-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NjttERgwOs2CyJywEwnqljokSlloq0aC9p4x8NSDvM7BbisT5DbFlGdUnrFmDT9r hqlq3d567ukJFA5+crIvEA== /in/edgar/work/20000818/0000075234-00-000014/0000075234-00-000014.txt : 20000922 0000075234-00-000014.hdr.sgml : 20000922 ACCESSION NUMBER: 0000075234-00-000014 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000818 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OWENS CORNING CENTRAL INDEX KEY: 0000075234 STANDARD INDUSTRIAL CLASSIFICATION: [3290 ] IRS NUMBER: 344323452 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-03660 FILM NUMBER: 705225 BUSINESS ADDRESS: STREET 1: OWENS CORNING WORLD HEADQUARTERS STREET 2: ONE OWENS CORNING PKWY CITY: TOLEDO STATE: OH ZIP: 43659 BUSINESS PHONE: 4192488000 MAIL ADDRESS: STREET 1: OWENS CORNING WORLD HEADQUARTERS STREET 2: ONE OWENS CORNING PARKWAY CITY: TOLEDO STATE: OH ZIP: 43659 FORMER COMPANY: FORMER CONFORMED NAME: OWENS CORNING FIBERGLAS CORP DATE OF NAME CHANGE: 19920703 10-Q/A 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q/A Amendment No. 1 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended June 30, 2000 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, 2000 55,446,027 Owens Corning's Form 10-Q for the quarter ended June 30, 2000, filed on August 14, 2000, is hereby amended by amending Item 1 "Financial Statements" of Part I to read as set forth below. This amendment corrects a transposition error involving the entries for the quarter and six months ended June 30, 2000 and 1999 for the line item "NET SALES" on the Consolidated Statement of Income. This transposition resulted from an undetected error in the software program used for converting the Form 10-Q to EDGAR filing format. - 2 - PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (unaudited) Quarter Ended Six Months Ended June 30, June 30, -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- (In millions of dollars, except share data) NET SALES $ 1,295 $ 1,310 $ 2,552 $ 2,440 COST OF SALES 996 987 1,968 1,858 -------- --------- -------- --------- Gross margin 299 323 584 582 -------- --------- --------- ---------- OPERATING EXPENSES Marketing and administrative expenses 146 152 295 288 Science and technology expenses 14 14 28 28 Provision for asbestos litigation claims (Note 11) 790 - 790 - Other (Note 4) (13) 2 3 1 ---------- ---------- ---------- ----------- Total operating expenses 937 168 1,116 317 -------- --------- -------- ---------- INCOME (LOSS) FROM OPERATIONS (638) 155 (532) 265 OTHER Cost of borrowed funds 51 39 94 72 Other (Note 12) - - - - ---------- ----------- ----------- ------------ INCOME (LOSS) BEFORE PROVISION (CREDIT) FOR INCOME TAXES (689) 116 (626) 193 Provision (credit) for income taxes (267) 41 (254) 68 --------- --------- ---------- ----------- INCOME (LOSS) BEFORE MINORITY INTEREST AND EQUITY IN NET INCOME (LOSS) OF AFFILIATES (422) 75 (372) 125 Minority Interest (2) (1) (4) (3) Equity in net income (loss) of affiliates (1) 2 (1) (2) --------- ---------- ----------- ------------ NET INCOME (LOSS) $ (425) $ 76 $ (377) $ 120 ======== ========= ========= ========== NET INCOME (LOSS) PER COMMON SHARE Basic net income (loss) per share $ (7.76) $ 1.41 $ (6.90) $ 2.22 -------- -------- --------- ---------- Diluted net income (loss) per share $ (7.76) $ 1.31 $ (6.90) $ 2.08 -------- -------- --------- ---------- Weighted average number of common shares outstanding and common equivalent shares during the period (in millions) Basic 54.8 54.1 54.7 54.0 Diluted 54.8 59.7 54.7 59.5 The accompanying notes are an integral part of this statement.
- 3 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (unaudited) June 30, December 31, June 30, 2000 1999 1999 ---- ---- ---- (In millions of dollars) ASSETS - ------ CURRENT Cash and cash equivalents $ 497 $ 70 $ 26 Restricted cash (Note 11) 250 - - Restricted cash and securities - Fibreboard - current portion (Note 12) 525 900 - Receivables 519 358 611 Inventories 549 466 502 Insurance for asbestos litigation claims - current portion (Note 11) - 25 150 Deferred income taxes 182 185 366 Income tax receivable 4 61 3 Other current assets 26 23 24 ----------- ------------ ----------- Total current 2,552 2,088 1,682 ---------- ----------- ---------- OTHER Insurance for asbestos litigation claims (Note 11) 93 205 228 Restricted cash and securities - Fibreboard (Note 12) 874 938 - Asbestos costs to be reimbursed - Fibreboard - - 62 Deferred income taxes 827 547 493 Goodwill (Note 4) 654 743 750 Investments in affiliates 90 65 51 Other noncurrent assets 259 208 243 ---------- ------------ ----------- Total other 2,797 2,706 1,827 --------- ----------- ---------- PLANT AND EQUIPMENT, at cost Land 58 70 70 Buildings and leasehold improvements 732 725 810 Machinery and equipment 2,504 2,639 2,502 Construction in progress 278 258 244 ---------- ------------ ----------- 3,572 3,692 3,626 Less - accumulated depreciation (1,933) (1,992) (1,944) ---------- ------------ ----------- Net plant and equipment 1,639 1,700 1,682 --------- ----------- ---------- TOTAL ASSETS $ 6,988 $ 6,494 $ 5,191 ========= =========== ========== 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, 2000 1999 1999 ---- ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars) - ------------------------------------ CURRENT Accounts payable and accrued liabilities $ 692 $ 839 $ 708 Reserve for asbestos litigation claims - current portion (Note 11) 925 950 1,050 Asbestos-related liabilities - Fibreboard - current portion (Note 12) 525 900 - Short-term debt 43 121 68 Long-term debt - current portion 75 159 27 ---------- ----------- ----------- Total current 2,260 2,916 1,906 --------- ---------- ---------- LONG-TERM DEBT 2,698 1,764 2,068 --------- ---------- ---------- OTHER Reserve for asbestos litigation claims (Note 11) 1,482 820 1,210 Asbestos-related liabilities - Fibreboard (Note 12) 874 938 67 Other employee benefits liability 320 318 325 Pension plan liability 37 42 52 Other 352 339 345 ---------- ----------- ----------- Total other 3,065 2,457 1,999 --------- ---------- ---------- COMPANY OBLIGATED SECURITIES OF ENTITIES HOLDING SOLELY PARENT DEBENTURES 195 194 195 ---------- ---------- ----------- MINORITY INTEREST 48 44 45 ----------- ----------- ------------ STOCKHOLDERS' EQUITY Common stock 701 695 698 Deficit (1,894) (1,510) (1,650) Accumulated other comprehensive income (74) (51) (48) Other (11) (15) (22) ------------ ------------ ------------ Total stockholders' equity (1,278) (881) (1,022) ---------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,988 $ 6,494 $ 5,191 ========= ========== ========== The accompanying notes are an integral part of this statement.
