========= ==========
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 Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(In millions of dollars)
Professional fees $ 17 $ 16 $ 35 $ 34
Payroll and compensation 6 5 12 12
Interest income (2) (4) (4) (9)
Other, net 4 - 7 1
---- ---- ---- ----
Total $ 25 $ 17 $ 50 $ 38
==== ==== ==== ====
- 19 -
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 Six Months Ended
June 30 June 30
------- -------
NET SALES 2002 2001 2002 2001
---- ---- ---- ----
(In millions of dollars)
Reportable Segments
Building Materials Systems
United States $ 887 $ 838 $ 1,651 $ 1,531
Europe 1 1 2 3
Canada and other 49 46 83 82
--------- --------- --------- --------
Total Building Materials Systems 937 885 1,736 1,616
--------- --------- --------- --------
Composite Solutions
United States 226 218 417 411
Europe 79 90 159 190
Canada and other 43 46 80 89
--------- --------- --------- --------
Total Composite Solutions 348 354 656 690
--------- --------- --------- --------
Total reportable segments $ 1,285 $ 1,239 $ 2,392 $ 2,306
========= ========= ========= ========
External Customer Sales by Geographic Region
United States $ 1,113 $ 1,056 $ 2,068 $ 1,942
Europe 80 91 161 193
Canada and other 92 92 163 171
--------- --------- --------- --------
Net sales $ 1,285 $ 1,239 $ 2,392 $ 2,306
========= ========= ========= ========
- 20 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2. SEGMENT DATA (continued)
Quarter Ended Six Months Ended
June 30, June 30,
INCOME FROM OPERATIONS 2002 2001 2002 2001
---- ---- ---- ----
(In millions of dollars)
Reportable Segments
Building Materials Systems
United States $ 80 $ 52 $ 113 $ 72
Europe - - - -
Canada and other 7 3 9 4
------- -------- -------- --------
Total Building Materials Systems 87 55 122 76
------- -------- -------- --------
Composite Solutions
United States 14 39 14 58
Europe 4 11 16 24
Canada and other 8 7 11 12
------- -------- -------- --------
Total Composite Solutions 26 57 41 94
------- -------- -------- --------
Total reportable segments $ 113 $ 112 $ 163 $ 170
======= ======== ======== ========
Geographic Regions
United States $ 94 $ 91 $ 127 $ 130
Europe 4 11 16 24
Canada and other 15 10 20 16
------- -------- -------- --------
Total reportable segments $ 113 $ 112 $ 163 $ 170
======= ======== ======== ========
Reconciliation to Consolidated Income Before
Provision for Income Taxes
Restructuring and other charges 3 (17) (9) (59)
Chapter 11 related reorganization items (25) (17) (50) (38)
General corporate expense (21) (21) (31) (33)
Cost of borrowed funds (4) (4) (8) (8)
Other - 2 - 6
------- -------- -------- --------
Consolidated income before provision for
income taxes $ 66 $ 55 $ 65 $ 38
======= ======== ======== ========
- 21 -
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
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 charge (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 determined 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 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. The primary groups impacted include manufacturing and administrative
personnel. As of June 30, 2002, approximately $4 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 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.
- 22 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued)
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 represents $21 million for severance
costs associated with the elimination of approximately 460 positions, primarily
impacting manufacturing and administrative personnel in the U.S., Canada and the
U.K. The remaining $5 million represented a charge for the divestiture of
non-strategic businesses and facilities, which consisted mainly of non-cash
asset write-downs to fair value and exit cost liabilities. As of June 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.
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 June 30, 2002:
Liability at
Original Total June 30,
(In millions of dollars) Liability Payments 2002
--------- -------- ----
Personnel Costs $ 45 $(37) $ 8
Facility and Business Exit Costs 4 (3) 1
---- ----- ----
Total $ 49 $(40) $ 9
---- ----- ----
- 23 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued)
The Company continually evaluates whether events and circumstances have occurred
that indicate that the carrying amount of certain long-lived assets is
recoverable. When factors indicate that a long-lived asset should be evaluated
for possible impairment, the Company uses an estimate of the expected
undiscounted cash flows to be generated by the asset to determine whether the
carrying amount is recoverable or if impairment exists. When it is determined
that an impairment exists, the Company uses the fair market value of the asset,
usually measured by the discounted cash flows to be generated by the asset, to
determine the amount of the impairment to be recorded in the financial
statements.
5. ACQUISITION 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"). As part of the restructuring, the Company, through its
wholly-owned subsidiary, IPM Inc., infused approximately $3 million of new value
into OCIL and Owens Corning 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
certain of its junior debt (to be determined as part of a formula) will be
converted to redeemable convertible debentures. Through these restructuring
efforts the Company's ownership interest in OCIL increased from 50% to 60%. The
Company will consolidate OCIL during the third quarter of 2002 once the
restructuring has been 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 will be added to amounts Subject to Compromise. Owens
Corning will account for this transaction under the purchase method of
accounting, whereby the assets acquired and liabilities assumed, including
approximately $57 million of senior debt and the amount of the redeemable
convertible debentures, will be recorded at their fair values and the results of
operations will be consolidated from that date. Prior to July 1, 2002, the
Company accounted for this joint venture under the equity method. The pro forma
effect of this acquisition on revenues and earnings is not expected to be
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).
- 24 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
6. INVENTORIES
Inventories are summarized as follows:
June 30, December 31,
2002 2001
---- ----
(In millions of dollars)
Finished goods $ 374 $ 378
Materials and supplies 170 150
----- -----
FIFO inventory 544 528
Less: reduction to LIFO basis (94) (91)
----- -----
Total inventory $ 450 $ 437
===== =====
Approximately $133 million and $120 million of total inventories were valued
using the LIFO method at June 30, 2002 and December 31, 2001, respectively.
7. COMPREHENSIVE INCOME
The Company's comprehensive income for the quarters ended June 30, 2002 and 2001
was $83 million and $31 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 June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
(In millions of dollars, except share data)
Net income (loss) used for basic and diluted
earnings per share $ 36 $ 29 $ (411) $ 19
======== ======== ======== ========
Weighted average number of shares
outstanding used for basic earnings per
share (thousands) 55,038 55,076 55,056 55,058
-------- -------- -------- --------
Deferred awards (thousands) 190 303 - 337
-------- -------- -------- --------
Shares from assumed conversion of
preferred securities (thousands) 4,566 4,566 - 4,566
-------- -------- -------- --------
Weighted average number of shares
outstanding and common equivalent
shares used for diluted earnings per
share (thousands) 59,794 59,945 55,056 59,961
======== ======== ======== ========
- 25 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
8. EARNINGS PER SHARE (continued)
For the six months ended June 30, 2002, the number of shares used in the
calculation of diluted earnings per share did not include 224 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
June 30, 2002 December 31, 2001
------------- -----------------
(In millions of dollars)
Forward currency exchange contracts $ 83 $ 30
Interest rate swaps 22 19
Commodity future contracts 540,000 MMBTU per month 540,000 MMBTU per month
for three months for nine months
350,000 MMBTU per month -
for five months
Foreign Currency Exchange Risk and Interest Rate Risk Management
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 June 30,
2002 the Company had 30 forward currency exchange contracts that exchanged
approximately 14 million U.S. dollars to euros, 5 million British pounds
sterling to euros, 30 million Swedish krone to euros, 108 million Norwegian
krone to euros, and 10 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 statement of
income. As of June 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.
- 26 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
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 second quarter of 2002, the Company
entered into 5 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 June 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.
