10-K405 1 f10k_0316.txt SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 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 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock - $.10 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] At February 28, 2002, the aggregate market value of Registrant's $.10 par value common stock (Registrant's voting stock) held by non-affiliates was $120,468,284, assuming for purposes of this computation only that all directors and executive officers are considered affiliates. At February 28, 2002, there were outstanding 55,319,957 shares of Registrant's $.10 par value common stock. - 2 - PART I ITEM 1. BUSINESS Owens Corning, a global company incorporated in Delaware in 1938, serves consumers and industrial customers with building materials systems and composites systems. Owens Corning's executive offices are at One Owens Corning Parkway, Toledo, Ohio 43659; telephone (419) 248-8000. Owens Corning's web site provides information on our business and products, and assists our customers in various building projects. It is located at www.owenscorning.com. Unless the context requires otherwise, the terms "Owens Corning", "Company", "we" and "our" in this report refer to Owens Corning and its subsidiaries. PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE On October 5, 2000 (the "Petition Date"), Owens Corning and 17 of its United States subsidiaries, including Fibreboard Corporation (collectively, the "Debtors"), filed voluntary petitions for relief (the "Filing") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "USBC"). The Debtors are currently operating their businesses as debtors-in-possession in accordance with provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") are being jointly administered under Case No. 00-3837 (JKF). The Chapter 11 Cases do not include other United States subsidiaries of Owens Corning or any of its foreign subsidiaries (collectively, the "Non-Debtor Subsidiaries"). The Chapter 11 Cases are discussed in greater detail in Note 1 to the Consolidated Financial Statements. 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 19 to the Consolidated Financial Statements. OVERVIEW OF OPERATIONS Owens Corning operates in two segments - Building Materials Systems and Composite Solutions. In 2001, the Building Materials Systems segment accounted for approximately 80% of our total sales while Composite Solutions accounted for the remainder. The products and systems provided by our Building Materials Systems segment are used in residential remodeling and repair, commercial improvement, new residential and commercial construction, and other related markets. The products and systems offered by our Composite Solutions segment are used in end-use markets such as building construction, automotive, telecommunications, marine, aerospace, energy, appliance, packaging and electronics. Many of Owens Corning's products are marketed under registered trademarks, including Propink(R), Advantex(R), Miravista(R) and/or the color PINK. Approximately 75% of Owens Corning's sales are related to home improvement, non-residential markets, sales of composite materials and sales outside U.S. markets. Approximately 25% of our sales are related to new U.S. residential construction. Owens Corning also has affiliate companies in a number of countries. Generally, affiliated companies' sales, earnings and assets are not included in either operating segment unless we own more than 50% of the affiliate and the ownership is not considered temporary. - 3 - As part of our strategy to divest non-strategic businesses, we sold the majority of our Engineered Pipe Business during the first quarter of 2001 and sold our 40% interest in Alcopor Owens Corning, our European building materials joint venture, during the fourth quarter of 2001. Revenue from external customers, income from operations and total assets attributable to each of Owens Corning's operating segments and geographic regions, as well as information concerning the dependence of our operating segments on foreign operations, for each of the years 2001, 2000, and 1999, are contained in Note 2 to Owens Corning's Consolidated Financial Statements, entitled "Segment Data", on pages 67 through 72 hereof. BUILDING MATERIALS SYSTEMS Principal Products And Methods Of Distribution Building Materials Systems operates primarily in North America. It also has a presence in Latin America and Asia Pacific. Building Materials Systems sells a variety of products and systems in two major categories: (i) glass fiber, foam and mineral wool insulation systems and (ii) exterior systems for the home, including roofing systems, vinyl and metal siding and accessories, vinyl windows and patio doors, rainware (consisting primarily of gutters and downspouts), manufactured stone veneer and rebranded housewrap. These products are used primarily in the home improvement, new residential construction, manufactured housing and commercial construction markets. The businesses responsible for these markets include: Insulating Systems, Exterior Systems, Cultured Stone, Distribution and Fabricating Solutions. Sales of building insulation systems, roofing shingles and accessories, housewrap, windows/patio doors, and vinyl siding are made through home centers, lumberyards, retailers and distributors. Other channels of distribution for insulation systems in North America include insulation contractors, wholesalers, specialty distributors, metal building insulation laminators, mechanical insulation distributors and fabricators, manufactured housing producers, and appliance, office products and automotive manufacturers. Foam insulation and related products are sold to distributors and retailers who resell to residential builders, remodelers and do-it-yourself customers; commercial and industrial markets through specialty distributors; and, in some cases, large contractors, particularly in the agricultural and cold storage markets. Owens Corning sells asphalt products, primarily for industrial and specialty applications, under the Trumbull brand name. There are three principal kinds of industrial asphalt: Built-Up Roofing Asphalt (BURA), used in commercial flat roof systems to provide waterproofing and adhesion; saturants or coating asphalt, used to manufacture roofing mats, felts and residential shingles; and industrial specialty asphalt, used by manufacturers in a variety of products such as waterproofing systems, adhesives, coatings, dyes, and product extenders, as well as in various automotive applications. There are several channels of distribution for these products. They are used internally in the manufacture of residential roofing products and are also sold to other shingle manufacturers. In addition, asphalt is sold to roofing contractors and distributors for BURA systems and to manufacturers in a variety of other industries, including automotive, chemical, rubber and construction. Glass fiber mat is used to provide fire and mildew resistance in 95% of all asphalt roofing shingles. Owens Corning sells glass fiber and/or mat directly to a small number of major shingle manufacturers, including our own roofing business. Outside North America, Owens Corning has a foam technology facility in Italy and a joint venture foam plant in China and has licensed others for the manufacture of foam products at locations in Europe, the Middle East and Asia. Owens Corning sells foam products through traditional agents and distributors. - 4 - In Latin America, Owens Corning produces and sells building and mechanical insulation primarily through an affiliate joint venture in Mexico, as well as exports from U.S. plants. In Asia Pacific, we sell primarily mechanical insulation through joint venture businesses, including two majority owned insulation plants and an insulation fabrication center in China, a minority owned joint venture in Saudi Arabia, and licensees. Seasonality Sales in the Building Materials Systems segment tend to follow seasonal home improvement, remodeling and renovation, and new construction industry patterns. Sales levels for the segment, therefore, are typically lower in the winter months. Major Customers No customer in the Building Materials Systems segment accounted for more than 6% of the segment's sales in 2001. COMPOSITE SOLUTIONS Principal Products and Methods of Distribution Composite Solutions operates in North America, Europe, Latin America and Asia Pacific, with affiliates and licensees around the world. Owens Corning is the world's leading producer of glass fiber materials used in composites. Composites are made up of two or more components (e.g., plastic resin and a fiber, traditionally a glass fiber) used in various applications to replace traditional materials, such as aluminum, wood, and steel. We are increasingly providing systems that are designed for a specific end-use application, and entail a material, a proprietary process and a fully assembled part or system. The global composites industry has thousands of end-use applications. Owens Corning has selected strategic markets and end-users, where we provide integral solutions, such as the automotive, telecommunications/electronics, and building construction markets. A large portion of the business also serves thousands of applications within the consumer, industrial and infrastructure markets. Tubs, showers and other related internal building components used for both remodeling and new construction are also major applications of composite materials in the construction market. These end-use products are some of the first successful material substitution conversions normally encountered in developing countries. Glass fiber reinforcements and composite material solutions for these markets are sold to direct accounts, and also to distributors around the world, who in turn service thousands of customers. More than 80% of transportation-related composite solutions are used in automotive applications. Non-automotive transportation applications include heavy trucks, rail cars, shipping containers, refrigerated containers, trailers and commercial ships. Growth continues in automotive applications, as composite systems create new applications or displace other materials in existing applications. There are hundreds of composites applications, including body panels, door modules, integrated front-end systems, instrument panels, chassis and underbody components and systems, pick-up truck beds, and heat and noise shields. These composite parts are either produced by original equipment manufacturers (OEMs), or are purchased by OEMs from first-tier suppliers. - 5 - Within the telecommunications and electronics markets, glass fiber composites are used to protect and reinforce fiber optic and copper cables. Owens Corning also produces central strength members for fiber optic cables. Other end-uses include connectors, circuit breaker boxes, computer housings, electricians' safety ladders, and hundreds of various electro/mechanical components. Through its 49% interest in a yarns joint venture, Owens Corning continues to participate in the yarns and specialty material markets, where glass fiber is used extensively in printed circuit boards made for the consumer electronics, transportation, and telecommunications industries. The consumer, industrial and infrastructure markets include sporting goods and marine applications. Owens Corning sells composite materials to OEMs and boat builders, both directly and through distributors. Major Customers No customer in the Composite Solutions segment accounted for more than 6% of the segment's sales in 2001. GENERAL Raw Materials and Patents Owens Corning considers the sources and availability of raw materials, supplies, equipment and energy necessary for the conduct of business in each of our operating segments to be adequate. During 2001, Owens Corning had several arrangements with units of Enron Corp., including for the supply of certain energy commodities, that were impacted by the collapse of Enron late in 2001. The Company has implemented, or expects to be able to implement, alternative arrangements on acceptable terms to the extent necessary or desirable. Owens Corning has numerous U.S. and foreign patents issued and applied for relating to our products and processes in each operating segment, resulting from research and development efforts. We have issued royalty-bearing patent licenses to companies in several foreign countries. The licenses cover technology relating to both operating segments. Including registered trademarks for the Owens Corning logo, the color PINK, and FIBERGLAS, Owens Corning has approximately 300 trademarks registered in the United States and approximately 1,400 trademarks registered in other countries. We consider our patent and trademark positions to be adequate for the present conduct of business in each of our operating segments. Working Capital Owens Corning's manufacturing operations in each operating segment are generally continuous in nature and we warehouse much of our production prior to sale since we operate primarily with short delivery cycles. Number of Employees Owens Corning averaged approximately 19,000 employees during 2001 and had approximately 19,000 employees at December 31, 2001. - 6 - Research and Development During 2001, 2000 and 1999, Owens Corning spent approximately $37 million, $52 million, and $59 million, respectively, for research and development activities. Customer-sponsored research and development was not material in any of the last three years. Environmental Control Owens Corning's capital expenditures relating to compliance with environmental control requirements were approximately $12 million in 2001. We currently estimate that such capital expenditures will be approximately $18 million in 2002 and $15 million in 2003. We do not consider that we have experienced a material adverse effect upon our capital expenditures or competitive position as a result of environmental control legislation and regulations. Operating costs associated with environmental compliance were approximately $30 million in 2001. We continue to invest in equipment and process modifications to remain in compliance with applicable environmental laws and regulations. The 1990 Clean Air Act Amendments (Act) provide that the United States Environmental Protection Agency (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. Competition Owens Corning's products compete with a broad range of products made from numerous basic, as well as high-performance, materials. We compete with a number of manufacturers in the United States of glass fibers in primary forms, not all of which produce a broad line of glass fiber products. Approximately one-half of these producers compete with our Building Materials Systems operating segment in the sale of glass fibers in primary form. A similar number compete with our Composite Solutions operating segment. Companies in other countries export small quantities of glass fiber products to the United States. We also compete outside the United States with a number of manufacturers of glass fibers in primary forms. We also compete with many manufacturers, fabricators and distributors in the sale of products made from glass fibers. In addition, we compete with many other manufacturers in the sale of roofing materials for sloped roofing, industrial asphalts, vinyl siding, windows and patio doors, and other products. Methods of competition include product performance, price, terms, service and warranty. - 7 - ITEM 2. PROPERTIES PLANTS Owens Corning's principal plants as of December 31, 2001, are listed below by operating segment and primary products, and are owned except as noted. We consider that these properties are in good condition and well maintained, and are suitable and adequate to carry on our business. The capacity of each plant varies depending upon product mix. Certain of the facilities listed below are shown as "leased" properties. Pursuant to the Bankruptcy Code, Owens Corning and the other Debtors in the Chapter 11 Cases may elect to reject or assume unexpired pre-petition leases. The Debtors are currently reviewing the leases for which such an election exists to determine whether they should be accepted or rejected. The Bankruptcy Court has extended the time period within which the Debtors must make their elections through June 4, 2002, and may grant further extensions. In the process of their review, the Debtors may conclude that certain of the arrangements constitute secured financings rather than leases, in which event the applicable facility will be owned rather than leased. BUILDING MATERIALS SYSTEMS Thermal and Acoustical Insulation Delmar, New York Newark, Ohio Denver, Colorado Palestine, Texas Eloy, Arizona Phenix City, Alabama (1) Fairburn, Georgia Salt Lake City, Utah Kansas City, Kansas Santa Clara, California Ladysmith, Wisconsin (1) Waxahachie, Texas Mount Vernon, Ohio Anshan, China Guangzhou, China Candiac, Canada Scarborough, Canada Edmonton, Canada Shanghai, China (1) Facility is leased. Foam Insulation Rockford, Illinois Tallmadge, Ohio Nanjing, China Volpiano, Italy (1) Valleyfield, Canada (1) Facility is leased.
- 8 - Asphalt Processing Atlanta, Georgia Kearny, New Jersey Channelview, Texas Medina, Ohio Compton, California Memphis, Tennessee Denver, Colorado Minneapolis, Minnesota Detroit, Michigan Mobile, Alabama (2) Ennis, Texas Morehead City, North Ft. Lauderdale, Florida Carolina (1) Houston, Texas North Bend, Ohio Irving, Texas Oklahoma City, Oklahoma Jacksonville, Florida Portland, Oregon (3) Jessup, Maryland Summit, Illinois (1) Facility is leased. (2) Operated under management agreement. (3) Two asphalt processing plants. Roofing Adelanto, California (1) Jessup, Maryland Atlanta, Georgia Kearny, New Jersey Brookville, Indiana Medina, Ohio Compton, California Memphis, Tennessee Denver, Colorado Minneapolis, Minnesota Houston, Texas Portland, Oregon Irving, Texas Savannah, Georgia Jacksonville, Florida Summit, Illinois (1) Facility is leased. Glass Mat/Wet Chop Aiken, South Carolina Jackson, Tennessee (1) Fort Smith, Arkansas (1) Facility is leased. OEM Solutions Group Angola, Indiana Indianapolis, Indiana (1) Athens, Alabama Johnson City, Tennessee (1) Cleveland, Tennessee (1) Los Angeles, California (1) Columbus, Ohio (1) Louisville, Kentucky (1) Dallas, Texas (1) Montgomery, Alabama (1) Grand Rapids, Michigan (1) Springfield, Tennessee (1) Hazleton, Pennsylvania (1) Tiffin, Ohio (1) Hebron, Ohio Brantford, Canada (1) Facility is leased.
- 9 - Manufactured Housing/Recreational Vehicles/Specialty Parts Douglas, Georgia Nappanee, Indiana Goshen, Indiana Waco, Texas (1) (1) Facility is leased. Metal Products Ashville, Ohio Bellwood, Virginia Beloit, Wisconsin (1) Roxboro, North Carolina (2) (1) Facility is leased. (2) Two facilities, one of which is leased. Cultured Stone Products Chester Co., South Carolina (1) Navarre, Ohio Napa, California (1) Facility is leased. Vinyl Siding Atlanta, Georgia (1) Joplin, Missouri Claremont, North Carolina Olive Branch, Mississippi London, Ontario (1) Facility is leased. Windows/Patio Doors Bradenton, Florida In addition, Owens Corning has approximately 190 Specialty Distribution Centers in 35 states in the U.S. COMPOSITE SOLUTIONS Textiles and Reinforcements Amarillo, Texas Huntingdon, Pennsylvania (1) Anderson, South Carolina New Braunfels, Texas (1) Duncan, South Carolina (1) Apeldoorn, The Netherlands Liversedge, United Kingdom Battice, Belgium Rio Claro, Brazil Birkeland, Norway San Vincente deCastellet/ Guelph, Canada Barcelona, Spain Kimchon, Korea Wrexham, United Kingdom L'Ardoise, France (1) Facility is leased.
- 10 - OTHER PROPERTIES Owens Corning's principal executive offices are located in the Owens Corning World Headquarters, Toledo, Ohio, a leased facility of approximately 400,000 square feet. Owens Corning's research and development activities are primarily conducted at our Science and Technology Center, located on approximately 500 acres of land outside Granville, Ohio. It consists of more than 20 structures totaling more than 600,000 square feet. Owens Corning is opening an Automotive Solutions Center in Novi, Michigan, and also has Application Development Centers in Battice, Belgium; Shanghai, China; and Bangalore, India. ITEM 3. LEGAL PROCEEDINGS The paragraphs in Note 19 to Owens Corning's Consolidated Financial Statements, entitled "Contingent Liabilities", on pages 96 through 109 hereof, are incorporated here by reference. On October 5, 2000 (the "Petition Date"), Owens Corning and the 17 United States subsidiaries listed below (collectively, the "Debtors") filed voluntary petitions for relief (the "Filing") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "USBC"). The Debtors are currently operating their businesses as debtors-in-possession in accordance with provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") are being jointly administered under Case No. 00-3837 (JKF). The 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
In late 2001, the asbestos-related Chapter 11 cases pending in the District of Delaware (the Chapter 11 Cases of Owens Corning and the cases of Armstrong World Industries, Inc., W. R. Grace & Co., Federal-Mogul Global, Inc., and USG Corporation) were ordered transferred to the United States District Court for the District of Delaware (the "District Court") before Judge Alfred M. Wolin to facilitate development and implementation of a coordinated plan for management (the "Administrative Consolidation"). The District Court has entered an order referring the Chapter 11 Cases back to the USBC, where they were previously pending, subject to its ongoing right to withdraw such referral with respect to any proceedings or issues (the applicable court from time to time responsible for any particular aspect of the Chapter 11 Cases being hereinafter referred to as the "Bankruptcy Court"). The Company anticipates that substantially all liabilities of the Debtors as of the date of the Filing will be resolved under one or more Chapter 11 plans of reorganization to be proposed and voted on in the Chapter 11 Cases in accordance with the provisions of the Bankruptcy Code. As a consequence of the Filing, all - 11 - ITEM 3. LEGAL PROCEEDINGS (continued) 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. Please see Note 1 to the Consolidated Financial Statements. Securities and Exchange Commission rules require us to describe certain governmental proceedings arising under federal, state or local environmental provisions unless we reasonably believe that the proceeding will result in monetary sanctions of less than $100,000. The following proceeding is reported in response to this requirement. As reported in Owens Corning's Annual Report on Form 10-K for the year ended December 31, 2000, Owens Corning had received information that the Ohio Environmental Protection Agency might be contemplating an enforcement action relating to our plant in Newark, Ohio, primarily involving alleged air emission violations that occurred in the early 1990's. On December 18, 2001, the State of Ohio filed a complaint in the Common Pleas Court in Licking County, Ohio, alleging violations of air pollution regulations and permits by the Newark plant. Concurrently, the State filed a consent order settling all allegations raised by the complaint. Any required corrective actions were completed some time ago. With the approval of the Bankruptcy Court, the consent order provides for treatment of the $201,633 penalty as an unsecured claim in the Chapter 11 Cases. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Owens Corning has nothing to report under this Item. - 12 - Executive Officers of Owens Corning (as of February 28, 2002) The name, age and business experience during the past five years of Owens Corning's executive officers as of February 28, 2002, are set forth below. Each executive officer holds office until his or her successor is elected and qualified or until his or her earlier resignation, retirement or removal. All those listed have been employees of Owens Corning during the past five years except as indicated. Name and Age Position* Glen H. Hiner (67) Chairman of the Board and Chief Executive Officer since January 1992. Director since 1992. Mr. Hiner will retire as Chairman and Chief Executive Officer of Owens Corning effective April 18, 2002. Rhonda L. Brooks (50) Vice President and President, Exterior Systems Business since April 2000; formerly Vice President and President, Roofing Systems Business (1998), Vice President, Investor Relations (1997), and Vice President, Marketing, Composites. David T. Brown (53) Executive Vice President and Chief Operating Officer since January 2001; formerly Vice President and President, Insulating Systems Business (1998), and Vice President and President, Building Materials Sales and Distribution. Director since January 2002. Mr. Brown has been elected President and Chief Executive Officer effective April 18, 2002. Charles E. Dana (46) Vice President - Corporate Controller and Global Sourcing since January 2002; formerly Vice President, Global Sourcing and eBusiness (2001), Vice President, Owens Corning Supply Chain Solutions (2000), Vice President, Global Sourcing Management (1999), and Vice President, Planning and Analysis - Composites Systems. David L. Johns (43) Senior Vice President and Chief Supply Chain and Information Technology Officer since April 2001; formerly Senior Vice President and Chief Technology Officer (1999), and Chief Information Officer. George E. Kiemle (54) Vice President and President, Insulating Systems Business since February 2001; formerly Vice President, Manufacturing, Insulating Systems Business.