- 5 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) Quarter Ended Six Months Ended June 30, June 30, -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- (In millions of dollars) NET CASH FLOW FROM OPERATIONS Net income (loss) $ (425) $ 76 $ (377) $ 120 Reconciliation of net cash provided by operating activities Noncash items: Provision for asbestos litigation claims 790 - 790 - Provision for depreciation and amortization 45 50 93 101 Provision (credit) for deferred income taxes (292) 16 (288) 39 Other (19) - (32) 5 (Increase) decrease in receivables (33) (56) (214) (142) (Increase) decrease in inventories (63) (7) (120) (60) Increase (decrease) in accounts payable and accrued liabilities 20 (45) (60) (226) (Increase) decrease in income tax receivable 12 24 62 104 (Increase) decrease in restricted cash 6 - (250) - Proceeds from insurance for asbestos litigation claims, excluding Fibreboard (Note 11) 335 13 347 32 Payments for asbestos litigation claims, excluding Fibreboard (Note 11) (141) (175) (364) (370) Other 7 5 (24) (6) -------- ----------- --------- ---------- Net cash flow from operations $ 242 $ (99) $ (437) $ (403) -------- ----------- --------- ---------- NET CASH FLOW FROM INVESTING Additions to plant and equipment $ (97) $ (59) $ (165) $ (99) Investment in subsidiaries, net of cash acquired - - (4) - Proceeds from the sale of affiliate or business (Note 4) 143 - 193 - Other (Note 4) (34) (16) (36) (27) --------- ----------- --------- ---------- Net cash flow from investing $ 12 $ (75) $ (12) $ (126) --------- ----------- --------- ---------- The accompanying notes are an integral part of this statement.
- 6 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) Quarter Ended Six Months Ended June 30, June 30, -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- (In millions of dollars) NET CASH FLOW FROM FINANCING Net additions to long-term credit facilities $ 300 $ 170 $ 955 $ 261 Other additions to long-term debt 22 1 22 251 Other reductions to long-term debt (72) (33) (83) (33) Net increase (decrease) in short-term debt (44) 10 (9) 28 Dividends paid (4) (4) (8) (8) Other - 3 - - ------- ----------- ----------- ------------ Net cash flow from financing $ 202 $ 147 $ 877 $ 499 ------- --------- --------- ---------- Effect of exchange rate changes on cash - 2 (1) 2 ------- ---------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 456 (25) 427 (28) Cash and cash equivalents at beginning of period 41 51 70 54 -------- ---------- --------- ---------- Cash and cash equivalents at end of period $ 497 $ 26 $ 497 $ 26 ======= ========== ======== ========== The accompanying notes are an integral part of this statement.
- 7 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. SEGMENT DATA Quarter Ended Six Months Ended June 30, June 30, -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- (In millions of dollars) NET SALES Reportable Operating Segments - ----------------------------- Building Materials United States $ 942 $ 946 $ 1,834 $ 1,760 Europe 31 58 88 121 Canada and other 62 60 117 105 --------- ------------ ---------- --------- Total Building Materials 1,035 1,064 2,039 1,986 -------- ---------- --------- -------- Composite Materials United States 157 150 316 278 Europe 87 86 171 168 Canada and other 47 40 91 69 --------- ----------- --------- --------- Total Composite Materials 291 276 578 515 -------- ---------- --------- -------- Total Reportable Operating Segments $ 1,326 $ 1,340 $ 2,617 $ 2,501 Reconciliation to Consolidated Net Sales - ---------------------------------------- Composite Materials U.S. Sales to Building Materials U.S. (31) (30) (65) (61) ---------- ------------ ----------- ---------- Net sales $ 1,295 $ 1,310 $ 2,552 $ 2,440 ======= ========== ======== ======== External Customer Sales by Geographic Region - -------------------------------------------- United States $ 1,068 $ 1,066 $ 2,085 $ 1,977 Europe 118 144 259 289 Canada and other 109 100 208 174 -------- ----------- --------- --------- Net Sales $ 1,295 $ 1,310 $ 2,552 $ 2,440 ======= ========== ======== ========
- 8 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 1. SEGMENT DATA (continued) Quarter Ended Six Months Ended June 30, June 30, -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- (In millions of dollars) INCOME (LOSS) FROM OPERATIONS Reportable Operating Segments - ----------------------------- Building Materials United States $ 103 $ 118 $ 174 $ 188 Europe - 1 1 4 Canada and other 9 12 13 16 ---------- ---------- --------- ---------- Total Building Materials 112 131 188 208 --------- ---------- -------- --------- Composite Materials United States 40 33 88 61 Europe 4 (4) 3 (4) Canada and other 5 4 12 7 ---------- ----------- --------- ----------- Total Composite Materials 49 33 103 64 --------- ---------- -------- ---------- Total Reportable Operating Segments $ 161 $ 164 $ 291 $ 272 -------- --------- -------- --------- Geographic Regions - ------------------ United States $ 143 $ 151 $ 262 $ 249 Europe 4 (3) 4 - Canada and other 14 16 25 23 --------- ---------- --------- ---------- Total Reportable Operating Segments $ 161 $ 164 $ 291 $ 272 ======== ========= ======== ========= Reconciliation to Consolidated Income - ------------------------------------- Before Provision for Income Taxes --------------------------------- Provision for asbestos litigation claims (790) - (790) - General corporate income (expense) (9) (9) (33) (7) Cost of borrowed funds (51) (39) (94) (72) ---------- ---------- ---------- ----------- Consolidated Income (Loss) Before Provision (Credit) for Income Taxes $ (689) $ 116 $ (626) $ 193 --------- --------- --------- ---------