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, which remained outstanding at June 30, 2002. This contract
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 two 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 June 30, 2002, there were 31 such cross-currency
interest rate swap contracts outstanding at a notional amount of $22 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. 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 statement of income. As of June 30, 2002 and December 31, 2001,
accumulated other comprehensive income (loss) related to these contracts was a
loss of approximately $3 million and income of approximately $10 million,
respectively, and the ineffectiveness recorded as other income (loss) was not
material in either period.
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
is 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 statement of income. At June 30, 2002, the
accumulated other comprehensive income (loss) related to the contract was not
material and the ineffectiveness recorded as
- 27 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
9. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
other income (loss) was also not material. 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 in the same manner as the previous natural gas hedge. At June 30,
2002, the accumulated other comprehensive income (loss) related to the contract
was not material and the ineffectiveness recorded as other income (loss) was
also not material.
Other Financial Instruments with Off-Balance-Sheet Risk
As of June 30, 2002 and December 31, 2001, the Company is contingently liable
for guarantees of indebtedness owed by certain unconsolidated affiliates of
approximately $25 million and $38 million, respectively. As of June 30, 2002,
and December 31, 2001, approximately $23 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 June 30, 2002 and December 31, 2001 was
approximately $19 million owed by Owens-Corning (India) Limited, which will be
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
has been 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.
- 28 -
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", ultimately, Owens
Corning's (and Fibreboard's) total liability for asbestos claims will be
determined after a lengthy period of negotiations and, if necessary, by the
Bankruptcy Court, taking into account numerous factors not present in Owens
Corning's pre-petition environment. Such factors include the claims of competing
creditor groups as to the appropriate treatment of their allowed claims in the
plan or plans of reorganization, the size of the total asbestos liability, the
total number of present asbestos claims allowed, the total amount of future
asbestos claims allowed, and the impact of the Administrative Consolidation.
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.
- 29 -
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 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 be treated under the terms of any plan or plans of reorganization.
- 30 -
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 June 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 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.
- 31 -
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 and 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.
- 32 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
Insurance
During the second quarter of 2002, Owens Corning received an additional $5
million payment in respect of a previous settlement with a bankrupt insurance
carrier concerning coverage for asbestos-related personal injury claims. This
amount was recorded as pre-tax income in the second quarter.
As of June 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."
- 33 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
The approximate balances of the components of the reserve at September 30, 2000
(the ending date of the last reporting period preceding the Petition Date) were:
September 30, 2000
------------------
(In billions of dollars)
NSP backlog $ 1.10
Non-NSP backlog 0.30
Future claims 0.70
Defense, Claims Processing and Administrative Expenses 0.10
In connection with this asbestos reserve, Owens Corning notes that:
- - The "NSP backlog" component represented the remaining estimated cost of
resolving Initial Claims under the NSP.
- - The "Non-NSP backlog" component represented the estimated cost of resolving
asbestos personal injury claims pending against Owens Corning outside the
NSP.
- - The "Future claims" component represented the estimated cost of resolving
(i) Future Claims under the NSP and (ii) non-NSP claims subsequently made.
As Owens Corning has discussed in previous public filings, any estimate of its
liabilities for pending and expected future asbestos claims is subject to
considerable uncertainty because such liabilities are influenced by numerous
variables that are inherently difficult to predict. As discussed further below,
such uncertainties significantly increased as a result of the Chapter 11 Cases.
Prior to the Petition Date, such variables included, among others, the cost of
resolving pending non-NSP claims; the disease mix and severity of disease of
pending NSP claims; the number, severity of disease, and jurisdiction of claims
filed in the future (especially the number of mesothelioma claims); how many
future claimants were covered by an NSP Agreement; the extent, if any, to which
individual claimants exercised a right to opt out of an NSP Agreement and/or
engage counsel not participating in the NSP; the extent, if any, to which
counsel not bound by an NSP Agreement undertook the representation of asbestos
personal injury plaintiffs against Owens Corning; the extent, if any, to which
Owens Corning exercised its right to terminate one or more of the NSP Agreements
due to excessive opt-outs or for other reasons; and Owens Corning's success in
controlling the costs of resolving future non-NSP claims.
As one example of the difficulties inherent in estimating future asbestos
claims, Owens Corning notes that the Manville Personal Injury Settlement Trust,
a trust established to settle asbestos claims against Johns Manville
Corporation, announced in June 2001 that it was reducing its initial settlement
distributions by fifty percent on the basis of the continued record pace of
asbestos claim filings and the prediction of its consultants that the trust
might receive 1.5 to 2.5 million additional claims.
- 34 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
The Chapter 11 Cases significantly increase the inherent difficulties and
uncertainties involved in estimating the number and cost of resolution of
present and future asbestos-related claims against Owens Corning and may have
the effect of increasing the number and ultimate cost of resolution of such
claims, perhaps substantially. In particular, the status of the NSP Agreements
and the treatment of pending and future claims thereunder will depend on the
outcome of negotiations among the various constituencies in the Chapter 11 Cases
and determinations by the Bankruptcy Court as to the issues involved, none of
which can be predicted at this time. The uncertainties associated with the
status of the NSP Agreements and the treatment of claims thereunder include the
following:
- - It is possible that one or more constituencies in the Chapter 11 Cases may
seek to set aside the NSP Agreements on various grounds. In any event, it
is highly uncertain how any plan or plans of reorganization will treat the
various types of NSP claims, including without limitation claims with no
evidence of significant medical impairment, or whether such unimpaired
claims will be treated as allowed claims thereunder.
- - The settlement values for specified categories of disease set forth in the
NSP Agreements were established by arms-length negotiations with the
participating law firms in circumstances very different from those
prevailing in the Chapter 11 Cases. The settlement values available to
individual claimants under the arrangements to be included in any plan or
plans of reorganization may vary substantially from those contemplated by
the NSP Agreements. Because Owens Corning's estimate of liabilities in
respect of non-NSP claims assumed payment of settlement values similar to
those contained in the NSP Agreements, such estimate is subject to similar
uncertainty.
Additional uncertainties raised by the Chapter 11 Cases include the following:
- - The impact, if any, the Administrative Consolidation will have on the
timing, outcome or other aspects of the Chapter 11 Cases.
- - As a result of the Filing, all of the holders of pre-petition asbestos
claims against Owens Corning or Fibreboard will be required to file proofs
of claim in the form and manner prescribed by the Bankruptcy Court. The
filing of a proof of claim will be a precondition to any pre-petition claim
being considered for payment as an allowed claim. Moreover, the Filing,
including the significant publicity associated with the Chapter 11 Cases
and notices required by the Bankruptcy Code that must be given to creditors
and other parties in interest, has significantly increased the inherent
difficulties and uncertainties involved in estimating the number and cost
of resolution of not only pre-petition claims but also additional claims
that may be asserted in the course of the Chapter 11 Cases. Among other
things, it is not possible to predict at this time how many proofs of claim
will be timely filed, how many proofs of claim will represent allowed
claims, or the aggregate value of such allowed claims.
- - Owens Corning anticipates that the number and estimated aggregate value of
allowed future claims will be determined as a result of negotiations
involving the legal representative for the class of future asbestos
claimants and the other interested constituencies or, if necessary, by the
Bankruptcy Court. It is not possible to predict the outcome of such
negotiations at this time.
- 35 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
In connection with the negotiation of a plan or plans of reorganization, it is
anticipated that a number of interested constituencies, including the
representatives of the pre-petition and future asbestos claimants and other
pre-petition creditors, will develop analyses of liability for both pre-petition
and future asbestos claims. Owens Corning and Fibreboard will also prepare
analyses for use in the negotiation process. Such analyses 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. Such analyses
could vary substantially from the amounts of Owens Corning's and Fibreboard's
respective existing asbestos reserves, and also could 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.