- 13 - Name and Age Position* Richard D. Lantz (50) Vice President and President, Composite Solutions Business since November 2001; formerly Vice President and President, Roofing Solutions Business (2000), Vice President and President, Systems Thinking Sales and Distribution Business (1998), Vice President- Marketing, Insulation Business (1997), and Vice President, Marketing and Sales Support, Building Materials Sales and Distribution. Edward Mirra, Jr. (62) Senior Vice President, Human Resources since July 2000; formerly Vice President of Roofing Operations (1998), and Vice President, Trumbull Asphalt. Maura Abeln Smith (46) Chief Restructuring Officer since November 2000 and Senior Vice President, General Counsel and Secretary since February 1998; formerly Vice President and General Counsel of GE Plastics. Director since January 2002. Michael H. Thaman (37) Senior Vice President and Chief Financial Officer since April 2000; formerly Vice President and President, Exterior Systems Business (1999), Vice President and President, Engineered Pipe Systems (1997), and General Manager, OEM Solutions Group. Director since January 2002. Mr. Thaman has been elected Chairman of the Board effective April 18, 2002.
*Information in parentheses indicates year in which service in position began. - 14 - PART II ITEM 5. MARKET FOR OWENS CORNING'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal market on which Owens Corning's common stock is traded is the New York Stock Exchange. The high and low sales prices in dollars per share for Owens Corning's common stock as reported in the consolidated transaction reporting system for each quarter during 2000 and 2001 are set forth in the following tables. 2000 High Low 2001 High Low --------------------------------------------------- ----------------------------------------------- First Quarter 20.375 13.625 First Quarter 3.74 0.875 Second Quarter 20.9375 9.2344 Second Quarter 2.96 2.01 Third Quarter 10.125 2.75 Third Quarter 2.18 1.14 Fourth Quarter 2.25 0.75 Fourth Quarter 2.09 1.10 --------------------------------------------------- ------------------------------------------------
The number of stockholders of record of Owens Corning's common stock on February 28, 2002 was 6,829. Owens Corning declared regular dividends of $.075 per share of common stock for each of the first three quarters of 2000. As a result of the Filing on October 5, 2000, Owens Corning (1) did not pay the regular dividend declared for the third quarter of 2000 and (2) will not pay additional cash dividends for the foreseeable future. - 15 - ITEM 6. SELECTED FINANCIAL DATA The following is a summary of certain financial information of the Company. 2001(a) 2000(a) 1999 1998(c) 1997(d) ------- ------- ---- ------- ------- (In millions of dollars, except per share data and where noted) Net sales $ 4,762 $ 4,940 $ 5,048 $ 5,009 $ 4,373 Cost of sales 3,938 4,014 3,815 3,933 3,482 Marketing, administrative and other expenses 565 659 594 668 572 Science and technology Expenses 37 52 61 59 69 Restructure costs 26 32 - 117 68 Provision (credit) for asbestos litigation claims (7) 790 - 1,415 - Chapter 11 related reorganization items 87 24 - - - Gain on sale of assets - - - 359 - Income (loss) from operations 116 (631) 578 (824) 182 Cost of borrowed funds 16 155 152 140 111 Other (2) 5 - - - Income (loss) before provision for income taxes 102 (791) 426 (964) 71 Provision (credit) for income taxes 57 (312) 149 (306) 9 Net income (loss) 39 (478) 270 (705) 47 Net income (loss) per share Basic .72 (8.71) 4.98 (13.16) .89 Diluted .66 (8.71) 4.67 (13.16) .88 Dividends per share on common stock Declared - .2250 .3000 .3000 .2750 Paid - .2250 .3000 .3000 .2625 Weighted-average number of shares outstanding (in thousands) Basic 55,056 54,816 54,083 53,579 52,860 Diluted 59,945 54,816 59,452 53,579 53,546 Net cash flow from operations 478 (190) (28) 124 131 Capital spending 270 476 244 253 227 Total assets 7,041 6,912 6,494 5,101 4,996 Long-term debt (b) 5 7 1,764 1,535 1,595 Liabilities subject to compromise (b) 6,804 6,935 - - - Average number of employees (in thousands) 19 20 21 20 22
(a) During 2001, the Company recorded a pretax charge of $140 million ($89 million after-tax) for restructuring and other charges, $87 million ($54 million after-tax) for Chapter 11 related reorganization expenses, and pretax income of $7 million ($4 million after-tax) for asbestos- related insurance recoveries. During 2000, the Company recorded a pretax charge of $790 million ($486 million after-tax) for asbestos litigation claims, $24 million ($15 million after-tax) for Chapter 11 related reorganization expenses, and a pretax charge of $229 million ($149 million after-tax) for restructuring and other charges. - 16 - ITEM 6. SELECTED FINANCIAL DATA (continued) (b) On October 5, 2000, Owens Corning and 17 of its United States subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. In accordance with AICPA Statement of Position 90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy Code," beginning in October 2000, the Company classifies substantially all pre-petition liabilities of the Debtors (Note 1) as "Liabilities Subject to Compromise" on the Consolidated Balance Sheet. Included in this item at December 31, 2001 and 2000 were: 2001 2000 ---- ---- (In millions of dollars) Accounts payable $ 195 $ 255 Accrued interest payable 40 39 Accrued liabilities 36 74 Debt 2,843 2,832 Income taxes payable 209 212 Reserve for asbestos litigation claims - Owens Corning 2,197 2,249 Reserve for asbestos litigation claims - Fibreboard 1,284 1,274 --------- ---------- Total consolidated 6,804 6,935 Payables to non-debtors 761 688 ---------- ----------- Total debtor $ 7,565 $ 7,623 ========= =========
(c) During 1998, the Company recorded a pretax charge of $1.415 billion ($906 million after-tax) for asbestos litigation claims, a pretax charge of $243 million ($171 million after-tax) for restructuring and other actions, a pretax net credit of $275 million ($165 million after-tax) from the sale of the Company's yarns and other businesses, a pretax credit of $84 million ($52 million after tax) from the sale of its ownership interest in Alpha/Owens-Corning, LLC, a $39 million after-tax extraordinary loss from the early retirement of debt, and a $10 million charge for various tax adjustments. (d) During 1997, the Company recorded a pretax charge of $143 million ($104 million after-tax) for restructuring and other actions as well as a $15 million after-tax charge for the cumulative effect of the change in method of accounting for business process reengineering costs. - 17 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (All per share information discussed below is on a diluted basis.) CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the statements. Some of the important factors that may influence possible differences are continued competitive factors and pricing pressures, material costs, construction activity, interest rate movements, issues involving implementation of new business systems, achievement of expected cost reductions, developments in and the outcome of the Chapter 11 proceedings described below, and general economic conditions. GENERAL Voluntary Petition for Relief Under Chapter 11 ---------------------------------------------- On October 5, 2000 (the "Petition Date"), Owens Corning and the 17 United States subsidiaries listed below (collectively, the "Debtors") filed voluntary petitions for relief (the "Filing") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "USBC"). The Debtors are currently operating their businesses as debtors-in-possession in accordance with provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") are being jointly administered under Case No. 00-3837 (JKF). The Chapter 11 Cases do not include other United States subsidiaries of Owens Corning or any of its foreign subsidiaries (collectively, the "Non-Debtor Subsidiaries"). The subsidiary Debtors that filed Chapter 11 petitions for relief are: CDC Corporation Integrex Testing Systems LLC Engineered Yarns America, Inc. HOMExperts LLC Falcon Foam Corporation Jefferson Holdings, Inc. Integrex Owens-Corning Fiberglas Technology Inc. Fibreboard Corporation Owens Corning HT, Inc. Exterior Systems, Inc. Owens-Corning Overseas Holdings, Inc. Integrex Ventures LLC Owens Corning Remodeling Systems, LLC Integrex Professional Services LLC Soltech, Inc. Integrex Supply Chain Solutions LLC
The Debtors filed for relief under Chapter 11 to address the growing demands on Owens Corning's cash flow resulting from its multi-billion dollar asbestos liability. This liability is discussed in greater detail in Note 19 to the Consolidated Financial Statements. In late 2001, the asbestos-related Chapter 11 cases pending in the District of Delaware (the Chapter 11 Cases of Owens Corning and the cases of Armstrong World Industries, Inc., W. R. Grace & Co., Federal-Mogul Global, Inc., and USG Corporation) were ordered transferred to the United States District Court for the District of Delaware (the "District Court") before Judge Alfred M. Wolin to facilitate development and implementation of a coordinated plan for management (the "Administrative Consolidation"). The District Court has entered an order referring the Chapter 11 Cases back to the USBC, where they were previously - 18 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) pending, subject to its ongoing right to withdraw such referral with respect to any proceedings or issues (the applicable court from time to time responsible for any particular aspect of the Chapter 11 Cases being hereinafter referred to as the "Bankruptcy Court"). Owens Corning is unable to predict what impact the Administrative Consolidation will have on the timing, outcome or other aspects of the Chapter 11 Cases. Consequence of Filing --------------------- As a consequence of the Filing, all pending litigation against the Debtors is stayed automatically by section 362 of the Bankruptcy Code and, absent further order of the Bankruptcy Court, no party may take any action to recover on pre-petition claims against the Debtors. In addition, pursuant to section 365 of the Bankruptcy Code, the Debtors may reject or assume pre-petition executory contracts and unexpired leases, and other parties to contracts or leases that are rejected may assert rejection damages claims as permitted by the Bankruptcy Code. Two creditors' committees, one representing asbestos claimants and the other representing unsecured creditors, have been appointed as official committees in the Chapter 11 Cases. In addition, the Bankruptcy Court has appointed James J. McMonagle as legal representative for the class of future asbestos claimants against one or more of the Debtors. The two committees and the futures representative will have the right to be heard on all matters that come before the Bankruptcy Court. Owens Corning expects that these committees and the futures representative will play important roles in the Chapter 11 Cases and the negotiation of the terms of any plan or plans of reorganization. Owens Corning anticipates that substantially all liabilities of the Debtors as of the date of the Filing will be resolved under one or more Chapter 11 plans of reorganization to be proposed and voted on in the Chapter 11 Cases in accordance with the provisions of the Bankruptcy Code. Although the Debtors intend to file and seek confirmation of such a plan or plans, there can be no assurance as to when the Debtors will file such a plan or plans, or that such plan or plans will be confirmed by the Bankruptcy Court and consummated. Owens Corning is unable to predict what impact the Administrative Consolidation will have on the timing of the Debtors' filing or confirmation of such plan or plans or its effect, if any, on the terms thereof. As provided by the Bankruptcy Code, the Debtors initially had the exclusive right to propose a plan of reorganization for 120 days following the Petition Date, until February 2, 2001. By subsequent action, the Bankruptcy Court has extended such exclusivity period until August 30, 2002. 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, - 19 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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 may be substantially altered by any plan or plans of reorganization confirmed in the Chapter 11 Cases. There is no assurance that there will be sufficient assets to satisfy the Debtors' pre-petition liabilities in whole or in part, and the pre-petition creditors of some Debtors may be treated differently than those of other Debtors. Pre-petition creditors may receive under a plan or plans less than 100% of the face value of their claims, and the interests of Owens Corning's equity security holders may be substantially diluted or cancelled in whole or in part. As noted above, it is not possible at this time to predict the outcome of the Chapter 11 Cases, the effect of the Administrative Consolidation, the terms and provisions of any plan or plans of reorganization, or the effect of the Chapter 11 reorganization process on the claims of the creditors of the Debtors or the interests of Owens Corning's equity security holders. Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the date of the Filing. Differences between amounts recorded by the Debtors and claims filed by creditors will be investigated and resolved as part of the proceedings in the Chapter 11 Cases. Bar Dates for Filing Claims --------------------------- In connection with the Chapter 11 Cases, the Bankruptcy Court has set April 15, 2002 as the last date by which holders of pre-petition claims against the Debtors must file their claims. Any holder of a claim that is required to file a - 20 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) claim by such date and does not do so will be barred from asserting such claim against any of the Debtors and will not participate in any distribution in any of the Chapter 11 Cases on account of such claim. Such deadline to file claims does not apply to asbestos-related personal injury claims and asbestos-related wrongful death claims (other than claims for contribution, indemnity, reimbursement, or subrogation). A bar date for filing proofs of claim against the Debtors with respect to asbestos-related personal injury claims and asbestos-related wrongful death claims has not been set. Because the April 15, 2002 bar date has not yet occurred and the asbestos bar date has not yet been set, the ultimate number and allowed amount of such claims are not presently known. RESULTS OF OPERATIONS Business Overview ----------------- Owens Corning is committed to continuing to invest in our businesses and provide quality products to our customers. In recent years, we have focused on increasing sales and earnings by (i) achieving productivity improvements and cost reductions in existing and acquired businesses, (ii) targeting growth markets and (iii) forming strategic alliances and partnerships to complement our existing businesses. We are also committed to taking full advantage of e-Business opportunities. We are also expanding our role as a service provider by offering complementary services in order to meet all of our consumers' needs. In the Composite Solutions business, Owens Corning has partnered with end users, OEMs, systems suppliers and other players within the supply chain for development of substitution opportunities for our products. Owens Corning's strategy also includes the divestiture of non-strategic businesses and the realignment of existing businesses. During the first quarter of 2001, the Company completed the sale of the majority of its Engineered Pipe Business, a producer of glass-reinforced plastic pipe. During the fourth quarter of 2001, we sold our 40% interest in Alcopor Owens Corning, a European building materials joint venture. We obtained this 40% ownership interest in connection with the sale of our Building Materials business in Europe during the second quarter of 2000. During the first quarter of 2000, we sold our Falcon Foam business in the U.S. Please see Notes 2 and 6 to the Consolidated Financial Statements. During 2000, we experienced significant increases in certain of our costs, particularly roofing and vinyl raw material costs, due to higher crude oil prices and tight supply conditions for polyvinyl chloride (PVC), respectively. Increased energy costs, reflecting changes in the availability of natural gas, also contributed to cost increases during 2000. These increases, coupled with a fall in demand for building materials associated with a weakening economy, significantly reduced our margins and income from operations for the second half of the year 2000 and into the first half of 2001. During 2001, the overall economy remained weak, resulting in lower demand in both the Building Materials and Composite Solutions markets. As a result, during 2000 we implemented the first phase of a strategic restructuring program, which continued throughout 2001. The specific objectives of this program are discussed in "Restructuring of Operations and Other Charges" below and in Note 5 to the Consolidated Financial Statements. Years Ended December 31, 2001, 2000 and 1999 -------------------------------------------- Sales and Profitability ----------------------- Net sales for the year ended December 31, 2001, were $4.762 billion, a 4% decline from the 2000 level of $4.940 billion. Net sales in 1999 were $5.048 billion. Adjusted for the disposition of the Building - 21 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Materials business in Europe during the second quarter of 2000, sales in 2001 were relatively flat compared to 2000. Sales in 2001 reflect the benefit of price increases in the Composite Solutions business, offset by volume decreases, particularly in the U.S., and price decreases in U.S. Building Materials sales. In addition, the impact of currency translation on sales denominated in foreign currencies was unfavorable during 2001 compared to 2000, reflecting a stronger U.S. dollar during 2001. Please see Note 2 to the Consolidated Financial Statements. Sales outside the U.S. represented 15% of total sales for the year ended December 31, 2001, compared to 16% during 2000 and 18% during 1999. The decline in non-U.S. sales is due to the sale of the Building Materials Europe business in the second quarter of 2000. Gross margin for 2001 was 17% of net sales, compared to 19% and 24% in 2000 and 1999, respectively. For the year ended December 31, 2001, Owens Corning reported net income of $39 million, or $.66 per share, compared to a net loss of $478 million, or $8.71 per share, for 2000 and net income of $270 million, or $4.67 per share, for 1999. The net income in 2001 reflects reduced operating costs as well as the impact of the Company's ongoing review of its cost structures as described below in "Restructuring of Operations and Other Charges", $87 million of Chapter 11 reorganization related expenses and $7 million of pretax income for asbestos-related insurance recoveries. Cost of borrowed funds during 2001 was $16 million, $139 million lower than 2000, reflecting the cessation of interest accruals on most debt as a result of the Chapter 11 Filing (From the Petition Date through December 31, 2001, contractual interest expense not accrued or recorded on pre-petition debt totaled $222 million, of which $171 million relates to 2001 (please see Note 1 to the Consolidated Financial Statements)). Marketing and administrative expenses were $524 million during 2001, compared to $542 million in 2000. The decrease is primarily attributable to cost cutting measures introduced in the second half of 2000 and continued into 2001. For the year ended December 31, 2001, we reported $116 million of income from operations. When adjusted for the cost of restructuring and other charges, asbestos-related charges and recoveries and Chapter 11 related expenditures, Owens Corning generated $336 million in income from ongoing operations for the year ended December 31, 2001, compared to $412 million for the same period in 2000. On a comparative basis, the decline from 2000 reflects lower prices in Building Materials, volume decreases primarily in Composite Solutions and increased energy and labor costs, only partially offset by price increases in Composite Solutions, lower raw material costs primarily in Building Materials and reduced operating expenses as the result of productivity initiatives. For the year ended December 31, 2000, we reported a net loss of $478 million, reflecting a decrease in gross margin compared to 1999, attributable primarily to the adverse impact of increased raw material and energy costs, as well as the following special items: a $790 million pretax charge ($486 million after-tax) for asbestos litigation claims, a $229 million pretax charge ($149 million after-tax) for restructuring and other charges, and $24 million of Chapter 11 reorganization related expenses. Marketing and administrative expenses were $542 million during 2000, compared to $599 million in 1999. The reduction is primarily attributable to cost cutting measures introduced in 2000. Restructuring of Operation and Other Charges -------------------------------------------- 2001 Charges ------------ During 2001, the Company experienced the effects of an overall slowed economy in - 22 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) both the building materials and composites industries. A decline in net sales and margins over the prior year led the Company to continue to review its cost structures. As a result of this review, the Company recorded approximately $140 million in pretax charges which were accounted for as a $26 million charge for restructuring, a $79 million charge to cost of sales and a $35 million charge to other operating expense. The Company recorded $46 million in the fourth quarter, $35 million in the third quarter, $17 million in the second quarter and $42 million in the first quarter. Fourth Quarter 2001 ------------------- The fourth quarter charges, totaling $46 million pretax, consisted of a $2 million pretax restructure charge and $44 million in pretax other charges. The $2 million 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 145 positions, primarily in the U.S. and Canada. The primary groups impacted included manufacturing and administrative personnel. As of December 31, 2001, less than $1 million has been paid and charged against this reserve. The $44 million in pretax other charges included $29 million of asset impairments mainly associated with the building materials business, principally to write down assets to estimated fair value on a held for use basis in certain manufacturing facilities due to changes in the Company's manufacturing and marketing strategies; $6 million in costs related to the Company's continuing plan for the realignment of its Newark, Ohio manufacturing facility and various other charges totaling $9 million. This $44 million pretax charge was accounted for as a $34 million charge to cost of sales and a $10 million charge to other operating expenses. Third Quarter 2001 ------------------ The third quarter charges, totaling $35 million pretax, were comprised of an $8 million pretax restructure charge and $27 million in pretax other charges. The restructure charge 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 December 31, 2001, approximately $7 million has been paid and charged against this reserve. The $27 million in pretax other charges included $15 million in costs associated with the Company's previously announced plan to realign its Newark, Ohio manufacturing facility; $4 million to write-down the Company's investment and related assets in Alcopor Owens Corning to net realizable value (The sale of the Company's investment in this joint venture was completed in the fourth quarter of 2001) and 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 ------------------- The second quarter charges, totaling $17 million pretax, were comprised of a $7 million pretax restructure charge and $10 million in pretax other charges. The $7 million restructure charge primarily represented a $5 million charge for the divestiture of non-strategic businesses and facilities, which consisted mainly of non-cash asset write-downs to fair value and exit cost liabilities. Also - 23 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) included in the restructure charge was 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 December 31, 2001, approximately $1 million has been paid and charged against this reserve. 