- 9 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 2. 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 1999 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. 3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS During 1997 and 1998, the Company recorded pretax charges of $386 million for restructuring and other actions to implement the Company's announced program to close manufacturing facilities, enhance manufacturing productivity and reduce overhead. Of the total pretax charge of $386 million, $143 million was recorded in the fourth quarter of 1997 and the remaining $243 million was recorded during 1998. The $386 million pretax charge was comprised of a $185 million charge associated with the restructuring of the Company's business segments and a $201 million charge associated with asset impairments, including investments in certain affiliates. The components of the restructuring charge include $115 million for personnel reductions; $68 million for the divestiture of non-strategic businesses and facilities, of which $52 million represented non-cash asset revaluations, $16 million for exit cost liabilities, primarily for leased warehouse and office facilities that were vacated; and $2 million for other actions. The divestiture of non-strategic businesses and facilities included the closure of the Candiac, Quebec manufacturing facility. During the second quarter of 1999, the Candiac manufacturing facility was re-opened in order to meet market demands. The $115 million for personnel reductions represented severance costs associated with the elimination of approximately 2,450 positions worldwide. The primary groups affected included manufacturing and administrative personnel. As of June 2000, approximately $103 million has been paid and charged against the reserve for personnel reductions. Charges of approximately $13 million have been made against exit cost liabilities through June 2000. No adjustments have been made to the liabilities. The following table summarizes the status of the liabilities from the restructure program described above, including cumulative spending and adjustments and the remaining balance as of June 30, 2000: Beginning Total Ending Liability Payments Liability --------- -------- --------- (In millions of dollars) Personnel Costs $ 115 $ (103) $ 12 Facility and Business Exit Costs 16 (13) 3 Other 2 (2) - ------- ------- ---------- Total $ 133 $ (118) $ 15 ======= ======== =======
- 10 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS (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 an impairment exists. When it is determined that an impairment exists, the Company uses the fair market value of the asset, usually measured by the discounted cash flows to be generated by the asset, to determine the amount of the impairment to be recorded in the financial statements. 4. ACQUISITIONS AND DIVESTITURES OF BUSINESSES On May 31, 2000, the Company completed the sale of its European Building Materials business to an unconsolidated joint venture, Alcopor Owens Corning, in which the Company has a 40% interest. Proceeds from the sale, net of the Company's $34 million cash infusion into the joint venture, were $177 million. In connection with this transaction, the joint venture assumed $62 million of debt from Owens Corning and the Company incurred fees of approximately $6 million, resulting in net cash proceeds of approximately $109 million. A pretax gain of approximately $5 million, including a $54 million write-off of goodwill, was realized from the sale. This pretax gain was recorded as a reduction of other operating expenses on the consolidated statement of income. The results of operations of the European Building Materials business are reflected in the Company's consolidated statement of income through the period ending May 31, 2000. For the six months ended June 30, 2000 and the year ended December 31, 1999, the European Building Materials business recorded sales of approximately $88 million and $234 million, respectively, and income from operations of approximately $1 million and $12 million, respectively. Effective May 31, 2000, the Company accounts for its ownership interest in Alcopor Owens Corning under the equity method. Please see Note 1 to the Consolidated Financial Statements. During the first quarter of 2000, the Company completed the sale of the assets of Falcon Foam, a producer of foam insulation in Michigan and California. Net proceeds from the sale were $50 million and resulted in a pretax loss of approximately $5 million, including a $32 write-off of goodwill. This loss was recorded as other operating expenses on the consolidated statement of income. During the first quarter of 2000, the Company also realigned its vinyl siding manufacturing operations, resulting in the closure of its Fair Bluff, North Carolina manufacturing plant. This realignment resulted in a $9 million pretax expense, all of which was recorded as other operating expenses on the consolidated statement of income. In connection with a proposal received from its Korean joint venture partner, the Company infused approximately $29 million of cash into this venture in March, 1999. As a result of this investment, along with additional investments by the other partner, the Company increased its ownership interest in Owens Corning Korea to 70%. The Company accounted for this transaction under the purchase method of accounting whereby the assets acquired and liabilities assumed, including $84 million in debt, have been recorded at their fair values and the results of operations have been consolidated since the date of acquisition. Prior to that date, the Company accounted for this joint venture under the equity method. - 11 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 5. LONG-TERM DEBT During the first quarter of 1999, the Company issued $250 million of senior debt securities ("the securities") as unsecured obligations of the Company. These securities, which mature in 2009, bear an annual rate of interest of 7.0%, payable semiannually. The proceeds from the issuance of these securities were used to reduce borrowings under the Company's long-term revolving credit agreement. 6. INCOME TAXES The reconciliation between the U.S. federal statutory rate and the Company's effective income tax rate is: Quarter Six Months Ended Ended June 30, June 30, -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- U.S. federal statutory rate (35%) 35% (35%) 35% State and local income taxes (5) 3 (5) 3 Special tax election (a) - - (2) - Foreign tax rate differences 1 - 1 - Other - (3) - (3) -------- ------- -------- ------- Effective tax rate (39%) 35% (41%) 35% ======== ====== ====== ======= (a) Represents the implementation of a tax strategy associated with one of our foreign subsidiaries.
7. INVENTORIES June 30, 2000 December 31, 1999 ------------- ----------------- (In millions of dollars) Inventories are summarized as follows: Finished goods $ 413 $ 374 Materials and supplies 205 158 ----------- ---------- FIFO inventory 618 532 Less: Reduction to LIFO basis (69) (66) ----------- ---------- Total Inventory $ 549 $ 466 =========== ========== Approximately $389 million and $269 million of total inventories were valued using the LIFO method at June 30, 2000 and December 31, 1999, respectively.