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 will be prepared solely for use in the
negotiation of a plan of reorganization, they will 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.
In light of the factors described above, among others (including its review of
developments in other asbestos-related bankruptcies, both pending and
concluded), Owens Corning believes that some, if not all, of such analyses
prepared in connection with the negotiation of its plan of reorganization may
involve estimates of Owens Corning's and Fibreboard's respective asbestos
liabilities that are many billions of dollars in excess of current reserves.
- 36 -
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 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 June 30, 2002, as a result of the Filing and the uncertainties referred to
above, the approximate balances of the components of Owens Corning's
asbestos-related reserve were:
Balance
(In billions of dollars)
Unpaid Final Settlements (NSP and other) $ 0.60
Other Pending and Future Claims 1.60
In connection with this asbestos reserve, Owens Corning notes that:
- - The "Unpaid Final Settlements" component represented the remaining
estimated cost for all asbestos personal injury claims pending against
Owens Corning which were subject to final settlement agreements for which
releases from claimants were obtained, and under which all other conditions
to settlement had been satisfied, as of the Petition Date.
- - The "Other Pending and Future Claims" component represented the estimated
cost of resolving (i) asbestos personal injury claims pending against Owens
Corning which were subject to resolution under NSP Agreements but for which
releases were not obtained from claimants prior to the Petition Date; (ii)
all other asbestos personal injury claims pending against Owens Corning
which were not subject to any settlement agreement; and (iii) future
asbestos personal injury claims against Owens Corning made after the
Petition Date.
Owens Corning believes that its reserve for asbestos claims represents at least
a minimum in a range of possible estimates of the ultimate costs to resolve
asbestos-related claims against it through the Chapter 11 process. Owens Corning
will continue to review its asbestos reserve on a periodic basis and make such
adjustments as may be appropriate. However, it is possible that Owens Corning
will not be in a position to conclude that a revision to the reserve is
appropriate until significant developments occur during the course of the
Chapter 11 Cases, including resolution of the uncertainties described above. Any
such revision could, however, be material to the Company's consolidated
financial position and results of operations in any given period.
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING)
Prior to 1972, Fibreboard manufactured insulation products containing asbestos.
Fibreboard has since been named as defendant in many thousands of personal
injury claims for injuries allegedly caused by asbestos exposure. Fibreboard
received approximately 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-
- 37 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
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 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 be treated under the terms of any plan or plans of
reorganization.
- 38 -
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 million during the fourth quarter of
1999 to fund costs of resolving pending and future Fibreboard asbestos-related
liabilities, whether under the NSP, in the tort system, or otherwise.
As of June 30, 2002, the Insurance Settlement funds were held in and invested by
the Fibreboard Settlement Trust. As of that date, $1,185 million (net of
outstanding payables) was held in the Fibreboard Settlement Trust and $127
million was held in Undistributed Administrative Deposits in respect of
Fibreboard claims. On an ongoing basis, the funds held in the Fibreboard
Settlement Trust will be subject to investment earnings/losses and will be
reduced if and as applied to satisfy asbestos-related liabilities. Under the
terms of the Fibreboard Settlement Trust, any of such assets that ultimately are
not used to fund Fibreboard's asbestos-related liabilities must be distributed
to charity. It will not be known whether any such assets will remain for
distribution until the conclusion of the Chapter 11 Cases.
Funds held in the Fibreboard Settlement Trust and Fibreboard's Undistributed
Administrative Deposits are reflected on Owens Corning's consolidated balance
sheet as restricted assets. At June 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 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
- 39 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
The payments for NSP Settlements include Administrative Deposits during the
reporting period in respect of Fibreboard claims.
Reserve
Owens Corning estimates a reserve for Fibreboard in accordance with generally
accepted accounting principles to reflect asbestos-related liabilities. As of
June 30, 2002, a reserve of approximately $1.3 billion in respect of these
liabilities was one of the items included in Owens Corning's consolidated
balance sheet under the category "Liabilities Subject to Compromise." For
periods prior to the Petition Date, they were reflected as current or other
liabilities (depending on the period in which payment was expected) under the
category "Asbestos-related liabilities - Fibreboard." These liabilities
(including any reserve for the charitable remainder) are always at least equal
to the funds held in the Fibreboard Settlement Trust and Fibreboard's
Undistributed Administrative Deposits since, under the terms of the Trust, the
funds held in the Trust must be expended either in connection with Fibreboard's
asbestos-related liabilities, or to satisfy the obligation under the Trust to
distribute to charity the assets, if any, remaining in the Trust after
satisfaction of all such liabilities (see Note 11).
The approximate balances of the components of the Fibreboard asbestos-related
reserve at September 30, 2000 (the ending date of the last reporting period
preceding the Petition Date) were:
September 30, 2000
(In billions of dollars)
NSP backlog $ 0.80
Non-NSP backlog 0.10
Future claims 0.30
Defense, Claims Processing and Administrative Expenses 0.05
In connection with this asbestos reserve, Owens Corning notes that:
- - The "NSP backlog" component represented the remaining estimated cost of
resolving Initial Claims against Fibreboard under the NSP.
- - The "Non-NSP backlog" component represented the estimated cost of resolving
asbestos personal injury claims pending against Fibreboard outside the NSP.
- - The "Future claims" component represented the estimated cost of resolving
(i) Future Claims against Fibreboard under the NSP and (ii) non-NSP claims
subsequently made against Fibreboard.
As noted in Item A above as to Owens Corning, the estimate of Fibreboard's
liabilities for pending and expected future asbestos claims is subject to
considerable uncertainty because such liabilities are influenced by numerous
variables that are inherently difficult to predict, and such uncertainties
significantly increased as a result of the Filing, including those set forth in
Item A above. In addition, as noted above, at this time Owens Corning is unable
to predict what the treatment of funds held in the Fibreboard Settlement Trust
and in Undistributed Administrative Deposits in respect of Fibreboard claims
will be under the terms of any plan or plans of reorganization.
- 40 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
At June 30, 2002, as a result of the Filing and the uncertainties referred to
above, the approximate balances of the components of the Fibreboard
asbestos-related reserve were:
Balance
(In billions of dollars)
Unpaid Final Settlements (NSP and other) $ 0.40
Other Pending and Future Claims 0.90
In connection with this asbestos reserve, Owens Corning notes that:
- - The "Unpaid Final Settlements" component represented the remaining
estimated cost for all asbestos personal injury claims pending against
Fibreboard which were subject to final settlement agreements for which
releases from claimants were obtained, and under which all other conditions
to settlement had been satisfied, as of the Petition Date.
- - The "Other Pending and Future Claims" component represented the estimated
cost of resolving (i) asbestos personal injury claims pending against
Fibreboard which were subject to resolution under NSP Agreements but for
which releases were not obtained from claimants prior to the Petition Date;
(ii) all other asbestos personal injury claims pending against Fibreboard
which were not subject to any settlement agreement; and (iii) future
asbestos personal injury claims against Fibreboard made after the Petition
Date. This component also included the residual obligation to charity under
the Fibreboard Settlement Trust (see Note 11).
Owens Corning believes that Fibreboard's reserve for asbestos claims represents
at least a minimum in a range of possible estimates of the ultimate costs to
resolve asbestos-related claims against Fibreboard through the Chapter 11
process. Owens Corning will continue to review Fibreboard's asbestos reserve on
a periodic basis and make such adjustments as may be appropriate. However, it is
possible that Owens Corning will not be in a position to conclude that a
revision to the reserve is appropriate until significant developments occur
during the course of the Chapter 11 Cases, including resolution of the
uncertainties described above. Any such revision could, however, be material to
the Company's consolidated financial position and results of operations in any
given period.