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 ------------------ The first quarter charges, totaling $42 million pretax, were 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 December 31, 2001, approximately $7 million has been paid and charged against this reserve. 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 (please see Note 5 to the Consolidated Financial Statements). 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; $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 our Newark, Ohio manufacturing facility. This represented the first phase of the Company's plan to realign operations at the Newark facility. - 24 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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 the Company's U.S. pension plans, and $96 million of charges focused on improving business operations and was accounted for as a $77 million charge to cost of sales, a $114 million charge to other operating expenses and a $6 million charge to marketing and administrative expenses. The $95 million of asset impairments included: 1) $54 million 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 a 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 entity 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; 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 our 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 December 31, 2001, approximately $13 million has been paid and charged against the reserve for personnel reductions and approximately $3 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 2002. Building Materials Systems -------------------------- In the Building Materials Systems segment, sales in 2001 decreased 3%, to $3.876 billion, compared to 2000, resulting mostly from the Building Materials Europe divestiture. Excluding the sales related to this divestiture, sales declined 1% compared to 2000. During 2001, volume increases in distribution and roofing products were offset by price decreases attributable to insulation and roofing products. The relatively constant level of sales in Building Materials is associated with an overall softness in the industry, reflecting a decline in housing starts and the remodeling market during 2001. Income from operations was $252 million in 2001, compared to $353 million in 2000. The decline primarily reflects lost margin due to price decreases. Please see Note 2 to the Consolidated Financial Statements. During 2000, sales decreased 4% compared to 1999, resulting mostly from the Building Materials Europe and Falcon transactions. Excluding the sales related to these divestitures, sales remained constant. Income from operations was $353 million in 2000, compared to $523 million in 1999, reflecting raw material and energy cost increases and volume decreases, only partially offset by price increases. The roofing and vinyl markets suffered most from the raw material cost increases. Due to the rapid rise in - 25 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) crude oil prices and significantly increased demand for PVC during 2000, Owens Corning was unable to fully pass through to customers these costs. Actions taken during the year to improve productivity partially narrowed the gap. Composite Solutions ------------------- In the Composite Solutions segment, sales during 2001 were down 5%, to $886 million, compared to 2000, reflecting volume decreases, primarily in the U.S., and the divestiture of the Engineered Pipe business. These volume decreases were partially offset by price increases across all markets. The translation impact of sales denominated in foreign currencies was a loss of approximately $23 million during 2001, reflecting a stronger U.S. dollar. Income from operations was $133 million in 2001, compared to $108 million in 2000, reflecting price increases and reduced operating costs. Please see Note 2 to the Consolidated Financial Statements. Sales during 2000 were up 7% compared to 1999, to $932 million, due to price improvements and significant volume increases. Price increases were seen across all markets, especially in Europe, and volume increases were significant in Europe and the U.S. The translation impact of sales denominated in foreign currencies was a loss of approximately $40 million during 2000, reflecting a stronger U. S. dollar. Income from operations was $108 million in 2000, compared to $83 million in 1999, reflecting price and volume increases, most notably in Europe, partially offset by production inefficiencies in the U.S. and Canada. LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS Cash flow from operations was $478 million for the year ended December 31, 2001, versus negative $190 million for the year ended December 31, 2000. The increase in cash flow from operations was driven primarily by increased earnings in 2001 compared to 2000, the absence of payments for asbestos litigation claims in 2001, and increased cash from working capital. There was no cash outflow for asbestos litigation claims in 2001, compared to $685 million in 2000 ($521 million for claims payments and $164 million paid into escrow as restricted cash), which was partially offset by insurance proceeds of $380 million. This net amount of $305 million paid in 2000 compares favorably to the net amount of $680 million paid in 1999. Please see Notes 1 and 19 to the Consolidated Financial Statements. Inventories at December 31, 2001, were $437 million, a decrease of $32 million from the December 31, 2000 level. Receivables at December 31, 2001 were $417 million, a $71 million decrease over the December 31, 2000 level, primarily due to slightly reduced demand toward year-end and aggressive monitoring of customer credit terms. The increase in accounts payable and accrued liabilities from $491 million at December 31, 2000, to $740 million at December 31, 2001, reflects improvements in payment terms initially adversely affected by the Filing. At December 31, 2001, our net working capital was $800 million and we had a current ratio of 1.94, compared to $955 million and 2.57, respectively, at December 31, 2000. The change in working capital and current ratio is the result of increasing accounts payable and accrued liabilities. Cash and cash equivalents at December 31, 2001 reflect an increase of $214 million compared to December 31, 2000. Owens Corning maintains pension plans for certain of its salaried and hourly employees. During 2001, the Company made contributions of $196 million to such plans, including approximately $14 million in connection with the sale of its - 26 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) remaining interest in Alcopor Owens Corning (please see Note 6 to the Consolidated Financial Statements). The Company's recorded long-term pension plan liability increased from $75 million at year-end 2000 to $291 million at year-end 2001, primarily as the result of changes in certain actuarial assumptions and a decline in plan asset values due to market conditions (please see Note 9 to the Consolidated Financial Statements). These factors were also the primary contributors to the increase in accumulated other comprehensive loss and the corresponding decrease in stockholders' equity. The ultimate cash flow impact to the Company, if any, of the pension plan liability, and the timing of any such impact, will depend on numerous variables, including future changes in actuarial assumptions and market conditions. At December 31, 2001, we had $2.843 billion of borrowings subject to compromise and $114 million of other borrowings (of which $96 million were in default as a consequence of the Filing) (please see Note 3 to the Consolidated Financial Statements). Borrowings outstanding at December 31, 2000, were $2.832 billion subject to compromise and $125 million of other borrowings (of which $94 million were in default as a consequence of the Filing) (please see Notes 3 and 4 to the Consolidated Financial Statements). At December 31, 2001, the Company had $764 million of cash and cash equivalents (of which approximately $38 million was subject to administrative freeze pending the resolution of certain alleged set-off rights by certain pre-petition lenders). In addition, in connection with the Filing, the Debtors obtained a $500 million debtor-in-possession credit facility from a group of lenders led by Bank of America, N.A. (the "DIP Financing"), which currently expires November 15, 2002. Due to seasonal year-end declines in the qualifying inventory and receivables that make up the borrowing base under the DIP Financing, $407 million was available under this credit facility at December 31, 2001. There were no borrowings outstanding under the DIP Financing at December 31, 2001, however, approximately $40 million of the availability under this credit facility was utilized as a result of the issuance of standby letters of credit and similar uses. As a consequence of the Filing and the impact of certain provisions of the Company's DIP Financing and in a cash management order entered by the Bankruptcy Court, the Company and its subsidiaries are now subject to certain restrictions, including on their ability to pay dividends and to transfer cash and other assets to each other and to their affiliates. The Company believes, based on information presently available to it, that its cash and cash equivalents, cash available from operations, and the DIP Financing will provide sufficient liquidity to allow it to continue as a going concern for the foreseeable future. However, the ability of the Company to continue as a going concern (including its ability to meet post-petition obligations of the Debtors and to meet obligations of the Non-Debtor Subsidiaries) and the appropriateness of using the going concern basis for its financial statements are dependent upon, among other things, (i) the Company's ability to comply with the terms of the DIP Financing and any cash management order entered by the Bankruptcy Court from time to time in connection with the Chapter 11 Cases, (ii) the ability of the Company to maintain adequate cash on hand, (iii) the ability of the Company to generate cash from operations, (iv) the ability of the Non-Debtor Subsidiaries to obtain necessary financing, (v) confirmation of a plan or plans of reorganization under the Bankruptcy Code, and (vi) the Company's ability to maintain profitability following such confirmation. Capital spending for property, plant and equipment, excluding acquisitions, was $270 million in 2001. We anticipate that 2002 capital spending, exclusive of acquisitions, will be approximately $280 million, the majority of which is uncommitted. The Company expects that funding for these expenditures will be from the Company's operations, existing cash on hand and the credit availability from the DIP Financing. - 27 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) As of December 31, 2001 and 2000, the Company is contingently liable for guarantees of indebtedness owed by certain unconsolidated affiliates of approximately $38 million and $35 million, respectively. As of December 31, 2001, approximately $34 million of such indebtedness was alleged to be in default as a result of the Filing. The affiliate that owed approximately $19 million of such indebtedness is in negotiations with its lenders and other parties, including Owens Corning, concerning the status of this indebtedness. Depending on the outcome of such negotiations, it is possible that the lender will attempt to enforce the related guarantee against Owens Corning. Any such claim would constitute a liability subject to compromise, since the claim would relate to a pre-petition obligation of Owens Corning, and may give rise to a loss of up to the full amount of the claim. Subject to the foregoing uncertainties, the Company is of the opinion that its other unconsolidated affiliates will be able to perform under their respective payment obligations in connection with such guaranteed indebtedness and that no payments will be required and no losses will be incurred by the Company under such guarantees. Critical Accounting Policies ---------------------------- The Company's discussion and analysis of its financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments related to these assets, liabilities, revenues and expenses. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. The Company's Consolidated Financial Statements have been prepared in accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," and on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Filing, such realization of assets and liquidation of liabilities are subject to uncertainty. While operating as debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as permitted in the ordinary course of business, the Debtors, or some of them, may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the Consolidated Financial Statements. Further, a plan of reorganization could materially change the amounts and classifications reported in the consolidated historical financial statements. The Company exercises judgment in evaluating its long-lived assets for impairment. This requires estimating useful lives, future operating cash flows and estimated fair value of the assets under review. Changes in management intentions, market conditions or operating performance could indicate that impairment charges might be necessary that would be material to the Company's consolidated financial statements in any given period. Accounting for pensions and other postretirement benefits involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. - 28 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) To accomplish this, extensive use is made of assumptions about inflation, investment returns, mortality, turnover, medical costs and discount rates through a collaborative effort by management and outside advisors such as consultants, lawyers and actuaries. The results of this effort provide management with the necessary information on which to base its judgments and develop the estimates used to prepare the financial statements. Changes in assumptions used could result in a material impact to the Company's consolidated financial statements in any given period. The Company estimates a reserve for asbestos-related liabilities that have been asserted or are probable of assertion. The estimate of 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 Chapter 11 Cases. The Company will continue to review its asbestos reserve on a periodic basis and make such adjustments as may be appropriate. However, it is possible that the Company 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 the resolution of uncertainties. Any such revision could, however, be material to the Company's consolidated financial statements in any given period. Please see Note 19 to the Consolidated Financial Statements for further discussion. The determination of the Company's tax provision is complex due to operations in several tax jurisdictions outside the U.S. In addition, realization of certain deferred tax assets is dependent upon our ability to generate future taxable income. The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. While the Company has considered future taxable income and on-going tax planning strategies in assessing the need for the valuation allowance, in the event the Company was to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. In addition, the Company maintains tax reserves to cover Internal Revenue Service (IRS) claims for income taxes and interest attributable to audits of open tax years. 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. 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 Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 142 eliminates the amortization of goodwill and indefinite-lived intangible assets and initiates an annual review for impairment. Identifiable intangible assets with a determinable useful life will continue to be amortized. - 29 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Goodwill acquired prior to June 30, 2001 will be affected upon adoption, which will require the Company to perform an impairment test of its existing goodwill by applying a fair-value test. The Company will apply SFAS No. 142 beginning in the first quarter of 2002. The Company will test goodwill for impairment using the two-step process prescribed in SFAS No. 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. The Company expects to perform the first of the required impairment tests of goodwill as of January 1, 2002 in the first quarter of 2002. Based on the steps the Company has taken to prepare for the adoption of SFAS No. 142, it is likely that between $450 and $500 million of the goodwill related to Building Materials Systems will be impaired using the impairment test required by SFAS No. 142. As of December 31, 2001, the Company has net unamortized goodwill of $610 million and recognized amortization expense of $18 million, $19 million, and $21 million for the years ended December 31, 2001, 2000, and 1999, respectively. An impairment that is required to be recognized when adopting SFAS No. 142 will be reflected as a cumulative effect of a change in accounting principle in the first quarter of 2002. The Company plans to complete the measurement of the impairment loss in the second quarter of 2002 and will address the tax implications, if any, on this impairment loss at that time. 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 SFAS No. 121. The new statement establishes a single accounting model for long-lived assets to be disposed of by sale, and requires companies to measure long-lived assets at the lower of fair value minus cost to sell or the carrying value. 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 estimate of fair value can be made, while the associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The Company does not expect the effects of adoption to be significant. Environmental Matters --------------------- The Company has been deemed by the Environmental Protection Agency (EPA) to be a Potentially Responsible Party (PRP) with respect to certain sites under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund). The Company has also been deemed a PRP under similar state or local laws. In other instances, other PRPs have brought suits against the Company as a PRP for contribution under such federal, state or local laws. At December 31, 2001, a total of 54 such PRP designations remained unresolved by the Company. The Company is also involved with environmental investigation or remediation at a number of other sites at which it has not been designated a PRP. The Company has established a $26 million reserve for our Superfund (and similar state, local and private action) contingent liabilities. In connection with the Filing, the Company has initiated a program to identify and discharge contingent environmental liabilities as part of its plan or plans of reorganization. Under the program, the Company will seek settlements, subject to approval of the Bankruptcy Court, with various federal, state and local authorities, as well as private claimants. The Company will continue to review its environmental reserve in light of such program and make such adjustments as may be appropriate. - 30 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to the impact of changes in foreign currency exchange rates, interest rates, and natural gas prices in the normal course of business. The Company manages such exposures through the use of certain financial and derivative financial instruments. The Company's objective with these instruments is to reduce exposure to fluctuations in earnings and cash flows. The Company enters into various forward contracts and options, which change in value as foreign currency exchange rates change, to preserve the carrying amount of foreign currency-denominated assets, liabilities, commitments, and certain anticipated foreign currency transactions and earnings. The Company also enters into certain currency and interest rate swaps to protect the carrying amount of its investments in certain foreign subsidiaries, to hedge the principal and interest payments of certain debt instruments, and to manage its exposure to fixed versus floating interest rates. The Company also enters into cash-settled natural gas futures to protect against changes in natural gas prices. The Company's policy is to use foreign currency, interest rate, and natural gas derivative financial instruments only to the extent necessary to manage exposures as described above. The Company does not enter into such transactions for speculative purposes. The Company uses a variance-covariance Value at Risk (VAR) computation model to estimate the potential loss in the fair value of the referenced financial instruments. The VAR model uses historical foreign exchange rates, interest, and natural gas rates as an estimate of the volatility and correlation of these rates in future periods. It estimates a loss in fair market value using statistical modeling techniques. The amounts presented below represent the maximum potential one-day loss in fair value that the Company would expect from adverse changes in foreign currency exchange rates, interest rates or natural gas prices assuming a 95% confidence level: December 31, December 31, Risk Category 2001 2000 ------------- ---- ---- (In millions of dollars) Foreign currency $ - $ 1 Interest rate $ 13 $ 8 Natural gas $ 1 $ -