- 12 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 8. CONSOLIDATED STATEMENT OF CASH FLOWS Cash payments (refunds) for income taxes and cost of borrowed funds are summarized as follows: Quarter Six Months Ended Ended June 30, June 30, -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- (In millions of dollars) Income taxes $ 10 $ 2 $ (34) $ (80) Cost of borrowed funds 57 46 99 73
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Please refer to Notes 4 and 12 for disclosure of Non-Cash activities. 9. COMPREHENSIVE INCOME The Company's comprehensive income for the quarters ended June 30, 2000 and 1999 was a loss of $434 million and income of $76 million, respectively. For the six months ended June 30, 2000 and 1999, comprehensive income was a loss of $401 million and income of $109 million, respectively. The Company's comprehensive income includes net income, currency translation adjustments, and deferred gains and losses on certain hedging transactions. The comprehensive loss for the quarter and six months ended June 30, 2000 includes a reclassification from other comprehensive income to net income of approximately $13 million. This reclassification reflects the expense recognition of currency translation adjustments resulting from the sale of the European Building Materials business to Alcopor Owens Corning (see Note 4). - 13 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 10. EARNINGS PER SHARE The following table reconciles the net income (loss) and weighted average number of shares used in the basic earnings per share calculation to the net income and weighted average number of shares used to compute diluted earnings per share. Quarter Ended June 30, Six Months Ended June 30, 2000 1999 2000 1999 ---- ---- ---- ---- (In millions of dollars, except share data) Net income (loss) used for basic earnings per share $ (425) $ 76 $ (377) $ 120 Net income (loss) effect of assumed conversion of preferred securities - 2 - 4 --------------- ------------- ------------ ------------ Net income used for diluted earnings per share $ (425) $ 78 $ (377) $ 124 ============== =========== =========== ========== Weighted average number of shares outstanding used for basic earnings per share (thousands) 54,793 54,116 54,652 54,011 Deferred awards and stock options (thousands) - 1,014 - 903 Shares from assumed conversion of preferred securities (thousands) - 4,566 - 4,566 --------------- ---------- ------------ --------- Weighted average number of shares outstanding and common equivalent shares used for diluted earnings per share (thousands) 54,793 59,696 54,652 59,480 ============ ========= ========= ========
- 14 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 11. CONTINGENT LIABILITIES Asbestos Liabilities - -------------------- ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) Numerous claims have been asserted against Owens Corning alleging personal injury 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. The vast majority of these claims are being resolved through the National Settlement Program described below. As a result of this program, the number of new lawsuits filed against Owens Corning has been sharply reduced from historical levels, and compared to other co-defendants in the litigation. National Settlement Program - --------------------------- Beginning in late 1998, Owens Corning has implemented a National Settlement Program ("NSP") to resolve personal injury asbestos claims through settlement agreements with individual plaintiffs' law firms. The number of participating law firms has expanded from approximately 50 when the NSP was established to 117 as of June 30, 2000. The NSP continues to expand. The NSP is designed to better manage Owens Corning's asbestos liability, and that of Fibreboard (see Item B below), and to help Owens Corning better predict the timing and amount of indemnity payments for both pending and future claims. Under the NSP, each participating law firm has agreed to a long-term settlement agreement ("NSP Agreement") that extends through at least 2008. All NSP Agreements provide for the resolution of asbestos claims, including unfiled claims, pending with a participating law firm at the time it enters into an NSP Agreement ("Initial Claims") and also establishes procedures and fixed payments for resolving without litigation those claims that may arise after a participating firm enters into an NSP Agreement ("Future Claims") against either Owens Corning or Fibreboard, or both. The NSP is designed to allow both holders of Initial Claims and Future Claims to receive prompt payment without incurring the significant delays and uncertainties of litigation, while enabling Owens Corning and Fibreboard to manage their respective businesses predictably and efficiently. Terms and Conditions of NSP Agreements - -------------------------------------- Settlement amounts for both Initial and Future Claims have been negotiated with each participating firm, and each firm has communicated with its respective current clients to obtain authority to settle individual claims. Payments to each claimant may vary based on a number of factors, including the type and severity of disease, age and occupation. All payments are 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 are or will be entitled to an agreed pre-determined amount of additional compensation if they later develop a more severe asbestos-related medical condition. - 15 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 11. CONTINGENT LIABILITIES ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) As to Future Claims, each participating NSP firm has 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 must present medical evidence of functional impairment, as well as the product exposure criteria and other requirements set forth above, to be entitled to compensation. Owens Corning and Fibreboard (see Item B below) each retains the right to terminate any individual NSP Agreement if in any year more than a specified number of plaintiffs represented by the plaintiffs' firm in question reject and ultimately opt out of such agreement. Opt out procedures are specified in the settlement agreements, and provide for mediation and further negotiation before a claimant may pursue his or her case in the court system. Through June 2000, fewer than 200 claimants have elected to reject the original settlement proposal, and to mediate under the terms of the NSP Agreement. As of June 30, 2000, Owens Corning has settled, through the NSP, a total of more than 237,000 Initial Claims. To date, Owens Corning has paid more than $1 billion (including Administrative Deposits as described below) of the settlement amounts payable under the NSP in connection with these Initial Claims; the balance is scheduled to be paid as part of Owens Corning's estimated asbestos-related payments through 2004 (described below under "Asbestos-Related Payments"). Through July 2000, Owens Corning has received approximately 1,300 Future Claims under the NSP for payment in 2003, provided that such claims meet the criteria for payment under the NSP Agreements. If all such claims were approved for payment, estimated payments for those claims would be less than $50 million. Claims approval and payments to claimants for both Initial and Future Claims are being managed by Integrex, a wholly-owned Owens Corning subsidiary that specializes in, among other things, claims processing. NSP Initial Claims Payment Schedules - ------------------------------------ Payments under the NSP for Initial Claims will generally be made through 2004. It is anticipated that payments for a limited number of "exigent" Future Claims (principally those of living malignancy claimants) will continue to be made as promptly as possible, limited by Owens Corning's available cash flow. In addition to the right to defer payments for Future Claims as described below, Owens Corning has requested that NSP participating firms agree to defer payments in 2000 through 2002 on Initial Claims to the extent necessary to ensure that Owens Corning limits its total asbestos-related payments to the following schedule: $950 million in 2000, $400 million in 2001, and $250 million in 2002 ("Deferral Program"). An Executive Committee appointed by the NSP firms to consider the request, conduct appropriate due diligence, and make a recommendation concerning the program has agreed to recommend the Deferral Program. To facilitate implementation of the Deferral Program, each NSP firm will receive a revised payment schedule. The Deferral Program is designed to facilitate continued predictability and manageability of Owens Corning's cash flow, while taking into account the ongoing expansion of the NSP, the timing of - 16 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 11. CONTINGENT LIABILITIES ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) expected future insurance recoveries, efficient tax planning, and compliance with ongoing loan covenants. On the basis of preliminary information, Owens Corning estimates