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 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
- 41 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. CONTINGENT LIABILITIES (continued)
unspecified amount of damages or, where appropriate, rescission of the
plaintiffs' purchases. The defendants filed a motion to dismiss the action on
November 20, 2001. A hearing was held on this motion on April 11, 2002, and the
Court has taken the matter under advisement. The Company believes that the claim
is without merit.
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 $15.8 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.
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.
- 42 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. FIBREBOARD SETTLEMENT TRUST
Under the Insurance Settlement described in Note 10, two of Fibreboard's
insurers provided $1.873 billion during the fourth quarter of 1999 to fund the
costs of resolving pending and future Fibreboard asbestos-related liabilities.
As of June 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.
The Trust is a qualified settlement fund for federal income tax purposes, and is
taxed separately from Owens Corning on its net taxable income, after deduction
for related administrative expenses. While there can be no assurance that the
proposed Asbestos Tax Fairness Bill discussed in Note 10, Item A, will be
enacted by Congress, such legislation would benefit the Trust during the
pendency of the Chapter 11 proceedings by eliminating the tax on income, thereby
enlarging the corpus of the Trust through tax-free income accumulation.
At this time, Owens Corning is unable to predict what the treatment of the
Fibreboard Settlement Trust will be under the terms of any plan or plans of
reorganization.
General Accounting Treatment
The assets of the Trust are comprised of cash and marketable securities
(collectively, the "Trust Assets") and, with Fibreboard's Undistributed
Administrative Deposits, are reflected on Owens Corning's consolidated balance
sheet as restricted assets. At June 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 June 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." These liabilities (including any reserve for the charitable
remainder) are always at least equal to the funds held in the Trust and
Fibreboard's Undistributed Administrative Deposits since, under the terms of the
Trust, the funds held in the Trust must be expended either in connection with
Fibreboard's asbestos-related liabilities, or to satisfy the obligation under
the Trust to distribute to charity the assets, if any, remaining in the Trust
after satisfaction of all such liabilities. It will not be known whether any
such assets will remain for distribution until the conclusion of the Chapter 11
Cases. At June 30, 2002, the Consolidated Financial Statements reflect
Fibreboard's reserve for asbestos litigation claims at $1.208 billion, with a
residual obligation to charity of $104 million.
For accounting purposes, the Trust Assets are classified from time to time as
"available for sale" or "held to maturity" and are reported in the Consolidated
Financial Statements in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, marketable securities
classified as available for sale are recorded at fair market value and
marketable securities designated as held to maturity are recorded at amortized
cost. At June 30, 2002 and December 31, 2001, substantially all marketable
securities were classified as "available for sale".
- 43 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. FIBREBOARD SETTLEMENT TRUST (continued)
Any unrealized increase/decrease in fair market value is reflected as a change
in the carrying amount of the asset on the consolidated balance sheet as well as
an increase/decrease to other comprehensive income within stockholders' equity,
net of tax. The residual liability that may be paid to charity will also
increase/decrease, with a related decrease/increase to other comprehensive
income within stockholders' equity, net of tax.
Any earnings and realized gains/losses on the Trust Assets are reflected as an
increase/decrease in the carrying amount of such assets on the consolidated
balance sheet as well as other income/expense on the consolidated statement of
income.
The residual liability that may be paid to charity will also increase/decrease,
with related other expense/income on the consolidated statement of income. Cost
for purposes of computing realized gains/losses is determined using the specific
identification method.
Results for the Period Ending June 30, 2002
During the second quarter of 2002 and 2001, Trust Assets generated
interest/dividend earnings of approximately $13 million in both years ($26
million and $29 million, respectively, for the first six 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 period, this income has been
offset by an equal charge to other expense, which represents an increase in the
residual liability to charity.
As a result of the Filing, there were no payments for asbestos litigation claims
from the Trust during the second quarter of 2002 or 2001. However, approximately
$1 million was paid during the second quarter of 2002 and $2 million was paid
during the six months ended June 30, 2002 for taxes related to earnings of the
Trust. This payment was funded by existing cash in the Trust or proceeds from
the sale of securities. The sale of securities during the second 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 June 30, 2002 and 2001, the fair market value adjustment for those securities
designated as available for sale resulted in an unrealized gain of approximately
$10 million and an unrealized loss of approximately $1 million, respectively.
These amounts have been reflected in the Company's consolidated balance sheet as
a change to the carrying amount of the asset and to other comprehensive income.
These amounts have also been reflected as a change to the liability to charity,
with a corresponding effect to other comprehensive income.
At June 30, 2002, the fair value of Trust Assets and Administrative Deposits was
$1.312 billion, which was comprised of Trust Assets of $1.203 billion of
marketable securities and $18 million of outstanding payables and Administrative
Deposits of $127 million.
- 44 -
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 June 30, 2002 and December 31,
2001 are as follows:
June 30, 2002
Gross Unrealized Gross Unrealized
Cost Gain Loss Fair Value
(In millions of dollars)
Municipal Bonds $1,151 $10 $ - $1,161
Corporate Bonds 9 - 9
Mutual Funds 33 - - 33
------ --- -------- ------
Total $1,193 $10 $ - $1,203
====== === ======== ======
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 June 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.
June 30, 2002 December 31, 2001
Cost Fair Value Cost Fair Value
(In millions of dollars)
Due within one year $ 117 $ 117 $ 91 $ 91
Due after one year through five years 738 747 679 679
Due after five years through ten years 152 153 171 171
Due after ten years 186 186 228 228
------ ------ ------ ------
Total $1,193 $1,203 $1,169 $1,169
====== ====== ====== ======
- 45 -
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
six months ended June 30, 2002:
Interest Unrealized Net Sales Realized
Balance and Gain/ of Gain/ Balance
12/31/01 Dividends (Loss) Securities (Loss) Other Payments 6/30/02
-------- --------- ------ ---------- ------ ----- -------- -------
(In millions of dollars)
Assets
Cash (payable for purchase of securities) $ (18) $ - $ - $ - $ - $ - $ - $ (18)
Marketable securities:
Available for sale 1,169 26 10 - (1) 1 (2) 1,203
------- --- --- ------ --- --- ------- -------
Total Trust assets 1,151 26 10 - (1) 1 (2) 1,185
------- --- --- ------ --- --- ------- -------
Administrative Deposits 133 - - - - (6) - 127
------- --- --- ------ --- --- ------- -------
Total assets $ 1,284 $26 $10 $ - $(1) $(5) $ (2) $ 1,312
======= === === ====== === === ======= =======
Liabilities
Asbestos litigation claims $ 1,213 $ - $ - $ - $ - $(5) $ - $ 1,208
Charity 71 26 10 - (1) - (2) 104
------- --- --- ------ --- --- ------- -------
Total liabilities $ 1,284 $26 $10 $ - $(1) $(5) $ (2) $ 1,312
======= === === ====== === === ======= =======
- 46 -
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 six months ended June
30, 2002, were as follows:
Quarter Ended June 30, 2002
---------------------------
Foreign Balance at