Virtually all of the potential loss associated with interest rate risk is attributable to fixed-rate long-term debt instruments. The potential loss, identified above, includes interest or debt subject to compromise. - 31 - ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pages 46 through 115 hereof are incorporated here by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Owens Corning has nothing to report under this Item. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF OWENS CORNING INFORMATION CONCERNING DIRECTORS At February 28, 2002, Owens Corning's Board of Directors was composed of thirteen directors, divided into three classes. Each class of directors serves for a term expiring at the third succeeding annual meeting of stockholders after the year of election of such class, and until their successors are elected and qualified. As of February 28, 2002, Owens Corning has not scheduled an annual meeting of stockholders for 2002 or any subsequent period. Information concerning each director of Owens Corning as of February 28, 2002, is set forth below. Class Expiring At First Succeeding Annual Meeting Of Stockholders David T. Brown, 53. Executive Vice President and Chief Operating Officer, Owens Corning. Mr. Brown has been elected President and Chief Executive Officer of Owens Corning effective April 18, 2002. Director since January 2002. A graduate of Purdue University, Mr. Brown became Chief Operating Officer of Owens Corning in January 2001. Previously, he held numerous leadership positions in sales and marketing at Owens Corning, including serving as President of the Insulating Systems Business beginning in 1997, President of Building Materials Sales and Distribution beginning in 1996, and President of the Roofing and Asphalt Business beginning in 1994. Mr. Brown joined Owens Corning in 1978 after working for Procter & Gamble, Shearson Hammill and Eli Lilly. Mr. Brown is a past board member of the National Building Museum, Asphalt Roofing Manufacturers Association Executive Committee, National Roofing Contractors Association Advisory Board, and Thermal Insulation Manufacturers Association. He currently serves on the Board of Governors and is Vice Chairman of the Executive Committee of the North American Insulation Manufacturers Association. In addition, he is a member of the U.S./China Council on Housing. Mr. Brown also serves on the Board of Directors of the Erie Shores Credit Union. Gaston Caperton, 62. President and Chief Executive Officer of The College Board, not-for-profit educational association, New York, NY and Chairman of The Caperton Group, a business investment and development company, Shepherdstown, WV; former Governor of the State of West Virginia. Director since 1997. A graduate of the University of North Carolina, Mr. Caperton began his career in a small insurance agency, became its principal owner and chief operating - 32 - ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF OWENS CORNING (continued) officer, and led the firm to become the tenth largest privately-owned insurance brokerage firm in the U.S. He also has owned a bank and mortgage banking company. Mr. Caperton was elected Governor of West Virginia in 1988 and 1992. In 1997, Mr. Caperton taught at Harvard University as a fellow at the John F. Kennedy Institute of Politics. Prior to beginning his current position in mid-1999, Mr. Caperton also taught at Columbia University, where he served as Director of the Institute on Education and Government at Teachers College. Mr. Caperton is a director of United Bankshares, Inc. and Energy Corporation of America. He was the 1996 Chair of the Democratic Governors' Association, and served on the National Governors' Association executive committee and as a member of the Intergovernmental Policy Advisory Committee on U.S. Trade. He also was Chairman of the Appalachian Regional Commission, Southern Regional Education Board, and the Southern Growth Policy Board. William W. Colville, 67. Retired; former Senior Vice President, General Counsel and Secretary of Owens Corning. Director since 1995. A graduate of Yale University and the Columbia University Law School, Mr. Colville began his career at Owens Corning in 1984 as Senior Vice President and General Counsel. Prior to joining Owens Corning, he was President of the Sohio Processed Minerals Group from 1982 to 1984, and General Counsel of Kennecott Corporation from 1980 to 1982. Mr. Colville is a director of Nordson Corporation. Landon Hilliard, 62. Partner, Brown Brothers Harriman & Co., private bankers, New York, NY. Director since 1989. A graduate of the University of Virginia, Mr. Hilliard began his career at Morgan Guaranty Trust Company of New York. He joined Brown Brothers Harriman in 1974 and became a partner in 1979. Mr. Hilliard is a director of Norfolk Southern Corporation and Western World Insurance Company. He is also Chairman of the Board of Trustees of the Provident Loan Society of New York and Secretary of The Economic Club of New York. Glen H. Hiner, 67. Chairman of the Board and Chief Executive Officer, Owens Corning. Mr. Hiner will retire as Chairman and Chief Executive Officer of Owens Corning effective April 18, 2002. Director since 1992. A graduate of West Virginia University, Mr. Hiner spent 35 years of his professional career at General Electric Company, eventually becoming Senior Vice President and head of GE Plastics. He was elected Chairman and Chief Executive Officer of Owens Corning in January 1992. Mr. Hiner is a director of Dana Corporation, Kohler Co., and Prudential Financial, Inc. Class Expiring At Second Succeeding Annual Meeting Of Stockholders Ann Iverson, 58. Chairman of Brooks Sports, Inc., athletic footwear and apparel, Bothell, WA and President and Chief Executive Officer of International Link, an international consulting firm, Scottsdale, AZ. Director since 1996. Ms. Iverson began her career in retailing and held various buying and executive positions at retail stores in the U.S. through 1989, including Bloomingdales, Dayton Hudson, and US Shoe. She then joined British Home Stores as Director of Merchandising and Operations in 1990; Mothercare as Chief Executive Officer in - 33 - ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF OWENS CORNING (continued) 1992; Kay-Bee Toy Stores as President and Chief Executive Officer in 1994; and Laura Ashley Holdings plc. as Group Chief Executive in 1995. In 1998, she founded and became President and Chief Executive Officer of International Link. Ms. Iverson is a director of Candie's, Inc., as well as several privately-held companies, including Brooks Sports, Inc. W. Walker Lewis, 57. Chairman, Devon Value Advisers, financial consulting and investment banking firm, Greenwich, CT and New York, NY. Director since 1993. Previously, Mr. Lewis served as Senior Advisor to SBC Warburg Dillon Read; Senior Advisor to Marakon Associates; and Managing Director, Kidder, Peabody & Co., Inc. Prior to April 1994, he was President, Avon U.S. and Executive Vice President, Avon Products, Inc. Prior to March 1992, Mr. Lewis was Chairman of Mercer Management Consulting, Inc., a wholly-owned subsidiary of Marsh & McLennan, which is the successor to Strategic Planning Associates, a management consulting firm he founded in 1972. He is a graduate of Harvard College, where he was President and Publisher of the Harvard Lampoon. Mr. Lewis is Chairman of London Fog Industries, Inc. and a director of American Management Systems, Inc., Mrs. Fields' Original Cookies, Inc., Scientific Games Corporation, and Unilab Corporation. He is also a member of the Council on Foreign Relations, the Washington Institute of Foreign Affairs, and The Harvard Committee on University Resources. Furman C. Moseley, Jr., 67. Chairman of Sasquatch Books, Inc., publishing, Seattle, WA. Director since 1983. Mr. Moseley joined Simpson Paper Company in 1960 and retired in June 1995 as Chairman of that company and President of Simpson Investment Company. Mr. Moseley is a director of Eaton Corporation. Michael H. Thaman, 37. Senior Vice President and Chief Financial Officer, Owens Corning. Mr. Thaman has been elected Chairman of the Board of Owens Corning effective April 18, 2002. Director since January 2002. A graduate of Princeton University, Mr. Thaman joined Owens Corning in 1992 and became Chief Financial Officer in 2000. Before assuming his current position, Mr. Thaman held a variety of leadership positions at Owens Corning, including serving as President of the Exterior Systems Business beginning in 1999 and President of the Engineered Pipe Systems Business beginning in 1997. Prior to joining Owens Corning, Mr. Thaman spent six years as a strategy consultant at Mercer Management Consulting, including as a Vice President in their New York office. Class Expiring At Third Succeeding Annual Meeting Of Stockholders Norman P. Blake, Jr., 60. Chairman, President and Chief Executive Officer of Comdisco, Inc., global technology services, Rosemont, IL. Director since 1992. A graduate of Purdue University, Mr. Blake previously has served as Chief Executive Officer of the United States Olympic Committee; Chief Executive Officer and President of Promus Hotel Corporation; Chairman, Chief Executive Officer and President of USF&G Corporation; and Chairman and Chief Executive Officer of Heller International Corporation of Chicago. - 34 - ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF OWENS CORNING (continued) Mr. Blake is a director of Enron Corporation and a member of the Community Partnership for Education. He is also a member of the Purdue Research Foundation and Purdue University's President's Council and Dean's Advisory Council, Krannert Graduate School of Management. He is the recipient of the degree of Doctor of Economics honoris causa from Purdue University, granted jointly by the Krannert Graduate School of Management and School of Liberal Arts. He has also been awarded The Ellis Island Medal of Honor. Leonard S. Coleman, Jr., 53. Chairman of ARENACO, a subsidiary of YankeeNets, LLC, and Senior Advisor to Major League Baseball, professional sports, New York, NY. Director since 1996. A graduate of Princeton and Harvard Universities, Mr. Coleman became President of The National League of Professional Baseball Clubs in 1994 after serving as Executive Director, Market Development of Major League Baseball. He assumed his current position with Major League Baseball in 1999 and became Chairman of ARENACO in 2001. Mr. Coleman is a director of H. J. Heinz Company, the Omnicom Group, New Jersey Resources, Cendant Corporation, Radio Unica, Electronic Arts Inc., Aramark Corporation, and Churchill Downs Incorporated. He also serves as a director of The Metropolitan Opera, The Schumann Fund, The Jackie Robinson Foundation, The Children's Defense Fund, and The National Urban League. W. Ann Reynolds, 64. President of The University of Alabama at Birmingham, Birmingham, AL. Director since 1993. A graduate of Kansas State Teachers College and the University of Iowa, Dr. Reynolds assumed her current position in 1997. Previously, she was Chancellor of City University of New York for seven years and served eight years as Chancellor of the twenty-campus California State University system. Dr. Reynolds is a director of Humana, Inc., Abbott Laboratories and Maytag Corporation. She is also a member of the American Association for the Advancement of Science, the American Association of Anatomists, the American Board of Medical Specialties, the Society for Gynecological Investigation, and the Perinatal Research Society. Maura Abeln Smith, 46. Senior Vice President, Chief Restructuring Officer, General Counsel and Secretary, Owens Corning. Director since January 2002. A graduate of Vassar College, Oxford University - where she was a Rhodes Scholar, and the University of Miami School of Law, Ms. Smith joined Owens Corning in 1998. Prior to joining Owens Corning, Ms. Smith worked at General Electric, where she served as Vice President and General Counsel at GE Plastics. Before her career at General Electric, Ms. Smith was a partner in the international law firm of Baker & McKenzie. INFORMATION CONCERNING EXECUTIVE OFFICERS Certain information concerning Owens Corning's executive officers is included on pages 12 through 13 hereof. As indicated in Item 1 above, Owens Corning and 17 of its domestic subsidiaries filed for protection under Chapter 11 of the United States Bankruptcy Code on October 5, 2000. All of the executive officers referenced above, except Mr. Dana, served as executive officers of Owens Corning at or within two years before the time of such filing. In addition, Mesdames Brooks and Smith and - 35 - ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF OWENS CORNING (continued) Messrs. Brown, Dana, Hiner, Kiemle, and Thaman also served as executive officers of one or more of such domestic subsidiaries at or within two years before the time of such filing. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission regulations require Owens Corning's directors, and certain officers and greater than ten percent stockholders, to file reports of ownership on Form 3 and changes in ownership on Forms 4 or 5 with the Securities and Exchange Commission. Owens Corning undertakes to file such forms on behalf of the reporting directors and officers pursuant to a power of attorney given to certain attorneys-in-fact. Such reporting officers, directors and ten percent stockholders are also required by Securities and Exchange Commission rules to furnish Owens Corning with copies of all Section 16(a) reports they file. Based solely on its review of copies of such reports received or written representations from such executive officers, directors and ten percent stockholders, Owens Corning believes that all Section 16(a) filing requirements applicable to its directors, executive officers and ten percent stockholders were complied with during fiscal year 2001. - 36 - ITEM 11. EXECUTIVE COMPENSATION Executive Officer Compensation The following tables provide information on compensation and stock-based awards received by Owens Corning's Chief Executive Officer and the four other highest paid individuals who were serving as executive officers of Owens Corning at the end of 2001 (these five individuals collectively are referred to as the "Named Executive Officers"). Summary Compensation Table -------------------------- The following table contains information about compensation paid, and certain awards made, by Owens Corning to the Named Executive Officers for the three-year period ended December 31, 2001. Long Term Compensation ----------------------- Annual Compensation Awards Payouts --------------------------------------------------------- ------ ------- Restricted Securities Other Annual Stock Underlying LTIP All Other Name and Salary Bonus Compensation Award(s) Options/ Payouts Compensation Principal Position(1) Year ($) ($)(2) ($)(3) ($)(4) SARs(#)(5) ($) ($) --------------------- ---- --------- --------- ------------ -------- ------------ ------- ------------ Glen H. Hiner............. 2001 1,000,000 2,687,300 267,036 0 0 1,361,976(6) Chairman and Chief 2000 1,000,000 2,035,600 207,341 0 0 697,451 Executive Officer 1999 970,833 3,029,000 224,907 2,280,219 243,000 35,688 David T. Brown............ 2001 400,000 767,000 0 0 483,550(6) Executive Vice President 2000 343,750 425,000 0 0 245,275 and Chief Operating 1999 300,000 771,900 348,125 36,000 11,913 Officer Michael H. Thaman......... 2001 425,000 742,000 0 0 517,800(6) Senior Vice President 2000 362,500 404,500 0 0 261,900 and Chief Financial 1999 275,000 497,500 348,125 36,000 12,000 Officer Maura Abeln Smith......... 2001 500,000 727,000 0 0 692,717(6) Senior Vice President, 2000 497,917 705,000 0 0 345,090 Chief Restructuring 1999 450,000 950,000 452,562 50,000 15,896 Officer, General Counsel and Secretary David L. Johns............ 2001 350,000 596,000 0 0 335,100(6) Senior Vice President 2000 245,000 286,000 0 0 168,100 and Chief Supply Chain 1999 209,167 383,000 139,250 16,000 6,400 and Information Technology Officer
(1) Prior to January 2001, Mr. Brown served as Vice President and President, Insulating Systems Business. Prior to April 2000, Mr. Thaman served as Vice President and President, Exterior Systems Business; prior to January 1999, he served as Vice President and President, Engineered Pipe Systems. Ms. Smith assumed the additional duties of Chief Restructuring Officer in November 2000. Prior to April 2001, Mr. Johns served as Senior Vice President and Chief Technology Officer; prior to September 1999, he served as Chief Information Officer. (2) The numbers shown for 2001 do not reflect amounts, if any, payable with respect to a peer group comparison performance measure that is not calculable through the latest practicable date. (3) "Other Annual Compensation" includes perquisites and personal benefits, where such perquisites and personal benefits exceed the lesser of $50,000 or 10% of the Named Executive Officer's annual salary and bonus for the year, as well as certain other items of compensation. For the years shown, none of the Named Executive Officers received perquisites and/or personal benefits in excess of the applicable threshold. - 37 - ITEM 11. EXECUTIVE COMPENSATION (continued) Mr. Hiner's numbers reflect contractually required tax payments on income from his Pension Preservation Trust account. The Pension Preservation Trust is described on page 39. (4) Reflects awards of restricted stock under the stockholder-approved Owens Corning Stock Performance Incentive Plan. The values of the restricted stock awards shown in the table were calculated by multiplying the number of shares awarded by the closing price of Owens Corning common stock on the date of award (as reported in the New York Stock Exchange Composite Transactions). There were no restricted stock awards to any of the Named Executive Officers in 2000 or 2001. At the end of 2001, Mr. Hiner held a total of 81,999 shares of restricted stock, valued at $155,798; Mr. Brown held a total of 12,516 shares of restricted stock, valued at $23,780; Mr. Thaman held a total of 11,700 shares of restricted stock, valued at $22,230; Ms. Smith held a total of 14,133 shares of restricted stock, valued at $26,853; and Mr. Johns held a total of 4,400 shares of restricted stock, valued at $8,360. The value of these aggregate restricted stock holdings was calculated by multiplying the number of shares held by the closing price of Owens Corning common stock on December 31, 2001 (as reported in the New York Stock Exchange Composite Transactions). Dividends are paid by Owens Corning on restricted stock held by the Named Executive Officers if paid on stock generally. (5) Represents shares of Owens Corning common stock underlying options granted under the Stock Performance Incentive Plan. The 1999 awards become exercisable five years after date of grant. Vesting may accelerate in the event of death, disability, retirement, involuntary termination due to job elimination, Change of Control (as defined in the Stock Performance Incentive Plan), and in certain other events at the discretion of the Compensation Committee. No stock options were awarded to any of the Named Executive Officers in 2000 or 2001 and no stock appreciation rights (SARs) were granted in 1999 through 2001. (6) Of Mr. Hiner's and Ms. Smith's numbers, $7,301 and $7,417, respectively, were the present values (based upon the Applicable Federal Rate from date of payment to earliest date of repayment to Owens Corning) of split-dollar life insurance premiums paid by Owens Corning which were invested on their behalf in 2001. Upon termination of employment, Mr. Hiner and Ms. Smith are obligated to reimburse Owens Corning for all premiums invested on his or her behalf. The numbers shown include amounts payable for 2001 under the Owens Corning Key Employee Retention Incentive Plan, as follows: Mr. Hiner, $1,340,000; Mr. Brown, $469,000; Mr. Thaman, $502,500; Ms. Smith, $670,000; and Mr. Johns, $328,300. Except as indicated in the preceding paragraphs, the amount shown for each of the Named Executive Officers represents contributions made by Owens Corning to such officer's account in the Owens Corning Savings and Profit Sharing Plan during the year. - 38 - ITEM 11. EXECUTIVE COMPENSATION (continued) Option Grant Table ------------------ No stock options or stock appreciation rights (SARs) were granted to any of the Named Executive Officers during 2001. Option/SAR Exercises and Year-End Value Table --------------------------------------------- The following table contains information about the options for Owens Corning common stock that were exercised in 2001 by the Named Executive Officers, and the aggregate values of these officers' unexercised options at the end of 2001. None of the Named Executive Officers held stock appreciation rights (SARs) at December 31, 2001. Aggregated Option/SAR Exercises in 2001, and 12/31/01 Option/SAR Values Number of Securities Value of Shares Acquired Value Underlying Unexercised Name on Exercise (#) Realized ($) Unexercised In-the-Money ---- --------------- ------------ Options/SARs at Options/SARs at 12/31/01 (#) 12/31/01 ($)(1) Exercisable/ Exercisable/ Unexercisable Unexercisable -------------- ---------------- Glen H. Hiner --0-- --0-- 371,666/243,000 0/0 David T. Brown --0-- --0-- 85,000/36,000 0/0 Michael H. Thaman --0-- --0-- 46,657/36,000 0/0 Maura Abeln Smith --0-- --0-- 52,000/50,000 0/0 David L. Johns --0-- --0-- 12,278/16,000 0/0