that the Deferral Program may result in the deferral of approximately $500 million of anticipated NSP payments. As part of the Deferral Program, Owens Corning has agreed to pay any such deferred amounts in two equal installments in 2003 and 2004, subject to then applicable loan covenants. NSP Future Claims Payment Schedules - ------------------------------------ Payments for other qualifying Future Claims will begin in 2003, and will be made on the following schedule, based on when such claims are accepted by Owens Corning for payment: - -------------------------------------------------------- ---------------------------------------------------- Date Accepted for Payment Year in which Claim Will be Paid - -------------------------------------------------------- ---------------------------------------------------- - -------------------------------------------------------- ---------------------------------------------------- January 1, 1999 through June 30, 2000 2003 - -------------------------------------------------------- ---------------------------------------------------- - -------------------------------------------------------- ---------------------------------------------------- July 1, 2000 through December 31, 2001 2004 - -------------------------------------------------------- ---------------------------------------------------- - -------------------------------------------------------- ---------------------------------------------------- January 1, 2002 through June 30, 2003 2005 - -------------------------------------------------------- ---------------------------------------------------- - -------------------------------------------------------- ---------------------------------------------------- July 1, 2003 through December 31, 2004 2006 - -------------------------------------------------------- ---------------------------------------------------- - -------------------------------------------------------- ---------------------------------------------------- January 1, 2005 through June 30, 2006 2007 - -------------------------------------------------------- ---------------------------------------------------- - -------------------------------------------------------- ---------------------------------------------------- July 1, 2006 or later 60 days to one year after acceptance - -------------------------------------------------------- ----------------------------------------------------
The schedule of payments provided for qualifying Future Claims under NSP Agreements that have been entered into during the fourth quarter of 1999 and thereafter will be delayed by at least one year from the dates for payment set forth above. Pursuant to existing NSP Agreements, if, in any calendar year after 2002, the payment of any amounts under the NSP in respect of Future Claims would not be permitted under Owens Corning's then prevailing loan covenants, Owens Corning will have the right to defer payment of such amounts until February 15 of the following year. Commencing in 2003, subject to the variables and uncertainties discussed below, Owens Corning expects that its payments for Future Claims will not exceed $150 million per year, plus any amounts payable pursuant to the Deferral Program discussed above. Additional settlement payments will be made by Fibreboard (see Item B below). Non-NSP Claims - -------------- As of June 30, 2000, approximately 27,000 asbestos personal injury claims were pending against Owens Corning outside the NSP. Owens Corning notes that information necessary to allow critical evaluation of these claims, including the nature and severity of disease and definitive identifying information concerning the claimant, typically becomes available only through the discovery process or as a result of settlement negotiations, often not occurring until years after the claim is filed. In view of the indefiniteness of the available information, the actual number of pending claims may vary from the number indicated. From the information available, it appears that fewer than 5 percent of the claims in this non-NSP backlog are mesothelioma claims. However, Owens Corning cautions that the number of new mesothelioma filings from non-NSP law firms, including new firms without prior asbestos litigation experience, exceeds those filed by NSP firms during the same period. - 17 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 11. CONTINGENT LIABILITIES ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) From the beginning of 1999 through June 30, 2000, Owens Corning has resolved (by settlement or otherwise) approximately 6,000 asbestos personal injury claims outside the NSP. Generally, these claims were settled as they were scheduled for trial, and typically involved more serious injuries and diseases. During the implementation of the NSP, Owens Corning has attempted to settle individual non-NSP claims for payments generally consistent with payments to NSP claimants. Such settlements are preferable to trials, provided that the agreed settlement is fair in relation to similarly situated NSP claimants, because both the timing and amount of such payments are more predictable. Owens Corning notes that, since late 1999, it has received a number of settlement demands from non-NSP plaintiffs' counsel which have exceeded historical settlement averages for like cases. In the event this trend continues, and Owens Corning is unable to reach acceptable settlements, Owens Corning may have to take certain cases to trial in order to attempt to obtain fair and appropriate resolution of those cases, and to pay settlement amounts that more closely approximate NSP settlement values. If this strategy is successful, non-participating plaintiffs' counsel may elect to join the NSP rather than continue to seek excessive settlement values. However, the possibility of adverse verdicts which exceed NSP settlement values, the increased costs of defense and appeals, and the delays inherent in litigation, may affect the aggregate payments for non-NSP claims. Asbestos-Related Payments - ------------------------- In the second quarter of 2000, Owens Corning made approximately $135 million of asbestos-related payments, falling within four major categories: (1) Settlements in respect of verdicts incurred or claims resolved prior to the implementation of the NSP ("Pre-NSP Settlements"); (2) NSP settlements; (3) Non-NSP settlements covering cases not resolved by the NSP; and (4) Defense, claims processing and administrative expenses, as follows: (In millions of dollars) Pre-NSP Settlements $ 20 NSP Settlements 78 Non-NSP Settlements 19 Defense, Claims Processing and Administrative Expenses 18 ------ $ 135
Owens Corning has 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, 2000, approximately $250 million of Administrative Deposits previously made by Owens Corning had not been finally distributed to claimants ("Undistributed Administrative Deposits") and, accordingly, are reflected in Owens Corning's consolidated balance sheet as restricted assets, under the caption "Restricted cash", and have not been subtracted from Owens Corning's reserve for asbestos personal injury claims (discussed below). - 18 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 11. CONTINGENT LIABILITIES ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) All amounts discussed above are before tax and application of insurance recoveries. Owens Corning currently estimates that it will make asbestos-related payments (including Administrative Deposits) before tax and application of insurance recoveries of approximately $950 million during 2000 (of which approximately $614 million had been made as of June 30), $400 million in 2001, $250 million in 2002 and $400 million in each of 2003 and 2004. The amounts shown for 2003 and 2004 include $250 million in each year to pay the estimated $500 million amount that may be deferred under the Deferral Program described above. The actual amounts of such payments will depend on numerous variables, including: (1) the rate at which NSP claims are submitted and processed; (2) the severity of disease involved in such claims; (3) the number and type of non-NSP claims resolved; (4) the cost of resolving such claims, including defense costs; (5) the amount of insurance recoveries obtained; and (6) the implementation and continued applicability of the Deferral Program described above. Asbestos Legislation - -------------------- In the fall of 1999, both the United States Senate and House of Representatives held hearings on proposed legislation (S 758 and HR 1283) intended to address the problem of asbestos litigation. Although the original House and Senate proposals were virtually identical, the House has been active in considering revisions to HR 1283. In the first quarter of 2000, the House Judiciary Committee approved HR 1283, amended to protect private settlement plans and to make such plans enforceable. Owens Corning believes that key members of Congress view the NSP favorably and that, if any asbestos legislation is eventually