Balance at Exchange June 30,
March 31, 2002 Reallocation and Other 2002
-------------- ------------ --------- ----
(In millions of dollars)
Composite Solutions $ 31 $(15) $2 $ 18
Building Materials Systems 90 15 1 106
---- ---- -- ----
Total $121 $ - $3 $124
==== ==== == ====
- 47 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. GOODWILL AND OTHER INTANGIBLES (continued)
Six Months Ended June 30, 2002
------------------------------
Effect of Foreign
Balance at Adopting Exchange Balance
December 31, SFAS and at June
2001 No. 142 Reallocation Other 30, 2002
---- ------- ------------ ----- --------
(In millions of dollars)
Composite Solutions $ 33 $ - $(15) $ - $ 18
Building Materials 577 (491) 15 5 106
---- ----- ---- -- ----
Total $610 $(491) $ - $5 $124
==== ===== ==== == ====
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
June 30, 2002 June 30, 2001
------------- -------------
(In millions of dollars, except per share data)
Net income:
Reported net income $ 36 $ 29
Add back goodwill amortization, net of tax - 4
------ ------
Adjusted net income $ 36 $ 33
====== ======
Basic earnings per share:
As reported $ .65 $ .53
Add back goodwill amortization, net of tax - .07
------ ------
Adjusted basic earnings per share $ .65 $ .60
====== ======
Diluted earnings per share:
As reported $ .60 $ .49
Add back goodwill amortization, net of tax - .07
------ ------
Adjusted diluted earnings per share $ .60 $ .56
====== ======
- 48 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. GOODWILL AND OTHER INTANGIBLES (continued)
Six Months Ended
June 30, 2002 June 30, 2001
------------- -------------
(In millions of dollars, except per share data)
Net income (loss):
Reported net income (loss) $ (411) $ 19
Add back cumulative effect of change in
accounting principle, net of tax 441 -
Add back goodwill amortization, net of tax - 7
------- ------
Adjusted net income $ 30 $ 26
======= ======
Basic earnings (loss) per share:
As reported $ (7.47) $ .34
Add back cumulative effect of change in
accounting principle, net of tax 8.01 -
Add back goodwill amortization, net of tax - .13
------- ------
Adjusted basic earnings per share $ .54 $ .47
======= ======
Diluted earnings (loss) per share:
As reported $ (7.47) $ .32
Add back cumulative effect of change in
accounting principle, net of tax 8.01 -
Add back goodwill amortization, net of tax - .12
Add back net impact of anti-dilutive shares
outstanding (Note 8) (.04) -
------- ------
Adjusted diluted earnings per share $ .50 $ .44
======= ======
All of the Company's acquired other intangible assets are subject to
amortization. Other intangible asset amortization expense was approximately $1
million in the second 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:
June 30, 2002
-------------
Weighted Average Gross Carrying Accumulated
Lives Amount Amortization
----- ------ ------------
(In millions of dollars)
Contract-based 6 $ 3 $ (1)
Technology-based 22 17 (7)
Marketing-related 6 13 (8)
--- ----
$33 $(16)
=== ====
- 49 -
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.
GENERAL
Voluntary Petition for relief under Chapter 11
On October 5, 2000 (the "Petition Date"), Owens Corning and the 17 United States
subsidiaries listed below (collectively, the "Debtors") filed voluntary
petitions for relief (the "Filing") under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "USBC"). The Debtors are currently operating
their businesses as debtors-in-possession in accordance with provisions of the
Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the "Chapter
11 Cases") are being jointly administered under Case No. 00-3837 (JKF). The
Chapter 11 Cases do not include other United States subsidiaries of Owens
Corning or any of its foreign subsidiaries (collectively, the "Non-Debtor
Subsidiaries"). The subsidiary Debtors that filed Chapter 11 petitions for
relief are:
CDC Corporation Integrex Testing Systems LLC
Engineered Yarns America, Inc. HOMExperts LLC
Falcon Foam Corporation Jefferson Holdings, Inc.
Integrex Owens-Corning Fiberglas Technology Inc.
Fibreboard Corporation Owens Corning HT, Inc.
Exterior Systems, Inc. Owens-Corning Overseas Holdings, Inc.
Integrex Ventures LLC Owens Corning Remodeling Systems, LLC
Integrex Professional Services LLC Soltech, Inc.
Integrex Supply Chain Solutions LLC
The Debtors filed for relief under Chapter 11 to address the growing demands on
Owens Corning's cash flow resulting from its multi-billion dollar asbestos
liability. This liability is discussed in greater detail in Note 10 to the
Consolidated Financial Statements.
- 50 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In late 2001, the asbestos-related Chapter 11 cases pending in the District of
Delaware (the Chapter 11 Cases of Owens Corning and the cases of Armstrong World
Industries, Inc., W. R. Grace & Co., Federal-Mogul Global, Inc., and USG
Corporation) were ordered transferred to the United States District Court for
the District of Delaware (the "District Court") before Judge Alfred M. Wolin to
facilitate development and implementation of a coordinated plan for management
(the "Administrative Consolidation"). The District Court has entered an order
referring the Chapter 11 Cases back to the USBC, where they were previously
pending, subject to its ongoing right to withdraw such referral with respect to
any proceedings or issues (the applicable court from time to time responsible
for any particular aspect of the Chapter 11 Cases being hereinafter referred to
as the "Bankruptcy Court"). Owens Corning is unable to predict what impact the
Administrative Consolidation will have on the timing, outcome or other aspects
of the Chapter 11 Cases.
Consequence of Filing
As a consequence of the Filing, all pending litigation against the Debtors is
stayed automatically by section 362 of the Bankruptcy Code and, absent further
order of the Bankruptcy Court, no party may take any action to recover on
pre-petition claims against the Debtors. In addition, pursuant to section 365 of
the Bankruptcy Code, the Debtors may reject or assume pre-petition executory
contracts and unexpired leases, and other parties to contracts or leases that
are rejected may assert rejection damages claims as permitted by the Bankruptcy
Code.
Two creditors' committees, one representing asbestos claimants and the other
representing unsecured creditors, have been appointed as official committees in
the Chapter 11 Cases. In addition, the Bankruptcy Court has appointed James J.
McMonagle as legal representative for the class of future asbestos claimants
against one or more of the Debtors. The two committees and the futures
representative will have the right to be heard on all matters that come before
the Bankruptcy Court. Owens Corning expects that these committees and the
futures representative will play important roles in the Chapter 11 Cases and the
negotiation of the terms of any plan or plans of reorganization.
Owens Corning anticipates that substantially all liabilities of the Debtors as
of the date of the Filing will be resolved under one or more Chapter 11 plans of
reorganization to be proposed and voted on in the Chapter 11 Cases in accordance
with the provisions of the Bankruptcy Code. Although the Debtors intend to file
and seek confirmation of such a plan or plans, there can be no assurance as to
when the Debtors will file such a plan or plans, or that such plan or plans will
be confirmed by the Bankruptcy Court and consummated. Owens Corning is unable to
predict what impact the Administrative Consolidation will have on the timing of
the Debtors' filing or confirmation of such plan or plans or its effect, if any,
on the terms thereof.
As provided by the Bankruptcy Code, the Debtors initially had the exclusive
right to propose a plan of reorganization for 120 days following the Petition
Date, until February 2, 2001. By subsequent action, the Bankruptcy Court has
extended such exclusivity period until August 30, 2002, and similarly extended
the Debtors' exclusive rights to solicit acceptances of a reorganization plan
from April 3, 2001 to October 31, 2002. If the Debtors fail to file a plan of
reorganization prior to the ultimate expiration of the exclusivity period, or if
such plan is not accepted by the requisite numbers of creditors and equity
holders entitled to vote on the plan, other parties in interest in the Chapter
11 Cases may be permitted to propose their own plan(s) of reorganization for the
Debtors.