(1) No options were in-the-money at December 31, 2001. Retirement Benefits ------------------- Owens Corning maintains a tax-qualified Cash Balance Plan covering certain of its salaried and hourly employees in the United States, including each of the Named Executive Officers, in lieu of the qualified Salaried Employees' Retirement Plan maintained prior to 1996 ("Prior Plan"), which provided retirement benefits primarily on the basis of age at retirement, years of service and average earnings from the highest three consecutive years of service. In addition, Owens Corning has a non-qualified Executive Supplemental Benefit Plan ("ESBP") to pay eligible employees leaving the Company the difference between the benefits payable under Owens Corning's tax-qualified retirement plan and those benefits which would have been payable except for limitations imposed by the Internal Revenue Code. Named Executive Officers are eligible to participate in both the Cash Balance Plan and the ESBP. Cash Balance Plan - Under the Cash Balance Plan, each covered employee's earned retirement benefit under the Prior Plan (including the ESBP) was converted to an opening cash balance. Each year, Owens Corning credits to each covered employee's account 2% of such employee's covered pay up to 50% of the Social Security Taxable Wage Base and 4% of covered pay in excess of such wage base. For this purpose, covered pay includes base pay, overtime pay, other wage premium pay and annual incentive bonuses payable during the year. Cash Balance Plan accounts earn monthly interest based on the average interest rate for five-year U.S. treasury securities. Employees may receive their account balance as a lump sum or as a monthly payment when they leave Owens Corning. For employees who were at least age 40 with 10 years of service as of December 31, 1995 ("Grandfathered Employees"), including Mr. Brown, the credit - 39 - ITEM 11. EXECUTIVE COMPENSATION (continued) percentages applied to covered pay are increased pursuant to a formula based on age and years of service on such date. In addition, Grandfathered Employees are entitled to receive the greater of their benefit under the Prior Plan frozen as of December 31, 2000, or under the Cash Balance Plan (in each case including the ESBP). The estimated annual annuity amounts payable under the Cash Balance Plan (including the ESBP) to the Named Executive Officers at age 65 (or, in the case of Mr. Hiner, age 67) are: Mr. Hiner, $150,354; Mr. Brown, $227,800; Mr. Thaman, $262,710; Ms. Smith, $167,082; and Mr. Johns, $135,619. These estimated amounts assume continued employment and current levels of covered pay through age 65 (or, in the case of Mr. Hiner, age 67), and are based on estimated interest rates. Supplemental Executive Retirement Plan - Owens Corning maintains a Supplemental Executive Retirement Plan ("SERP") covering certain employees, including Ms. Smith and Mr. Johns, who join Owens Corning in mid-career. The SERP provides for a lump sum payment following termination of employment equal to a multiple of the covered employee's Cash Balance Plan balance minus an offset equal to the present value of retirement benefits attributable to prior employment. The applicable multiplier for each covered employee ranges from 0 to 4 (determined by the covered employee's age when first employed by Owens Corning) and is 1.7 and 1.1 in the case of Ms. Smith and Mr. Johns, respectively. The estimated annual annuity amounts payable to Ms. Smith and Mr. Johns to satisfy the lump sum obligation under this plan at age 65, under the assumptions described in the preceding paragraph, are $284,039 and $149,181, respectively, less the annualized offset due to prior employment. Other Arrangements - Mr. Hiner's Employment Agreement calls for him to receive a pension which will, together with amounts payable under his prior employer's pension plan, any qualified defined benefit plan maintained by Owens Corning, and Social Security, total 60% of his "average annual compensation" (the pension he would have obtained had he remained with his prior employer until retirement). His "average annual compensation" is one third of his highest 36 months of compensation from Owens Corning or his prior employer. In 1992, Owens Corning established a Pension Preservation Trust for amounts payable under the ESBP as well as under the individual pension arrangements described above. Each year, the Compensation Committee determines (except with respect to Mr. Hiner, where payments are contractually determined) the participants in and any amounts to be paid with respect to the Pension Preservation Trust, which may include a portion of benefits earned under the ESBP and the pension agreements described above. Amounts paid into the Trust and income from the Trust reduce the pension otherwise payable at retirement. During 2001, no payments were made to the Trust. Employment and Severance Agreements ----------------------------------- Mr. Hiner is employed under an amended agreement that continues through April 16, 2002. Under this agreement, Mr. Hiner would receive a lump sum termination payment equal to 330% of his base salary if he were to be terminated by Owens Corning without "cause," or if he should terminate his employment for "good reason," as defined by the terms of the agreement. Mr. Hiner is entitled to an annual salary review, and any salary approved may not be decreased in a later year. Mr. Hiner is also to receive a contractual bonus calculated as a percentage of base pay based upon mutually agreed entry, target and maximum company performance objectives. For 2001, these performance objectives were the same as those applicable to the other participants in Owens Corning's Corporate Incentive Plan. Owens Corning also has entered into severance arrangements with each of the other Named Executive Officers. These agreements provide for the payment of an amount equal to two times base salary plus annual - 40 - ITEM 11. EXECUTIVE COMPENSATION (continued) incentive bonuses (based on an average of the three previous years' annual incentive payments or the average of the three previous years' annual incentive targets, whichever is greater) plus continuation of insurance benefits for a period of up to two years and, in the case of Messrs. Brown and Thaman, a payment equal to the additional lump sum pension benefit that would have accrued had such individuals been three years older, with three additional years of service, at the time of employment termination. The base salaries as of December 31, 2001, of these Named Executive Officers were: Mr. Brown, $400,000; Mr. Thaman, $425,000; Ms. Smith, $500,000; and Mr. Johns, $350,000. Directors' Compensation Retainer and Meeting Fees - In 2001, Owens Corning paid each director who was not an Owens Corning employee an annual retainer of $25,000. Non-employee Committee Chairmen receive an additional retainer of $4,000 each year. In addition, Owens Corning paid non-employee directors a fee of $1,000 for (a) attendance at one or more meetings of the Board of Directors on the same day, (b) attendance at one or more meetings of each Committee of the Board of Directors on the same day, and (c) for each day's attendance at other functions in which directors were requested to participate. Prior to December 2000, a director could elect to defer all or a portion of his or her annual retainer and meeting fees under the Directors' Deferred Compensation Plan, in which case his or her account was credited with the number of shares of common stock that such deferred compensation could have purchased on the date of payment. The account was also credited with the number of shares that dividends on previously credited shares could have purchased on dividend payment dates. Account balances are payable in cash based on the value of the account, which is determined by the then fair market value of Owens Corning common stock, at the time the participant ceases to be a director. Stock Plan for Directors - Owens Corning maintains a stockholder approved Stock Plan for Directors, applicable to each director who is not an Owens Corning employee. The plan provides for two types of grants to each eligible director: (1) a one-time non-recurring grant of options to each new outside director to acquire 10,000 shares of common stock at a per share exercise price of 100 percent of the value of a share of common stock on the date of grant, and (2) an annual grant of 500 shares of common stock on the fourth Friday in April. Initial option grants become exercisable in equal installments over five years from date of grant, subject to acceleration in certain events, and generally expire ten years from date of grant. No grant may be made under the plan after August 20, 2007, and a director may not receive an annual grant of common stock in the same calendar year he or she receives an initial option grant. A director entitled to receive an annual grant may elect to defer receipt of the common stock until he or she leaves the Board of Directors. In 2001, Messrs. Blake, Caperton, Coleman, Colville, Hilliard, Lewis, and Moseley, Ms. Iverson and Dr. Reynolds each received an annual 500 share grant valued at $1,120 on the date of grant (based on the closing price of Owens Corning common stock as reported in the New York Stock Exchange Composite Transactions). Indemnity Agreements - Owens Corning has entered into an indemnity agreement with each member of the Board of Directors which provides that, if the director becomes involved in a claim (as defined in the agreement) by reason of an indemnifiable event (as defined in the agreement), Owens Corning will indemnify the director to the fullest extent authorized by Owens Corning's by-laws, notwithstanding any subsequent amendment, repeal or modification of the by-laws, against any and all expenses, judgments, fines, penalties and amounts paid in settlement of the claim. - 41 - ITEM 11. EXECUTIVE COMPENSATION (continued) The indemnity agreement also provides that, in the event of a potential change of control (as defined in the agreement), the director is entitled to require the creation of a trust for his or her benefit, the assets of which would be subject to the claims of Owens Corning's general creditors, and the funding of such trust from time to time in amounts sufficient to satisfy Owens Corning's indemnification obligations reasonably anticipated at the time of the funding request. Charitable Award Program - To recognize the interest of Owens Corning and its directors in supporting worthy educational institutions and other charitable organizations, Owens Corning permits each director who joined the Board prior to December 31, 2001 (subject to certain vesting requirements) to nominate up to two organizations to share a contribution of $1 million to be made in ten annual installments after the death of the director. Owens Corning expects to fully fund its contributions (as well as insurance premiums) from the proceeds of life insurance policies that it maintains on directors. Directors will receive no financial benefit from this program, since the charitable deduction and insurance proceeds accrue solely to Owens Corning. Compensation Committee Interlocks and Insider Participation The Compensation Committee presently consists of Landon Hilliard (Chairman), Norman P. Blake, Jr., Leonard S. Coleman, Jr., Furman C. Moseley, Jr., and W. Ann Reynolds. Gaston Caperton also served on the Committee during a portion of 2001. No other persons served on the Compensation Committee during 2001. Mr. Hilliard is a partner of Brown Brothers Harriman & Co. ("BBH"), a private banking firm. BBH acts as one of the investment managers for the Fibreboard Settlement Trust, which holds certain assets that are available to fund asbestos-related liabilities of Fibreboard Corporation, a subsidiary of Owens Corning. During 2001, BBH was paid fees of approximately $700,000 from the Trust for these services. In addition, BBH serves as the custodian and investment advisor of an escrow account funded by one of the Company's excess insurance carriers during the third quarter of 2001 (see Note 19, Item A, to the Consolidated Financial Statements). During 2001, BBH earned fees of approximately $34,000 from the escrow account for these services. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Major Stockholders Based on statements filed with the Securities and Exchange Commission pursuant to section 13(d) or 13(g) of the Securities Exchange Act of 1934, no person beneficially owned more than 5% of Owens Corning common stock as of December 31, 2001. As of February 28, 2002, Owens Corning employees, including officers, beneficially owned 2,502,601 shares (4.5%) of Owens Corning common stock under Owens Corning sponsored savings plans in the United States and Canada. Stock Ownership of Management The following table shows information concerning beneficial ownership of Owens Corning common stock on February 28, 2002, by each of the directors, by each of the Named Executive Officers, and by all directors and executive officers as a group. With the exception of the ownership of Mr. Hiner (1.0%) and all directors and executive officers as a group (2.0%), each ownership shown represents less than 1% of the shares of common stock outstanding. - 42 - ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (continued) Amount And Nature Name Of Beneficial Ownership ---------------------------------------------------------- ----------------------- Norman P. Blake, Jr....................................... 14,620(1)(3) David T. Brown............................................ 98,484(1)(2) Gaston Caperton........................................... 12,032(1)(3) Leonard S. Coleman, Jr.................................... 12,552(1)(3) William W. Colville....................................... 10,000(1) Landon Hilliard........................................... 7,075(3) Glen H. Hiner............................................. 549,174(1)(2) Ann Iverson............................................... 12,532(1)(3) David L. Johns............................................ 17,148(1)(2) W. Walker Lewis........................................... 14,120(1)(3) Furman C. Moseley, Jr..................................... 46,082(3) W. Ann Reynolds........................................... 16,327(1)(3)(4) Maura Abeln Smith......................................... 65,785(1)(2) Michael H. Thaman......................................... 61,247(1)(2) All Directors and Executive Officers (including Named Executive Officers) (19 persons)....................... 1,148,635(1)(2)(3)(4) (1) Includes shares which are not owned but are unissued shares subject to exercise of options, or which will be subject to exercise of options under Owens Corning benefit plans within 60 days after February 28, 2002, as follows: Mr. Blake, 10,000; Mr. Brown, 85,000; Mr. Caperton, 10,000; Mr. Coleman, 10,000; Mr. Colville, 10,000; Mr. Hiner, 371,666; Ms. Iverson, 10,000; Mr. Johns, 12,278; Mr. Lewis, 10,000; Dr. Reynolds, 10,000; Ms. Smith, 52,000; Mr. Thaman, 46,657; All Directors and Executive Officers (19 persons), 812,767. (2) Includes shares over which there is sole voting power, but no investment power, as follows: Mr. Brown, 11,350; Mr. Hiner, 76,333; Mr. Johns, 4,400; Ms. Smith, 13,566; Mr. Thaman, 10,800; All Directors and Executive Officers (19 persons), 151,423. (3) Includes deferred shares over which there is currently no voting or investment power, as follows: Mr. Blake, 3,620; Mr. Caperton, 1,532; Mr. Coleman, 2,052; Mr. Hilliard, 2,575; Ms. Iverson, 1,532; Mr. Lewis, 3,620; Mr. Moseley, 6,232; Dr. Reynolds, 3,097; All Directors and Executive Officers (19 persons), 24,260. (4) Does not include shares of common stock held by family members as to which beneficial interest is disclaimed, as follows: Dr. Reynolds, 700; All Directors and Executive Officers (19 persons), 700.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Owens Corning has nothing additional to report under this Item. - 43 - PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT 1. See Index to Financial Statements on page 45 hereof 2. See Index to Financial Statement Schedules on page 116 hereof 3. See Exhibit Index beginning on page 118 hereof Management contracts and compensatory plans and arrangements required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K are denoted in the Exhibit Index by an asterisk ("*"). (b) REPORTS ON FORM 8-K No report on Form 8-K was filed during the fourth quarter of 2001. - 44 - Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OWENS CORNING By /s/ Glen H. Hiner Date March 21, 2002 ------------------------------------------ ---------------------------- Glen H. Hiner, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Glen H. Hiner Date March 21, 2002 ------------------------------------------ ---------------------------- Glen H. Hiner, Chairman of the Board, Chief Executive Officer and Director /s/ Michael H. Thaman Date March 20, 2002 ------------------------------------------ ---------------------------- Michael H. Thaman, Senior Vice President, Chief Financial Officer and Director /s/ Charles E. Dana Date March 20, 2002 ------------------------------------------ ---------------------------- Charles E. Dana, Vice President - Corporate Controller and Global Sourcing /s/ Norman P. Blake, Jr. Date March 21, 2002 ------------------------------------------ ---------------------------- Norman P. Blake, Jr., Director /s/ David T. Brown Date March 21, 2002 ------------------------------------------ ---------------------------- David T. Brown, Director /s/ Date ------------------------------------------ ---------------------------- Gaston Caperton, Director /s/ Date ------------------------------------------ ---------------------------- Leonard S. Coleman, Jr., Director /s/ Date ------------------------------------------ ---------------------------- William W. Colville, Director /s/ Landon Hilliard Date March 21, 2002 ------------------------------------------ ---------------------------- Landon Hilliard, Director /s/ Date ------------------------------------------ ---------------------------- Ann Iverson, Director /s/ W. Walker Lewis Date March 20, 2002 ------------------------------------------ ---------------------------- W. Walker Lewis, Director /s/ Date ------------------------------------------ ---------------------------- Furman C. Moseley, Jr., Director /s/ W. Ann Reynolds Date March 20, 2002 ------------------------------------------ ---------------------------- W. Ann Reynolds, Director /s/ Maura Abeln Smith Date March 21, 2002 ------------------------------------------- ---------------------------- Maura Abeln Smith, Director
- 45 - INDEX TO FINANCIAL STATEMENTS Item Page ---- ---- Report of Independent Public Accountants................................................................46 Summary of Significant Accounting Policies.........................................................47 - 48 Consolidated Statement of Income (Loss) - for the years ended December 31, 2001, 2000 and 1999....................................................49 - 50 Consolidated Statement of Comprehensive Income (Loss) - for the years ended December 31, 2001, 2000 and 1999.................................................51 Consolidated Balance Sheet - December 31, 2001 and 2000...........................................52 - 53 Consolidated Statement of Stockholders' Equity - for the years ended December 31, 2001, 2000 and 1999.................................................54 Consolidated Statement of Cash Flows - for the years ended December 31, 2001, 2000 and 1999..........................................................55 - 56 Notes to Consolidated Financial Statements Notes 1 through 22.............................................................................57 - 115
- 46 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Stockholders and Board of Directors of Owens Corning: We have audited the accompanying consolidated balance sheet of OWENS CORNING (a Delaware corporation) and subsidiaries (the "Company") as of December 31, 2001, and 2000, and the related consolidated statements of income (loss), comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Owens Corning and subsidiaries as of December 31, 2001, and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company voluntarily filed for Chapter 11 bankruptcy protection on October 5, 2000. This action, which was taken primarily as a result of asbestos litigation as discussed in Note 19 to the consolidated financial statements, raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the Index to Financial Statement Schedules is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP January 23, 2002, Toledo, Ohio. - 47 - OWENS CORNING AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation Owens Corning and subsidiaries' (the "Company") consolidated financial statements generally include the accounts of majority owned subsidiaries, unless ownership is considered temporary. Intercompany accounts and transactions are eliminated. Revenue Recognition The Company recognizes revenue when goods are shipped and title passes to the customer. Provisions for discounts and rebates to customers, returns and other adjustments are provided in the same period that the related sales are recorded. Net Income per Share Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share reflects the dilutive effect of common equivalent shares and increased shares that would result from the conversion of debt and equity securities. The effects of anti-dilution are not presented. Unless otherwise indicated, all per share information included in the Notes to the Consolidated Financial Statements is presented on a diluted basis. Inventory Valuation Inventories are stated at cost, which is less than market value, and include material, labor and manufacturing overhead. The majority of the U.S. inventories are valued using the first-in, first-out (FIFO) method and the balance of inventories are generally valued using the last-in, first-out (LIFO) method. Investments in Affiliates Investments in affiliates are accounted for using the equity method, under which the Company's share of earnings of these affiliates is reflected in income as earned and dividends are credited against the investment in affiliates when received. Capitalization of Software Developed for Internal Use The Company capitalizes the direct external and internal costs incurred in connection with the development, testing and installation of software for internal use. Internally developed software is included in plant and equipment and is amortized over its estimated useful life using the straight-line method. Goodwill Goodwill is carried at cost, less accumulated amortization, and is amortized on a straight-line basis over a period of forty years. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the undiscounted cash flows of the related business over the remaining life of the goodwill in assessing whether the goodwill is recoverable. Depreciation For assets placed in service prior to January 1, 1992, the Company's plant and equipment is depreciated - 48 - OWENS CORNING AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) primarily using the double-declining balance method for the first half of an asset's estimated useful life and the straight-line method thereafter. For assets placed in service on or after January 1, 1992, the Company's plant and equipment is depreciated using the straight-line method. 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 and related gains and losses to be recorded in income or other comprehensive income as appropriate. Stock Based Compensation Plans The Company applies Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) for disclosures of its stock based compensation plans. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations for expense recognition as permitted by SFAS 123. Reorganization Items and Other Expenses In accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" (SOP 90-7), revenues, expenses (including professional fees), realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business are reported separately as reorganization items in the Consolidated Statement of Income (Loss). Foreign Currency Translation The functional currency of the Company's subsidiaries is generally the applicable local currency. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the period-end rate of exchange and their statement of income (loss) and statement of cash flows are converted on an ongoing basis at the rate of exchange when transactions occur. The resulting translation adjustment is included in "Accumulated other comprehensive loss" in the Consolidated Statement of Stockholders' Equity Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the Consolidated Statement of Income (Loss) as incurred. Shipping and Handling Costs The Company incurs certain expenses related to preparing, packaging and shipping its products to its customers, mainly third-party transportation fees. All costs related to these activities are included as a component of cost of goods sold in the Consolidated Statement of Income (Loss). Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. - 49 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 2001 2000 1999 ---- ---- ---- (In millions of dollars, except share data) NET SALES $ 4,762 $ 4,940 $ 5,048 COST OF SALES (Note 5) 3,938 4,014 3,815 -------------- ------------ ------------ Gross margin 824 926 1,233 -------------- ------------ ------------ OPERATING EXPENSES Marketing and administrative expenses (Note 5) 524 542 599 Science and technology expenses 37 52 61 Provision (credit) for asbestos litigation claims (Note 19) (7) 790 - Restructure costs (Note 5) 26 32 - Chapter 11 related reorganization items (Note 1) 87 24 - Other (Note 5) 41 117 (5) --------------- ------------ ------------- Total operating expenses 708 1,557 655 -------------- ------------ ------------ INCOME (LOSS) FROM OPERATIONS 116 (631) 578 OTHER Cost of borrowed funds (Notes 1, 3, 4 and 18) 16 155 152 Other (Notes 3, 18 and 20) (2) 5 - ------------- ------------ ------------ INCOME (LOSS) BEFORE PROVISION (CREDIT) FOR INCOME TAXES 102 (791) 426 Provision (credit) for income taxes (Notes 10 and 19) 57 (312) 149 -------------- ------------- ------------ INCOME (LOSS) BEFORE MINORITY INTEREST AND EQUITY IN NET INCOME (LOSS) OF AFFILIATES 45 (479) 277 Minority interest (Notes 5 and 7) (4) (2) (6) Equity in net income (loss) of affiliates (Note 13) (2) 3 (1) --------------- ------------ ------------- NET INCOME (LOSS) $ 39 $ (478) $ 270 ============== ============== ============