enacted, it will be consistent with the continued implementation of the NSP. Tax Legislation - --------------- In the spring of 2000, the United States House of Representatives introduced proposed legislation (HR 4543) which would exempt investment income earned by an asbestos-related trust from federal income tax, and 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 manufactured 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 exemption of investment income would benefit the Fibreboard Settlement Trust (described below) by having the effect of enlarging the corpus of the trust through tax-free interest accumulation. The Senate is considering a similar bill (S 2955). There can be no assurance that any such legislation will be enacted. Other Asbestos-Related Litigation - --------------------------------- As previously reported, Owens Corning believes that it has spent significant amounts to resolve claims of asbestos claimants whose injuries were caused or exacerbated by cigarette smoking. Owens Corning is 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. - 19 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 11. CONTINGENT LIABILITIES ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) In October 1998, the Circuit Court for Jefferson County, Mississippi granted leave to file an amended complaint in an existing action to add claims by Owens Corning against seven tobacco companies and several other tobacco industry defendants. The court has set a February 2001 trial date for this action. 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. Insurance - --------- During the second quarter of 2000, Owens Corning received a $335 million settlement payment from a group of excess insurers, resolving a dispute concerning coverage from such insurers for non-products asbestos-related personal injury claims. Of this amount, $125 million had been reflected on Owens Corning's financial statements as a probable insurance recovery. The balance of $210 million was recorded as pre-tax income in the second quarter. As of June 30, 2000, Owens Corning's financial statements reflect $93 million in unexhausted insurance coverage (net of deductibles and self-insured retentions) under its liability insurance policies applicable to asbestos personal injury claims. Most of this amount represents unconfirmed potential non-products coverage with excess level insurance carriers, as to which Owens Corning has estimated its probable recoveries. Owens Corning also has a significant amount of other unconfirmed potential non-products coverage with excess level carriers. Owens Corning is actively pursuing non-products insurance recoveries under these policies. The amount and timing of recoveries from excess level policies will depend on subsequent negotiations and/or proceedings. Reserve - ------- Owens Corning estimates a reserve in accordance with generally accepted accounting principles to reflect asbestos-related liabilities that have been asserted or are probable of assertion, in which liabilities are probable and estimable. This reserve was established initially through a charge to income in 1991, with additional charges to income of $1.1 billion in 1996 and $1.4 billion in 1998. During the second quarter of 2000, Owens Corning reviewed the sufficiency of its provision for asbestos-related liabilities in light of recent trends and developments in the administration of the NSP and in asbestos litigation generally. These trends and developments included: o Additional information obtained in reviewing, processing and approving for payment more than 90,000 of the claims submitted under the NSP. This information allowed Owens Corning to better determine the disease type and value of the claims submitted under the NSP, including the substantial number of claims originally classified as of "unknown" disease type and the more than 60,000 claims that have been added to the NSP since its inception. As the result of such information, Owens Corning's estimate of the average value of an NSP claim has increased by approximately $2,000. o Increased settlement demands (as described above) and higher than expected costs, particularly in 2000, to settle non-NSP claims. - 20 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 11. CONTINGENT LIABILITIES ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) o Recent large verdict awards against other asbestos defendants in several jurisdictions, including Madison County, Illinois and Orange County, Texas. o Additional information from plaintiffs' firms as to their expectations concerning the number and nature of future filings. As the result of its review, Owens Corning increased its asbestos reserves by $1 billion in the second quarter of 2000. The approximate balances of the components of the reserve at June 30, 2000 are: ----------------------------------------------------------- ------------------------------------- Balance ----------------------------------------------------------- ------------------------------------- ----------------------------------------------------------- ------------------------------------- (In billions of dollars) ----------------------------------------------------------- ------------------------------------- ----------------------------------------------------------- ------------------------------------- NSP backlog 1.2 ----------------------------------------------------------- ------------------------------------- ----------------------------------------------------------- ------------------------------------- Non-NSP backlog 0.3 ----------------------------------------------------------- ------------------------------------- ----------------------------------------------------------- ------------------------------------- Future claims 0.7 ----------------------------------------------------------- ------------------------------------- ----------------------------------------------------------- ------------------------------------- Defense and administrative processing costs 0.1 ----------------------------------------------------------- ------------------------------------- ----------------------------------------------------------- ------------------------------------- Pre-NSP Settlements 0.1 ----------------------------------------------------------- -------------------------------------
In connection with its asbestos reserve, Owens Corning notes that: o The "NSP backlog" component represents the remaining estimated cost of resolving Initial Claims (as of June 30, 2000) under the NSP. Owens Corning is scheduled to pay these costs as part of its estimated asbestos-related payments through 2004 (described above under "Asbestos-Related Payments"). o The "Non-NSP backlog" component represents the estimated cost of resolving asbestos personal injury claims pending against Owens Corning outside the NSP as of June 30, 2000. o The "Future claims" component represents the estimated cost of resolving (i) Future Claims under the NSP and (ii) non-NSP claims made after June 30, 2000. o The reserve as a whole reflects $250 million of Undistributed Administrative Deposits. Owens Corning cautions that its estimate of its liabilities for pending and expected future asbestos claims is influenced by numerous variables that are difficult to predict and that such estimate therefore remains subject to considerable uncertainty. Such variables include, 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 are covered by an NSP Agreement; the extent, if any, to which an individual claimant exercises his or her right to opt out of an NSP Agreement and/or utilize counsel not participating in the NSP; the extent, if any, to which counsel that are not bound by an NSP Agreement undertake the representation of asbestos personal injury plaintiffs against Owens Corning; the extent, if any, to which Owens Corning exercises 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. - 21 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 11. CONTINGENT LIABILITIES ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) As referenced above, Owens Corning also notes that in recent months it has received a number of settlement demands from non-NSP plaintiffs' counsel which have exceeded historical settlement averages for like cases. In addition, there have been recent large verdict awards against other asbestos defendants in several jurisdictions, including Madison County, Illinois and Orange County, Texas. While the impact of these events to date was considered in connection with the increase in Owens Corning's asbestos reserves during the second quarter of 2000 (described above), these events, and the possibility that either or both will continue at the same or worse levels, further contributes to the uncertainty surrounding Owens Corning's estimate of its liabilities for asbestos claims. Recent bankruptcies of two other defendants in the personal injury litigation may also have an adverse impact on future NSP claimants' willingness to accept agreed NSP values to resolve their claims, as well