Owens Corning is unable to predict at this time what the treatment of creditors
and equity holders of the respective Debtors will be under any proposed plan or
plans of reorganization. Such plan or plans may provide, among other things,
that all present and future asbestos-related liabilities of Owens Corning and
Fibreboard will be discharged and assumed and resolved by one or more
independently administered trusts
- 51 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
established in compliance with Section 524(g) of the Bankruptcy Code. Such plan
or plans may also provide for the issuance of an injunction by the Bankruptcy
Court pursuant to Section 524(g) of the Bankruptcy Code that will enjoin actions
against the reorganized Debtors for the purpose of, directly or indirectly,
collecting, recovering or receiving payment of, on, or with respect to any
claims resulting from asbestos-containing products allegedly manufactured, sold
or installed by Owens Corning or Fibreboard, which claims will be paid in whole
or in part by one or more Section 524(g) trusts. Similar plans of reorganization
have been confirmed in the Chapter 11 cases of other companies involved in
asbestos-related litigation. Section 524(g) of the Bankruptcy Code provides
that, if certain specified conditions are satisfied, a court may issue a
supplemental permanent injunction barring the assertion of asbestos-related
claims or demands against the reorganized company and channeling those claims to
an independent trust.
Owens Corning is unable to predict at this time what treatment will be accorded
under any such reorganization plan or plans to inter-company indebtedness,
licenses, transfers of goods and services and other inter-company and
intra-company arrangements, transactions and relationships that were entered
into prior to the Petition Date. These arrangements, transactions and
relationships may be challenged by various parties in the Chapter 11 Cases and
payments and other obligations in respect thereof may be restricted 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 be under any such plan or plans with respect to (1) the
guaranties issued by certain of Owens Corning's U.S. subsidiaries, including
Owens-Corning Fiberglas Technology Inc. ("OCFT") and IPM Inc., a Non-Debtor
Subsidiary that holds Owens Corning's ownership interest in a majority of Owens
Corning's foreign subsidiaries ("IPM"), with respect to Owens Corning's $1.8
billion pre-petition bank credit facility (the "Pre-Petition Credit Facility"
which is now in default) or (2) OCFT's license agreements with Owens Corning and
Exterior Systems, Inc., a wholly-owned subsidiary of Owens Corning ("Exterior"),
pursuant to which OCFT licenses intellectual property to Owens Corning and
Exterior.
The Bankruptcy Court may confirm a plan of reorganization only upon making
certain findings required by the Bankruptcy Code, and a plan may be confirmed
over the dissent of non-accepting creditors and equity security holders if
certain requirements of the Bankruptcy Code are met. The payment rights and
other entitlements of pre-petition creditors and Owens Corning's shareholders
may be substantially altered by any plan or plans of reorganization confirmed in
the Chapter 11 Cases. There is no assurance that there will be sufficient assets
to satisfy the Debtors' pre-petition liabilities in whole or in part, and the
pre-petition creditors of some Debtors may be treated differently than those of
other Debtors. Pre-petition creditors may receive under a plan or plans less
than 100% of the face value of their claims, and the interests of Owens
Corning's equity security holders may be substantially diluted or cancelled in
whole or in part. As noted above, it is not possible at this time to predict the
outcome of the Chapter 11 Cases, the effect of the Administrative Consolidation,
the terms and provisions of any plan or plans of reorganization, or the effect
of the Chapter 11 reorganization process on the claims of the creditors of the
Debtors or the interests of Owens Corning's equity security holders.
Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with
the Bankruptcy Court setting forth the assets and liabilities of the Debtors as
of the date of the Filing. Differences between amounts recorded by the Debtors
and claims filed by creditors will be investigated and resolved as part of the
proceedings in the Chapter 11 Cases.
- 52 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 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 $15.8 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 $8.4 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 will file a motion to dismiss
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 June 30, 2002, the
remaining filed proofs of claim included approximately 9,000 claims, totaling
approximately $7.4 billion, as follows:
- - Approximately 2,900 claims, totaling approximately $1.2 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.
- 53 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
- - Approximately 5,500 claims, totaling approximately $5.5 billion, alleging
rights to payment for financing, environmental, trade debt and other
matters (the "General Claims"). The Company has previously recorded
approximately $3.6 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
fully under the heading "PBGC Claim" in Note 10 to the Consolidated
Financial Statements; a $275 million class action claim involving alleged
problems with a specialty roofing product, which Owens Corning does not
believe is meritorious based upon its historic experience with servicing
its warranty program for such product; claims for contract rejections,
totaling approximately $260 million, of which approximately $200 million
are protective claims covering contracts which have not been rejected by
the Debtors as of June 30, 2002; 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.
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 2,700 proofs of claim (in addition to claims
described above under "General Bar Date"), totaling approximately $2.1 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 900, totaling approximately $0.4
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.
- 54 -
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.
Quarter and Six Months Ended June 30, 2002
SALES AND PROFITABILITY FOR THE QUARTER ENDED JUNE 30, 2002
Net sales for the quarter ended June 30, 2002 were $1.285 billion, up 4% from
the second quarter of 2001 level of $1.239 billion, principally due to higher
volumes in U.S. Building Materials partially offset by lower sales volume in the
European composite market. Sales in the Building Materials segment increased 6%
to $937 million in the second quarter of 2002, compared to $885 million in the
second quarter of 2001, due to volume increases in the U.S. residential
insulation and roofing markets, partially offset by lower prices in U.S.
residential insulation markets. In the Composite Solutions business, sales were
$348 million during the second quarter of 2002, down 2% from $354 million in
2001 primarily due to lower sales volume in Europe, partially offset by higher
sales volume in the U.S. and Asia Pacific. Please see Note 2 to the Consolidated
Financial Statements for further details of segment sales. On a consolidated
basis, there was a favorable currency translation impact on sales denominated in
foreign currencies during the second quarter of 2002 compared to the second
quarter of 2001.
Sales outside the U.S. represented 13% of total sales during the second quarter
of 2002, compared to 15% during the first quarter of 2001. The decline in
non-U.S. sales is primarily due to decreases in sales volume in composite
materials in Europe.
Gross margin for the quarters ended June 30, 2002 and 2001 was 19% and 18% of
net sales, respectively. Marketing and administrative expenses increased to $144
million in the second quarter of 2002, compared to $128 million in the second
quarter of 2001, primarily as the result of programs supporting our growth
initiatives, employee training, and selling costs associated with higher
Building Material sales volume.
- 55 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
On a comparative basis, income from operations increased to $70 million for the
quarter ended June 30, 2002 from $57 million in 2001, primarily reflecting lower
Chapter 11 related costs, asbestos insurance proceeds, and a credit in the
second quarter of 2002 for restructure and other charges compared to a charge in
2001. Please see the table below for further details of these items. Also
negatively impacting income from operations were increased costs associated with
post-retirement health and pension related expenses, which were up approximately
$8 million from the second quarter 2001, due mainly to changes in plan
assumptions and prior declines in plan asset values. Primary drivers of income
from operations in our business segments were sales volume increases in our
Building Materials market and productivity improvements across most businesses,
partially offset by price and volume decreases in our Composites business. Other
contributing factors to income from operations for the second quarter 2002 in
the Building Materials segment were lower energy costs, higher asphalt costs in
residential roofing, increased operating expenses as a result of spending in
support of our growth initiatives, as well as higher selling costs attributable
to a higher sales volume. Please see Note 2 to the Consolidated Financial
Statements for further details of segment income from operations.
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
June 30,
(In millions of dollars)
2002 2001
---- ----
Reported income from operations $ 70 $57
Restructure (credit)/charges (See below) (1) 7
Other (credits)/charges in cost of sales and operating
expenses (See below) (2) 10
Chapter 11 related reorganization items (See Note 1) 25 17
Proceeds from insurance for asbestos litigation claims,
excluding Fibreboard (See Note 10) (5) -
---- ---
Income from ongoing operations $ 87 $91
==== ===
For the quarter ended June 30, 2002, Owens Corning reported net income of $36
million, or $.60 per share on a diluted basis, compared to net income of $29
million, or $.49 per share on a diluted basis, for the quarter ended June 31,
2001. Cost of borrowed funds was $4 million for each of the referenced quarters
(from the Petition Date through June 30, 2002, contractual interest expense not
accrued or recorded on pre-petition debt totaled $294 million, of which $35
million relates to the second quarter of 2002 and $44 million relates to the
second quarter of 2001 (please see Note 1 to the Consolidated Financial
Statements)).
