-----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, FDRAU8zbDANKPRY2sonaYyaLtpAAEI8Omh2hSClBdL6N1gY4gu5LBk512FPR2B/E DryPMCQNLvdywdZxpzGO6Q== 0000075234-01-500012.txt : 20020410 0000075234-01-500012.hdr.sgml : 20020410 ACCESSION NUMBER: 0000075234-01-500012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OWENS CORNING CENTRAL INDEX KEY: 0000075234 STANDARD INDUSTRIAL CLASSIFICATION: ABRASIVE ASBESTOS & MISC NONMETALLIC MINERAL PRODUCTS [3290] IRS NUMBER: 344323452 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03660 FILM NUMBER: 1781944 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 1 f10q_11091.txt SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended September 30, 2001 Commission File No. 1-3660 Owens Corning One Owens Corning Parkway Toledo, Ohio 43659 Area Code (419) 248-8000 A Delaware Corporation I.R.S. Employer Identification No. 34-4323452 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes / X / No / / Shares of common stock, par value $.10 per share, outstanding at September 30, 2001 55,342,340 - 2 - PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (LOSS) (unaudited) Quarter Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- (In millions of dollars, except share data) NET SALES $ 1,291 $ 1,281 $ 3,597 $ 3,833 COST OF SALES 1,046 1,036 2,957 3,003 --------- -------- --------- -------- Gross margin 245 245 640 830 ---------- --------- ---------- --------- OPERATING EXPENSES Marketing and administrative expenses 141 143 396 437 Science and technology expenses 10 13 30 42 Restructure costs (Note 4) 8 6 24 6 Chapter 11 related reorganization items (Note 1) 23 - 60 - Provision for asbestos litigation claims (Note 12) (5) - (5) 790 Other 5 3 32 7 ------------ ----------- ----------- ----------- Total operating expenses 182 165 537 1,282 ---------- --------- ---------- -------- INCOME (LOSS) FROM OPERATIONS 63 80 103 (452) OTHER Cost of borrowed funds (Note 1) 4 55 11 149 Other 4 - (2) - ----------- ----------- ---------- ----------- INCOME (LOSS) BEFORE PROVISION (CREDIT) FOR INCOME TAXES 55 25 94 (601) Provision (credit) for income taxes (Note 6) 26 10 46 (244) ---------- --------- ----------- --------- INCOME (LOSS) BEFORE MINORITY INTEREST AND EQUITY IN NET INCOME (LOSS) OF AFFILIATES 29 15 48 (357) Minority Interest (2) (3) (3) (6) Equity in net income (loss) of affiliates - 2 1 - ------------ --------- ------------ ----------- NET INCOME (LOSS) $ 27 $ 14 $ 46 $ (363) ========== ========= ========== ========= NET INCOME (LOSS) PER COMMON SHARE Basic net income (loss) per share $ .50 $ .25 $ .84 $ (6.64) ---------- --------- ---------- ---------- Diluted net income (loss) per share $ .46 $ .25 $ .77 $ (6.64) ---------- --------- ---------- ---------- Weighted average number of common shares outstanding and common equivalent shares during the period (in millions) Basic 55.1 55.0 55.1 54.8 Diluted 59.9 55.5 60.0 54.8 The accompanying notes are an integral part of this statement.
- 3 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (unaudited) September 30, December 31, September 30, 2001 2000 2000 ---- ---- ---- (In millions of dollars) ASSETS - ------ CURRENT Cash and cash equivalents $ 551 $ 550 $ 378 Restricted cash (Note 12) - - 100 Restricted cash and securities - Fibreboard - current portion (Note 12) - - 850 Receivables 597 488 507 Inventories (Note 7) 480 469 532 Insurance for asbestos litigation claims - current portion (Note 12) - - 33 Deferred income taxes 5 6 181 Income tax receivable 5 31 4 Other current assets 22 20 25 ------------ ------------- ----------- Total current 1,660 1,564 2,610 ---------- ----------- --------- OTHER Insurance for asbestos litigation claims (Note 12) 4 59 59 Restricted cash - asbestos-related (Note 12) 171 164 44 Restricted cash, securities and other - Fibreboard (Notes 12 and 13) 1,285 1,274 395 Deferred income taxes 1,037 1,075 828 Goodwill 618 636 649 Investments in affiliates 50 62 87 Other noncurrent assets 359 257 273 ----------- ------------ ---------- Total other 3,524 3,527 2,335 ---------- ----------- --------- PLANT AND EQUIPMENT, at cost Land 68 60 58 Buildings and leasehold improvements 666 663 672 Machinery and equipment 2,866 2,717 2,547 Construction in progress 172 327 360 ---------- ------------ ---------- 3,772 3,767 3,637 Less - accumulated depreciation (1,984) (1,946) (1,944) ---------- ------------ ---------- Net plant and equipment 1,788 1,821 1,693 ---------- ----------- --------- TOTAL ASSETS $ 6,972 $ 6,912 $ 6,638 ========= ========== ========= The accompanying notes are an integral part of this statement.
- 4 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (continued) (unaudited) September 30, December 31, September 30, 2001 2000 2000 ---- ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars) - ------------------------------------ CURRENT Accounts payable and accrued liabilities $ 678 $ 491 $ 696 Reserve for asbestos litigation claims - current portion (Note 12) - - 1,250 Asbestos-related liabilities - Fibreboard - current portion (Note 13) - - 850 Short-term debt 43 50 56 Long-term debt - current portion 65 68 2,733 ---------- ----------- -------- Total current 786 609 5,585 --------- ---------- -------- LONG-TERM DEBT 6 7 32 ----------- ------------ ---------- OTHER Reserve for asbestos litigation claims (Note 12) - - 980 Asbestos-related liabilities - Fibreboard (Note 13) - - 395 Other employee benefits liability 330 322 322 Pension plan liability 38 75 41 Other 127 124 337 ---------- ---------- -------- Total other 495 521 2,075 ---------- ---------- ------- LIABILITIES SUBJECT TO COMPROMISE (Note 1) 6,817 6,935 - --------- --------- ---------- COMMITMENTS AND CONTINGENCIES COMPANY OBLIGATED SECURITIES OF ENTITIES HOLDING SOLELY PARENT DEBENTURES - SUBJECT TO COMPROMISE 200 200 195 --------- ---------- -------- MINORITY INTEREST 40 39 47 ---------- ----------- --------- STOCKHOLDERS' EQUITY Common stock 697 699 700 Deficit (1,950) (1,996) (1,884) Accumulated other comprehensive income (115) (97) (103) Other (4) (5) (9) ------------ ------------- ----------- Total stockholders' equity (1,372) (1,399) (1,296) --------- ---------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,972 $ 6,912 $ 6,638 ======== ======== ======== The accompanying notes are an integral part of this statement.
- 5 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) Quarter Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- (In millions of dollars) NET CASH FLOW FROM OPERATIONS Net income (loss) $ 27 $ 14 $ 46 $ (363) Reconciliation of net cash provided by operating activities Noncash items: Provision for asbestos litigation claims - - - 790 Provision for depreciation and amortization 51 44 161 137 Provision (credit) for deferred income taxes 12 (1) 40 (289) Other - noncash items 39 9 69 (23) (Increase) decrease in receivables 29 (1) (123) (215) (Increase) decrease in inventories 7 15 (21) (105) Increase (decrease) in accounts payable and accrued liabilities 47 17 125 (43) Change in liabilities subject to compromise, net (Note 1) (1) - (97) - (Increase) decrease in restricted cash - asbestos-related (Note 12) (1) 106 48 (144) Proceeds from insurance for asbestos litigation claims, excluding Fibreboard (Note 12) - - - 347 Payments for asbestos litigation claims, excluding Fibreboard (Note 12) - (176) - (540) Pension fund contribution (150) - (176) - Other 24 (34) 42 4 ------------ ---------- ----------- ----------- Net cash flow from operations $ 84 $ (7) $ 114 $ (444) ----------- ----------- ---------- --------- NET CASH FLOW FROM INVESTING Additions to plant and equipment (50) (113) (133) (278) Investment in subsidiaries, net of cash acquired - - - (4) Proceeds from the sale of affiliate or business (Note 5) - - 20 193 Other (4) 1 (2) (35) ------------- ---------- ---------- ---------- Net cash flow from investing $ (54) $ (112) $ (115) $ (124) ------------ --------- ----------- --------- The accompanying notes are an integral part of this statement.
- 6 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (continued) (unaudited) Quarter Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- (In millions of dollars) NET CASH FLOW FROM FINANCING Net additions to long-term credit facilities $ - $ (7) $ - $ 948 Other additions to long-term debt 1 - 17 22 Other reductions to long-term debt (2) (1) (4) (84) Net decrease in short-term debt (2) 13 (7) 4 Subject to compromise (Note 1) - - (4) - Dividends paid - (4) - (12) Other - - (1) - ----------- ------------ ------------ ----------- Net cash flow from financing (3) 1 1 878 ----------- ----------- ----------- -------- Effect of exchange rate changes on cash 4 (1) 1 (2) ---------- ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents 31 (119) 1 308 Cash and cash equivalents at beginning of period 520 497 550 70 --------- --------- -------- --------- Cash and cash equivalents at end of period $ 551 $ 378 $ 551 $ 378 ======== ========= ======== ======== The accompanying notes are an integral part of this statement.
- 7 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 On October 5, 2000 (the "Petition Date"), Owens Corning and the 17 United States subsidiaries listed below (collectively, the "Debtors"), filed voluntary petitions for relief (the "Filing") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The Debtors are currently operating their businesses as debtors-in-possession in accordance with provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") are being jointly administered under Case No. 00-3837 (JKF). The Chapter 11 Cases do not include other United States subsidiaries of Owens Corning or any of its foreign subsidiaries (collectively, the "Non-Debtor Subsidiaries"). The subsidiary Debtors that filed Chapter 11 petitions for relief are: CDC Corporation Integrex Testing Systems LLC Engineered Yarns America, Inc. HOMExperts LLC Falcon Foam Corporation Jefferson Holdings, Inc. Integrex Owens-Corning Fiberglas Technology Inc. Fibreboard Corporation Owens Corning HT, Inc. Exterior Systems, Inc. Owens-Corning Overseas Holdings, Inc. Integrex Ventures LLC Owens Corning Remodeling Systems, LLC Integrex Professional Services LLC Soltech, Inc. Integrex Supply Chain Solutions LLC
The Debtors filed for relief under Chapter 11 to address the growing demands on Owens Corning's cash flow resulting from its multi-billion dollar asbestos liability. This liability is discussed in greater detail in Note 12 to the Consolidated Financial Statements. Consequence of Filing - --------------------- As a consequence of the Filing, all pending litigation against the Debtors is stayed automatically by section 362 of the Bankruptcy Code and, absent further order of the Bankruptcy Court, no party may take any action to recover on pre-petition claims against the Debtors. In addition, pursuant to section 365 of the Bankruptcy Code, the Debtors may reject or assume pre-petition executory contracts and unexpired leases, and other parties to contracts or leases that are rejected may assert rejection damages claims as permitted by the Bankruptcy Code. Two creditors' committees, one representing asbestos claimants and the other representing unsecured creditors, have been appointed as official committees in the Chapter 11 Cases. In addition, the Bankruptcy Court has appointed James J. McMonagle as legal representative for the class of future asbestos claimants against one or more of the Debtors. The two committees and the futures representative will have the right to be heard on all matters that come before the Bankruptcy Court. Owens Corning expects that these committees and the futures representative will play important roles in the Chapter 11 Cases and the negotiation of the terms of any plan or plans of reorganization. Owens Corning anticipates that substantially all liabilities of the Debtors as of the date of the Filing will be resolved under one or more Chapter 11 plans of reorganization to be proposed and voted on in the Chapter 11 Cases in accordance with the provisions of the Bankruptcy Code. Although the Debtors intend to file and seek confirmation of such a plan or plans, there can be no assurance as to when the Debtors - 8 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued) will file such a plan or plans, or that such plan or plans will be confirmed by the Bankruptcy Court and consummated. As provided by the Bankruptcy Code, the Debtors initially had the exclusive right to propose a plan of reorganization for 120 days following the Petition Date, until February 2, 2001. By order, the Bankruptcy Court has extended such exclusivity period until February 2, 2002, and similarly extended the Debtors' exclusive rights to solicit acceptances of a reorganization plan from April 3, 2001 to April 3, 2002. If the Debtors fail to file a plan of reorganization prior to the ultimate expiration of the exclusivity period, or if such plan is not accepted by the requisite numbers of creditors and equity holders entitled to vote on the plan, other parties in interest in the Chapter 11 Cases may be permitted to propose their own plan(s) of reorganization for the Debtors. Owens Corning is unable to predict at this time what the treatment of creditors and equity holders of the respective Debtors will be under any proposed plan or plans of reorganization. Such plan or plans may provide, among other things, that all present and future asbestos-related liabilities of Owens Corning and Fibreboard will be discharged and assumed and resolved by one or more independently administered trusts established in compliance with Section 524(g) of the Bankruptcy Code. Such plan or plans may also provide for the issuance of an injunction by the Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy Code that will enjoin actions against the reorganized Debtors for the purpose of, directly or indirectly, collecting, recovering or receiving payment of, on, or with respect to any claims resulting from asbestos-containing products allegedly manufactured, sold or installed by Owens Corning or Fibreboard, which claims will be paid in whole or in part by one or more Section 524(g) trusts. Similar plans of reorganization have been confirmed in the Chapter 11 cases of other companies involved in asbestos-related litigation. Section 524(g) of the Bankruptcy Code provides that, if certain specified conditions are satisfied, a court may issue a supplemental permanent injunction barring the assertion of asbestos-related claims or demands against the reorganized company and channeling those claims to an independent trust. Owens Corning is unable to predict at this time what treatment will be accorded under any such reorganization plan or plans to inter-company indebtedness, licenses, transfers of goods and services and other inter-company and intra-company arrangements, transactions and relationships that were entered into prior to the Petition Date. These arrangements, transactions and relationships may be challenged by various parties in the Chapter 11 Cases and the outcome of those challenges, if any, may have an impact on the treatment of various claims under such plan or plans. For example, Owens Corning is unable to predict at this time what the treatment will be under any such plan or plans with respect to (1) the guaranties issued by certain of Owens Corning's U.S. subsidiaries, including Owens-Corning Fiberglas Technology Inc. ("OCFT") and IPM, Inc., a Non-Debtor Subsidiary that holds Owens Corning's ownership interest in a majority of Owens Corning's foreign subsidiaries ("IPM"), with respect to Owens Corning's $1.8 billion pre-petition bank credit facility (the "Pre-Petition Credit Facility" which is now in default) or (2) OCFT's license agreements with Owens Corning and Exterior Systems, Inc., a wholly-owned subsidiary of Owens Corning ("Exterior"), pursuant to which OCFT licenses intellectual property to Owens Corning and Exterior. The Bankruptcy Court may confirm a plan of reorganization only upon making certain findings required by the Bankruptcy Code, and a plan may be confirmed over the dissent of non-accepting creditors and equity security holders if certain requirements of the Bankruptcy Code are met. The payment rights and other entitlements of pre-petition creditors and Owens Corning's shareholders - 9 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued) may be substantially altered by any plan or plans of reorganization confirmed in the Chapter 11 Cases. There is no assurance that there will be sufficient assets to satisfy the Debtors' pre-petition liabilities in whole or in part, and the pre-petition creditors of some Debtors may be treated differently than those of other Debtors. Pre-petition creditors may receive under a plan or plans less than 100% of the face value of their claims, and the interests of Owens Corning's equity security holders may be substantially diluted or cancelled in whole or in part. As noted above, it is not possible at this time to predict the outcome of the Chapter 11 Cases, the terms and provisions of any plan or plans of reorganization, or the effect of the Chapter 11 reorganization process on the claims of the creditors of the Debtors or the interests of Owens Corning's equity security holders. Financial Statement Presentation - -------------------------------- The accompanying Consolidated Financial Statements have been prepared in accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," and on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Filing, such realization of assets and liquidation of liabilities are subject to uncertainty. While operating as debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as permitted in the ordinary course of business, the Debtors, or some of them, may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the Consolidated Financial Statements. Further, a plan of reorganization could materially change the amounts and classifications reported in the consolidated historical financial statements. Substantially all of the Company's pre-petition debt is now in default due to the Filing. As described below, the accompanying Consolidated Financial Statements present the Debtors' pre-petition debt under the caption "Liabilities Subject to Compromise." This includes debt under the Pre-Petition Credit Facility and approximately $1.4 billion of other outstanding debt. As required by SOP 90-7, the Company, beginning in the fourth quarter of 2000, recorded the Debtors' pre-petition debt instruments at the allowed amount, as defined by SOP 90-7. As reflected in the Consolidated Financial Statements, "Liabilities Subject to Compromise" refer to Debtors' liabilities incurred prior to the commencement of the Chapter 11 Cases. The amounts of the various liabilities that are subject to compromise are set forth below following the debtor-in-possession financial statements. These amounts represent Owens Corning's estimate of known or potential pre-petition claims to be resolved in connection with the Chapter 11 Cases. Such claims remain subject to future adjustments. Adjustments may result from (1) negotiations; (2) actions of the Bankruptcy Court; (3) further developments with respect to disputed claims; (4) rejection of executory contracts and unexpired leases; (5) the determination as to the value of any collateral securing claims; (6) proofs of claim; or (7) other events. Payment terms for these amounts will be established in connection with the Chapter 11 Cases. Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the date of the Filing. Differences between amounts recorded by the Debtors and claims filed by creditors will be investigated and resolved as part of the proceedings in the Chapter 11 Cases. No bar dates have been set for the filing of proofs of claim against the Debtors. Accordingly, the ultimate number and allowed amount of such claims are not presently known. - 10 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued) The Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of their pre-petition obligations, including employee wages, salaries, benefits and other employee obligations, pre-petition claims of critical vendors, and certain other pre-petition claims including certain customer program and warranty claims. From the Petition Date through September 30, 2001, contractual interest expense not accrued or recorded on pre-petition debt totaled $190 million, of which $139 million relates to 2001 and $43 million relates to the quarter ended September 30, 2001. At September 30, 2001, the Company had $551 million of Cash and Cash Equivalents (of which approximately $39 million was subject to administrative freeze pending the resolution of certain alleged set-off rights by certain pre-petition lenders). In addition, in connection with the Filing, the Debtors obtained a $500 million debtor-in-possession credit facility from a group of lenders led by Bank of America, N.A. (the "DIP Financing"). At September 30, 2001, this facility had not been utilized except for approximately $32 million of standby letters of credit and similar uses. As a consequence of the Filing and the impact of certain provisions of the Company's DIP Financing and in a cash management order entered by the Bankruptcy Court, the Company and its subsidiaries are now subject to certain restrictions, including their ability to pay dividends and to transfer cash and other assets to each other and to their affiliates. The Company believes, based on information presently available to it, that cash available from operations and the DIP Financing will provide sufficient liquidity to allow it to continue as a going concern for the foreseeable future. However, the ability of the Company to continue as a going concern (including its ability to meet post-petition obligations of the Debtors and to meet obligations of the Non-Debtor Subsidiaries) and the appropriateness of using the going concern basis for its financial statements are dependent upon, among other things, (i) the Company's ability to comply with the terms of the DIP Financing and any cash management order entered by the Bankruptcy Court in connection with the Chapter 11 Cases, (ii) the ability of the Company to maintain adequate cash on hand, (iii) the ability of the Company to generate cash from operations, (iv) the ability of the Non-Debtor Subsidiaries to obtain necessary financing, (v) confirmation of a plan or plans of reorganization under the Bankruptcy Code, and (vi) the Company's ability to maintain profitability following such confirmation. Debtor-In-Possession Financial Statements - ----------------------------------------- The condensed financial statements of the Debtors are presented below. These statements reflect the financial position and results of operations of the combined Debtor entities, including certain amounts and activities between Debtors and non-debtor entities of Owens Corning which are eliminated in the consolidated financial statements. - 11 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued) Owens Corning and Subsidiaries Debtor-in-Possession Statement of Income for the QUARTER AND NINE MONTHS ended September 30, 2001 2001 ---- Quarter Ended Nine Months Ended September 30 September 30 ------------ ------------ (In millions of dollars) NET SALES $ 1,143 $ 3,139 COST OF SALES 953 2,663 ----------- ----------- Gross margin 190 476 ----------- ------------ OPERATING EXPENSES Marketing and administrative expenses 129 356 Science and technology expenses 9 27 Restructure costs (Note 4) 5 14 Chapter 11 reorganization items (Note 1) 23 60 Proceeds from asbestos litigation claims (5) (5) Other (Including interest income from non-debtors of $14 million in the third quarter and $42 million for the nine months ended) (31) (71) ------------ ------------- Total operating expenses 130 381 ----------- ----------- INCOME FROM OPERATIONS 60 95 OTHER Cost of borrowed funds 1 (1) Other (Note 13) 4 (2) ------------- ------------- INCOME BEFORE PROVISION FOR INCOME TAXES 55 98 Provision for income taxes 25 46 ------------ ------------ INCOME BEFORE EQUITY IN NET INCOME (LOSS) OF AFFILIATES 30 52 Equity in net income (loss) of affiliates (1) - ------------- ------------- NET INCOME $ 29 $ 52 =========== ===========
The accompanying notes are an integral part of this statement. - 12 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued) Owens Corning and Subsidiaries Debtor-in-Possession Balance Sheet September 30, December 31, 2001 2000 ---- ---- (In millions of dollars) ASSETS - ------ CURRENT Cash and cash equivalents $ 431 $ 461 Receivables - debtors, net 439 338 Receivables - non-debtors 744 672 Inventories 349 347 Deferred income taxes 4 4 Income tax receivable 4 31 Other current assets 20 18 ------------ ---------- Total current 1,991 1,871 ---------- ------- OTHER Insurance for asbestos litigation claims (Note 12) 4 59 Restricted cash and other - asbestos-related (Note 12) 171 164 Restricted cash, securities and other - Fibreboard (Notes 12 and 13) 1,285 1,274 Deferred income taxes 1,001 1,058 Goodwill, net 520 530 Investments in affiliates 29 38 Investments in non-debtor subsidiaries 736 745 Other noncurrent assets 309 209 ----------- --------- Total other 4,055 4,077 ---------- ------- PLANT AND EQUIPMENT, at cost Land 41 34 Buildings and leasehold improvements 526 522 Machinery and equipment 2,196 2,078 Construction in progress 153 259 ----------- --------- 2,916 2,893 Less: Accumulated depreciation (1,527) (1,502) ----------- ------- Net plant and equipment 1,389 1,391 ---------- -------- TOTAL ASSETS $ 7,435 $ 7,339 ========= ======= The accompanying notes are an integral part of this statement.
- 13 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued) Owens Corning and Subsidiaries Debtor-in-Possession Balance Sheet September 30, December 31, 2001 2000 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars) - ------------------------------------ CURRENT Accounts payable and accrued liabilities - debtor $ 509 $ 320 Accounts payable and accrued liabilities - non-debtors 7 46 Long-term debt - current portion - 1 ------------ ----------- Total current 516 367 ---------- --------- OTHER Other employee benefits liability 316 308 Pension plan liability 32 68 Other 103 96 ---------- ---------- Total other 451 472 ---------- --------- LIABILITIES SUBJECT TO COMPROMISE 7,532 7,623 STOCKHOLDERS' EQUITY Common stock 697 699 Deficit (1,748) (1,807) Accumulated other comprehensive loss (11) (12) Other (2) (3) ------------- ---------- Total stockholders' equity (1,064) (1,123) ---------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,435 $ 7,339 ========= =======
The accompanying notes are an integral part of this statement. - 14 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued) Owens Corning and Subsidiaries Debtor-in-Possession Statement of CASH FLOWS for the QUARTER AND NINE MONTHS ended September 30, 2001 2001 ---- Quarter Nine Months Ended Ended September 30 September 30 ------------ ------------- (In millions of dollars) NET CASH FLOW FROM OPERATIONS Net income $ 29 $ 52 Reconciliation of net cash provided by operating activities Noncash items: Provision for depreciation and amortization 37 115 Credit for deferred income taxes 21 61 Other 26 71 Increase (decrease) in receivables 16 (186) Increase (decrease) in inventories 7 (4) Increase in accounts payable and accrued liabilities 38 100 (Increase) decrease in restricted cash and other - asbestos-related (1) 48 Change in liabilities subject to compromise, net (1) (97) Pension fund contribution (150) (176) Other 28 88 --------- ---------- Net cash flow from operations 50 72 --------- ---------- NET CASH FLOW FROM INVESTING Additions to plant and equipment (38) (113) Other (3) (1) ----------- ---------- Net cash flow from investing (41) (114) ---------- --------- NET CASH FLOW FROM FINANCING Net additions to long-term credit facilities - 17 Subject to compromise - (4) Other - (1) ----------- ---------- Net cash flow from financing $ - $ 12 ---------- --------
The accompanying notes are an integral part of this statement. - 15 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued) Owens Corning and Subsidiaries Debtor-in-Possession Statement of Cash Flows for the quarter and Nine months ended September 30, 2001 Quarter Ended Nine Months Ended September 30 September 30 ------------ ------------ (In millions of dollars) Net increase (decrease) in cash and cash equivalents $ 9 $ (30) Cash and cash equivalents at beginning of period 422 461 ----------- ----------- Cash and cash equivalents at end of period $ 431 $ 431 ========== ==========
The amounts subject to compromise in the Consolidated and Debtor-in-Possession Balance Sheets consist of the following items: September 30, December 31, 2001 2000 ---- ---- (amounts in millions) Accounts payable $ 193 $ 255 Accrued interest payable 40 39 Accrued liabilities 47 74 Debt 2,843 2,832 Income taxes payable 209 212 Reserve for asbestos litigation claims - Owens Corning (Note 12) 2,200 2,249 Reserve for asbestos related liabilities - Fibreboard (Notes 12 and 13) 1,285 1,274 --------- --------- Total consolidated 6,817 6,935 Payables to non-debtors 715 688 ---------- ---------- Total debtor $ 7,532 $ 7,623 ======== ========
The amounts for reorganizational items in the Consolidated and Debtor-in-Possession Income Statements consist of the following for the quarter and nine months ended September 30: Quarter Ended Nine Months Ended September 30 September 30 ------------ ------------ (amounts in millions) Professional fees $ 15 $ 49 Payroll and compensation 9 21 Interest income (5) (15) Litigation related expenses and other 4 5 ------------ ---------- Total $ 23 $ 60 ========== =========
- 16 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Segment Data During 2000, the Company realigned its internal operating segments. Following this realignment, the Company reviewed its segments in accordance with SFAS 131 and concluded that the aggregation of its operating segments into two reportable segments was still appropriate. As a result of this realignment, intersegment transactions no longer exist between reportable segments. Net sales and income from operations have been restated for all periods presented to reflect this change. Quarter Ended Nine Months Ended September 30, September 30, ------------- ------------- NET SALES 2001 2000 2001 2000 ---- ---- ---- ---- (In millions of dollars) Reportable Operating Segments - ----------------------------- Building Materials Systems United States $ 1,024 $ 994 $ 2,769 $ 2,901 Europe 2 1 5 89 Canada and other 50 53 134 143 ----------- --------- ----------- --------- Total Building Materials Systems 1,076 1,048 2,908 3,133 ----------- ------- ----------- -------- Composite Systems United States 96 104 293 309 Europe 76 85 266 256 Canada and other 43 44 130 135 ----------- --------- ----------- -------- Total Composite Systems 215 233 689 700 ----------- -------- ----------- -------- Total Reportable Operating Segments $ 1,291 $ 1,281 $ 3,597 $ 3,833 =========== ======= =========== ======= External Customer Sales by Geographic - ------------------------------------- Region ------ United States $ 1,120 $ 1,098 $ 3,062 $ 3,210 Europe 78 86 271 345 Canada and other 93 97 264 278 ----------- --------- ----------- --------- Net Sales $ 1,291 $ 1,281 $ 3,597 $ 3,833 =========== ======= =========== =======
- 17 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 2. SEGMENT DATA (continued) Quarter Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- (In millions of dollars) INCOME (LOSS) FROM OPERATIONS Reportable Operating Segments - ----------------------------- Building Materials Systems United States $ 92 $ 73 $ 180 $ 285 Europe - - - 2 Canada and other 5 12 9 26 ---------- --------- ---------- ---------- Total Building Materials Systems 97 85 189 313 --------- --------- --------- --------- Composite Systems United States 21 5 63 54 Europe 8 7 32 10 Canada and other 4 4 16 16 ----------- ----------- --------- --------- Total Composite Systems 33 16 111 80 ---------- ----------- -------- --------- Total Reportable Operating Segments $ 130 $ 101 $ 300 $ 393 -------- --------- -------- -------- Geographic Regions - ------------------ United States $ 113 $ 78 $ 243 $ 339 Europe 8 7 32 12 Canada and other 9 16 25 42 ---------- ---------- --------- --------- Total Reportable Operating Segments $ 130 $ 101 $ 300 $ 393 ======== ========= ======== ======== Reconciliation to Consolidated Income Before Provision for Income Taxes Restructuring and other charges (35) - (94) - Chapter 11 related reorganization items (23) - (60) - Provision for asbestos litigation claims 5 - 5 (790) General corporate income (expense) (14) (21) (48) (55) Cost of borrowed funds (4) (55) (11) (149) Other (4) - 2 - ----------- ------------ ---------- ----------- Consolidated Income (Loss) Before Provision (Credit) for Income Taxes $ 55 $ 25 $ 94 $ (601) ========= ---------- ======== --------
- 18 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 3. GENERAL The financial statements included in this Report are condensed and unaudited, pursuant to certain Rules and Regulations of the Securities and Exchange Commission, but include, in the opinion of the Company, adjustments necessary for a fair statement of the results for the periods indicated, which, however, are not necessarily indicative of results which may be expected for the full year. In connection with the condensed financial statements and notes included in this Report, reference is made to the financial statements and notes thereto contained in the Company's 2000 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. 4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES 2001 Charges - ------------ Third Quarter 2001 - ------------------ During the third quarter of 2001, the Company continued to experience the effects of an overall slowed economy in both the building materials and composite materials industries. While sales were flat with a year ago and margins showed slight improvements due to some productivity gains and material cost deflation, the Company continues to review its cost structures in light of economic forecasts. As a result, the Company recorded a $35 million pretax charge to income from operations for restructuring and other charges. This charge was comprised of an $8 million pretax restructure charge and $27 million in pretax other charges. The restructure charge has been classified as a separate component of operating expenses on the Company's Consolidated Statement of Income (Loss) and represents severance costs associated with the elimination of approximately 160 positions, primarily in the U.S. and the U.K. The primary groups impacted included manufacturing and administrative personnel. As of September 30, 2001, approximately $5 million has been paid and charged against this reserve. The $27 million in pretax other charges included: 1) $15 million in costs associated with the Company's previously announced plan to realign its Newark, Ohio manufacturing facility; 2) $4 million to write-down the Company's investment and related assets in Alcopor Owens Corning, a building materials joint venture in Europe, to net realizable value. The Company reached an agreement to sell its interest in Alcopor Owens Corning and the proceeds were placed in escrow. This transaction received final approval from the Bankruptcy Court on October 29, 2001 (see Note 5); and 3) various other charges totaling $8 million. This $27 million pretax charge was accounted for as a $19 million charge to cost of sales and an $8 million charge to other operating expenses. Second Quarter 2001 - ------------------- During the second quarter of 2001, the Company recorded $17 million in pretax charges for restructuring and other charges as a result of the continued impact of a soft overall economy. This charge was comprised of a $7 million pretax restructure charge and $10 million in pretax other charges. The $7 million restructure charge represented $5 million for the divestiture of non-strategic businesses and facilities, consisting mainly of non-cash asset write-downs to fair value and exit cost liabilities, and a $2 million charge for severance costs associated with the elimination of approximately 25 positions, primarily in the U.K. The primary groups affected included manufacturing and administrative personnel. As of September 30, 2001, approximately $1 million has been paid and charged against the reserve for personnel reductions. - 19 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued) The $10 million in pretax other charges included $4 million in costs related to the Company's continuing plan for the realignment of the Newark, Ohio facility, $2 million to write-down inventory made obsolete by changes in the Company's manufacturing and marketing strategies, and various other charges totaling $4 million. This $10 million pretax charge was accounted for as an $8 million charge to cost of sales and a $2 million charge to other operating expenses. First Quarter 2001 - ------------------ During the first quarter of 2001, the Company recorded $42 million in pretax charges for restructuring and other charges as a result of the impact of a soft overall economy. The $42 million pretax charge was comprised of a $9 million pretax restructure charge, $2 million pretax loss from assets held for sale, and $31 million in other pretax charges. The $9 million pretax restructure charge represented severance costs associated with the elimination of approximately 130 positions, primarily in the U.S. The primary groups affected included manufacturing and administrative personnel. As of September 30, 2001, approximately $2 million has been paid and charged against the reserve for personnel reductions. The $2 million pretax loss from assets held for sale represented the results of operations for the Company's investments in its Pipe joint ventures and subsidiaries on a held-for-sale basis for the first quarter of 2001. This sale was completed in February 2001. The $31 million in other pretax charges was comprised of $10 million of asset impairments, principally the write-down of equipment; $4 million to write down inventory to reflect updated estimates of the net realizable value of certain inventories; $4 million of payroll-related charges associated with the realignment of the Newark, Ohio manufacturing facility; and various other charges totaling $13 million. This $31 million pretax charge was accounted for as an $18 million charge to cost of sales and a $13 million charge to other operating expenses. 