as on the cost of resolving future non-NSP claims. Owens Corning will continue to review the adequacy of its estimates of liabilities and insurance on a periodic basis and make such adjustments as may be appropriate. Management Opinion - ------------------ As described above, Owens Corning has agreed to make payments for asbestos liabilities through at least 2004. These payments will require dedication of a significant portion of Owens Corning's sources of liquidity expected to be available during this period. Depending on operational cash flow and other sources of cash, such as insurance recoveries, divestitures and tax refunds, it is possible that Owens Corning will require additional financing. In this respect, Owens Corning notes that its current $1.8 billion long-term bank credit facility expires in June 2002. As a result, such facility will become a current liability in the second quarter of 2001. Prior to its expiration, Owens Corning will need to replace it, in a similar or larger amount, or obtain alternate financing, on acceptable terms ("Refinancing"). Management believes that it is likely that such Refinancing will place limits on payments for asbestos liabilities and may impose other restrictive terms and conditions. Therefore, accommodations in addition to the Deferral Program may be required. Although Owens Corning intends to continue to work with the Executive Committee appointed by the NSP firms, there can be no assurance that such additional accommodations or other conditions of the Refinancing will be acceptable to plaintiffs' attorneys. In addition to the foregoing risk factors, Owens Corning notes that, in view of the variables and uncertainties described above, additional uninsured and unreserved costs may arise out of personal injury asbestos claims, and such additional costs may be substantial over time. - 22 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 11. CONTINGENT LIABILITIES ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) Although any opinion is necessarily judgmental and must be based on an assessment of the variables and uncertainties described above, provided that Refinancing can be obtained on acceptable terms, NSP firms continue to support the Deferral Program and agree to any necessary additional accommodations or other conditions of the Refinancing, Owens Corning is not required to make asbestos-related payments during the period through 2004 in excess of its estimated payments described above under "Asbestos-Related Payments", and Owens Corning's results of operations do not deteriorate significantly during the period, management believes that asbestos-related costs will not impair the ability of Owens Corning to meets its obligations. The process of obtaining the Refinancing, obtaining necessary additional accommodations, and limiting total asbestos-related payments will involve complex negotiations among numerous parties with varying interests. Moreover, many factors not in the control of Owens Corning affect the Company's financial performance. As a result, there can be no assurance that the necessary steps will be successfully completed. 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. The vast majority of these claims are being resolved through the NSP, as described below. National Settlement Program - --------------------------- Fibreboard is a participant in the NSP and is a party to the NSP Agreements discussed in Item A. The NSP Agreements became effective as to Fibreboard in the fourth quarter of 1999, when the Insurance Settlement (discussed below) became effective. The NSP Agreements settle 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 June 30, 2000, Fibreboard has settled, through the NSP, approximately 200,000 Initial Claims. The NSP Agreements also provide for the resolution of Future Claims against Fibreboard through the administrative processing arrangement described in Item A. The timing of payments for Initial and Future Claims against Fibreboard will be consistent, generally, with the timing of Owens Corning payments, described in Item A. 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 and is final and not subject to appeal. - 23 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 11. CONTINGENT LIABILITIES ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued) 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 Fibreboard's costs of resolving pending and future asbestos claims, whether under the NSP, in the tort system, or otherwise. The Insurance Settlement funds are held in and invested by the Fibreboard Settlement Trust and are available to satisfy Fibreboard's pending and future asbestos-related liabilities. As of June 30, 2000, $1,249 million (net of outstanding payables) was held in the Fibreboard Settlement Trust and $150 million was held in Undistributed Administrative Deposits on behalf of Fibreboard. On an ongoing basis, the funds held in the Trust will be subject to investment earnings/losses and will be reduced as applied to satisfy Fibreboard's asbestos-related liabilities. Generally, it is expected that payments of Fibreboard's asbestos-related liabilities will be paid directly by the Fibreboard Settlement Trust on behalf of Fibreboard. Any asbestos-related amounts paid directly by Fibreboard are subject to reimbursement from the Trust's assets. Under the terms of the Trust, any of such assets that ultimately are not used to fund Fibreboard's asbestos-related liabilities must be distributed to charity. 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. These assets are reflected as current assets or other assets, with each category denoted "Restricted cash and securities - Fibreboard". 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. Accordingly, Owens Corning's consolidated balance sheet also reflects liabilities in an aggregate amount equal to the funds held in the Trust and Fibreboard's Undistributed Administrative Deposits. These liabilities, denoted as "Asbestos-related liabilities - Fibreboard", are reflected as current or other liabilities, depending on the period in which payment is expected. At June 30, 2000, Owens Corning estimates Fibreboard's asbestos-related liabilities at $1,365 million. This amount includes an increase of $99 million during the second quarter of 2000 as the result of Owens Corning's review of Fibreboard's asbestos-related liabilities. See Note 12 for additional information concerning the Fibreboard Settlement Trust. Asbestos-Related Payments - ------------------------- In the second quarter of 2000, gross payments for asbestos-related claims against Fibreboard were approximately $249 million, all of which were paid/reimbursed by the Fibreboard Settlement Trust. These payments fell within four major categories, as follows: (In millions of dollars) Pre-1993 and Interim Claims $ 7 NSP Settlements 208 Non-NSP Settlements 17 Defense, Claims Processing and Administrative Expenses 17 ------- $ 249
- 24 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 11. CONTINGENT LIABILITIES ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued) The payments for NSP Settlements include Administrative Deposits during the quarter on behalf of Fibreboard. At June 30, 2000, there were approximately $150 million of Undistributed Administrative Deposits made on behalf of Fibreboard. As described above, these Undistributed Administrative Deposits are included as restricted assets, under the caption "Restricted cash and securities - Fibreboard", on Owens Corning's consolidated balance sheet. In addition to the Deferral Program for Owens Corning asbestos-related payments (described in Item A), Owens Corning has requested that NSP participating firms agree to modify the Fibreboard NSP payment obligations so as to slow early year payments and allow earnings in the Fibreboard Settlement Trust to accumulate. Owens Corning is currently working with the NSP Executive Committee to develop an acceptable payment schedule. There can be no assurance that an acceptable schedule will be agreed upon. Owens Corning currently estimates that Fibreboard will incur total asbestos-related payments (including Administrative Deposits) of approximately $700 million in 2000, all of which are payable/reimbursable by the Fibreboard Settlement Trust as described above. Fibreboard payments beyond 2000 will depend upon whether an acceptable alternative payment schedule is agreed upon. Fibreboard payments will also depend on the same variables and uncertainties as those described above affecting Owens Corning's payments. Management Opinion - ------------------ Owens Corning cautions that its estimate of Fibreboard's asbestos-related liabilities is influenced by the same types of variables and is subject to similar uncertainty as in the case of Owens Corning. Although any opinion is necessarily judgmental and must be based on an assessment of the variables and uncertainties described above, Owens Corning believes the amounts available from the Fibreboard Settlement Trust will be adequate to fund Fibreboard's ongoing defense and indemnity costs associated with asbestos-related personal injury claims for the foreseeable future. Other Liabilities - ----------------- Various other lawsuits and claims arising in the normal course of business are pending against Owens Corning, some of which allege substantial damages. Management believes that the outcome of these lawsuits and claims will not have a materially adverse effect on Owens Corning's financial position or results of operations. - 25 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. FIBREBOARD SETTLEMENT TRUST Under the Insurance Settlement described in Note 11, two of Fibreboard's insurers provided $1.873 billion during the fourth quarter of 1999 to fund Fibreboard's costs of resolving pending and future asbestos claims. The Insurance Settlement funds are held in and invested by the Fibreboard Settlement Trust (the "Trust") and are available to satisfy Fibreboard's pending and future asbestos-related liabilities. On an ongoing basis, the funds held in the Trust will be subject to investment earnings/losses and will be reduced as applied to satisfy Fibreboard's asbestos liabilities. Under the terms of the Trust, any Trust assets which ultimately are not used to fund Fibreboard's asbestos 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. 