SALES AND PROFITABILITY FOR THE SIX MONTHS ENDED JUNE 30, 2002
Net sales for the six months ended June 30, 2002 were $2.392 billion, up from
the $2.306 billion reported for the first six months of 2001, principally due to
higher volumes in U.S. Building Materials partially offset by volume declines in
the European composite market.
- 56 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
On a comparative basis, income from operations for the six months ended June 30,
2002 was $73 million compared to $40 million for 2001. This increase was
primarily attributable to lower restructure and other charges and asbestos
insurance proceeds, 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 was increased costs associated with
post-retirement health and pension related expenses, which were up approximately
$18 million from the six months ended 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 increases in
Building Materials and decreased material and energy costs for both segments,
partially offset by lower price and higher operating expenses in our Building
Materials businesses. Please see Note 2 to the Consolidated Financial Statements
for further details of segment income from operations.
The reconciliation from income from operations to income from ongoing operations
(see description above) is as follows:
Six Months Ended
June 30,
(In millions of dollars)
2002 2001
---- ----
Reported income from operations $ 73 $ 40
Restructure charges (See below) 7 16
Other charges in cost of sales and operating expenses
(See below) 2 43
Chapter 11 related reorganization items (See Note 1) 50 38
Proceeds from insurance for asbestos litigation claims,
excluding Fibreboard (See Note 10) (5) -
----- ----
Income from ongoing operations $ 127 $137
===== ====
The net loss for the six months ended June 30, 2002 was $411 million, or $(7.47)
per share compared to net income of $19 million or $.32 per share for the same
period in 2001. Results for the six months ended June 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 $8 million for each of the referenced
periods (contractual interest expense not accrued or recorded on pre-petition
debt totaled $71 million for the six months ended June 30, 2002 and $93 million
for the six months ended June 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 second
half 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.
- 57 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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 charge (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 determined 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 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. The primary groups impacted include manufacturing and administrative
personnel. As of June 30, 2002, approximately $4 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 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 represents $21 million for severance
costs associated with the elimination of approximately 460 positions, primarily
impacting manufacturing and administrative personnel in the U.S., Canada and the
U.K. The remaining $5 million represented a charge for the
- 58 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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
June 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 46%, compared to 55% for the full year 2001.
LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS
Cash flow from operations used $105 million in the six months ended June 30,
2002, compared to positive $30 million for the six months ended June 30, 2001.
The decrease in cash flow from operations in 2002 is primarily attributable to
the cash flow effect of a decrease in accounts payable of $119 million in the
six months ended June 30, 2002 compared to an increase of $78 million in the
same period of 2001.
Inventories at June 30, 2002 increased by $13 million from the December 31, 2001
level due largely to the seasonal build of inventories. Receivables at June 30,
2002 were $585 million, a $168 million increase over the December 31, 2001
level, attributable to the seasonal increase in sales. At June 30, 2002, Owens
Corning's net working capital was $870 million and our current ratio was 2.16,
compared to $800 million and 1.94, respectively, at December 31, 2001 and $948
million and 2.33, respectively, at June 30, 2001.
Investing activities used $99 million of cash during the six months ended June
30, 2002, compared to $62 million in the same period of 2001. Capital spending
for property, plant and equipment, excluding acquisitions, for the six months
was $104 million in 2002 and $83 million in 2001. We anticipate that 2002
spending for capital and investments will be approximately $280 million, a
portion of which is uncommitted. We expect that funding for these expenditures
will be from the Company's operations and existing cash on hand.
Financing activities in the six months ended June 30, 2002 resulted in a $17
million decrease in cash compared to an increase of $6 million during the same
period in 2001. The results for 2002 reflect an $18 million application of funds
previously subject to administrative freeze (see discussion below) to satisfy
certain pre-petition indebtedness. At June 30, 2002, we had $2.831 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 June 30, 2001, we
had $2.838 billion of borrowings subject to compromise and $119 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).
- 59 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
At June 30, 2002, the Company had $553 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.
In connection with the Filing, the Debtors obtained a $500 million
debtor-in-possession credit facility from a group of lenders led by Bank of
America, N.A. (the "DIP Financing"), which currently expires November 15, 2002.
There were no borrowings outstanding under the DIP facility at June 30, 2002,
however, approximately $54 million of the availability under this credit
facility was utilized as a result of the issuance of standby letters of credit
and similar uses.
As a consequence of the Filing and the impact of certain provisions of the
Company's DIP Financing and in a cash management order entered by the Bankruptcy
Court, the Company and its subsidiaries are now subject to certain restrictions,
including on their ability to pay dividends and to transfer cash and other
assets to each other and to their affiliates.
The Company believes, based on information presently available to it, that its
cash and cash equivalents, cash available from operations and the DIP Financing
will provide sufficient liquidity to allow it to continue as a going concern for
the foreseeable future. However, the ability of the Company to continue as a
going concern (including its ability to meet post-petition obligations of the
Debtors and to meet obligations of the Non-Debtor Subsidiaries) and the
appropriateness of using the going concern basis for its financial statements
are dependent upon, among other things, (i) the Company's ability to comply with
the terms of the DIP Financing and any cash management order entered by the
Bankruptcy Court in connection with the Chapter 11 Cases, (ii) the ability of
the Company to maintain adequate cash on hand, (iii) the ability of the Company
to generate cash from operations, (iv) the ability of the Non-Debtor
Subsidiaries to obtain necessary financing, (v) confirmation of a plan or plans
of reorganization under the Bankruptcy Code, and (vi) the Company's ability to
achieve profitability following such confirmation.
Accounting Changes
Effective January 1, 2001, the Company implemented Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), see Note 9 to the Consolidated Financial Statements.
This statement and its interpretations establish accounting and reporting
standards requiring derivative instruments (including certain derivative
instruments embedded in other contracts) to be recorded in the balance sheet as
either an asset or liability measured at its fair value. The impact of adoption
at January 1, 2001 did not have a material effect in the Consolidated Statement
of Income (Loss) and resulted in other comprehensive income of approximately $1
million.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), 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.
- 60 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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".