2000 Charges - ------------ During 2000, the Company recorded pretax charges of $229 million for restructuring and other activities as a result of its reassessment of business strategies with respect to investments in certain ventures, facilities and overhead expenditures. The $229 million pretax charge was comprised of a $32 million charge associated with the restructuring of the Company's business segments and $197 million of other charges, the majority of which represented impairments of long-lived assets. In addition, the Company recorded a $6 million pretax credit to minority interest resulting from charges related to a majority-owned consolidated subsidiary. The components of the restructuring charge included $16 million for personnel reductions, $10 million for the divestiture of non-strategic businesses and facilities, and $6 million for asset impairments associated with the planned closing of two lines at the Company's Newark, Ohio manufacturing facility. This represented the first phase of the Company's plan to realign operations at the Newark facility. The $197 million of other charges was comprised of $95 million of asset impairments, a $6 million charge for a settlement loss associated with one of Owens Corning's U.S. pension plans, and $96 million of charges focused on improving business operations. The $95 million of asset impairments included: 1) $54 million charge to write-down the Company's investment and related assets in Alcopor Owens Corning, a building materials joint venture in Europe, to estimated fair value on a held for sale basis; 2) $12 million to write-down the Company's investment in the majority owned, consolidated venture in South Africa, on a held-in-use basis based upon management's analysis of current and - 20 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued) expected future financial results and constraints on the Company's ability to fund future significant capital investments in this subsidiary as a consequence of the bankruptcy filing. The $12 million charge was offset by a $6 million credit to record the minority owner's share, recorded in the minority interest line on the Consolidated Statement of Income (Loss); 3) $8 million to write-down to fair value the investments in the Company's Pipe joint ventures and subsidiaries on a held for sale basis. The sale of a majority of the investments and subsidiaries held for sale was completed in February 2001, with final approval obtained in June, 2001, at which time cash proceeds were released from escrow; 4) $10 million to write-down the equity investment in ImproveNet, due to a significant decrease in market value which management believes is other than temporary; and 5) $11 million associated with asset impairments within the Company's Cultured Stone and other businesses. The $96 million charge consisted of $43 million to write-down inventory made obsolete by changes in the Company's manufacturing and marketing strategies; $19 million to write-down equipment and receivables; $15 million to increase warranty reserves due to general changes in estimates associated with these reserves; and various other charges totaling $19 million recorded as other operating expenses. As of September 30, 2001, approximately $13 million has been paid and charged against the reserve for personnel reductions and approximately $2 million has been charged against exit cost liabilities. 1997 and 1998 Charges - --------------------- During 1997 and 1998, the Company recorded pretax charges of $386 million for restructuring and her actions to implement a program to close manufacturing facilities, enhance manufacturing productivity and reduce overhead. Of the total pretax charge of $386 million, $143 million was recorded in the fourth quarter of 1997 and the remaining $243 million was recorded during 1998. The $386 million pretax charge was comprised of a $185 million charge associated with the restructuring of the Company's business segments and a $201 million charge associated with asset impairments, including investments in certain affiliates. The components of the restructuring charge included $115 million for personnel reductions; $68 million for the divestiture of non-strategic businesses and facilities, of which $52 million represented non-cash asset revaluations and $16 million represented exit cost liabilities, primarily for leased warehouse and office facilities that were vacated; and $2 million for other actions. The divestiture of non-strategic businesses and facilities included the closure of the Candiac, Quebec manufacturing facility. During the second quarter of 1999, the Candiac manufacturing facility was re-opened in order to meet market demands. As of September 30, 2001, approximately $105 million has been paid and charged against the reserve for personnel reductions, representing the elimination of approximately 2,450 employees, the majority of whose severance payments were made over the course of 1998 and 1999, and approximately $13 million has been charged against exit cost liabilities. The following table summarizes the status of the liabilities from the 1997, 1998 and 2000/2001 restructure program described above, including cumulative spending and adjustments and the remaining balance as of September 30, 2001: Liability at Original Total September 30, (In millions of dollars) Liability Payments 2001 --------- -------- ---- Personnel Costs $ 150 $ (126) $ 24 Facility and Business Exit Costs 20 (15) 5 Other 2 (2) - ---------- ----------- ----------- Total $ 172 $ (143) $ 29 ======= ========= =========
- 21 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 4. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued) The Company continually evaluates whether events and circumstances have occurred that indicate that the carrying amount of certain long-lived assets is recoverable. When factors indicate that a long-lived asset should be evaluated for possible impairment, the Company uses an estimate of the expected undiscounted cash flows to be generated by the asset to determine whether the carrying amount is recoverable or if impairment exists. When it is determined that an impairment exists, the Company uses the fair market value of the asset, usually measured by the discounted cash flows to be generated by the asset, to determine the amount of the impairment to be recorded in the financial statements. 5. ACQUISITIONS AND DIVESTITURES OF BUSINESSES In September, 2001, the Company reached agreement to sell its 40% interest in Alcopor Owens Corning, an unconsolidated joint venture. Net proceeds of approximately $23 million were placed in escrow. This transaction received final approval from the Bankruptcy Court on October 29, 2001. The Company reduced its investment in the joint venture to net realizable value during the third quarter of 2001. See Note 4 to the Consolidated Financial Statements. As part of the divestiture, the Company will be obligated to fund certain U.K. pension obligations. The amount of the contribution will be actuarially determined as of the closing date and is dependent on fair market value of the pension plan assets at that time. The contribution is not expected to exceed the proceeds from the sale. During the first quarter of 2001, the Company completed the sale of the majority of its Engineered Pipe Business, a producer of glass-reinforced plastic pipe with operations mostly in Europe. Net proceeds from the sale were $22 million, substantially all of which was received in the first quarter of 2001. On May 31, 2000, the Company completed the sale of its European Building Materials business to Alcopor Owens Corning. Proceeds from the sale, net of the Company's $34 million cash infusion into the joint venture, were $177 million. In connection with this transaction, the joint venture assumed $62 million of debt from Owens Corning and the Company incurred fees of approximately $6 million, resulting in net cash proceeds of approximately $109 million. A pretax gain of approximately $5 million, including a $54 million write-off of goodwill, was realized from the sale. This pretax gain was recorded as a reduction of other operating expenses on the consolidated statement of income. The results of operations of the European Building Materials business are reflected in the Company's consolidated statement of income through the period ending May 31, 2000. For the nine months ended September 30, 2000, the European Building Materials business recorded sales of approximately $88 million, and income from operations of approximately $1 million. Effective May 31, 2000, the Company accounted for its ownership interest in Alcopor Owens Corning under the equity method. Please see Note 1 to the Consolidated Financial Statements. During the first quarter of 2000, the Company completed the sale of the assets of Falcon Foam, a producer of foam insulation in Michigan and California. Net proceeds from the sale were $50 million and resulted in a pretax loss of approximately $5 million, including transaction costs. This net loss was recorded as other operating expenses on the Consolidated Statement of Income (Loss). - 22 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 6. INCOME TAXES The reconciliation between the U.S. federal statutory rate and the Company's effective income tax rate is: Quarter Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- U.S. federal statutory rate 35% 35% 35% (35%) State and local income taxes 1 (3) 1 (5) Operating losses of foreign subsidiaries - 11 - 1 Special tax election (a) - - - (2) Interest 6 - 8 - Foreign tax rate differences 2 (1) 2 - Other 4 - 3 - ------- ------- ------- -------- Effective tax rate 48% 42% 49% (41%) ======= ====== ======= =======
(a) Represents the implementation of a tax strategy associated with one of our foreign subsidiaries. 7. INVENTORIES September 30, 2001 December 31, 2000 ------------------ ----------------- (In millions of dollars) Inventories are summarized as follows: Finished goods $ 414 $ 397 Materials and supplies 164 165 --------- --------- FIFO inventory 578 562 Less: Reduction to LIFO basis (98) (93) ----------- ----------- Total Inventory $ 480 $ 469 ========= =========
Approximately $138 million and $300 million of total inventories were valued using the LIFO method at September 30, 2001 and December 31, 2000, respectively. 8. CONSOLIDATED STATEMENT OF CASH FLOWS Cash payments (refunds) for income taxes and cost of borrowed funds are summarized as follows: Quarter Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- (In millions of dollars) Income taxes $ 5 $ 5 $ (27) $ (30) Cost of borrowed funds 3 54 6 154
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. - 23 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 9. COMPREHENSIVE INCOME The Company's comprehensive income for the quarters ended September 30, 2001 and 2000 was income of $34 million and a loss of $14 million, respectively. For the nine months ended September 30, 2001 and 2000, comprehensive income was income of $28 million and a loss of $415 million, respectively. The Company's comprehensive income includes net income (loss), currency translation adjustments, and deferred gains and losses on certain hedging transactions. The comprehensive loss for the nine months ended September 30, 2000 includes a reclassification from other comprehensive income to net income of approximately $13 million. This reclassification reflects the expense recognition of currency translation adjustments resulting from the sale of the European Building Materials business to Alcopor Owens Corning in May, 2000 (see Note 5). 10. EARNINGS PER SHARE The following table reconciles the net income (loss) and weighted average number of shares used in the basic earnings per share calculation to the net income (loss) and weighted average number of shares used to compute diluted earnings per share. Quarter Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- (In millions of dollars, except share data) Net income (loss) used for basic earnings per share $ 27 $ 14 $ 46 $ (363) Net income effect of assumed conversion of preferred securities - - - - --------------- ---------- ------------ ----------- Net income used for diluted earnings per share $ 27 $ 14 $ 46 $ (363) ============= ======== ========== ========= Weighted average number of shares outstanding used for basic earnings per share (thousands) 55,079 55,008 55,064 54,759 Deferred awards (thousands) 290 457 323 - Shares from assumed conversion of preferred securities (thousands) 4,566 - 4,566 - ------------ ----------- --------- ----------- Weighted average number of shares outstanding and common equivalent shares used for diluted earnings per share (thousands) 59,935 55,465 59,953 54,759 =========== ======= ======== =======
- 24 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 11. DERIVATIVE FINANCIAL INSTRUMENTS Effective January 1, 2001, the Company implemented Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This statement and its interpretations establish accounting and reporting standards requiring derivative instruments (including certain derivative instruments embedded in other contracts) to be recorded in the balance sheet as either an asset or liability measured at its fair value. The impact of adoption at January 1, 2001 did not have a material effect in the Consolidated Statement of Income (Loss) and resulted in other comprehensive income of approximately $1 million. 12. CONTINGENT LIABILITIES Asbestos Liabilities - -------------------- ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) Numerous claims have been asserted against Owens Corning alleging personal injuries arising from inhalation of asbestos fibers. Virtually all of these claims arise out of Owens Corning's manufacture, distribution, sale or installation of an asbestos-containing calcium silicate, high temperature insulation product, the manufacture and distribution of which was discontinued in 1972. Owens Corning received approximately 18,000 asbestos personal injury claims during 2000, approximately 32,000 such claims during 1999 and approximately 69,000 such claims during 1998. Prior to October 5, 2000, when the Debtors, including Fibreboard (see Item B below), filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, the vast majority of asserted asbestos personal injury claims were in the process of being resolved through the National Settlement Program described below. As a result of the Filing, all pre-petition asbestos claims and pending litigation against the Debtors, including without limitation claims arising under the National Settlement Program, were automatically stayed (see Note 1). Owens Corning expects that all pending and future asbestos claims against Owens Corning and Fibreboard will be resolved pursuant to a plan or plans of reorganization. Owens Corning is unable to determine at this time whether asbestos-related claims asserted against Fibreboard will be treated in the same manner as those asserted against Owens Corning in any such plan or plans. National Settlement Program - --------------------------- Beginning in late 1998, Owens Corning implemented a National Settlement Program ("NSP") to resolve personal injury asbestos claims through settlement agreements with individual plaintiffs' law firms. The NSP was intended to better manage the asbestos liabilities of Owens Corning and Fibreboard (see Item B below), and to help Owens Corning better predict the timing and amount of indemnity payments for both pending and future asbestos claims. The number of law firms participating in the NSP expanded from approximately 50 when the NSP was established to approximately 120 as of the Petition Date. Each of these participating law firms agreed to a long-term settlement agreement which varied by firm ("NSP Agreement") extending through at least 2008 which provided for the resolution of their existing asbestos claims, including unfiled claims pending with the participating law firm at the time it entered into an NSP Agreement ("Initial Claims"). The NSP agreements also established procedures and fixed payments for resolving without litigation claims against - 25 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. CONTINGENT LIABILITIES ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) either Owens Corning or Fibreboard, or both, arising after a participating firm entered into an NSP Agreement ("Future Claims"). Terms and Conditions of NSP Agreements - -------------------------------------- Settlement amounts for both Initial Claims and Future Claims were negotiated with each firm participating in the NSP, and each firm was to communicate with its respective clients to obtain authority to settle individual claims. Payments to individual claimants were to vary based on a number of factors, including the type and severity of disease, age and occupation. All such payments were subject to delivery of satisfactory evidence of a qualifying medical condition and exposure to Owens Corning's and/or Fibreboard's products, delivery of customary releases by each claimant, and other conditions. Certain claimants settling non-malignancy claims with Owens Corning and/or Fibreboard were entitled to an agreed pre-determined amount of additional compensation if they later developed a more severe asbestos-related medical condition. As to Future Claims, each participating NSP firm agreed (consistent with applicable legal requirements) to recommend to its future clients, based on appropriately exercised professional judgment, to resolve their asbestos personal injury claims against Owens Corning and/or Fibreboard through an administrative processing arrangement, rather than litigation. In the case of Future Claims involving non-malignancy, claimants were required to present medical evidence of functional impairment, as well as the product exposure criteria and other requirements set forth above, to be entitled to compensation. Owens Corning and Fibreboard (see Item B below) each retained the right to terminate any individual NSP Agreement if in any year more than a specified number of plaintiffs represented by the plaintiffs' firm in question rejected and ultimately opted out of such agreement. Opt out procedures were specified in the settlement agreements, and provided for mediation and further negotiation before a claimant could pursue his or her case in the court system. Through the Petition Date, fewer than 300 claimants had elected to reject the original settlement proposal, and to mediate under the terms of the NSP Agreement. As of the Petition Date, the NSP covered approximately 240,000 Initial Claims, approximately 148,000 of which had satisfied all conditions to final settlement, including receipt of executed releases, or other resolution (the "Final NSP Settlements") at an average cost per claim of