The accompanying summary of significant accounting policies and notes are an integral part of this statement. - 50 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (continued) 2001 2000 1999 ---- ---- ---- (In millions of dollars, except share data) NET INCOME (LOSS) PER COMMON SHARE (Note 17) Basic $ .72 $ (8.71) $ 4.98 ============= ================ ============== Diluted $ .66 $ (8.71) $ 4.67 ============= ================ ============== Weighted average number of common shares outstanding and common equivalent shares during the period (in millions) Basic 55.1 54.8 54.1 Diluted 59.9 54.8 59.5
The accompanying summary of significant accounting policies and notes are an integral part of this statement. - 51 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 2001 2000 1999 ---- ---- ---- (In millions of dollars) Net Income (Loss) $ 39 $ (478) $ 270 Other comprehensive income (loss), net of tax: Currency translation adjustment (30) (41) (21) Minimum pension liability adjustment (net of taxes of $153 million in 2001, $2 million in 2000 and $1 million in 1999) (227) (3) 2 Deferred gains (losses) on hedges (1) (2) 5 ------------- ----------- ---------- Other comprehensive loss (258) (46) (14) -------------- ----------- ----------- Comprehensive income (loss) $ (219) $ (524) $ 256 ============= =========== ==========
The accompanying summary of significant accounting policies and notes are an integral part of this statement. - 52 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET - DECEMBER 31, 2001 AND 2000 2001 2000 ---- ---- ASSETS (In millions of dollars) ------ CURRENT Cash and cash equivalents (Note 1) $ 764 $ 550 Receivables, less allowances of $29 million in 2001 and 2000 (Note 11) 417 488 Inventories (Note 12) 437 469 Deferred income taxes (Note 10) 1 6 Income tax receivable (Note 10) 5 31 Other current assets 25 20 --------------- ----------- Total current 1,649 1,564 ------------- ----------- OTHER Insurance for asbestos litigation claims (Note 19) 4 59 Restricted cash - asbestos and insurance related (Note 19) 169 164 Restricted cash, securities, and other - Fibreboard (Notes 19 and 20) 1,284 1,274 Deferred income taxes (Note 10) 1,187 1,075 Goodwill, less accumulated amortization of $131 million in 2001 and $113 million in 2000 (Notes 5 and 6) 610 636 Investments in affiliates (Notes 5 and 13) 48 62 Other noncurrent assets (Note 9) 247 257 -------------- ----------- Total other 3,549 3,527 ------------- ----------- PLANT AND EQUIPMENT, at cost Land 67 60 Buildings and leasehold improvements 669 663 Machinery and equipment 2,854 2,717 Construction in progress 256 327 -------------- ----------- 3,846 3,767 Less: Accumulated depreciation (2,003) (1,946) -------------- ------------ Net plant and equipment 1,843 1,821 ------------- ----------- TOTAL ASSETS $ 7,041 $ 6,912 ============ ===========
The accompanying summary of significant accounting policies and notes are an integral part of this statement. - 53 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET - DECEMBER 31, 2001 AND 2000 (continued) 2001 2000 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars) ------------------------------------ CURRENT Accounts payable and accrued liabilities (Note 14) $ 740 $ 491 Short-term debt (Note 4) 43 50 Long-term debt - current portion (Note 3) 66 68 ----------- ----------- Total current 849 609 ---------- ----------- LONG-TERM DEBT (Note 3) 5 7 ------------ ----------- OTHER Other employee benefits liability (Note 8) 331 322 Pension plan liability (Note 9) 291 75 Other 141 124 ----------- ----------- Total other 763 521 ----------- ----------- LIABILITIES SUBJECT TO COMPROMISE (Notes 1, 3, 7 and 19) 6,804 6,935 ---------- ----------- COMMITMENTS AND CONTINGENCIES (Notes 16, 18 and 19) COMPANY-OBLIGATED SECURITIES OF ENTITIES HOLDING SOLELY PARENT DEBENTURES - SUBJECT TO COMPROMISE (Note 7) 200 200 ----------- ----------- MINORITY INTEREST 37 39 ------------ ----------- STOCKHOLDERS' EQUITY Preferred stock, no par value; authorized 8 million shares, none outstanding - - Common stock, par value $.10 per share; authorized 100 million shares; issued 2001 - 55.3 million and 2000 - 55.4 million shares (Notes 6 and 17) 697 699 Deficit (1,957) (1,996) Accumulated other comprehensive loss (Note 9) (355) (97) Other (Note 17) (2) (5) -------------- ------------ Total stockholders' equity (1,617) (1,399) ----------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,041 $ 6,912 ========== ===========
The accompanying summary of significant accounting policies and notes are an integral part of this statement. - 54 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 2001 2000 1999 ---- ---- ---- COMMON STOCK (In millions of dollars) Balance beginning of year $ 699 $ 695 $ 679 Awards (forfeitures) of stock under stock compensation plans (Note 17) (2) 4 16 ------------ ---------- ---------- Balance end of year 697 699 695 ----------- ---------- ---------- DEFICIT Balance beginning of year (1,996) (1,510) (1,762) Net income (loss) 39 (478) 270 Cash dividends declared - (8) (18) --------------- ----------- ----------- Balance end of year (1,957) (1,996) (1,510) ------------ ----------- ----------- ACCUMULATED OTHER COMPREHENSIVE LOSS Balance beginning of year Currency translation adjustment (103) (62) (41) Minimum pension liability adjustment (3) - (2) Deferred gains on hedges 9 11 6 ------------ ---------- ---------- (97) (51) (37) Adjustments Currency translation adjustment (30) (41) (21) Minimum pension liability adjustment (227) (3) 2 Deferred gains (losses) on hedges (1) (2) 5 --------------- ----------- ---------- (258) (46) (14) Balance end of year Currency translation adjustment (133) (103) (62) Minimum pension liability adjustment (230) (3) - Deferred gains on hedges 8 9 11 ---------- ---------- ---------- Balance end of year (355) (97) (51) ----------- ----------- ----------- OTHER Balance beginning of year (5) (15) (14) Net increase (decrease) 3 10 (1) ---------- ---------- ----------- Balance end of year (2) (5) (15) -------------- ----------- ----------- STOCKHOLDERS' EQUITY $ (1,617) $ (1,399) $ (881) =========== =========== ===========
The accompanying summary of significant accounting policies and notes are an integral part of this statement. - 55 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 2001 2000 1999 ---- ---- ---- (In millions of dollars) NET CASH FLOW FROM OPERATIONS Net income (loss) $ 39 $ (478) $ 270 Reconciliation of net cash from operating activities: Noncash items: Provision (credit) for asbestos litigation claims (Note 19) (7) 790 - Provision for depreciation and amortization 237 203 210 Provision (credit) for deferred income taxes (Note 10) 47 (361) 163 Other (Note 5) 87 126 (2) (Increase) decrease in receivables (Note 11) 41 (198) 112 (Increase) decrease in inventories 19 (78) (25) Increase (decrease) in accounts payable and accrued liabilities 188 218 (113) (Increase) decrease in restricted cash - asbestos and insurance related (Note 19) (5) (164) - Change in liabilities subject to compromise (Note 1) (75) (100) - Proceeds from insurance for asbestos litigation claims, excluding Fibreboard (Note 19) 62 380 180 Payments for asbestos litigation claims, excluding Fibreboard (Note 19) - (521) (860) Pension fund contribution (196) - - Other 41 (7) 37 --------- ------------ ----------- Net cash flow from operations 478 (190) (28) --------- ------------ ------------ NET CASH FLOW FROM INVESTING Additions to plant and equipment (270) (476) (244) Investment in subsidiaries, net of cash acquired (7) (4) (1) Proceeds from the sale of affiliate or business (Note 6) 34 193 - Other (6) (45) 20 ---------- ------------ ----------- Net cash flow from investing $ (249) $ (332) $ (225) ---------- ------------- ------------
The accompanying summary of significant accounting policies and notes are an integral part of this statement. - 56 - OWENS CORNING AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (continued) 2001 2000 1999 ---- ---- ---- (In millions of dollars) NET CASH FLOW FROM FINANCING (Notes 3 and 4) Net additions to long-term credit facilities $ - $ 1,073 $ 91 Other additions to long-term debt - 29 253 Other reductions to long-term debt (4) (91) (38) Net increase (decrease) in short-term debt (6) 7 (24) Net increase (decrease) in short-term debt subject to compromise (4) - - Dividends paid - (12) (16) Other - (4) 2 ---------- ------------ ----------- Net cash flow from financing (14) 1,002 268 ----------- ----------- ----------- Effect of exchange rate changes on cash (1) - 1 ----------- ----------- ----------- Net increase in cash and cash equivalents 214 480 16 Cash and cash equivalents at beginning of year 550 70 54 ------------ ----------- ----------- Cash and cash equivalents at end of year $ 764 $ 550 $ 70 ========== ============ ===========
The accompanying summary of significant accounting policies and notes are an integral part of this statement. - 57 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 On October 5, 2000 (the "Petition Date"), Owens Corning and the 17 United States subsidiaries listed below (collectively, the "Debtors") filed voluntary petitions for relief (the "Filing") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "USBC"). The Debtors are currently operating their businesses as debtors-in-possession in accordance with provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") are being jointly administered under Case No. 00-3837 (JKF). The Chapter 11 Cases do not include other United States subsidiaries of Owens Corning or any of its foreign subsidiaries (collectively, the "Non-Debtor Subsidiaries"). The subsidiary Debtors that filed Chapter 11 petitions for relief are: CDC Corporation Integrex Testing Systems LLC Engineered Yarns America, Inc. HOMExperts LLC Falcon Foam Corporation Jefferson Holdings, Inc. Integrex Owens-Corning Fiberglas Technology Inc. Fibreboard Corporation Owens Corning HT, Inc. Exterior Systems, Inc. Owens-Corning Overseas Holdings, Inc. Integrex Ventures LLC Owens Corning Remodeling Systems, LLC Integrex Professional Services LLC Soltech, Inc. Integrex Supply Chain Solutions LLC
The Debtors filed for relief under Chapter 11 to address the growing demands on Owens Corning's cash flow resulting from its multi-billion dollar asbestos liability. This liability is discussed in greater detail in Note 19 to the Consolidated Financial Statements. In late 2001, the asbestos-related Chapter 11 cases pending in the District of Delaware (the Chapter 11 Cases of Owens Corning and the cases of Armstrong World Industries, Inc., W. R. Grace & Co., Federal-Mogul Global, Inc., and USG Corporation) were ordered transferred to the United States District Court for the District of Delaware (the "District Court") before Judge Alfred M. Wolin to facilitate development and implementation of a coordinated plan for management (the "Administrative Consolidation"). The District Court has entered an order referring the Chapter 11 Cases back to the USBC, where they were previously pending, subject to its ongoing right to withdraw such referral with respect to any proceedings or issues (the applicable court from time to time responsible for any particular aspect of the Chapter 11 Cases being hereinafter referred to as the "Bankruptcy Court"). Owens Corning is unable to predict what impact the Administrative Consolidation will have on the timing, outcome or other aspects of the Chapter 11 Cases. Consequence of Filing --------------------- As a consequence of the Filing, all pending litigation against the Debtors is stayed automatically by section 362 of the Bankruptcy Code and, absent further order of the Bankruptcy Court, no party may take any action to recover on pre-petition claims against the Debtors. In addition, pursuant to section 365 of the Bankruptcy Code, the Debtors may reject or assume pre-petition executory contracts and unexpired leases, and other parties to contracts or leases that are rejected may assert rejection damages claims as permitted by the Bankruptcy Code. Two creditors' committees, one representing asbestos claimants and the other representing unsecured creditors, have been appointed as official committees in - 58 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued) the Chapter 11 Cases. In addition, the Bankruptcy Court has appointed James J. McMonagle as legal representative for the class of future asbestos claimants against one or more of the Debtors. The two committees and the futures representative will have the right to be heard on all matters that come before the Bankruptcy Court. Owens Corning expects that these committees and the futures representative will play important roles in the Chapter 11 Cases and the negotiation of the terms of any plan or plans of reorganization. Owens Corning anticipates that substantially all liabilities of the Debtors as of the date of the Filing will be resolved under one or more Chapter 11 plans of reorganization to be proposed and voted on in the Chapter 11 Cases in accordance with the provisions of the Bankruptcy Code. Although the Debtors intend to file and seek confirmation of such a plan or plans, there can be no assurance as to when the Debtors will file such a plan or plans, or that such plan or plans will be confirmed by the Bankruptcy Court and consummated. Owens Corning is unable to predict what impact the Administrative Consolidation will have on the timing of the Debtors' filing or confirmation of such plan or plans or its effect, if any, on the terms thereof. As provided by the Bankruptcy Code, the Debtors initially had the exclusive right to propose a plan of reorganization for 120 days following the Petition Date, until February 2, 2001. By subsequent action, the Bankruptcy Court has extended such exclusivity period until August 30, 2002. 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 - 59 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued) with respect to (1) the guaranties issued by certain of Owens Corning's U.S. subsidiaries, including Owens-Corning Fiberglas Technology Inc. ("OCFT") and IPM, Inc., a Non-Debtor Subsidiary that holds Owens Corning's ownership interest in a majority of Owens Corning's foreign subsidiaries ("IPM"), with respect to Owens Corning's $1.8 billion pre-petition bank credit facility (the "Pre-Petition Credit Facility" which is now in default) or (2) OCFT's license agreements with Owens Corning and Exterior Systems, Inc., a wholly-owned subsidiary of Owens Corning ("Exterior"), pursuant to which OCFT licenses intellectual property to Owens Corning and Exterior. The Bankruptcy Court may confirm a plan of reorganization only upon making certain findings required by the Bankruptcy Code, and a plan may be confirmed over the dissent of non-accepting creditors and equity security holders if certain requirements of the Bankruptcy Code are met. The payment rights and other entitlements of pre-petition creditors and Owens Corning's shareholders may be substantially altered by any plan or plans of reorganization confirmed in the Chapter 11 Cases. There is no assurance that there will be sufficient assets to satisfy the Debtors' pre-petition liabilities in whole or in part, and the pre-petition creditors of some Debtors may be treated differently than those of other Debtors. Pre-petition creditors may receive under a plan or plans less than 100% of the face value of their claims, and the interests of Owens Corning's equity security holders may be substantially diluted or cancelled in whole or in part. As noted above, it is not possible at this time to predict the outcome of the Chapter 11 Cases, the effect of the Administrative Consolidation, the terms and provisions of any plan or plans of reorganization, or the effect of the Chapter 11 reorganization process on the claims of the creditors of the Debtors or the interests of Owens Corning's equity security holders. Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the date of the Filing. Differences between amounts recorded by the Debtors and claims filed by creditors will be investigated and resolved as part of the proceedings in the Chapter 11 Cases. Bar Dates for Filing Claims --------------------------- In connection with the Chapter 11 Cases, the Bankruptcy Court has set April 15, 2002 as the last date by which holders of pre-petition claims against the Debtors must file their claims. Any holder of a claim that is required to file a claim by such date and does not do so will be barred from asserting such claim against any of the Debtors and will not participate in any distribution in any of the Chapter 11 Cases on account of such claim. Such deadline to file claims does not apply to asbestos-related personal injury claims and asbestos-related wrongful death claims (other than claims for contribution, indemnity, reimbursement, or subrogation). A bar date for filing proofs of claim against the Debtors with respect to asbestos-related personal injury claims and asbestos-related wrongful death claims has not been set. Because the April 15, 2002 bar date has not yet occurred and the asbestos bar date has not yet been set, the ultimate number and allowed amount of such claims are not presently known. Certain Post-petition Matters ----------------------------- The Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of their pre-petition obligations, including employee wages, salaries, benefits and other employee obligations, pre-petition claims of critical vendors, and certain other pre-petition claims including certain customer program and warranty claims. - 60 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued) As a result of the Filing, contractual interest expense has not been accrued or recorded on pre-petition debt of the Debtors since the Petition Date. From the Petition Date through December 31, 2001, contractual interest expense not accrued or recorded on pre-petition debt totaled $222 million, of which $171 million relates to 2001. At December 31, 2001, the Company had $764 million of cash and cash equivalents (of which approximately $38 million was subject to administrative freeze pending the resolution of certain alleged set-off rights by certain pre-petition lenders). In addition, in connection with the Filing, the Debtors obtained a $500 million debtor-in-possession credit facility from a group of lenders led by Bank of America, N.A. (the "DIP Financing"), which currently expires November 15, 2002. Due to seasonal year-end declines in the qualifying inventory and receivables that make up the borrowing base under the DIP Financing, $407 million was available under this credit facility at December 31, 2001. There were no borrowings outstanding under the DIP Facility at December 31, 2001, however, approximately $40 million of the availability under this credit facility was utilized as a result of the issuance of standby letters of credit and similar uses. As a consequence of the Filing and the impact of certain provisions of the Company's DIP Financing and in a cash management order entered by the Bankruptcy Court, the Company and its subsidiaries are now subject to certain restrictions, including on their ability to pay dividends and to transfer cash and other assets to each other and to their affiliates. The Company believes, based on information presently available to it, that its cash and cash equivalents, cash available from operations, and the DIP Financing will provide sufficient liquidity to allow it to continue as a going concern for the foreseeable future. However, the ability of the Company to continue as a going concern (including its ability to meet post-petition obligations of the Debtors and to meet obligations of the Non-Debtor Subsidiaries) and the appropriateness of using the going concern basis for its financial statements are dependent upon, among other things, (i) the Company's ability to comply with the terms of the DIP Financing and any cash management order entered by the Bankruptcy Court from time to time in connection with the Chapter 11 Cases, (ii) the ability of the Company to maintain adequate cash on hand, (iii) the ability of the Company to generate cash from operations, (iv) the ability of the Non-Debtor Subsidiaries to obtain necessary financing, (v) confirmation of a plan or plans of reorganization under the Bankruptcy Code, and (vi) the Company's ability to maintain profitability following such confirmation. Financial Statement Presentation -------------------------------- The Company's Consolidated Financial Statements have been prepared in accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," and on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Filing, such realization of assets and liquidation of liabilities are subject to uncertainty. While operating as debtors-in-possession under the 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 - 61 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued) 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. 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. - 62 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued) OWENS CORNING AND SUBSIDIARIES DEBTOR-IN-POSSESSION STATEMENT OF INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 2001 2000 ----- ---- (In millions of dollars) NET SALES $ 4,161 $ 4,218 COST OF SALES 3,542 3,509 ----- ----- Gross margin 619 709 ------- ------ OPERATING EXPENSES Marketing and administrative expenses 474 460 Science and technology expenses 32 47 Provision (credit) for asbestos litigation claims (7) 790 Restructure costs 16 26 Chapter 11 related reorganization items 87 24 Other (Including interest income from non-Debtors of $56 (90) (94) ------- -------- million in 2001 and $82 million in 2000) Total operating expenses 512 1,253 -------- ----- INCOME (LOSS) FROM OPERATIONS 107 (544) OTHER Cost of borrowed funds 1 174 Other (2) 5 ---------- -------- INCOME (LOSS) BEFORE PROVISION (CREDIT) FOR INCOME TAXES 108 (723) Provision (credit) for income taxes 52 (340) --------- ------- INCOME (LOSS) BEFORE EQUITY IN NET LOSS OF AFFILIATES 56 (383) Equity in net loss of affiliates (3) (2) ------------ --------- NET INCOME (LOSS) $ 53 $ (385) ========== ========
The accompanying summary of significant accounting policies and notes are an integral part of this statement. - 63 - 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 DECEMBER 31, 2001 AND 2000 2001 2000 ---- ---- (In millions of dollars) ASSETS CURRENT Cash and cash equivalents $ 605 $ 461 Receivables, net 315 338 Receivables - non-debtors 849 759 Inventories 311 347 Deferred income taxes 4 4 Income tax receivable 4 31 Other current assets 25 18 ------- ------- Total current 2,113 1,958 ----- ----- OTHER Insurance for asbestos litigation claims 4 59 Restricted cash - asbestos and insurance related 169 164 Restricted cash, securities and other - Fibreboard 1,284 1,274 Deferred income taxes 1,143 1,058 Goodwill, net 513 530 Investments in affiliates 29 38 Investments in non-debtor subsidiaries 758 745 Other noncurrent assets 138 122 ------ ------ Total other 4,038 3,990 ----- ----- PLANT AND EQUIPMENT, at cost Land 41 34 Buildings and leasehold improvements 533 522 Machinery and equipment 2,194 2,078 Construction in progress 217 259 ------- ------- 2,985 2,893 Less: Accumulated depreciation (1,548) (1,502) ------- ------- Net plant and equipment 1,437 1,391 ----- ----- TOTAL ASSETS $ 7,588 $ 7,339 ========= ==========