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 six months ended June
30, 2002, were as follows:
Quarter Ended June 30, 2002
---------------------------
Foreign Balance at
Balance at Exchange June 30,
March 31, 2002 Reallocation and Other 2002
-------------- ------------ --------- ----
(In millions of dollars)
Composite Solutions $ 31 $(15) $2 $ 18
Building Materials Systems 90 15 1 106
---- ---- -- ----
Total $121 $ - $3 $124
==== ==== == ====
- 61 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Six Months Ended June 30, 2002
------------------------------
Effect of Foreign
Balance at Adopting Exchange Balance
December 31, SFAS and at June
2001 No. 142 Reallocation Other 30, 2002
---- ------- ------------ ----- --------
(In millions of dollars)
Composite Solutions $ 33 $ - $(15) $ - $ 18
Building Materials 577 (491) 15 5 106
---- ----- ---- -- ----
Total $610 $(491) $ - $5 $124
==== ===== ==== == ====
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
June 30, 2002 June 30, 2001
------------- -------------
(In millions of dollars, except per share data)
Net income:
Reported net income $ 36 $ 29
Add back goodwill amortization, net of tax - 4
------ ------
Adjusted net income $ 36 $ 33
====== ======
Basic earnings per share:
As reported $ .65 $ .53
Add back goodwill amortization, net of tax - .07
------ ------
Adjusted basic earnings per share $ .65 $ .60
====== ======
Diluted earnings per share:
As reported $ .60 $ .49
Add back goodwill amortization, net of tax - .07
------ ------
Adjusted diluted earnings per share $ .60 $ .56
====== ======
- 62 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Six Months Ended
June 30, 2002 June 30, 2001
------------- -------------
(In millions of dollars, except per share data)
Net income (loss):
Reported net income (loss) $ (411) $ 19
Add back cumulative effect of change in
accounting principle, net of tax 441 -
Add back goodwill amortization, net of tax - 7
------- ------
Adjusted net income $ 30 $ 26
======= ======
Basic earnings (loss) per share:
As reported $ (7.47) $ .34
Add back cumulative effect of change in
accounting principle, net of tax 8.01 -
Add back goodwill amortization, net of tax - .13
------- ------
Adjusted basic earnings per share $ .54 $ .47
======= ======
Diluted earnings (loss) per share:
As reported $ (7.47) $ .32
Add back cumulative effect of change in
accounting principle, net of tax 8.01 -
Add back goodwill amortization, net of tax - .12
Add back net impact of anti-dilutive shares
outstanding (Note 8) (.04) -
------- ------
Adjusted diluted earnings per share $ .50 $ .44
======= ======
All of the Company's acquired other intangible assets are subject to
amortization. Other intangible asset amortization expense was approximately $1
million in the second 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:
June 30, 2002
-------------
Weighted Average Gross Carrying Accumulated
Lives Amount Amortization
----- ------ ------------
(In millions of dollars)
Contract-based 6 $ 3 $ (1)
Technology-based 22 17 (7)
Marketing-related 6 13 (8)
--- ----
$33 $(16)
=== ====
- 63 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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.
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 June 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.
- 64 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of changes in foreign currency exchange
rates, interest rates, and natural gas prices in the normal course of business.
The Company manages such exposures through the use of certain financial and
derivative financial instruments. The Company's objective with these instruments
is to reduce exposure to fluctuations in earnings and cash flows.
The Company enters into various forward contracts and options, which change in
value as foreign currency exchange rates change, to preserve the carrying amount
of foreign currency-denominated assets, liabilities, commitments, and certain
anticipated foreign currency transactions and earnings.
The Company also enters into certain currency and interest rate swaps to protect
the carrying amount of its investments in certain foreign subsidiaries, to hedge
the principal and interest payments of certain debt instruments, and to manage
its exposure to fixed versus floating interest rates.
The Company also enters into cash-settled natural gas futures to protect against
changes in natural gas prices.
The Company's policy is to use foreign currency, interest rate, and natural gas
derivative financial instruments only to the extent necessary to manage
exposures as described above. The Company does not enter into such transactions
for speculative purposes.
The Company uses a variance-covariance Value at Risk (VAR) computation model to
estimate the potential loss in the fair value of the referenced financial
instruments. The VAR model uses historical foreign exchange, interest, and
natural gas rates as an estimate of the volatility and correlation of these
rates in future periods. It estimates a loss in fair market value using
statistical modeling techniques.
The amounts presented below represent the maximum potential one-day loss in fair
value that the Company would expect from adverse changes in foreign currency
exchange rates, interest rates or natural gas prices assuming a 95% confidence
level:
June 30, December 31,
Risk Category 2002 2001
------------- ---- ----
(In millions of dollars)
Foreign currency $ - $ -
Interest rate $ 8 $ 13
Natural gas $ 1 $ 1
Virtually all of the potential loss associated with interest rate risk is
attributable to fixed-rate long-term debt instruments. The potential loss,
identified above, includes interest on debt subject to compromise.
- 65 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 10, Contingent Liabilities, to Owens Corning's Consolidated Financial
Statements above, which is incorporated here by reference.
On October 5, 2000 (the "Petition Date"), Owens Corning and the 17 United States
subsidiaries listed below (collectively, the "Debtors") filed voluntary
petitions for relief (the "Filing") under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "USBC"). The Debtors are currently operating
their businesses as debtors-in-possession in accordance with provisions of the
Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the "Chapter
11 Cases") are being jointly administered under Case No. 00-3837 (JKF). The
subsidiary Debtors that filed Chapter 11 petitions for relief are:
CDC Corporation Integrex Testing Systems LLC
Engineered Yarns America, Inc. HOMExperts LLC
Falcon Foam Corporation Jefferson Holdings, Inc.
Integrex Owens-Corning Fiberglas Technology Inc.
Fibreboard Corporation Owens Corning HT, Inc.
Exterior Systems, Inc. Owens-Corning Overseas Holdings, Inc.
Integrex Ventures LLC Owens Corning Remodeling Systems, LLC
Integrex Professional Services LLC Soltech, Inc.
Integrex Supply Chain Solutions LLC
In late 2001, the asbestos-related Chapter 11 cases pending in the District of
Delaware (the Chapter 11 Cases of Owens Corning and the cases of Armstrong World
Industries, Inc., W. R. Grace & Co., Federal-Mogul Global, Inc., and USG
Corporation) were ordered transferred to the United States District Court for
the District of Delaware (the "District Court") before Judge Alfred M. Wolin to
facilitate development and implementation of a coordinated plan for management
(the "Administrative Consolidation"). The District Court has entered an order
referring the Chapter 11 Cases back to the USBC, where they were previously
pending, subject to its ongoing right to withdraw such referral with respect to
any proceedings or issues (the applicable court from time to time responsible
for any particular aspect of the Chapter 11 Cases being hereinafter referred to
as the "Bankruptcy Court").
The Company anticipates that substantially all liabilities of the Debtors as of
the date of the Filing will be resolved under one or more Chapter 11 plans of
reorganization to be proposed and voted on in the Chapter 11 Cases in accordance
with the provisions of the Bankruptcy Code. As a consequence of the Filing, all
pending litigation against the Debtors is stayed automatically by section 362 of
the Bankruptcy Code and, absent further order of the Bankruptcy Court, no party
may take action to recover on pre-petition claims against the Debtors. See Note
1, Voluntary Petition for Relief Under Chapter 11, to Owens Corning's
Consolidated Financial Statements above.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As a consequence of the Filing and the impact of certain provisions of the
Company's DIP Financing and in a cash management order entered by the Bankruptcy
Court, the Company and its subsidiaries are now subject to certain restrictions,
including on their ability to pay dividends and to transfer cash and other
assets to each other and to their affiliates. See Note 1, Voluntary Petition for
Relief Under Chapter 11, to Owens Corning's Consolidated Financial Statements
above.
- 66 -
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 June 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
June 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.
o The Company did not file any reports on Form 8-K during the quarter ended June
30, 2002.
- 67 -
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: August 12, 2002 By: /s/ Michael H. Thaman
---------------- ---------------------
Michael H. Thaman
Chairman of the Board and
Chief Financial Officer
(as duly authorized officer)
Date: August 12 , 2002 By: /s/ Charles E. Dana
----------------- -------------------
Charles E. Dana
Vice President - Corporate
Controller and Global Sourcing
- 68 -
EXHIBIT INDEX
Exhibit
Number Document Description
(3) Articles of Incorporation and By-Laws.
(i) Certificate of Incorporation of Owens Corning, as amended
(incorporated herein by reference to Exhibit (3) to Owens
Corning's quarterly report on Form 10-Q (File No. 1-3660) for
the quarter ended March 31, 1997).
(ii) By-Laws of Owens Corning, as amended (incorporated herein by
reference to Exhibit (3) to Owens Corning's annual report on
Form 10-K (File No. 1-3660) for the year 1999).
(10) Material Contracts
Description of amendment of 1987 Stock Plan for Directors (filed
herewith).
(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).