approximately $9,000. As of the Petition Date, approximately 88,000 of such Final NSP Settlements had been paid in full or otherwise resolved, and approximately 60,000 were unpaid in whole or in part. As of such date, the remaining balance payable under NSP Agreements in connection with these unpaid Final NSP Settlements was approximately $539 million. Through the Petition Date, Owens Corning had received approximately 3,800 Future Claims under the NSP. At this time, Owens Corning is unable to predict the manner in which the NSP Agreements and the resolution of claims thereunder will be treated under the terms of any plan or plans of reorganization. Non-NSP Claims - -------------- As of the Petition Date, approximately 36,000 asbestos personal injury claims were pending against Owens - 26 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. CONTINGENT LIABILITIES ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) Corning outside the NSP. This compares to approximately 25,300 such claims pending on December 31, 1999. The information needed for a critical evaluation of pending claims, including the nature and severity of disease and definitive identifying information concerning claimants, typically becomes available only through the discovery process or as a result of settlement negotiations, which often occur years after particular claims are filed. As a result, Owens Corning has limited information about many of such claims, and the actual number of pending claims may vary from the numbers indicated. Owens Corning resolved (by settlement or otherwise) approximately 10,200 asbestos personal injury claims outside the NSP during 1998, 4,800 such claims during 1999 and 3,100 such claims during 2000 prior to the Petition Date. The average cost of resolution was approximately $35,900 per claim for claims resolved during 1998, $34,600 per claim for claims resolved during 1999, and $44,800 per claim for claims resolved during 2000 prior to the Petition Date. As a rule, these claims were settled as they were scheduled for trial, and they typically involved more serious injuries and diseases. Accordingly, Owens Corning does not believe that such average costs of resolution are representative of the value of the non-NSP claims then pending against the Company. At this time, Owens Corning is unable to predict the manner in which non-NSP claims will be treated under the terms of any plan or plans of reorganization. Asbestos-Related Payments - ------------------------- As a result of the Filing, Owens Corning has not made any asbestos-related payments since the Petition Date except for approximately $13 million paid on its behalf by third parties pursuant to appeal bonds issued prior to the Petition Date. During 1999 and 2000 (prior to the Petition Date), Owens Corning (excluding Fibreboard) made asbestos-related payments falling within four major categories: (1) Settlements in respect of verdicts incurred or claims resolved prior to the implementation of the NSP ("Pre-NSP Settlements"); (2) NSP settlements; (3) Non-NSP settlements covering cases not resolved by the NSP; and (4) Defense, claims processing and administrative expenses, as follows: (In millions of dollars) 2000 (through 1999 October 4, 2000) ---- ---------------- Pre-NSP Settlements $ 170 $ 51 NSP Settlements 570 538 Non-NSP Settlements 30 42 Defense, Claims Processing and Administrative Expenses 90 54 --------- --------- $ 860 $ 685 ======= =======
Prior to the Petition Date, Owens Corning deposited certain amounts in escrow accounts to facilitate claims processing under the NSP ("Administrative Deposits"). Amounts deposited into escrow in Administrative Deposits during a reporting period are included in the payments shown for NSP Settlements during the period. At September 30, 2001, approximately $115 million of Administrative Deposits previously made by Owens Corning had not been finally distributed to - 27 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. CONTINGENT LIABILITIES ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) claimants ("Undistributed Administrative Deposits") and, accordingly, are reflected in Owens Corning's consolidated balance sheet as restricted assets (under the caption "Restricted cash - asbestos related") and have not been subtracted from Owens Corning's reserve for asbestos personal injury claims (discussed below). At this time, Owens Corning is unable to predict what the treatment of funds held in Undistributed Administrative Deposits will be under the terms of any plan or plans of reorganization. However, one of the holders of Undistributed Administrative Deposits for Owens Corning (and similar deposits for Fibreboard) has filed a motion with the Bankruptcy Court requesting an order authorizing distribution of the deposits it holds to the escrow beneficiaries. The Bankruptcy Court has scheduled a hearing on this motion for November 28, 2001. All amounts discussed above are before tax and application of insurance recoveries. Tax Legislation - --------------- On April 4, 2001, the United States House of Representatives introduced proposed legislation (HR 1412, also known as the Asbestos Tax Fairness Act) to exempt income earned by qualifying asbestos-related settlement funds, including qualifying trusts established under Section 524(g) of the Bankruptcy Code, from federal income tax. The exemption from income tax would benefit the Fibreboard Settlement Trust (described below) by having the effect of enlarging the corpus of the trust through tax-free income accumulation. In addition, the legislation would allow asbestos defendants to carry-back net operating losses ("NOLs") created by asbestos payments to the years in which the products containing asbestos were produced or distributed (and to each subsequent year) in order to obtain a refund of federal income taxes paid in those periods. In the case of Owens Corning, this would entitle the Company to carry-back its NOLs to the early 1950s. The bill has strong bipartisan support in the form of 72 original cosponsors, including a majority of the members of the House Ways and Means Committee. On June 14, 2001, a companion bill identical to HR 1412 was introduced in the United States Senate (S 1048). This bill also has strong bipartisan support. Despite the foregoing developments, there can be no assurance that any such legislation will be ultimately enacted. Moreover, as a result of the Filing, there is uncertainty regarding the impact of the proposed tax legislation on the Debtors' respective estates even if such legislation were enacted. Other Asbestos-Related Litigation - --------------------------------- As previously reported, the Company believes that it has spent significant amounts to resolve claims of asbestos claimants whose injuries were caused or exacerbated by cigarette smoking. Owens Corning and Fibreboard are pursuing litigation against tobacco companies (discussed below) to obtain payment of monetary damages (including punitive damages) for payments made by Owens Corning and Fibreboard to asbestos claimants who developed smoking related diseases. There can be no assurance that any such litigation will go to trial or be successful. In October 1998, the Circuit Court for Jefferson County, Mississippi granted - 28 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. CONTINGENT LIABILITIES ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) leave to file an amended complaint in an existing action to add claims by Owens Corning against seven tobacco companies and several other tobacco industry defendants. On June 17, 2001, the Jefferson court entered an order dismissing Owens Corning's case in response to the defendants' motion for summary judgment on the basis that Owens Corning's injuries were indirect and thus too remote under Mississippi law to allow recovery. The Company has appealed such dismissal to the Supreme Court of Mississippi. In addition to the Mississippi lawsuit, a lawsuit brought in December 1997 by Owens Corning and Fibreboard is pending in the Superior Court for Alameda County, California against the same tobacco companies. The defendants have filed motions to dismiss Owens Corning's and Fibreboard's claims on the basis of the decision in the Mississippi lawsuit as well as California law. A hearing on these motions is set for November 20, 2001. Insurance - --------- As previously reported, late in the second quarter of 2001, Owens Corning entered into a settlement agreement with one of its excess insurance carriers, resolving a dispute concerning coverage from such insurer for non-products asbestos-related personal injury claims. The Bankruptcy Court approved such settlement in July. As a result, during the third quarter of 2001, the carrier funded $55 million into an escrow account to be released in conjunction with implementation of an approved plan of reorganization, and the Company's recorded insurance asset was reduced. The escrowed funds plus earnings are reflected on Owens Corning's consolidated balance sheet as restricted assets, under the category "Restricted cash - asbestos-related". During the third quarter of 2001, Owens Corning also received an additional $5 million payment in respect of a previous settlement with a bankrupt insurance carrier. This amount was recorded as pre-tax income in the third quarter. As of September 30, 2001, Owens Corning's financial statements reflect $4 million in unexhausted insurance coverage (net of deductibles and self-insured retentions) under its liability insurance policies applicable to asbestos personal injury claims. This amount represented unconfirmed potential non-products coverage with excess level insurance carriers, as to which Owens Corning had estimated its probable recoveries. Owens Corning also has other unconfirmed potential non-products coverage with excess level carriers. Owens Corning is actively pursuing non-products insurance recoveries under these policies. In October, 2001, Owens Corning filed a lawsuit in Lucas County, Ohio, against ten excess level carriers for declaratory relief and damages for failure to make payments under its non-products insurance coverage. The amount and timing of recoveries from excess level policies will depend on the outcome of litigation or other proceedings, possible settlements of those proceedings, or other negotiations. Reserve - ------- Owens Corning estimates a reserve in accordance with generally accepted accounting principles to reflect asbestos-related liabilities that have been asserted or are probable of assertion, in which liabilities are probable and reasonably estimable. This reserve was established initially through a charge to income in 1991, with additional charges to income of $1.1 billion in 1996, $1.4 billion in 1998, and $1.0 billion in 2000. - 29 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. CONTINGENT LIABILITIES ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) As of September 30, 2001, a reserve of approximately $2.2 billion in respect of Owens Corning's asbestos- related liabilities was one of the items included in Owens Corning's consolidated balance sheet under the category "Liabilities Subject to Compromise." For periods prior to the Petition Date, these liabilities were reflected as current or other liabilities (depending on the period in which payment was expected) under the category "Reserve for asbestos litigation claims." The approximate balances of the components of the reserve at September 30, 2000 (the ending date of the last reporting period preceding the Petition Date) were: September 30, 2000 ------------------ (In billions of dollars) NSP backlog $ 1.1 Non-NSP backlog 0.3 Future Claims 0.7 Defense, Claims Processing and Administrative Expenses 0.1
In connection with this asbestos reserve, Owens Corning notes that: - - The "NSP backlog" component represented the remaining estimated cost of resolving Initial Claims under the NSP. - - The "Non-NSP backlog" component represented the estimated cost of resolving asbestos personal injury claims pending against Owens Corning outside the NSP. - - The "Future claims" component represented the estimated cost of resolving (i) Future Claims under the NSP and (ii) non-NSP claims subsequently made. As Owens Corning has discussed in previous public filings, any estimate of its liabilities for pending and expected future asbestos claims is subject to considerable uncertainty because such liabilities are influenced by numerous variables that are inherently difficult to predict. As discussed further below, such uncertainties significantly increased as a result of the Chapter 11 Cases. Prior to the Petition Date, such variables included, among others, the cost of resolving pending non-NSP claims; the disease mix and severity of disease of pending NSP claims; the number, severity of disease, and jurisdiction of claims filed in the future (especially the number of mesothelioma claims); how many future claimants were covered by an NSP Agreement; the extent, if any, to which individual claimants exercised a right to opt out of an NSP Agreement and/or engage counsel not participating in the NSP; the extent, if any, to which counsel not bound by an NSP Agreement undertook the representation of asbestos personal injury plaintiffs against Owens Corning; the extent, if any, to which Owens Corning exercised its right to terminate one or more of the NSP Agreements due to excessive opt-outs or for other reasons; and Owens Corning's success in controlling the costs of resolving future non-NSP claims. As one example of the difficulties inherent in estimating future asbestos claims, Owens Corning notes that the Manville Personal Injury Settlement Trust, a trust established to settle asbestos claims against Johns Manville Corporation, announced in June 2001 that it was reducing its initial settlement distributions by fifty percent on the basis of the continued record pace of asbestos claim filings and the prediction of its consultants that the trust might receive 1.5 to 2.5 million additional claims. - 30 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. CONTINGENT LIABILITIES ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) The Chapter 11 Cases significantly increase the inherent difficulties and uncertainties involved in estimating the number and cost of resolution of present and future asbestos-related claims against Owens Corning and may have the effect of increasing the number and ultimate cost of resolution of such claims, perhaps substantially. In particular, the status of the NSP Agreements and the treatment of pending and future claims thereunder will depend on the outcome of negotiations among the various constituencies in the Chapter 11 Cases and determinations by the Bankruptcy Court as to the issues involved, none of which can be predicted at this time. The uncertainties associated with the status of the NSP Agreements and the treatment of claims thereunder include the following: - - It is possible that one or more constituencies in the Chapter 11 Cases may seek to set aside the NSP Agreements on various grounds. In any event, it is highly uncertain how any plan or plans of reorganization will treat the various types of NSP claims, including without limitation claims with no evidence of significant medical impairment, or whether such unimpaired claims will be treated as allowed claims thereunder. - - The settlement values for specified categories of disease set forth in the NSP Agreements were established by arms-length negotiations with the participating law firms in circumstances very different from those prevailing in the Chapter 11 Cases. The settlement values available to individual claimants under the arrangements to be included in any plan or plans of reorganization may vary substantially from those contemplated by the NSP Agreements. Because Owens Corning's estimate of liabilities in respect of non-NSP claims assumed payment of settlement values similar to those contained in the NSP Agreements, such estimate is subject to similar uncertainty. Additional uncertainties raised by the Chapter 11 Cases include the following: - - As a result of the Filing, all of the holders of pre-petition asbestos claims against Owens Corning or Fibreboard will be required to file proofs of claim in the form and manner prescribed by the Bankruptcy Court. The filing of a proof of claim will be a precondition to any pre-petition claim being considered for payment as an allowed claim. Moreover, the Filing, including the significant publicity associated with the Chapter 11 Cases and notices required by the Bankruptcy Code that must be given to creditors and other parties in interest, has significantly increased the inherent difficulties and uncertainties involved in estimating the number and cost of resolution of not only pre-petition claims but also additional claims that may be asserted in the course of the Chapter 11 Cases. Among other things, it is not possible to predict at this time how many proofs of claim will be timely filed, how many proofs of claim will represent allowed claims, or the aggregate value of such allowed claims. - - Owens Corning anticipates that the number and estimated aggregate value of allowed future claims will be determined as a result of negotiations involving the legal representative for the class of future asbestos claimants and the other interested constituencies or, if necessary, by the Bankruptcy Court. It is not possible to predict the outcome of such negotiations at this time. In connection with such negotiations, it is anticipated that a number of interested constituencies, including the representatives of the pre-petition and future asbestos claimants and other pre-petition creditors, will develop analyses of liability for both pre-petition and future asbestos claims. Owens Corning - 31 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. CONTINGENT LIABILITIES ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued) and Fibreboard will also prepare analyses for use in the negotiation process. Such analyses are also required in connection with the establishment, as part of the plan of reorganization, of a Section 524(g) trust for the benefit of asbestos claimants. These analyses could vary substantially from one another and from the amounts of Owens Corning's and Fibreboard's existing reserves. Such analyses will be prepared solely for use in the negotiation of a plan of reorganization and will not involve the same type of estimation process required in connection with the preparation of financial statements under generally accepted accounting principles. Ultimately, Owens Corning's (and Fibreboard's) total liability for asbestos claims will be determined after a lengthy period of negotiations and, if necessary, by the Bankruptcy Court following the bar date for submission of proofs of claim, taking into account numerous factors not present in Owens Corning's pre-petition environment. Such factors include the claims of competing creditor groups as to the appropriate treatment of their allowed claims in the plan or plans of reorganization, the size of the total asbestos liability, the total number of present asbestos claims allowed and the total amount of future asbestos claims allowed. At September 30, 2001, as a result of the Filing and the uncertainties referred to above, the approximate balances of the components of Owens Corning's asbestos-related reserve were: Balance ------- (In billions of dollars) Unpaid Final Settlements (NSP and other) $ 0.6 Other Pending and Future Claims 1.6