The accompanying summary of significant accounting policies and notes are an integral part of this statement. - 64 - 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 DECEMBER 31, 2001 AND 2000 2001 2000 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars) ------------------------------------ CURRENT Accounts payable and accrued liabilities $ 589 $ 320 Accounts payable and accrued liabilities - non-debtors 12 46 Long-term debt - current portion 1 1 ---------- ---------- Total current 602 367 -------- -------- OTHER Other employee benefits liability 318 308 Pension plan liability 264 68 Other 110 96 -------- ---------- Total other 692 472 -------- --------- LIABILITIES SUBJECT TO COMPROMISE 7,565 7,623 STOCKHOLDERS' EQUITY Common stock 697 699 Deficit (1,747) (1,807) Accumulated other comprehensive loss (219) (12) Other (2) (3) ---------- ----------- Total stockholders' equity (1,271) (1,123) ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,588 $ 7,339 ======== ==========
The accompanying summary of significant accounting policies and notes are an integral part of this statement. - 65 - 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 YEAR ENDED DECEMBER 31, 2001 AND 2000 2001 2000 ---- ---- (In millions of dollars) NET CASH FLOW FROM OPERATIONS Net income (loss) $ 53 $ (385) Reconciliation of net cash flow from operating activities Noncash items: Provision (credit) for asbestos litigation claims (7) 790 Provision for depreciation and amortization 176 142 Provision (credit) for deferred income taxes 79 (345) Other 91 116 Increase in receivables (168) (154) (Increase) decrease in inventories 34 (70) Increase in accounts payable and accrued liabilities 175 452 (Increase) decrease in restricted cash - asbestos and insurance related (5) (164) Change in liabilities subject to compromise (75) (100) Proceeds from insurance for asbestos litigation claims, excluding Fibreboard 62 380 Payments for asbestos litigation claims, excluding Fibreboard - (521) Pension fund contribution (182) - Other 145 (167) -------- --------- Net cash flow from operations 378 (26) --------- ---------- NET CASH FLOW FROM INVESTING Additions to plant and equipment (220) (422) Investment in non-debtor subsidiaries, net of cash acquired (5) (5) Proceeds from liquidation of non-debtor subsidiaries - 83 Investment in non-debtor subsidiaries - (146) Proceeds from the sale of subsidiary - 50 Other (5) (7) ---------- ---------- Net cash flow from investing (230) (447) -------- ---------
The accompanying summary of significant accounting policies and notes are an integral part of this statement. - 66 - 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 YEAR ENDED DECEMBER 31, 2001 AND 2000 2001 2000 ---- ---- (In millions of dollars) NET CASH FLOW FROM FINANCING Net additions to long-term credit facilities $ - $ 1,088 Other additions to long-term debt - 7 Other reductions to long-term debt - (61) Net decrease in short-term debt (subject to compromise in 2001) (4) (21) Dividends paid - (12) Other - (79) -------- ---------- Net cash flow from financing (4) 922 -------- ---------- Net increase in cash and cash equivalents 144 449 Cash and cash equivalents at beginning of year 461 12 ------- ----------- Cash and cash equivalents at end of year $ 605 $ 461 ======= ===========
The amounts subject to compromise in the Consolidated and Debtor-in-Possession Balance Sheets consist of the following items at December 31: 2001 2000 ---- ---- (In millions of dollars) Accounts payable $ 195 $ 255 Accrued interest payable 40 39 Accrued liabilities 36 74 Debt 2,843 2,832 Income taxes payable 209 212 Reserve for asbestos litigation claims - Owens Corning 2,197 2,249 Reserve for asbestos litigation claims - Fibreboard 1,284 1,274 --------- --------- Total consolidated 6,804 6,935 Payables to non-debtors 761 688 ---------- ---------- Total debtor $ 7,565 $ 7,623 ======== ========
The accompanying summary of significant accounting policies and notes are an integral part of this statement - 67 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 (continued) The amounts for Chapter 11 related reorganization items in the Consolidated and Debtor-in-Possession Income Statements consist of the following for the years ended December 31: 2001 2000 ---- ---- (In millions of dollars) Accelerated amortization of debt issuance costs $ - $ 30 Professional fees 60 6 Payroll and compensation 29 9 Interest income (17) (5) Other 15 (16) ------ ------ Total $ 87 $ 24 ====== =====
2. SEGMENT DATA The Company has identified two reportable segments and has reported financial and descriptive information about each of those segments below on a basis that is used internally for evaluating segment performance and deciding how to allocate resources to those segments. The Company's two reportable segments are defined as follows: Building Materials Systems -------------------------- Production and sale of glass wool fibers formed into thermal and acoustical insulation and air ducts; extruded polystyrene insulation; roofing shingles, glass fiber mat and asphalt materials; windows and doors; vinyl and metal siding and accessories; cast stone building products; and the branded sale of housewrap. Composite Solutions ------------------- Production and sale of glass fiber rovings and veils; long-fibre reinforced thermoplastic compounds, tailored Composite Solutions for the automotive, building and telecommunications markets, and composite manufacturing services. Income (loss) from operations by segment consists of net sales less related costs and expenses and is presented on a basis that is used internally for evaluating segment performance. Certain categories of expenses such as cost of borrowed funds, general corporate expenses or income, and certain expense or income items are excluded from the internal evaluation of segment performance. Accordingly, these items are not reflected in income (loss) from operations for the Company's reportable segments. Reference is made to the reconciliation of reportable segment income from operations to consolidated income before income taxes below for additional information about such items. Total assets by reportable segment are those assets that are used in the Company's operations in each segment and do not include general corporate assets. General corporate assets consist primarily of cash and cash equivalents, deferred taxes, asbestos-related assets, and corporate property and equipment. Reference is made to the reconciliation of reportable segment assets to consolidated total assets below for additional information about such items. - 68 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. SEGMENT DATA (continued) External customer sales by geographic region are attributed based upon the location from which the product is shipped. Long-lived assets by geographic region are attributed based upon the location of the assets and include net plant and equipment. 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. NET SALES 2001 2000 1999 ---- ---- ---- (In millions of dollars) Reportable Segments ------------------- Building Materials Systems United States $ 3,687 $ 3,728 $ 3,757 Europe 6 90 234 Canada and other 183 190 188 ------------ ----------- ----------- Total Building Materials Systems 3,876 4,008 4,179 ----------- ----------- ----------- Composite Solutions United States 375 410 374 Europe 336 340 338 Canada and other 175 182 157 ------------ ----------- ----------- Total Composite Solutions 886 932 869 ------------ ----------- ----------- Total Reportable Segments $ 4,762 $ 4,940 $ 5,048 ========== =========== =========== External Customer Sales by Geographic Region -------------------------------------------- United States $ 4,062 $ 4,138 $ 4,131 Europe 342 430 572 Canada and other 358 372 345 ------------ ----------- ----------- Net Sales $ 4,762 $ 4,940 $ 5,048 ========== =========== ===========
- 69 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. SEGMENT DATA (continued) INCOME (LOSS) FROM OPERATIONS 2001 2000 1999 ----- ----- ----- (In millions of dollars) Reportable Segments ------------------- Building Materials Systems United States $ 237 $ 318 $ 480 Europe - 2 10 Canada and other 15 33 33 ----- ----- ----- Total Building Materials Systems 252 353 523 ----- ----- ----- Composite Solutions United States 67 73 68 Europe 45 15 - Canada and other 21 20 15 ----- ----- ----- Total Composite Solutions 133 108 83 ----- ----- ----- Total Reportable Segments $ 385 $ 461 $ 606 ===== ===== ===== Geographic Regions ------------------ United States $ 304 $ 391 $ 548 Europe 45 17 10 Canada and other 36 53 48 ----- ----- ----- Total Reportable Segments $ 385 $ 461 $ 606 ===== ===== ===== Reconciliation to Consolidated Income (Loss) Before --------------------------------------------------- Provision (Credit) for Income Taxes ----------------------------------- Restructuring and other charges (Note 5) (140) (229) - Chapter 11 related reorganization items (Note 1) (87) (24) - Asbestos litigation claims (Note 19) 7 (790) - General corporate expense (49) (49) (28) Cost of borrowed funds (16) (155) (152) Other 2 (5) - ----- ----- ----- Consolidated Income (Loss) Before Provision (Credit) for Income Taxes $ 102 $(791) $ 426 ===== ===== =====
- 70 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. SEGMENT DATA (continued) December 31, TOTAL ASSETS 2001 2000 1999 ---- ---- ---- (In millions of dollars) Reportable Segments ------------------- Building Materials Systems United States $ 2,177 $ 2,094 $ 2,020 Europe 5 6 226 Canada and other 164 184 193 ------------ ------------- ----------- Total Building Materials Systems 2,346 2,284 2,439 ------------ ------------ ------------ Composite Solutions United States 434 492 282 Europe 198 294 201 Canada and other 235 283 317 ------------ ------------ ------------ Total Composite Solutions 867 1,069 800 ------------ ------------ ------------ Total Reportable Segments $ 3,213 $ 3,353 $ 3,239 ============= ============ ============ Reconciliation to Consolidated Total Assets ------------------------------------------- Restricted cash - asbestos and insurance related 169 164 - Insurance for asbestos litigation claims 4 59 230 Deferred income taxes 1,188 1,081 732 Income tax receivable 5 31 61 Cash and cash equivalents 764 550 70 Restricted cash, securities and other - Fibreboard 1,284 1,274 1,838 Investments in affiliates 48 62 65 LIFO inventory valuation adjustment (91) (93) (66) Other general corporate assets 457 431 325 ------------ ------------ ------------ Consolidated Total Assets $ 7,041 $ 6,912 $ 6,494 ============ ============ ============ LONG-LIVED ASSETS BY GEOGRAPHIC REGION -------------------------------------- United States $ 1,448 $ 1,402 $ 1,138 Europe 152 157 277 Canada and other 243 262 285 ------------ ------------ ------------ Total Long-Lived Assets $ 1,843 $ 1,821 $ 1,700 ============ ============ ============
- 71 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. SEGMENT DATA (continued) PROVISION FOR DEPRECIATION AND AMORTIZATION 2001 2000 1999 ---- ---- ---- (In millions of dollars) Reportable Segments ------------------- Building Materials Systems United States $ 100 $ 92 $ 95 Europe - 17 20 Canada and other 10 10 13 --------------- --------------- ------------- Total Building Materials Systems 110 119 128 -------------- -------------- ------------- Composite Solutions United States 18 16 16 Europe 20 20 19 Canada and other 19 9 18 ---------------- ---------------- ------------- Total Composite Solutions 57 45 53 --------------- --------------- ------------- Total Reportable Segments $ 167 $ 164 $ 181 ============== ============== ============= Geographic Regions ------------------ United States $ 118 $ 108 $ 111 Europe 20 37 39 Canada and other 29 19 31 --------------- --------------- ------------- Total Reportable Segments $ 167 $ 164 $ 181 ============== ============== ============= Reconciliation to Consolidated Provision for -------------------------------------------- Depreciation and Amortization ----------------------------- General Corporate Depreciation and Amortization 70 39 29 ---------------- ---------------- ------------- Consolidated Provision for Depreciation and Amortization $ 237 $ 203 $ 210 ============== ============== =============
- 72 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. SEGMENT DATA (continued) ADDITIONS TO LONG-LIVED ASSETS ------------------------------ ADDITIONS TO PLANT AND EQUIPMENT 2001 2000 1999 ---- ---- ---- (In millions of dollars) Reportable Segments ------------------- Building Materials Systems United States $ 145 $ 180 $ 127 Europe - 5 17 Canada and other 6 5 9 ---------------- --------------- ------------- Total Building Materials Systems 151 190 153 --------------- ------------- ------------- Composite Solutions United States 50 135 12 Europe 26 66 18 Canada and other 12 59 25 ---------------- -------------- ------------- Total Composite Solutions 88 260 55 -------------- ------------- ------------- Total Reportable Segments $ 239 $ 450 $ 208 ============== ============ ============= Geographic Regions ------------------ United States $ 195 $ 315 $ 139 Europe 26 71 35 Canada and other 18 64 34 ---------------- -------------- ------------- Total Reportable Segments $ 239 $ 450 $ 208 =============== ============ =============
- 73 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. LONG-TERM DEBT 2001 2000 ---- ---- (In millions of dollars) Long-Term Debt: -------------- Guaranteed debentures due in 2001, 10% $ 42 $ 42 Asian credit facility due in 2003, variable interest rate 22 22 Other long-term debt due through 2004, at rates from 7.24% to 11.45% 7 11 ---------- ------------ 71 75 Less: current portion (66) (68) ----------- ------------- Total long-term debt $ 5 $ 7 ============ ============ Long-Term Debt Subject to Compromise: ------------------------------------ U.S. credit facility due in 2002, variable $ 1,469 $ 1,443 Debentures due in 2005, 7.5% 300 300 Debentures due in 2008, 7.7% 250 250 Debentures due in 2009, 7.0% 250 250 Debentures due in 2018, 7.5% 400 400 Debentures due in 2002, 8.875% 40 40 Debentures due in 2012, 9.375% 7 7 Bonds due in 2000, 7.25%, payable in Deutsche marks (Note 18) 60 63 Other long-term debt due through 2012, at rates from 6.25% to 13.80% 62 70 ------------- ------------ Total long-term debt subject to compromise $ 2,838 $ 2,823 ========== ==========
Due to the Filing (see Note 1), pre-petition long-term debt of the Debtors has been reclassified to the caption Subject to Compromise in the above table and on the Consolidated Balance Sheet. From the Petition Date through December 31, 2001, contractual interest expense not accrued or recorded on pre-petition debt totaled $222 million, of which $171 million relates to 2001. At December 31, 2001 and 2000, the amounts shown under the caption "Long-Term Debt" in the table above represent long-term debt of non-Debtor subsidiaries. In connection with the Filing, the Company obtained a $500 million debtor-in-possession credit facility from a group of lenders led by Bank of America, N.A., which currently expires November 15, 2002. The interest rate applicable is a floating rate varying from .75% - 2.00%, based upon the average daily outstanding balance, plus LIBOR. The facility had a commitment fee on unused portions of .375% at December 31, 2001 and 2000. The amount available under the facility depends on a borrowing base of qualifying receivables and inventory of the Debtors. Due to seasonal year-end declines in the components of the borrowing base, $407 million was available under this facility at December 31, 2001. While the Company had no outstanding borrowings from the facility at year-end 2001 or 2000, approximately $40 million and $15 million, respectively, of this facility was utilized at such times for standby letters of credit and similar uses. This facility has super priority in the bankruptcy proceeding. The Asian credit facility is payable in U.S. dollars and had a rate of interest at December 31, 2001 and 2000, of 2.53% and 7.24%, respectively. As a result of the Filing, the Company violated a non-financial covenant of this facility and it is considered callable at the discretion of the financial institution. The liability has been moved to current at December 31, 2001 and 2000. After the Filing, the Company discontinued debt payments to its non-Debtor subsidiary responsible for the $42 million in guaranteed debentures due 2001. As this subsidiary has no assets other than this intercompany receivable, it was unable to make required payments and is in default. At December 31, 2001 and 2000, this instrument was classified as a current liability. - 74 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. LONG-TERM DEBT (continued) As is typical for bank credit facilities, the agreements relating to the facilities described above contain restrictive covenants, including requirements for a minimum EBITDA and limitations on additional borrowings, among other restrictions. The agreements include a provision that would result in all of the unpaid principal and accrued interest of the facilities becoming due immediately upon a change of control in ownership of the Company. A material adverse change in the Company's business, assets, liabilities, financial condition or results of operations constitutes default under the agreements. The aggregate maturities for all long-term debt issues for each of the five years following December 31, 2001 are: Year (In millions of dollars) ---- 2002 $ 66 2003 2 2004 2 2005 1 2006 -
4. SHORT-TERM DEBT 2001 2000 ---- ---- Short-Term Debt: (In millions of dollars) --------------- Balance outstanding at December 31 $ 43 $ 50 Weighted average interest rates on short-term debt outstanding at December 31 7.2% 7.5% 2001 2000 ---- ---- Short-Term Debt Subject to Compromise: (In millions of dollars) ------------------------------------- Balance outstanding at December 31 $ 5 $ 9
The Company had unused short-term lines of credit totaling $6 million and $7 million at December 31, 2001 and 2000, respectively. After the Filing, the Company discontinued debt payments to its non-Debtor European subsidiary responsible for $32 million in short-term debt. As this subsidiary has no assets other than this intercompany receivable, it was unable to make required payments and is in default. - 75 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES 2001 Charges ------------ During 2001, the Company experienced the effects of an overall slowed economy in both the building materials and composites industries. A decline in net sales and margins over the prior year led the Company to continue to review its cost structures. As a result of this review, the Company recorded approximately $140 million in pretax charges which were accounted for as a $26 million charge for restructuring, a $79 charge to cost of sales and a $35 million charge to other operating expense. The Company recorded $46 million in the fourth quarter, $35 million in the third quarter, $17 million in the second quarter and $42 million in the first quarter. Fourth Quarter 2001 ------------------- The fourth quarter charges, totaling $46 million pretax, consisted of a $2 million pretax restructure charge and $44 million in pretax other charges. The $2 million 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 145 positions, primarily in the U.S. and Canada. The primary groups impacted included manufacturing and administrative personnel. As of December 31, 2001, less than $1 million has been paid and charged against this reserve. The $44 million in pretax other charges included $29 million of asset impairments mainly associated with the building materials business, principally to write-down assets to net estimated fair value on a held in use basis in certain manufacturing facilities due to changes in the Company's manufacturing and marketing strategies; $6 million in costs related to the Company's continuing plan for the realignment of its Newark, Ohio manufacturing facility and various other charges totaling $9 million. This $44 million pretax charge was accounted for as a $34 million charge to cost of sales and a $10 million charge to other operating expenses. Third Quarter 2001 ------------------ The third quarter charges, totaling $35 million pretax, were comprised of an $8 million pretax restructure charge and $27 million in pretax other charges. The restructure charge 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 December 31, 2001, approximately $7 million has been paid and charged against this reserve. The $27 million in pretax other charges included $15 million in costs associated with the Company's previously announced plan to realign its Newark, Ohio manufacturing facility; $4 million to write-down the Company's investment and related assets in Alcopor Owens Corning to net realizable value (The sale of the Company's investment in this joint venture was completed in the fourth quarter of 2001) and 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. - 76 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued) Second Quarter 2001 ------------------- The second quarter charges, totaling $17 million pretax, were comprised of a $7 million pretax restructure charge and $10 million in pretax other charges. The $7 million restructure charge primarily represented a $5 million charge for the divestiture of non-strategic businesses and facilities, which consisted mainly of non-cash asset write-downs to fair value and exit cost liabilities. Also included in the restructure charge was 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 December 31, 2001, approximately $1 million has been paid and charged against this reserve. 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 ------------------ the first quarter charges, totaling $42 million pretax, were 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 December 31, 2001, approximately $7 million has been paid and charged against this reserve. 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; $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 - 77 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (continued) 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 our 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 the Company's U.S. pension plans, and $96 million of charges focused on improving business operations and was accounted for as a $77 million charge to cost of sales, a $114 million charge to other operating expenses and a $6 million charge to marketing and administrative expenses. The $95 million of asset impairments included: 1) $54 million 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 a 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 entity 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 write-down to fair value the investments in the Company's Pipe joint ventures and subsidiaries on a held for sale basis; 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 our 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 December 31, 2001, approximately $13 million has been paid and charged against the reserve for personnel reductions and approximately $3 million has been charged against exit cost liabilities. The following table summarizes the status of the liabilities from the 2000 and 2001 restructure program described above, including cumulative spending and adjustments and the remaining balance as of December 31, 2001: Liability at Original Total December 31, (In millions of dollars) Liability Payments 2001 --------- -------- ---- Personnel Costs $ 37 $ (28) $ 9 Facility and Business Exit Costs 4 (3) 1 -------- ------------- --------- Total $ 41 $ (31) $ 10 ======= =========== ========