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. These assets are reflected as current assets or other assets, with each category denoted "Restricted cash and securities - Fibreboard". 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. Accordingly, Owens Corning's consolidated balance sheet also reflects liabilities in an aggregate amount equal to the funds held in the Trust and Fibreboard's Undistributed Administrative Deposits. These liabilities, denoted as "Asbestos-related liabilities - Fibreboard," are reflected as current or other liabilities, depending on the period in which payment is expected. At June 30, 2000, Owens Corning estimates Fibreboard's asbestos-related liabilities at $1.365 billion, with a residual obligation to charity of $34 million. Payments from the Trust and distributions from Undistributed Administrative Deposits for asbestos-related liabilities reduce both the assets and related liabilities on the consolidated balance sheet. 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 Company's consolidated financial statements in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, marketable securities classified as available for sale are recorded at fair market value and marketable securities designated as held to maturity are recorded at amortized cost. Any unrealized increase/decrease in fair market value is reflected as a change in the carrying amount of the asset on the consolidated balance sheet as well as an increase/decrease to other comprehensive income within stockholders' equity, net of tax. The residual liability to 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. - 26 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. FIBREBOARD SETTLEMENT TRUST (continued) The residual liability to 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. Adjustments - ----------- Periodically, the Company evaluates the amount of Fibreboard's asbestos-related liabilities. During the second quarter of 2000, the Company determined that Fibreboard's asbestos-related liabilities required an increase of $99 million (see Note 11). Accordingly, the Company increased Fibreboard's asbestos-related liabilities and reduced the amount payable to charity by this amount during the second quarter of 2000. Results for the Period Ending June 30, 2000 - ------------------------------------------- Trust Assets generated interest/dividend earnings of approximately $18 million in the second quarter of 2000 and $38 million year to date, which have been recorded as an increase in the carrying amount of the assets on Owens Corning's consolidated balance sheet and as other income on the consolidated statement of income. This income, however, has been offset by an equal charge to other expense, which represents the increase in the residual liability to be paid to charity. Payments for asbestos-related claims from the Trust (including Administrative Deposits) during the second quarter of 2000 were approximately $249 million and total $634 million for the year. Such payments were funded by existing cash in the Trust or proceeds from the sale of securities. The sale of securities resulted in a net realized gain of less than $1 million during the second quarter of 2000 and approximately $1 million year to date. 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. During 2000, fair market value adjustments for securities designated as available for sale have resulted in a net unrealized gain of $1 million since their valuation at December 31, 1999. As the investments had an unrealized loss of approximately $1 million at December 31, 1999, there is no net unrealized gain or loss on these investments at June 30, 2000. The gain in the current year has been reflected in the Company's consolidated balance sheet as an increase to the carrying amount of the asset and an increase to other comprehensive income. This gain has also been reflected as an increase to the charity liability, with a corresponding decrease to other comprehensive income. At June 30, 2000, the fair value of Trust Assets was $1.399 billion, net of $29 million in outstanding payables. Total trust assets of $1.278 billion were invested in marketable securities. The fair value of Undistributed Administrative Deposits was $150 million and was held as restricted cash. $525 million of these assets have been classified as a current asset while the remaining securities have been classified as noncurrent assets. The amortized cost, gross unrealized holding gains and losses and fair value of the investment securities available for sale at June 30, 2000 and December 31, 1999 are as follows: - 27 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. FIBREBOARD SETTLEMENT TRUST (continued) June 30, 2000 ------------- Amortized Gross Unrealized Gross Unrealized Cost Gain Loss Fair Value --------- ---------------- ---------------- ---------- (In millions of dollars) Corporate Bonds $ 532 $ - $ - $ 532 Corporate Notes 73 - - 73 Municipal Bonds 204 - - 204 Mutual Funds 247 - - 247 US Government Bonds 222 - - 222 --------- ---------- -------- --------- Total $ 1,278 $ - $ - $ 1,278
December 31, 1999 ----------------- Amortized Gross Unrealized Gross Unrealized Cost Gain Loss Fair Value --------- ---------------- ---------------- ---------- (In millions of dollars) Corporate Bonds $ 85 $ - $ - $ 85 Corporate Notes 1,334 - (1) 1,333 Municipal Bonds 199 - - 199 US Government Bonds 221 - - 221 --------- ------ ------------ ---------- Total $ 1,839 $ - $ (1) $ 1,838
Maturities of investment securities classified as available for sale at June 30, 2000 and December 31, 1999 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, 2000 December 31, 1999 ------------- ----------------- Amortized Amortized Cost Fair Value Cost Fair Value ---- ---------- ---- ---------- (In millions of dollars) Due within one year $ 537 $ 537 $ 1,152 $ 1,152 Due after one year through five years 47 47 72 72 Due after five years through ten years 26 26 87 87 Due after ten years 668 668 528 527 ---------- --------- ------------ ----------- Total $ 1,278 $ 1,278 $ 1,839 $ 1,838
- 28 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. FIBREBOARD SETTLEMENT TRUST (continued) The table below summarizes Trust and Administrative Deposits activity for the first half of 2000: Interest Unrealized Sale Realized Balance and Gain/ of Gain/ Balance 12/31/99 Dividends (Loss) Securities (Loss) Adjustments Other Payments 6/30/00 -------- --------- ------ ---------- ------ ----------- ----- -------- ------- Assets - ------ Cash (Note 11) $ - $ - $ - $ 605 $ - $ - $ - $ (634) $ (29) Restricted Cash (Note 11) - - - - - - 150 - 150 Marketable Securities: Available for Sale 1,838 38 1 (605) 1 - 5 - 1,278 --------- --------- ------ --------- ------ ---------- ----- ------- ------- Total Assets $ 1,838 $ 38 $ 1 $ - $ 1 $ - $ 155 $ (634) $ 1,399 ========= ========= ====== ========= ====== ========== ===== ======== ======== Liabilities - ----------- Asbestos Litigation Claims (Note 11) $ 1,750 $ - $ - $ - $ - $ 99 $ 150 $ (634) $ 1,365 Charity 88 38 1 - 1 (99) 5 - 34 --------- -------- ------ --------- ------ ---------- ----- -------- -------- Total Liabilities $ 1,838 $ 38 $ 1 $ - $ 1 $ - $ 155 $ (634) $ 1,399 ========= ======== ====== ========= ====== ========== ===== ======== ========
- 29 - 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 16, 2000 By: /s/ Michael H. Thaman ------------------------ ------------------------- Michael H. Thaman Senior Vice President and Chief Financial Officer (as duly authorized officer) Date: August 16, 2000 By: /s/ Deyonne F. Epperson ------------------------ --------------------------- Deyonne F. Epperson Vice President and Controller
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