In connection with this asbestos reserve, Owens Corning notes that: - - The "Unpaid Final Settlements" component represented the remaining estimated cost for all asbestos personal injury claims pending against Owens Corning which were subject to final settlement agreements for which releases from claimants were obtained, and under which all other conditions to settlement had been satisfied, as of the Petition Date. - - The "Other Pending and Future Claims" component represented the estimated cost of resolving (i) asbestos personal injury claims pending against Owens Corning which were subject to resolution under NSP Agreements but for which releases were not obtained from claimants prior to the Petition Date; (ii) all other asbestos personal injury claims pending against Owens Corning which were not subject to any settlement agreement; and (iii) future asbestos personal injury claims against Owens Corning made after the Petition Date. Owens Corning will continue to review its asbestos reserve on a periodic basis and make such adjustments as may be appropriate. However, it is possible that Owens Corning will not be in a position to conclude that a revision to the reserve is appropriate until significant developments occur during the course of the Chapter 11 Cases, including resolution of the uncertainties described above. Any such revision could, however, be material to the Company's consolidated financial position and results of operations in any given period. - 32 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. CONTINGENT LIABILITIES ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) Prior to 1972, Fibreboard manufactured insulation products containing asbestos. Fibreboard has since been named as defendant in many thousands of personal injury claims for injuries allegedly caused by asbestos exposure. Fibreboard received approximately 21,600 asbestos personal injury claims during 2000. Prior to the Petition Date, the vast majority of Fibreboard asbestos personal injury claims were in the process of being resolved through the NSP, as described below. As a result of the Filing, all pre-petition asbestos claims and pending litigation against the Debtors were automatically stayed (see Note 1). Owens Corning expects that all pending and future asbestos claims against Owens Corning and Fibreboard will be resolved pursuant to a plan or plans of reorganization. Owens Corning is unable to determine at this time whether asbestos-related claims asserted against Fibreboard will be treated in the same manner as those asserted against Owens Corning in any such plan or plans. National Settlement Program - --------------------------- Fibreboard is a participant in the NSP and is a party to the NSP Agreements discussed in Item A. The NSP Agreements became effective as to Fibreboard in the fourth quarter of 1999, when the Insurance Settlement (discussed below) became effective. The NSP Agreements settled asbestos personal injury claims that had been filed against Fibreboard by participating plaintiffs' law firms and claims that could have been filed against Fibreboard by such firms following the lifting, in the third quarter of 1999, of an injunction which had barred the filing of asbestos personal injury claims against Fibreboard. As of the Petition Date, the NSP covered approximately 212,000 Initial Claims against Fibreboard, approximately 116,000 of which had satisfied all conditions to final settlement, including receipt of executed releases, or other resolution as Final NSP Settlements at an average cost per claim of approximately $7,500. As of the Petition Date, approximately 61,000 of such Final NSP Settlements had been paid in full or otherwise resolved and approximately 55,000 were unpaid in whole or in part. As of such date, the remaining balance payable under NSP Agreements in connection with these unpaid Final NSP Settlements was approximately $357 million. The NSP Agreements also provided for the resolution of Future Claims against Fibreboard through the administrative processing arrangement described in Item A. Through the Petition Date, Fibreboard had received approximately 3,800 Future Claims under the NSP. At this time, Owens Corning is unable to predict the manner in which the NSP Agreements and the resolution of Fibreboard claims thereunder will be treated under the terms of any plan or plans of reorganization. Non-NSP Claims - -------------- As of the Petition Date, approximately 15,000 asbestos personal injury claims were pending against Fibreboard outside the NSP. This compares to approximately 1,000 such claims pending on December 31, 1999. Fibreboard resolved (by settlement or otherwise) approximately 2,300 asbestos personal injury claims outside the NSP during 2000 prior to the Petition Date at an average cost of resolution of approximately $45,000 per claim. Generally, these claims were settled as they were scheduled for trial, and they typically involved more serious injuries and diseases. Accordingly, Owens Corning does not believe that such average costs of resolution are representative of the value of the non-NSP claims then pending against Fibreboard. - 33 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. CONTINGENT LIABILITIES ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued) At this time, Owens Corning is unable to predict the manner in which Fibreboard non-NSP claims will be treated under the terms of any plan or plans of reorganization. Insurance Settlement - -------------------- In 1993, Fibreboard and two of its insurers, Continental Casualty Company ("Continental") and Pacific Indemnity Company ("Pacific"), entered into the Insurance Settlement. The Insurance Settlement became effective in the fourth quarter of 1999, is final and is not subject to appeal. Since 1993, Continental and Pacific paid, either directly or through an escrow account funded by them, for substantially all settlements of asbestos claims reached prior to the initiation of the NSP. Under the Insurance Settlement, Continental and Pacific provided $1,873 million during the fourth quarter of 1999 to fund costs of resolving pending and future asbestos claims, whether under the NSP, in the tort system, or otherwise. As of September 30, 2001, the Insurance Settlement funds were held in and invested by the Fibreboard Settlement Trust. As of that date, $1,150 million (net of outstanding payables) was held in the Fibreboard Settlement Trust and $135 million was held in Undistributed Administrative Deposits in respect of Fibreboard claims. On an ongoing basis, the funds held in the Fibreboard Settlement Trust will be subject to investment earnings/losses and will be reduced if and as applied to satisfy asbestos-related liabilities. Under the terms of the Fibreboard Settlement Trust, any of such assets that ultimately are not used to fund Fibreboard's asbestos-related liabilities must be distributed to charity. It will not be known whether any such assets will remain for distribution until the conclusion of the Chapter 11 Cases. Funds held in the Fibreboard Settlement Trust and Fibreboard's Undistributed Administrative Deposits are reflected on Owens Corning's consolidated balance sheet as restricted assets. At September 30, 2001, these assets were reflected as non-current assets, under the category "Restricted cash, securities and other - - Fibreboard." See Note 13 for additional information concerning the Fibreboard Settlement Trust. At this time, Owens Corning is unable to predict what the treatment of funds held in the Fibreboard Settlement Trust and in Undistributed Administrative Deposits in respect of Fibreboard claims will be under the terms of any plan or plans of reorganization. Asbestos-Related Payments - ------------------------- As a result of the Filing, Fibreboard has not made any asbestos-related payments since the Petition Date. During 2000 (prior to the Petition Date), gross payments for asbestos-related claims against Fibreboard, all of which were paid/reimbursed by the Fibreboard Settlement Trust, fell within four major categories, as follows: (In millions of dollars) 2000 (through October 4, 2000) Pre-NSP Settlements $ 29 NSP Settlements 705 Non-NSP Settlements 41 Defense, Claims Processing and Administrative Expenses 45 --------- $ 820
- 34 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. CONTINGENT LIABILITIES ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued) The payments for NSP Settlements include Administrative Deposits during the reporting period in respect of Fibreboard claims. Reserve - ------- Owens Corning estimates a reserve for Fibreboard in accordance with generally accepted accounting principles to reflect asbestos-related liabilities. As of September 30, 2001, a reserve of approximately $1.3 billion in respect of these liabilities was one of the items included in Owens Corning's consolidated balance sheet under the category "Liabilities Subject to Compromise." For periods prior to the Petition Date, they were reflected as current or other liabilities (depending on the period in which payment was expected) under the category "Asbestos-related liabilities - Fibreboard." These liabilities (including any reserve for the charitable remainder) are always at least equal to the funds held in the Fibreboard Settlement Trust and Fibreboard's Undistributed Administrative Deposits since, under the terms of the Trust, the funds held in the Trust must be expended either in connection with Fibreboard's asbestos-related liabilities, or to satisfy the obligation under the Trust to distribute to charity the assets, if any, remaining in the Trust after satisfaction of all such liabilities (see Note 13). The approximate balances of the components of the Fibreboard asbestos-related reserve at September 30, 2000 (the ending date of the last reporting period preceding the Petition Date) were: September 30, 2000 ------------------ (In billions of dollars) NSP backlog $ 0.80 Non-NSP backlog 0.10 Future Claims 0.30 Defense, Claims Processing and Administrative Expenses 0.05
In connection with this asbestos reserve, Owens Corning notes that: - - The "NSP backlog" component represented the remaining estimated cost of resolving Initial Claims against Fibreboard under the NSP. - - The "Non-NSP backlog" component represented the estimated cost of resolving asbestos personal injury claims pending against Fibreboard outside the NSP. - - The "Future claims" component represented the estimated cost of resolving (i) Future Claims against Fibreboard under the NSP and (ii) non-NSP claims subsequently made against Fibreboard. As noted in Item A above as to Owens Corning, the estimate of Fibreboard's liabilities for pending and expected future asbestos claims is subject to considerable uncertainty because such liabilities are influenced by numerous variables that are inherently difficult to predict, and such uncertainties significantly increased as a result of the Filing including those set forth in Item A above. In addition, as noted above, at this time Owens Corning is unable to predict what the treatment of funds held in the Fibreboard Settlement Trust and in Undistributed Administrative Deposits in respect of Fibreboard claims will be under the terms of any plan or plans of reorganization. - 35 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. CONTINGENT LIABILITIES ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued) At September 30, 2001, as a result of the Filing and the uncertainties referred to above, the approximate balances of the components of the Fibreboard asbestos-related reserve were: Balance ------- (In billions of dollars) Unpaid Final Settlements (NSP and other) $0.4 Other Pending and Future Claims 0.9
In connection with this asbestos reserve, Owens Corning notes that: - - The "Unpaid Final Settlements" component represented the remaining estimated cost for all asbestos personal injury claims pending against Fibreboard which were subject to final settlement agreements for which releases from claimants were obtained, and under which all other conditions to settlement had been satisfied, as of the Petition Date. - - The "Other Pending and Future Claims" component represented the estimated cost of resolving (i) asbestos personal injury claims pending against Fibreboard which were subject to resolution under NSP Agreements but for which releases were not obtained from claimants prior to the Petition Date; (ii) all other asbestos personal injury claims pending against Fibreboard which were not subject to any settlement agreement; and (iii) future asbestos personal injury claims against Fibreboard made after the Petition Date. This component also included the residual obligation to charity under the Fibreboard Settlement Trust (see Note 13). Owens Corning will continue to review Fibreboard's asbestos reserve on a periodic basis and make such adjustments as may be appropriate. However, it is possible that Owens Corning will not be in a position to conclude that a revision to the reserve is appropriate until significant developments occur during the course of the Chapter 11 Cases, including resolution of the uncertainties described above. Any such revision could, however, be material to the Company's consolidated financial position and results of operations in any given period. Non-Asbestos Liabilities - ------------------------ Securities Litigation - --------------------- On or about April 30, 2001, certain of the Company's current and former directors and officers, as well as certain underwriters, were named as defendants in a lawsuit captioned John Hancock Life Insurance Company, et al. v. Goldman, Sachs & Co., et al. in the United States District Court for the District of Massachusetts. An amended complaint was filed by the plaintiffs on or about July 5, 2001. Owens Corning is not named in the lawsuit. The suit purports to be a securities class action on behalf of purchasers of certain unsecured debt securities of Owens Corning in offerings occurring on or about April 30, 1998 and July 23, 1998. The complaint alleges that the registration statements pursuant to which the offerings were made contained untrue and misleading statements of material fact and omitted to state material facts which were required to be stated therein and which were necessary to make the statements therein not misleading, in violation of sections 11, 12(a)(2) and 15 - 36 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 12. CONTINGENT LIABILITIES ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued) of the Securities Act of 1933. The amended complaint seeks an unspecified amount of damages or, where appropriate, rescission of the plaintiffs' purchases. The Company believes that the claim is without merit. Tax Claim - --------- Owens Corning's federal income tax returns typically are audited by the Internal Revenue Service ("IRS") in multi-year audit cycles. The audit for the years 1992-1995 was completed in late 2000. Due to the Filing, the IRS also accelerated and completed the audit of the years 1996-1999 by March of 2001. As the result of these audits and unresolved issues from prior audit cycles, the IRS is asserting claims for approximately $390 million in income taxes plus interest of approximately $175 million. Pending audit of Owens Corning's federal income tax return for the year 2000, the IRS has also filed a protective claim in the amount of approximately $50 million, covering a tax refund received by Owens Corning for such year, plus interest. In accordance with generally accepted accounting principles, Owens Corning maintains tax reserves to cover audit issues. While Owens Corning believes that the existing reserves are appropriate in light of the audit issues involved, its defenses, its prior experience in resolving audit issues, and its ability to realize certain challenged deductions in subsequent tax returns if the IRS were successful, there can be no assurance that such reserves will be sufficient. Owens Corning will continue to review its tax reserves on a periodic basis and make such adjustments as may be appropriate. Any such revision could be material to the Company's consolidated financial position and results of operations in any given period. 13. FIBREBOARD SETTLEMENT TRUST Under the Insurance Settlement described in Note 12, two of Fibreboard's insurers provided $1.873 billion during the fourth quarter of 1999 to fund the costs of resolving pending and future asbestos claims. As of September 30, 2001, the Insurance Settlement funds were held in and invested by the Fibreboard Settlement Trust (the "Trust"). On an ongoing basis, the funds held in the Trust will be subject to investment earnings/losses and will be reduced if and as applied to satisfy Fibreboard asbestos-related liabilities. Under the terms of the Trust, any Trust assets that ultimately are not used to fund Fibreboard's asbestos-related liabilities must be distributed to charity. The Trust is a qualified settlement fund for federal income tax purposes, and is taxed separately from Owens Corning on its net taxable income, after deduction for related administrative expenses. While there can be no assurance that the proposed Asbestos Tax Fairness Bill discussed in Note 12, Item A, will be enacted by Congress, such legislation would benefit the Trust during the pendency of the Chapter 11 proceedings by eliminating the tax on income, thereby enlarging the corpus of the Trust through tax-free income accumulation. At this time, Owens Corning is unable to predict what the treatment of the Fibreboard Settlement Trust will be under the terms of any plan or plans of reorganization. - 37 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 13. FIBREBOARD SETTLEMENT TRUST (continued) General Accounting Treatment - ---------------------------- The assets of the Trust are comprised of cash and marketable securities (collectively, the "Trust Assets") and, with Fibreboard's Undistributed Administrative Deposits, are reflected on Owens Corning's consolidated balance sheet as restricted assets. At September 30, 2001, these assets were reflected as non-current assets, under the category "Restricted cash, securities and other - - Fibreboard." Owens Corning estimates a reserve for Fibreboard in accordance with generally accepted accounting principles to reflect asbestos-related liabilities (see Note 12, Part B). As of September 30, 2001, these liabilities were one of the items included in Owens Corning's consolidated balance sheet under the category "Liabilities Subject to Compromise." For periods prior to the Petition Date, they were reflected as current or other liabilities (depending on the period in which payment was expected) under the category "Asbestos-related liabilities - Fibreboard." These liabilities (including any reserve for the charitable remainder) are always at least equal to the funds held in the Trust and Fibreboard's Undistributed Administrative Deposits since, under the terms of the Trust, the funds held in the Trust must be expended either in connection with Fibreboard's asbestos-related liabilities, or to satisfy the obligation under the Trust to distribute to charity the assets, if any, remaining in the Trust after satisfaction of all such liabilities. It will not be known whether any such assets will remain for distribution until the conclusion of the Chapter 11 Cases. At September 30, 2001, the Consolidated Financial Statements reflect Fibreboard's liabilities for asbestos litigation claims at $1.215 billion, with a residual obligation to charity of $70 million. For accounting purposes, the Trust Assets are classified from time to time as "available for sale" or "held to maturity" and are reported in the Consolidated Financial Statements in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, marketable securities classified as available for sale are recorded at fair market value and marketable securities designated as held to maturity are recorded at amortized cost. Any unrealized increase/decrease in fair market value is reflected as a change in the carrying amount of the asset on the consolidated balance sheet as well as an increase/decrease to other comprehensive income within stockholders' equity, net of tax. The residual liability that may be paid to charity will also increase/decrease, with a related decrease/increase to other comprehensive income within stockholders' equity, net of tax. Any earnings and realized gains/losses on the Trust Assets are reflected as an increase/decrease in the carrying amount of such assets on the consolidated balance sheet as well as other income/expense on the consolidated statement of income. The residual liability that may be paid to charity will also increase/decrease, with related other expense/ income on the consolidated statement of income. Cost for purposes of computing realized gains/losses is determined using the specific identification method. Results for the Period Ending September 30, 2001 - ------------------------------------------------ Trust Assets generated interest/dividend earnings of approximately $13 million and $15 million, respectively, during the third quarter of 2001 and 2000 ($42 million and $53 million, respectively, for the first nine months of the year), which have been recorded as an increase in the carrying amount of the assets on Owens Corning's consolidated balance sheet and as other income on the - 38 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 13. FIBREBOARD SETTLEMENT TRUST (continued) Consolidated Statement of Income (Loss). This income, however, has been offset by an equal charge to other expense, which represents an increase in the residual liability to charity. As a result of the Filing, there were no payments from the Trust during the first half of 2001. However, in the third quarter of 2001, approximately $11 million was paid for taxes related to earnings of the Trust. Payments for asbestos litigation claims from the Trust during the third quarter of 2000 were approximately $186 million, and totaled $820 million for the year. As the result of the sale of securities, the Trust realized a gain of less than $1 million during the third quarter of 2001, compared to a gain of approximately $1 million during the same period of 2000 (for the first nine months of such years, the Trust realized gains of approximately $4 million and $2 million, respectively). Realized gains or losses from the sale of securities are reflected on the Company's financial statements in the same manner as actual returns on Trust Assets, described above. At September 30, 2001 and 2000, the fair market value adjustment for those securities designated as available for sale resulted in an unrealized gain of approximately $11 million and $1 million, respectively. These amounts have been reflected in the Company's consolidated balance sheet as a change to the carrying amount of the asset and to other comprehensive income. These amounts have also been reflected as a change to the liability to charity, with a corresponding effect to other comprehensive income. At September 30, 2001, the fair value of Trust Assets was $1.285 billion, which was comprised of $1.168 billion of marketable securities, $18 million of outstanding payables and $135 million of restricted cash, which represents undistributed administrative deposits. The amortized cost, gross unrealized holding gains and losses and fair value of the investment securities available for sale at September 30, 2001 and December 31, 2000 are as follows: September 30, 2001 ------------------ Amortized Gross Unrealized Gross Unrealized Cost Gain Loss Fair Value ---- ---- ---- ---------- (In millions of dollars) Municipal Bonds $ 1,151 $ 11 $ - $ 1,162 Mutual Funds 2 - - 2 US Government Bonds 4 - - 4 ---------- ----------- ----------- ---------- Total $ 1,157 $ 11 $ - $ 1,168
- 39 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 13. FIBREBOARD SETTLEMENT TRUST (continued) December 31, 2000 ----------------- Amortized Gross Unrealized Gross Unrealized Cost Gain Loss Fair Value ---- ---- ---- ---------- (In millions of dollars) Corporate Bonds $ 148 $ - $ - $ 148 Corporate Notes 449 1 - 450 Municipal Bonds 284 - - 284 Mutual Funds 116 - - 116 Time Deposits 37 - - 37 US Government Bonds 57 - - 57 ---------- ---------- --------- ---------- Total $ 1,091 $ 1 $ - $ 1,092 ======= ========= ======== =======
Maturities of investment securities classified as available for sale at September 30, 2001 and December 31, 2000 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to recall or prepay obligations with or without call or prepayment penalties. September 30, 2001 December 31, 2000 ------------------ ----------------- Amortized Amortized Cost Fair Value Cost Fair Value ---- ---------- ---- ---------- (In millions of dollars) Due within one year $ 37 $ 37 $ 656 $ 656 Due after one year through five years 581 589 2 2 Due after five years through ten years 219 221 51 51 Due after ten years 320 321 382 383 --------- --------- --------- --------- Total $ 1,157 $ 1,168 $ 1,091 $ 1,092
- 40 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 13. FIBREBOARD SETTLEMENT TRUST (continued) The table below summarizes Trust and Administrative Deposits activity for the period ended September 30, 2001: Interest Unrealized Net Sales Realized Balance and Gain/ of Gain/ Balance 12/31/00 Dividends (Loss) Securities (Loss) Other Payments 9/30/01 -------- --------- ------ ---------- ------ ----- -------- ------- Assets - ------ Cash $ 12 $ - $ - $ (30) $ - $ - $ - $ (18) Restricted Cash 170 - - - - (35) - 135 Marketable Securities: Available for Sale 1,092 42 11 30 4 - (11) 1,168 --------- -------- ---------- ----------- --------- -------- ------------ ------- Total Assets $ 1,274 $ 42 $ 11 $ - $ 4 $ (35) $ (11) $ 1,285 ======== ======== ========= ============ ========= ======== =========== ======= Liabilities - ----------- Asbestos Litigation Claims $ 1,250 $ - $ - $ - $ - $ (35) $ - $ 1,215 Charity 24 42 11 - 4 - (11) 70 ---------- -------- ---------- ------------ --------- -------- ------------ ------- Total Liabilities $ 1,274 $ 42 $ 11 $ - $ 4 $ (35) $ (11) $ 1,285 ======== ======== ========= ============ ========= ======== =========== =======
- 41 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (All per share information in Item 2 is on a diluted basis.) CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the statements. Some of the important factors that may influence possible differences are continued competitive factors and pricing pressures, material costs, construction activity, interest rate movements, issues involving implementation of new business systems, achievement of expected cost reductions, developments in and the outcome of the Chapter 11 proceedings described below, and general economic conditions. GENERAL Voluntary Petition for Relief Under Chapter 11 - ---------------------------------------------- On October 5, 2000 (the "Petition Date"), Owens Corning and the 17 United States subsidiaries listed below (collectively, the "Debtors"), filed voluntary petitions for relief (the "Filing") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The Debtors are currently operating their businesses as debtors-in-possession in accordance with provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") are being jointly administered under Case No. 00-3837 (JKF). The Chapter 11 Cases do not include other United States subsidiaries of Owens Corning or any of its foreign subsidiaries (collectively, the "Non-Debtor Subsidiaries"). The subsidiary Debtors that filed Chapter 11 etitions for relief are: CDC Corporation Integrex Testing Systems LLC Engineered Yarns America, Inc. HOMExperts LLC Falcon Foam Corporation Jefferson Holdings, Inc. Integrex Owens-Corning Fiberglas Technology Inc. Fibreboard Corporation Owens Corning HT, Inc. Exterior Systems, Inc. Owens-Corning Overseas Holdings, Inc. Integrex Ventures LLC Owens Corning Remodeling Systems, LLC Integrex Professional Services LLC Soltech, Inc. Integrex Supply Chain Solutions LLC
The Debtors filed for relief under Chapter 11 to address the growing demands on Owens Corning's cash flow resulting from its multi-billion dollar asbestos liability. This liability is discussed in greater detail in Note 12 to the Consolidated Financial Statements. Consequence of Filing - --------------------- As a consequence of the Filing, all pending litigation against the Debtors is stayed automatically by section 362 of the Bankruptcy Code and, absent further order of the Bankruptcy Court, no party may take any action to recover on pre-petition claims against the Debtors. In addition, pursuant to section 365 of the Bankruptcy Code, the Debtors may reject or assume pre-petition executory - 42 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) contracts and unexpired leases, and other parties to contracts or leases that are rejected may assert rejection damages claims as permitted by the Bankruptcy Code. Two creditors' committees, one representing asbestos claimants and the other representing unsecured creditors, have been appointed as official committees in the Chapter 11 Cases. In addition, the Bankruptcy Court has appointed James J. McMonagle as legal representative for the class of future asbestos claimants. The two committees and the futures representative will have the right to be heard on all matters that come before the Bankruptcy Court. Owens Corning expects that these committees and the futures representative will play important roles in the Chapter 11 Cases and the negotiation of the terms of any plan or plans of reorganization. Owens Corning anticipates that substantially all liabilities of the Debtors as of the date of the Filing will be resolved under one or more Chapter 11 plans of reorganization to be proposed and voted on in the Chapter 11 Cases in accordance with the provisions of the Bankruptcy Code. Although the Debtors intend to file and seek confirmation of such a plan or plans, there can be no assurance as to when the Debtors will file such a plan or plans, or that such plan or plans will be confirmed by the Bankruptcy Court and consummated. As provided by the Bankruptcy Code, the Debtors initially had the exclusive right to propose a plan of reorganization for 120 days following the Petition Date, until February 2, 2001. By order, the Bankruptcy Court has extended such exclusivity period until February 2, 2002, and similarly extended the Debtors' exclusive rights to solicit acceptances of a reorganization plan from April 3, 2001 to April 3, 2002. If the Debtors fail to file a plan of reorganization prior to the ultimate expiration of the exclusivity period, or if such plan is not accepted by the requisite numbers of creditors and equity holders entitled to vote on the plan, other parties in interest in the Chapter 11 Cases may be permitted to propose their own plan(s) of reorganization for the Debtors. Owens Corning is unable to predict at this time what the treatment of creditors and equity holders of the respective Debtors will be under any proposed plan or plans of reorganization. Such plan or plans may provide, among other things, that all present and future asbestos-related liabilities of Owens Corning and Fibreboard will be discharged and assumed and resolved by one or more independently administered trusts established in compliance with Section 524(g) of the Bankruptcy Code. Such plan or plans may also provide for the issuance of an injunction by the Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy Code that will enjoin actions against the reorganized Debtors for the purpose of, directly or indirectly, collecting, recovering or receiving payment of, on, or with respect to any claims resulting from asbestos-containing products allegedly manufactured, sold or installed by Owens Corning or Fibreboard, which claims will be paid in whole or in part by one or more Section 524(g) trusts. Similar plans of reorganization have been confirmed in the Chapter 11 cases of other companies involved in asbestos-related litigation. Section 524(g) of the Bankruptcy Code provides that, if certain specified conditions are satisfied, a court may issue a supplemental permanent injunction barring the assertion of asbestos-related claims or demands against the reorganized company and channeling those claims to an independent trust. Owens Corning is unable to predict at this time what treatment will be accorded under any such reorganization plan or plans to inter-company indebtedness, - 43 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) licenses, transfers of goods and services and other inter-company and intra-company arrangements, transactions and relationships that were entered into prior to the Petition Date. These arrangements, transactions and relationships may be challenged by various parties in the Chapter 11 Cases and the outcome of those challenges, if any, may have an impact on the treatment of various claims under such plan or plans. For example, Owens Corning is unable to predict at this time what the treatment will be under any such plan or plans with respect to (1) the guaranties issued by certain of Owens Corning's U.S. subsidiaries, including Owens-Corning Fiberglas Technology Inc. ("OCFT") and IPM, Inc., a Non-Debtor Subsidiary that holds Owens Corning's ownership interest in a majority of Owens Corning's foreign subsidiaries ("IPM"), with respect to Owens Corning's $1.8 billion pre-petition bank credit facility (the "Pre-Petition Credit Facility" which is now in default) or (2) OCFT's license agreements with Owens Corning and Exterior Systems, Inc., a wholly-owned subsidiary of Owens Corning ("Exterior"), pursuant to which OCFT licenses intellectual property to Owens Corning and Exterior. The Bankruptcy Court may confirm a plan of reorganization only upon making certain findings required by the Bankruptcy Code, and a plan may be confirmed over the dissent of non-accepting creditors and equity security holders if certain requirements of the Bankruptcy Code are met. The payment rights and other entitlements of pre-petition creditors and Owens Corning's shareholders may be substantially altered by any plan or plans of reorganization confirmed in the Chapter 11 Cases. There is no assurance that there will be sufficient assets to satisfy the Debtors' pre-petition liabilities in whole or in part, and the pre-petition creditors of some Debtors may be treated differently than those of other Debtors. Pre-petition creditors may receive under a plan or plans less than 100% of the face value of their claims, and the interests of Owens Corning's equity security holders may be substantially diluted or cancelled in whole or in part. As noted above, it is not possible at this time to predict the outcome of the Chapter 11 Cases, the terms and provisions of any plan or plans of reorganization, or the effect of the Chapter 11 reorganization process on the claims of the creditors of the Debtors or the interests of Owens Corning's equity security holders. Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the date of the Filing. Differences between amounts recorded by the Debtors and claims filed by creditors will be investigated and resolved as part of the proceedings in the Chapter 11 Cases. No bar dates have been set for the filing of proofs of claim against the Debtors. Accordingly, the ultimate number and allowed amount of such claims are not presently known. RESULTS OF OPERATIONS Business Overview - ----------------- Owens Corning is committed to continuing to invest in our businesses and provide quality products to our customers. In recent years, we have focused on increasing sales and earnings by (i) achieving productivity improvements and cost reductions in existing and acquired businesses, (ii) targeting growth markets and (iii) forming strategic alliances and partnerships to complement our existing businesses. We are committed to taking full advantage of e-Business opportunities. We are also expanding our role as a service provider by offering complementary services in order to meet all of our customers' needs. In the Composite Systems Business, Owens Corning has partnered with end users, OEMs, systems suppliers and other players within the supply chain for development of substitution opportunities for composite systems. Owens Corning's strategy also includes the divestiture of non-strategic businesses and the realignment of existing businesses. During the third quarter of 2001, Owens Corning reached agreement to sell its 40% interest in Alcopor Owens Corning, an unconsolidated joint venture. This transaction received final - 44 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) approval from the Bankruptcy Court on October 29, 2001 (see Note 5). Also part of this strategy was the sale of the Engineered Pipe Business during the first quarter of 2001, the Falcon Foam business in the U.S. during the first quarter of 2000, and the Building Materials business in Europe to Alcopor Owens Corning in the second quarter of 2000. Please see Notes 2 and 5 to the Consolidated Financial Statements. As a result of significant increases in certain materials costs, increased energy costs and a fall in demand for building materials associated with a weakening economy, during late 2000 we implemented the first phase of a strategic restructuring program, which continues into 2001. The specific objectives of this program are discussed in "Restructuring of Operations and Other Charges" below and in Note 4 to the Consolidated Financial Statements. During the first nine months of 2001, the overall economy remained weak. The weakened economy resulted in lower demands in both the Building Materials and Composite Systems markets. In the third quarter, slightly improved demand for Building Materials was offset by some price decline, resulting in flat sales for the third quarter of 2001 compared to the third quarter of 2000. The Company had some margin improvements attributable to productivity gains and material cost deflation. Quarter and Nine Months Ended September 30, 2001 - ------------------------------------------------ Sales and Profitability - ----------------------- Net sales for the quarter ended September 30, 2001 were $1.291 billion, up slightly from the third quarter 2000 level of $1.281 billion. The increase is due primarily to increased volume in North American Building Materials businesses, partially offset by decreased sales in the overall Composites Systems business. In the Building Materials Systems business, sales during the third quarter of 2001 reflect volume increases in U.S. Building Materials, partially offset by price decreases in the U.S. insulation and roofing markets, compared to the third quarter of 2000. In the Composite Systems business, sales reflect volume decreases only partially offset by price increases compared to the year earlier period. On a consolidated basis, the currency translation impact of sales denominated in foreign currencies was unfavorable during the third quarter of 2001 compared to the third quarter of 2000. Please see Notes 2 and 5 to the Consolidated Financial Statements. Sales outside the U.S. represented 13% of total sales during the third quarter of 2001, compared to 14% during the third quarter of 2000. For the quarter ended September 30, 2001, Owens Corning reported net income of $27 million, or $.46 per share, compared to $14 million, or $.25 per share, for the quarter ended September 30, 2000. On a pre-tax basis, Owens Corning reported income from operations of $63 million in the third quarter of 2001 compared to $80 million for the same period in 2000. When adjusted for $35 million in costs of restructuring and other charges, $23 million in Chapter 11 related expenditures and $5 million in income from asbestos-related insurance recoveries, Owens Corning generated $116 million in income from operations in the third quarter of 2001, compared to $106 million for the third quarter of 2000 (adjusted for restructuring and other charges). Net income for third quarter 2001 reflects increased gross margin and reduced operating costs as well as the impact of the Company's ongoing review of its cost structures as described below in "restructuring and other charges". Cost of borrowed funds during the third quarter of 2001 was $4 million, $51 million lower than the third quarter 2000 level, due to the cessation of interest (totaling $43 million during the quarter, and $139 million year to date (please see Note 1 to the Consolidated Financial Statements)) on most debt as a result of the Chapter 11 Filing. - 45 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Marketing and administrative expenses were $141 million during the third quarter of 2001, compared to $143 million in the third quarter of 2000. Net sales for the nine months ended September 30, 2001 were $3.597 billion, down 6% from the $3.833 billion reported for the first nine months of 2000. The decline reflects volume decreases across North American Building Materials markets and the disposition of Building Materials Europe. Net income for the nine months ended September 30, 2001 was $46 million, or $.77 per share, compared to a net loss of $363 million, or $(6.64) per share, for the same period in 2000. On a pre-tax basis, Owens Corning reported income from operations of $103 million for the nine months ended September 30, 2001. When adjusted for $94 million in costs of restructuring and other charges, $60 million in Chapter 11 related expenditures and $5 million in income from asbestos-related insurance recoveries, Owens Corning generated $252 million in income from operations in 2001 compared to $363 million in 2000 (adjusted for asbestos-related charges and restructuring and other charges). Building Materials Systems - -------------------------- In the Building Materials Systems segment, sales increased 3%, to $1.076 billion, in the third quarter of 2001 compared to the third quarter of 2000. This increase resulted primarily from slightly higher volume in U.S. Building Materials. Income from operations was $97 million during the third quarter of 2001, up approximately 14% from the same period in 2000. The increase reflects the combined effects of volume increases, raw material cost decreases and a decline in energy costs from earlier in the year. Composite Systems - ----------------- In the Composite Systems segment, sales were down 7%, to $215 million, during the third quarter of 2001 compared to the third quarter of 2000. This decline reflects volume decreases partially offset by increases in price. Income from operations was $33 million in the third quarter of 2001, compared to $16 million in the prior-year period, as a result of increased gross margin due to process improvements and reduction of manufacturing costs, price increases, and continued focus on operating expenses. Restructuring of Operations and Other Charges - --------------------------------------------- 2001 Charges - ------------ Third Quarter 2001 - ------------------ During the third quarter of 2001, the Company continued to experience the effects of an overall slowed economy in both the building materials and composite materials industries. While sales were flat with a year ago, margins showed slight improvements due to some productivity gains and material cost deflation. As a result, the Company recorded a $35 million pretax charge to income from operations for restructuring and other charges. This charge was comprised of an $8 million pretax restructure charge and $27 million in pretax other charges. The restructure charge has been classified as a separate component of operating expenses on the Company's Consolidated Statement of Income (Loss) and represents severance costs associated with the elimination of approximately 160 positions, primarily in the U.S. and the U.K. The primary groups impacted included manufacturing and administrative personnel. As of September 30, 2001, approximately $5 million has been paid and charged against this reserve. The $27 million in pretax other charges included: 1) $15 million in costs associated with the Company's previously announced plan to realign its Newark, - 46 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Ohio manufacturing facility; 2) $4 million to write-down the Company's investment and related assets in Alcopor Owens Corning, a building materials joint venture in Europe, to net realizable value. The Company reached an agreement to sell its interest in Alcopor Owens Corning and the proceeds were placed in escrow. This transaction received final approval from the Bankruptcy Court on October 29, 2001 (see Note 5); and 3) various other charges totaling $8 million. This $27 million pretax charge was accounted for as a $19 million charge to cost of sales and an $8 million charge to other operating expenses. Second Quarter 2001 - ------------------- During the second quarter of 2001, the Company recorded $17 million in pretax charges for restructuring and other charges as a result of the continued impact of a soft overall economy. This charge was comprised of a $7 million pretax restructure charge and $10 million in pretax other charges. The $7 million restructure charge represented $5 million for the divestiture of non-strategic businesses and facilities, consisting mainly of non-cash asset write-downs to fair value and exit cost liabilities, and a $2 million charge for severance costs associated with the elimination of approximately 25 positions, primarily in the U.K. The primary groups affected included manufacturing and administrative personnel. As of September 30, 2001, approximately $1 million has been paid and charged against the reserve for personnel reductions. The $10 million in pretax other charges included $4 million in costs related to the Company's continuing plan for the realignment of the Newark, Ohio facility, $2 million to write-down inventory made obsolete by changes in the Company's manufacturing and marketing strategies, and various other charges totaling $4 million. This $10 million pretax charge was accounted for as an $8 million charge to cost of sales and a $2 million charge to other operating expenses. First Quarter 2001 - ------------------ During the first quarter of 2001, the Company recorded $42 million in pretax charges for restructuring and other charges as a result of the impact of a soft overall economy. The $42 million pretax charge was comprised of a $9 million pretax restructure charge, $2 million pretax loss from assets held for sale, and $31 million in other pretax charges. The $9 million pretax restructure charge represented severance costs associated with the elimination of approximately 130 positions, primarily in the U.S. The primary groups affected included manufacturing and administrative personnel. As of September 30, 2001, approximately $2 million has been paid and charged against the reserve for personnel reductions. The $2 million pretax loss from assets held for sale represented the results of operations for the Company's investments in its Pipe joint ventures and subsidiaries on a held-for-sale basis for the first quarter of 2001. This sale was completed in February 2001. The $31 million in other pretax charges was comprised of $10 million of asset impairments, principally the write-down of equipment; $4 million to write down inventory to reflect updated estimates of the net realizable value of certain inventories; $4 million of payroll-related charges associated with the realignment of the Newark, Ohio manufacturing facility; and various other charges totaling $13 million. This $31 million pretax charge was accounted for as an $18 million charge to cost of sales and a $13 million charge to other operating expenses. 2000 Charges - ------------ During 2000, the Company recorded pretax charges of $229 million for restructuring and other activities as a result of its reassessment of business strategies with respect to investments in certain ventures, facilities and overhead expenditures. The $229 million pretax charge was comprised of a $32 - 47 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) million charge associated with the restructuring of the Company's business segments and $197 million of other charges, the majority of which represented impairments of long-lived assets. In addition, the Company recorded a $6 million pretax credit to minority interest resulting from charges related to a majority-owned consolidated subsidiary. The components of the restructuring charge included $16 million for personnel reductions, $10 million for the divestiture of non-strategic businesses and facilities, and $6 million for asset impairments associated with the planned closing of two lines at the Company's Newark, Ohio manufacturing facility. This represented the first phase of the Company's plan to realign operations at the Newark facility. The $197 million of other charges was comprised of $95 million of asset impairments, a $6 million charge for a settlement loss associated with one of Owens Corning's U.S. pension plans, and $96 million of charges focused on improving business operations. The $95 million of asset impairments included: 1) $54 million charge to write-down the Company's investment and related assets in Alcopor Owens Corning, a building materials joint venture in Europe, to estimated fair value on a held for sale basis; 2) $12 million to write-down the Company's investment in the majority owned, consolidated venture in South Africa, on a held-in-use basis based upon management's analysis of current and expected future financial results and constraints on the Company's ability to fund future significant capital investments in this subsidiary as a consequence of the bankruptcy filing. The $12 million charge was offset by a $6 million credit to record the minority owner's share, recorded in the minority interest line on the Consolidated Statement of Income (Loss); 3) $8 million to write-down to fair value the investments in the Company's Pipe joint ventures and subsidiaries on a held for sale basis. The sale of a majority of the investments and subsidiaries held for sale was completed in February 2001, with final approval obtained in June, 2001, at which time cash proceeds were released from escrow; 4) $10 million to write-down the equity investment in ImproveNet, due to a significant decrease in market value which management believes is other than temporary; and 5) $11 million associated with asset impairments within the Company's Cultured Stone and other businesses. The $96 million charge consisted of $43 million to write-down inventory made obsolete by changes in the Company's manufacturing and marketing strategies; $19 million to write-down equipment and receivables; $15 million to increase warranty reserves due to general changes in estimates associated with these reserves; and various other charges totaling $19 million recorded as other operating expenses. As of September 30, 2001, approximately $13 million has been paid and charged against the reserve for personnel reductions and approximately $2 million has been charged against exit cost liabilities. 1997 and 1998 Charges - --------------------- During 1997 and 1998, the Company recorded pretax charges of $386 million for restructuring and other actions to implement a program to close manufacturing facilities, enhance manufacturing productivity and reduce overhead. Of the total pretax charge of $386 million, $143 million was recorded in the fourth quarter of 1997 and the remaining $243 million was recorded during 1998. The $386 million pretax charge was comprised of a $185 million charge associated with the restructuring of the Company's business segments and a $201 million charge associated with asset impairments, including investments in certain affiliates. The components of the restructuring charge included $115 million for personnel reductions; $68 million for the divestiture of non-strategic businesses and facilities, of which $52 million represented non-cash asset revaluations and $16 million represented exit cost liabilities, primarily for leased warehouse and office facilities that were vacated; and $2 million for other actions. The divestiture of non-strategic businesses and facilities included the closure of the Candiac, Quebec manufacturing facility. During the second quarter of 1999, the Candiac manufacturing facility was re-opened in order to meet market demands. As of September 30, 2001, approximately $105 - 48 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) million has been paid and charged against the reserve for personnel reductions, representing the elimination of approximately 2,450 employees, the majority of whose severance payments were made over the course of 1998 and 1999, and approximately $13 million has been charged against exit cost liabilities. Due to timing of events, we anticipate that additional restructuring and other charges will be recorded during 2001. LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS Cash flow from operations was $84 million for the quarter ended September 30, 2001, compared to negative $7 million for the quarter ended September 30, 2000. Cash flow from operations in the third quarter of 2001 was favorably impacted by increased net income, decreases in accounts receivable and other long term assets and increases in accounts payable and accrued liabilities. Cash flow in the third quarter of 2001 was negatively impacted by a contribution of $150 million to the Company's U.S. pension plans. Cash flow from operations for the quarter ended September 30, 2000 included payments for asbestos litigation claims net of proceeds from insurance of $70 million. As a result of the Filing, cash payments to asbestos claimants are stayed. Cash flow in the third quarter of 2000 also included $54 million of cost of borrowed funds. As a result of the Filing, interest on the pre-petition debt of the Debtors is also stayed. Inventories at September 30, 2001 were $480 million, $11 million more than the December 31, 2000 level, due largely to the seasonal build of inventories. Receivables at September 30, 2001 were $597 million, a $109 million increase over the December 31, 2000 level, attributable to the seasonal increase in sales. The increase in accounts payable and accrued liabilities from $491 million at December 31, 2000, to $678 million at September 30, 2001, reflects typical payment patterns during the first nine months of 2001, as well as improvements in payment terms initially adversely affected by the Filing. At September 30, 2001, Owens Corning's net working capital was $874 million and our current ratio was 2.11, compared to $955 million and 2.57, respectively, at December 31, 2000 and negative $2.975 billion and .47, respectively, at September 30, 2000. The change in working capital and current ratio at September 30, 2001 compared to September 30, 2000 is the direct result of the Filing, which reclassified liabilities of Debtors outstanding at the date of the Filing to "Liabilities Subject to Compromise." Please see Note 1 to the Consolidated Financial Statements. At September 30, 2001, the Company had $2.843 billion of borrowings subject to compromise and $71 million of other long-term borrowings (of which $65 million were in default as a consequence of the Filing and therefore classified as current on the Consolidated Balance Sheet). Long-term borrowings outstanding at September 30, 2000 were $ 2.765 billion. At September 30, 2001, the Company had $551 million of Cash and Cash Equivalents (of which approximately $39 million was subject to administrative freeze pending the resolution of certain alleged set-off rights by certain pre-petition lenders). In addition, in connection with the Filing, the Debtors obtained a $500 million debtor-in-possession credit facility from a group of lenders led by Bank of America, N.A. (the "DIP Financing"). At September 30, 2001, this facility had not been utilized except for approximately $32 million of standby letters of credit and similar uses. As a consequence of the Filing and the impact of certain provisions of the Company's DIP Financing and in a cash management order entered by the Bankruptcy Court, the Company and its subsidiaries are now subject to certain restrictions on their ability to pay dividends and to transfer cash and other assets to each other and to their affiliates. - 49 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Owens Corning maintains pension plans for certain of its salaried and hourly employees. During the third quarter of 2001, the Company contributed $150 million to its U.S. plans, for a total year-to-date contribution of $176 million. The Company does not anticipate making additional contributions to its U.S. plans during 2001. The Company believes, based on information presently available to it, that cash available from operations and the DIP Financing will provide sufficient liquidity to allow it to continue as a going concern for the foreseeable future. However, the ability of the Company to continue as a going concern (including its ability to meet post-petition obligations of the Debtors and to meet obligations of the Non-Debtor Subsidiaries) and the appropriateness of using the going concern basis for its financial statements are dependent upon, among other things, (i) the Company's ability to comply with the terms of the DIP Financing and any cash management order entered by the Bankruptcy Court in connection with the Chapter 11 Cases, (ii) the ability of the Company to maintain adequate cash on hand, (iii) the ability of the Company to generate cash from operations, (iv) the ability of the Non-Debtor Subsidiaries to obtain necessary financing, (v) confirmation of a plan or plans of reorganization under the Bankruptcy Code, and (vi) the Company's ability to maintain profitability following such confirmation. Capital spending for property, plant and equipment, excluding acquisitions, was $50 million in the third quarter of 2001. Owens Corning anticipates that 2001 capital spending, exclusive of acquisitions and investments in affiliates, will be approximately $285 million. We expect that funding for these expenditures will be from our operations and the credit availability from the DIP Financing. Accounting Changes - ------------------ Effective January 1, 2001, the Company implemented Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This statement and its interpretations establish accounting and reporting standards requiring derivative instruments (including certain derivative instruments embedded in other contracts) to be recorded in the balance sheet as either an asset or liability measured at its fair value. The impact of adoption at January 1, 2001 did not have a material effect in the Consolidated Statement of Income (Loss) and resulted in other comprehensive income of approximately $1 million. Effective January 1, 2002, the Company will adopt Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. The first of these statements requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method. With the adoption of Statement 142, Goodwill is no longer subject to amortization over its estimated useful life; rather it is subject to an annual assessment for impairment charge. During the third and fourth quarters of 2001, we are reviewing the impairment analysis set forth in Statement 142 and assessing the impact of adoption. The Company recognizes approximately $18 million in annual Goodwill amortization. Effective January 1, 2002, the Company will adopt Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement replaces FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The impact of adoption has not yet been determined. Effective January 1, 2003, the Company will adopt Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable - 50 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) estimate of fair value can be made, while the associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The impact of adoption has not yet been determined. Environmental Matters - --------------------- Owens Corning has been deemed by the Environmental Protection Agency (EPA) to be a Potentially Responsible Party (PRP) with respect to certain sites under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund). The Company has also been deemed a PRP under similar state or local laws. In other instances, other PRPs have brought suits or claims against Owens Corning as a PRP for contribution under such federal, state or local laws. At September 30, 2001, a total of 51 such PRP designations remained unresolved by the Company. The Company is also involved with environmental investigation or remediation at a number of other sites at which Owens Corning has not been designated a PRP. The Company has established a $26 million reserve for our Superfund (and similar state, local and private action) contingent liabilities. In connection with the Filing, the Company has initiated a program to identify and discharge contingent environmental liabilities as part of its plan or plans of reorganization. Under the program, the Company will seek settlements, subject to approval of the Bankruptcy Court, with various federal, state and local authorities, as well as private claimants. The Company will continue to review its environmental reserve in light of such program and make such adjustments as may be appropriate. The 1990 Clean Air Act Amendments (Act) provide that the EPA will issue regulations on a number of air pollutants over a period of years. The EPA issued final regulations for wool fiberglass and mineral wool in June, 1999, for amino/phenolic resin in January, 2000 and for secondary aluminum smelting in March, 2000. The Company anticipates that other sources to be regulated will be wet formed glass mat, asphalt processing and roofing, metal coil coating, and open molded fiber-reinforced plastics. Based on information now known to the Company, including the nature and limited number of regulated materials Owens Corning emits, we do not expect the Act to have a materially adverse effect on our results of operations, financial condition or long-term liquidity. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Owens Corning is exposed to the impact of changes in foreign currency exchange rates and interest rates in the normal course of business. The Company manages such exposures through the use of certain financial and derivative financial instruments. Our objective with these instruments is to reduce exposure to fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates and interest rates. The Company enters into various forward contracts and options, which change in value as foreign currency exchange rates change, to preserve the carrying amount of foreign currency-denominated assets, liabilities, commitments, and certain anticipated foreign currency transactions and earnings. Owens Corning also enters into certain currency and interest rate swaps to protect the carrying amount of investments in certain foreign subsidiaries, to hedge the principal and interest payments of certain debt instruments, and to manage exposure to fixed versus floating interest rates. Owens Corning's policy is to use foreign currency and interest rate derivative financial instruments only to the extent necessary to manage exposures as described above. The Company does not enter into foreign currency or interest rate derivative transactions for speculative purposes. - 51 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company uses a variance-covariance Value at Risk (VAR) computation model to estimate the potential loss in the fair value of its interest rate-sensitive financial instruments and its foreign currency-sensitive financial instruments. The VAR model uses historical foreign exchange rates and interest rates as an estimate of the volatility and correlation of these rates in future periods. It estimates a loss in fair market value using statistical modeling techniques. The amounts presented below represent the maximum potential one-day loss in fair value that we would expect from adverse changes in foreign currency exchange rates or interest rates assuming a 95% confidence level: Risk Category September 30, 2001 December 31, 2000 ------------- ------------------ ----------------- (In millions of dollars) Foreign currency $ 1 $ 1 Interest rate $ 12 $ 8
Virtually all of the potential loss associated with interest rate risk is attributable to fixed-rate long-term debt instruments. The potential loss, identified above, includes interest on debt subject to compromise. - 52 - PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 12, Contingent Liabilities, to Owens Corning's Consolidated Financial Statements above, which is incorporated here by reference. On October 5, 2000 (the "Petition Date"), Owens Corning and the 17 United States subsidiaries listed below (collectively, the "Debtors"), filed voluntary petitions for relief (the "Filing") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The Debtors are currently operating their businesses as debtors-in-possession in accordance with provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") are being jointly administered under Case No. 00-3837 (JKF). The subsidiary Debtors that filed Chapter 11 petitions for relief are: CDC Corporation Integrex Testing Systems LLC Engineered Yarns America, Inc. HOMExperts LLC Falcon Foam Corporation Jefferson Holdings, Inc. Integrex Owens-Corning Fiberglas Technology Inc. Fibreboard Corporation Owens Corning HT, Inc. Exterior Systems, Inc. Owens-Corning Overseas Holdings, Inc. Integrex Ventures LLC Owens Corning Remodeling Systems, LLC Integrex Professional Services LLC Soltech, Inc. Integrex Supply Chain Solutions LLC
The Company anticipates that substantially all liabilities of the Debtors as of the date of the Filing will be resolved under one or more Chapter 11 plans of reorganization to be proposed and voted on in the Chapter 11 Cases in accordance with the provisions of the Bankruptcy Code. As a consequence of the Filing, all pending litigation against the Debtors is stayed automatically by section 362 of the Bankruptcy Code and, absent further order of the Bankruptcy Court, no party may take action to recover on pre-petition claims against the Debtors. Please see Note 1 to the Consolidated Financial Statements. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS As a consequence of the Filing and the impact of certain provisions of the Company's DIP Financing and in a cash management order entered by the Bankruptcy Court, the Company and its subsidiaries are now subject to certain restrictions, including on their ability to pay dividends and to transfer cash and other assets to each other and to their affiliates. See Note 1, Voluntary Petition for Relief Under Chapter 11, to Owens Corning's Consolidated Financial Statements above. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Substantially all of the Company's pre-petition debt is now in default due to the Filing. See Note 1, Voluntary Petition for Relief Under Chapter 11, to Owens Corning's Consolidated Financial Statements above. As described in Note 1, the Consolidated Financial Statements present the Debtors' pre-petition debt under the caption "Liabilities Subject to Compromise." This includes debt under the Pre-Petition Credit Facility and approximately $1.4 billion of other outstanding debt. As required by SOP 90-7, the Company, beginning in the fourth quarter of 2000, recorded the Debtors' pre-petition debt instruments at the allowed amount, as defined by SOP 90-7. - 53 - PART II. OTHER INFORMATION (continued) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the quarter ended September 30, 2001. ITEM 5. OTHER INFORMATION As a result of the Filing, the Debtors are required to file periodically with the Bankruptcy Court certain financial information on an unconsolidated basis for each of the Debtors. This information includes Statements of Financial Affairs, Schedules and certain monthly operating reports (in forms prescribed by the Federal Rules of Bankruptcy Procedure). As part of these informational filings, the Debtors plan to file certain Amended and Restated Schedules of Assets and Liabilities (the "Amended Schedules") with the Bankruptcy Court on or about November 20, 2001. The Debtors' informational filings with the Bankruptcy Court, including the Amended Schedules when filed (collectively, the "Reports"), are available to the public at the office of the Clerk of the Bankruptcy Court, 824 Market Street, 5th Floor, Wilmington, Delaware 19801. The Reports may also be obtained from a document retrieval service, Lason, One Rodney Square, Suite 505, Wilmington, Delaware 19801, telephone: (302) 426-1500. Certain of the Reports may be viewed on the Internet at www.deb.uscourts.gov (Case No. 00-03837 (JKF)). The Company cautions that the Reports are unaudited and subject to change, and are not prepared for the purpose of providing the basis for an investment decision relating to any of the securities of the Company or other Debtor, or any other affiliate of the Company. For example, the Reports include certain information concerning inter-company arrangements that were entered into prior to the filing of the Bankruptcy Cases. Certain of these arrangements may be challenged by various parties in the Bankruptcy Cases, and payments in respect of certain of these arrangements may be restricted by order of, or subject to review and approval by, the Bankruptcy Court. Such arrangements, and the manner in which they are ultimately treated in the Bankruptcy Cases, may have a material impact on the respective assets, liabilities and results of operations of the Company and its subsidiaries. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. See Exhibit Index below, which is incorporated here by reference. (b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the quarter ended September 30, 2001. - 54 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Owens Corning has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OWENS CORNING Registrant Date: November 13, 2001 By: /s/ Michael H. Thaman ------------------------------ ---------------------------------------- Michael H. Thaman Senior Vice President and Chief Financial Officer (as duly authorized officer) Date: November 13, 2001 By: /s/ Deyonne F. Epperson ------------------------------ ---------------------------------------- Deyonne F. Epperson Vice President and Controller - 55 - EXHIBIT INDEX Exhibit Number Document Description (3) Articles of Incorporation and By-Laws. (i) Certificate of Incorporation of Owens Corning, as amended (incorporated herein by reference to Exhibit (3) to Owens Corning's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended March 31, 1997). (ii) By-Laws of Owens Corning, as amended (incorporated herein by reference to Exhibit (3) to Owens Corning's annual report on Form 10-K (File No. 1-3660) for the year 1999). (11) Statement re Computation of Per Share Earnings (filed herewith). (99) Additional Exhibits Subsidiaries of Owens Corning, as amended (filed herewith). EX-11 3 ex11r.txt Exhibit (11) ------------ OWENS CORNING AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS Quarter Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- (In millions of dollars, except share data) Basic: - ----- Net income (loss) $ 27 $ 14 $ 46 ($ 363) ========= ============ ========== =========== Basic weighted average number of common shares outstanding (thousands) 55,079 55,008 55,064 54,759 Basic per share amount $ .50 $ .25 $ .84 ($ 6.64) ========= ============ ========== =========== Diluted: - ------- Net income $ 27 $ 14 $ 46 ($ 363) ========= ============ ========== =========== Weighted average number of common shares outstanding (thousands) 55,079 55,008 55,064 54,759 Weighted average common equivalent shares (thousands): Deferred awards 26 26 26 - Stock options using the average market price during the period 264 431 297 - Shares from assumed conversion of preferred securities 4,566 - 4,566 - --------- ------------ ---------- ---------- Diluted weighted average number of common shares outstanding and common equivalent shares (thousands) 59,935 55,465 59,953 54,759 ========= ============ ========== ========== Diluted per share amount $ .46 $ .25 $ .77 ($ 6.64) ========= ============ ========== ==========
EX-99 4 ex99.txt Exhibit (99) ------------ State or Other Jurisdiction Under the Laws of Subsidiaries of Owens Corning (9/30/2001) Which Organized - --------------------------------------------------------------- ----------------------------------- CDC Corporation Wisconsin Commercial Owens Corning Chile Limitada Chile Crown Manufacturing Inc. Canada Engineered Pipe Systems, Inc. Delaware Engineered Yarns America, Inc. Massachusetts Eric Company Delaware European Owens-Corning Fiberglas, S.A. Belgium Exterior Systems, Inc. Delaware Falcon Foam Corporation Delaware Fibreboard Corporation Delaware Flowtite Eksport AS Norway Flowtite Offshore Services Ltd. Cyprus EPS Holding AS Norway Goodman Ventures, Inc. Delaware HOMExperts LLC Delaware IPM Inc. Delaware Integrex Delaware Integrex Professional Services LLC Delaware Integrex Supply Chain Solutions LLC Delaware Integrex Testing Systems LLC Delaware Integrex Ventures LLC Delaware Jefferson Holdings, Inc. Delaware LMP Impianti Srl Italy Norske EPS Botswana AS Norway OC (Belgium) Holdings, Inc. Delaware OC Celfortec Inc. Canada O.C. Funding B.V. The Netherlands OCW Acquisition Corporation Delaware Owens Corning (Anshan) Fiberglass Co., Ltd. China Owens Corning Argentina Sociedad de Responsabilidad Limitada Argentina Owens Corning Australia Pty Limited Australia Owens-Corning Britinvest Limited United Kingdom Owens Corning Building Materials Espana S.A. Spain Owens Corning Canada Inc. Canada Owens-Corning Capital Holdings I, Inc. Delaware Owens-Corning Capital Holdings II, Inc. Delaware Owens-Corning Capital L.L.C. Delaware Owens Corning Cayman (China) Holdings Cayman Islands Owens-Corning Cayman Limited Cayman Islands Owens Corning (China) Investment Company, Ltd. China Owens Corning Composites Italia S.r.l. Italy Owens Corning Composites SPRL Belgium Owens Corning Espana SA Spain Owens Corning Fiberglas A. S. Limitada Brazil Owens-Corning Fiberglas Deutschland GmbH Germany
State or Other Jurisdiction Under the Laws of Subsidiaries of Owens Corning (9/30/2001) Which Organized - --------------------------------------------------------------- ----------------------------------- Owens-Corning Fiberglas Espana, S.A. Spain Owens-Corning Fiberglas France S.A. France Owens-Corning Fiberglas (G.B.) Ltd. United Kingdom Owens-Corning Fiberglas Norway A/S Norway Owens-Corning Fiberglas S.A. Uruguay Owens-Corning Fiberglas Sweden Inc. Delaware Owens-Corning Fiberglas Technology Inc. Illinois Owens-Corning Fiberglas (U.K.) Pension Plan Ltd. United Kingdom Owens-Corning FSC, Inc. Barbados Owens-Corning Funding Corporation Delaware Owens-Corning (Guangzhou) Fiberglas Co., Ltd. China Owens-Corning Holdings Limited Cayman Islands Owens Corning HT, Inc. Delaware Owens Corning Integrated Acoustic Systems, LLC Delaware Owens Corning (Japan) Ltd. Japan Owens Corning Korea Korea Owens Corning Mexico, S.A. de C.V. Mexico Owens Corning NRO Inc. Canada Owens Corning NRO II Inc. Canada Owens-Corning Overseas Holdings, Inc. Delaware Owens-Corning Real Estate Corporation Ohio Owens Corning Remodeling Systems, LLC Delaware Owens Corning (Shanghai) Fiberglas Co., Ltd. China Owens Corning (Singapore) Pte Ltd. Singapore Owens Corning South Africa (Pty) Ltd South Africa Owens-Corning (Sweden) AB Sweden Owens-Corning Veil Netherlands B.V. The Netherlands Owens-Corning Veil U.K. Ltd. United Kingdom Owens Corning VF Holdings, Inc. Canada Palmetto Products, Inc. Delaware Quest Industries, LLC Delaware Scanglas Ltd. United Kingdom Soltech, Inc. Kentucky Trumbull Asphalt Co. of Delaware Delaware Vytec Corporation Ontario Willcorp, Inc. Delaware Wrexham A.R. Glass Ltd. United Kingdom
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