During 1997 and 1998, the Company implemented a restructuring program related to closing manufacturing locations and reducing overhead. As of December 31, 2001, approximately $15 million in reserves remain and are primarily related to ongoing personnel severance costs. - 78 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. 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. 6. DIVESTITURES OF BUSINESSES In the fourth quarter of 2001, the Company sold its remaining 40% interest in Alcopor Owens Corning, an unconsolidated joint venture. The Company reduced its investment in the joint venture to net realizable value during the third quarter of 2001. See Note 5 to the Consolidated Financial Statements. Net proceeds on the divestiture were approximately $23 million, of which approximately $9 million remained in escrow at December 31, 2001 and was received in January 2002. As part of the divestiture, the Company was obligated to fund certain U.K pension obligations in the amount of approximately $14 million. 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. During the second quarter of 2000, the Company completed the sale of its European Building Materials business to Alcopor Owens Corning, in which the Company had a 40% interest. Proceeds from the sale, net of the Company's $34 million cash infusion into the joint venture, were $177 million. In connection with this transaction, the joint venture assumed $62 million of debt from Owens Corning and the Company incurred fees of approximately $6 million, resulting in net cash proceeds of approximately $109 million. A pretax gain of approximately $5 million, including a $54 million write-off of goodwill, was realized from the sale. During the fourth quarter of 2000, the Company reduced its investment in Alcopor Owens Corning to estimated net realizable value. See Note 5 to the Consolidated Financial Statements. The results of operations of the European Building Materials business are reflected in the Company's Consolidated Statement of Income (Loss) through the period ending May 31, 2000. For the five months ended May 31, 2000, and the year ended December 31, 1999, the European Building Materials business generated sales of approximately $79 million and $234 million, respectively, and income from operations of approximately $3 million and $12 million, respectively. Effective May 31, 2000, the Company accounted for its ownership interest in Alcopor Owens Corning under the equity method. During the first quarter of 2000, the Company completed the sale of the assets of Falcon Foam, a producer of foam insulation in Michigan and California. Net proceeds from the sale were $50 million and resulted in a pretax loss of approximately $5 million, including a $32 million write-off of goodwill. - 79 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. CONVERTIBLE MONTHLY INCOME PREFERRED SECURITIES In 1995, Owens Corning Capital, LLC ("OC Capital"), a Delaware limited liability company, all of the common limited liability company interests in which are owned indirectly by Owens Corning (the "Common Securities"), completed a private offering of 4 million shares of 6-1/2% Convertible Monthly Income Preferred Securities ("Preferred Securities"). The aggregate purchase price for the offering was $200 million. The only asset of OC Capital is $253 million of 6-1/2% Convertible Subordinated Debentures due 2025 of Owens Corning (the "Debentures"), which were issued in exchange for the proceeds of the Preferred Securities and the Common Securities. As a result of the Filing (see Note 1), Owens Corning is no longer making interest payments to OC Capital on the Debentures. As a result, OC Capital no longer has funds available to pay distributions on the Preferred Securities and stopped paying such distributions in October 2000. Distributions of $10 million ($6 million after-tax) and $13 million ($8 million after-tax) for 2000 and 1999, respectively, have been recorded net of tax as minority interest on the Company's Consolidated Statement of Income (Loss). 8. POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company and its subsidiaries maintain health care and life insurance benefit plans for certain retired employees and their dependents. The health care plans in the U.S. are nonfunded and pay either 1) stated percentages of covered medically necessary expenses, after subtracting payments by Medicare or other providers and after stated deductibles have been met or, 2) fixed amounts of medical expense reimbursement. Employees become eligible to participate in the health care plans upon retirement under the Company's pension plans if they have accumulated 10 years of service after age 45. Some of the plans are contributory, with some retiree contributions adjusted annually. The Company has reserved the right to change or eliminate these benefit plans subject to the terms of collective bargaining agreements. In accordance with Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," the following tables provide a reconciliation of the changes in the accumulated postretirement benefits obligation and the accrued benefits cost liability at October 31, 2001 and 2000, as reflected on the Consolidated Balance Sheet at December 31, 2001 and 2000: - 80 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued) 2001 2000 ---- ---- (In millions of dollars) Change in Accumulated Postretirement Benefit Obligation ------------------------------------------------------- Benefits obligation at beginning of period $ 374 $ 319 Service cost 8 7 Interest cost 28 24 Amendments 5 - Actuarial loss 91 50 Currency gain (1) (1) Benefits paid (28) (25) ------------------ ------------- Benefits obligation at end of period $ 477 $ 374 ================ ============= Funded status $ (477) $ (374) Unrecognized net actuarial loss 142 52 Benefit payments subsequent to valuation date 7 5 ----------------- ------------ Accrued benefit cost (includes current liabilities of $25 million in 2001 and 2000) $ (328) $ (317) ================ ============== Weighted-average assumptions as of December 31 2001 2000 ---------------------------------------------- ---- ---- Discount rate 7.0% 8.0% The following table presents the components of net periodic benefits cost during 2001, 2000 and 1999: Components of net periodic benefit cost 2001 2000 1999 --------------------------------------- --------- --------- --------- (In millions of dollars) Service cost $ 8 $ 7 $ 8 Interest cost 28 24 24 Amortization of prior service cost - - (9) ---------- ---------- --------- Net periodic benefit cost $ 36 $ 31 $ 23 ========== ========== =========
For measurement purposes, an 8 - 15% annual rate of increase in the per capita cost of covered health care claims was assumed for 2002, varying by plan. The assumed rate decreases to 5 - 6% by 2006. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, a one-percentage point change in the assumed health care cost trend rate would have the following effects as of October 31, 2001 and 2000: 2001 2000 ---- ---- 1-Percentage Point 1-Percentage Point Increase Decrease Increase Decrease -------- -------- -------- -------- (In millions of dollars) Effect on total of service and interest cost components $ 4 $ (4) $ 4 $ (3) Effect on accumulated postretirement benefit 47 (40) 37 (31) obligation
- 81 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued) The Company also recognizes the obligation to provide benefits to former or inactive employees after employment but before retirement under certain conditions. These benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits (including workers' compensation), job training and counseling, and continuation of benefits such as health care and life insurance coverage. The accrued postemployment benefits cost liabilities at October 31, 2001 and 2000, as reflected on the balance sheet at December 31, 2001 and 2000, were $33 million and $34 million, respectively, including current liabilities of $4 million in both years. The net postemployment benefits expense was approximately $4 million in 2001 and 2000 and $2 million in 1999. 9. PENSION PLANS The Company has several defined benefit pension plans covering most employees. Under the plans, pension benefits are generally based on an employee's pay and number of years of service. Company contributions to these pension plans are determined by an independent actuary to meet or exceed minimum funding requirements. Plan assets consist primarily of equity securities with the balance in fixed income investments. The unrecognized cost of retroactive amendments and actuarial gains and losses are amortized over the average future service period of plan participants expected to receive benefits. In accordance with Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," the following tables provide a reconciliation of the changes in the projected pension benefits obligation, the changes in the pension plan assets, and the net pension liability at October 31, 2001 and 2000, as reflected on the consolidated balance sheet at December 31, 2001 and 2000: 2001 2000 ---- ---- (In millions of dollars) Change in Projected Pension Benefit Obligation ---------------------------------------------- Benefits obligation at beginning of period $ 979 $ 865 Service cost 15 18 Interest cost 70 64 Amendments 7 55 Impact of curtailment - 3 Impact of foreign currency translation (2) (24) Actuarial loss 217 117 Employee contributions 1 2 Benefits paid (130) (121) -------- --------- Benefits obligation at end of period $ 1,157 $ 979 ======== =========
Benefits paid during 2001 and 2000 include payments resulting from the Company's restructuring program and the sale of certain businesses (see Notes 5 and 6). - 82 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. PENSION PLANS (continued) Change in Pension Plan Assets 2001 2000 ----------------------------- ---- ---- (In millions of dollars) Fair value of plan assets at beginning of period $ 936 $ 977 Actual return on plan assets (129) 91 Impact of foreign currency translation (3) (23) Employer contributions 182 3 Employee contributions - 2 Benefits paid (128) (114) ------------ ------------ Fair value of plan assets at end of period $ 858 $ 936 =========== =========== Funded status $ (299) $ (43) Contributions subsequent to valuation date 14 - Unrecognized net transition asset (12) (17) Unrecognized net actuarial loss 457 37 Unrecognized prior service cost 30 30 ----------- ----------- Prepaid benefit cost $ 190 $ 7 =========== ===========
Amounts Recognized in the Consolidated Balance Sheet 2001 2000 ---------------------------------------------------- ---- ---- (In millions of dollars) Prepaid benefit cost $ 71 $ 56 Accrued benefit liability (includes current liabilities of $3 million and $5 million in 2001, and 2000, respectively) (294) (80) Intangible asset 28 26 Accumulated other comprehensive loss 230 3 Deferred tax asset 155 2 -------------- ----------- Net amount recognized $ 190 $ 7 ============== ==========
The combination of the decline in asset value, noted above, and the decrease in the discount rate, noted below, caused a significant other comprehensive loss in 2001. Weighted-average assumptions as of December 31 2001 2000 ----------------------------------------------- ---- ---- Discount rate 7.00% 8.00% Expected return on plan assets 9.00% 9.00% Rate of compensation increase 5.50% 5.50%
- 83 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. PENSION PLANS (continued) The following table presents the components of net periodic pension cost during 2001, 2000 and 1999: Components of Net Periodic Pension Cost 2001 2000 1999 --------------------------------------- ---- ---- ---- (In millions in dollars) Service cost $ 15 $ 18 $ 19 Interest cost 70 64 65 Expected return on plan assets (73) (73) (75) Amortization of transition amount (5) (5) (5) Amortization of prior service cost - (2) (4) Amortization of net actuarial loss 1 1 5 Curtailment/settlement (gain) loss 7 9 (6) ------------- --------- ---------- Net periodic benefit cost $ 15 $ 12 $ (1) ============ ========== ==========
Certain of the Company's pension plans have an accumulated benefit obligation (ABO) in excess of the fair value of plan assets. The ABO and fair value of plan assets for such plans are $1,046 million and $761 million, respectively, at October 31, 2001, and $742 million and $669 million, respectively, at October 31, 2000. Certain of the Company's pension plans are not funded. The portion of the total projected benefit obligation attributable to unfunded plans is approximately $12 million and $9 million at October 31, 2001 and 2000, respectively. The Company also sponsors defined contribution plans available to substantially all U.S. employees. Company contributions reflect a matching of a percentage of employee savings up to a maximum savings level and certain profit sharing awards. The Company recognized expense of $31 million in 2001, $26 million in 2000, and $29 million in 1999. 10. INCOME TAXES 2001 2000 1999 ---- ---- ---- (In millions in dollars) Income (loss) before provision (credit) for income taxes: U.S. $ 24 $ (849) $ 374 Foreign 78 58 52 ----------- ----------- -------- Total $ 102 $ (791) $ 426 ========= ============ ========
- 84 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. INCOME TAXES (continued) 2001 2000 1999 ---- ---- ---- (In millions in dollars) Provision (credit) for income taxes: Current U.S. $ 25 $ 7 $ (56) State and local (32) (1) (2) Foreign 17 31 16 ----------- ---------- ------- Total current 10 37 (42) ----------- ---------- ------- Deferred U.S. (3) (330) 158 State and local 36 (23) 25 Foreign 14 4 8 ----------- ---------- ------- Total deferred 47 (349) 191 ----------- ----------- ------- Total provision (credit) for income taxes $ 57 $ (312) $ 149 ========== =========== =======
The reconciliation between the U.S. federal statutory rate and the Company's effective income tax rate is: 2001 2000 1999 ---- ---- ---- U.S. federal statutory rate 35% (35)% 35% State and local income taxes 4 (4) 4 Operating losses of foreign subsidiaries - 1 2 Adjustment to estimated liability for tax claims 9 - - Other, net 7 (2) (6) ----- ---- ---- Effective tax rate 55% (40)% 35% ===== ==== ====
As of December 31, 2001, the Company has not provided for withholding or U.S. federal income taxes on approximately $365 million of accumulated undistributed earnings of its foreign subsidiaries as they are considered by management to be permanently reinvested. If these undistributed earnings were not considered to be permanently reinvested, approximately $53 million of deferred income taxes would have been provided. At December 31, 2001, the Company had net operating loss carryforwards for certain of its foreign subsidiaries and certain of its state tax jurisdictions, the tax benefit of which is approximately $312 million. Tax benefits of $276 million expire over the period from 2002 through 2021, and the remaining $36 million have an indefinite carryforward. The cumulative temporary differences giving rise to the deferred tax assets and liabilities at December 31, 2001 and 2000 are as follows: - 85 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. INCOME TAXES (continued) 2001 2000 ---- ---- Deferred Deferred Deferred Tax Deferred Tax Tax Assets Liabilities Tax Assets Liabilities ---------- ----------- ---------- ----------- (In millions of dollars) Asbestos litigation claims $ 876 $ - $ 847 $ - Other employee benefits 152 - 146 - Pension plans 155 61 15 21 Depreciation - 303 - 303 Operating loss carryforwards 325 - 290 - State and local taxes - 58 - 52 Other 521 338 492 252 --------- -------- --------- -------- Subtotal 2,029 760 1,790 628 Valuation allowances (81) - (81) - ----------- ----------- ---------- ------------ Total deferred taxes $ 1,948 $ 760 $ 1,709 $ 628 ========= ========= ========= =========
Management fully expects to realize its net deferred tax assets through income from future operations. 11. ACCOUNTS RECEIVABLE SECURITIZATION Prior to its expiration in October 2000, Owens Corning, through its subsidiary Owens Corning Funding Corporation, had an agreement allowing sale, on a revolving basis, of accounts receivable, up to a maximum of $125 million. In 2001, 2000 and 1999, the Company also sold certain accounts receivable of certain European operations. At December 31, 2001 and 2000, $22 million and $21 million had been sold, respectively, and the sale was reflected as a reduction of accounts receivable in the Company's Consolidated Balance Sheet. The Company maintains an allowance for doubtful accounts based upon the expected collectibility of all consolidated trade accounts receivable, including receivables sold. Discounts of $1 million, $8 million, and $9 million on receivables sold were recorded as other expenses on the Company's Consolidated Statement of Income (Loss) for the years ended December 31, 2001, 2000 and 1999, respectively. - 86 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. INVENTORIES Inventories are summarized as follows: 2001 2000 ---- ---- (In millions of dollars) Finished goods $ 378 $ 397 Materials and supplies 150 165 ------------ ------------ FIFO inventory 528 562 Less: reduction to LIFO basis (91) (93) ------------- -------------- Total inventory $ 437 $ 469 ============ ===========
Approximately $120 million and $300 million of total inventories were valued using the LIFO method at December 31, 2001 and 2000, respectively. 13. INVESTMENTS IN AFFILIATES At December 31, 2001 and 2000, the Company's affiliates, which generally are engaged in the manufacture of fibrous glass and related products for the insulation, construction, reinforcements, and textile markets, include: Percent Ownership 2001 2000 ---- ---- Advanced Glassfiber Yarns, LLC (U. S.) 49% 49% Alcopor Owens Corning Holding AG - 40% Amiantit Fiberglass Industries, Ltd. (Saudi Arabia) - 30% Arabian Fiberglass Insulation Company, Ltd. (Saudi Arabia) 49% 49% Automotive Composite Solutions (International) 26% - Fiberteq LLC (U. S.) 50% 50% (a) Flowtite Argentina (Argentina) - 100% Flowtite (Botswana) (Proprietary) Limited (Botswana) - 49% (a) Flowtite Iberica, S.A. (Spain) - 100% Owens Corning Energy LLC (U. S.) 50% 50% Owens Corning (India) Limited (India) 49% 49% (b) Owens Corning (Nanjing) (China) 90% 50% Owens Corning Yapi Merkezi Boru Sanayi VeTicaret A.S. (Turkey) 50% 50% (a) Owens-Corning Eternit Rohre GmbH (Germany) - 100% Siam Fiberglass Co., Ltd. (Thailand) - 17% Stamax B.V. (Netherlands) 50% 50% Stamax NA LLC (U. S.) 50% 50% Vitro-Fibras, S.A. (Mexico) 40% 40%
(a) Although the Company owned 100% of Flowtite Argentina, Flowtite Iberica and Owens-Corning Eternit Rohre GmbH, it considered its ownership to be temporary and therefore accounted for these entities as unconsolidated affiliates under the equity method. (b) During 2001, the Company increased its ownership interest in Owens Corning (Nanjing) to 90% and has consolidated this subsidiary. - 87 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 13. INVESTMENTS IN AFFILIATES (continued) The following table provides summarized financial information on a combined 100% basis for the Company's affiliates accounted for under the equity method: 2001 2000 1999 ---- ---- ---- (In millions of dollars) At December 31: Current assets $114 $266 $239 Noncurrent assets 528 827 623 Current liabilities 98 188 171 Noncurrent liabilities 457 706 514 For the year ended December 31: Net sales 369 699 477 Gross margin 116 172 138 Net income 18 22 7 The Company's equity in undistributed earnings of affiliates was $6 million at December 31, 2001. Net sales, gross margin, and net income for the year ended December 31, 2000, have been presented on a full year basis for Alcopor Owens Corning Holding AG. The Company's former European building materials business is included in the consolidated financial statements through the period ending May 31, 2000 (Note 6).
14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 2001 2000 -------------- ------------- (In millions of dollars) Accounts payable $ 362 $235 Payroll and vacation pay 144 48 Payroll, property, and miscellaneous taxes 46 30 Other employee benefits liability (Note 8) 30 29 Restructure costs (Note 5) 16 24 Other 142 125 -------------- ------ Total $ 740 $491 ============== ======
15. CONSOLIDATED STATEMENT OF CASH FLOWS Cash payments (refunds) for income taxes and cost of borrowed funds are summarized as follows: 2001 2000 1999 ----------- --------- ---------- (In millions of dollars) Income taxes $ (22) $ (26) $ (77) Cost of borrowed funds (Note 3) 8 154 154
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. - 88 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 15. CONSOLIDATED STATEMENT OF CASH FLOWS (continued) As a result of the Filing (see Note 1), contractual interest expense has not been paid on pre-petition debt of the Debtors since the Petition Date. During the years ended December 31, 2000 and 1999, gross payments for asbestos litigation claims filed against Fibreboard were approximately $820 million and $136 million, respectively, all of which were paid/reimbursed by Fibreboard's insurers or the Fibreboard Settlement Trust. 16. LEASES The Company leases certain equipment and facilities under operating leases, some of which include cost escalation clauses, expiring on various dates through 2015. Total rental expense charged to operations was $124 million in 2001, $185 million in 2000, and $143 million in 1999. At December 31, 2001, the minimum future rental commitments under noncancellable leases with initial maturities greater than one year payable over the remaining lives of the leases are: Minimum Future Period Rental Commitments ------ ------------------ (In millions of dollars) 2002 $ 112 2003 88 2004 56 2005 41 2006 28 2007 through 2015 127 ---------- $ 452 ==========
Pursuant to the Bankruptcy Code, Owens Corning and the other Debtors in the Chapter 11 Cases may elect to reject or assume unexpired pre-petition leases. The Debtors are currently reviewing the leases for which such an election exists to determine whether they should be accepted or rejected. The Bankruptcy Court has extended the time period within which the Debtors must make their elections as to leases of real property through June 4, 2002, and may grant further extensions. - 89 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 17. STOCK COMPENSATION PLANS The Company currently has three stock-based compensation plans. The Company's Stock Performance Incentive Plan ("SPIP") grants stock options, restricted stock, performance restricted stock and phantom performance units. The Owens Corning 1995 Stock Plan ("95 Stock Plan") grants options, restricted stock and performance stock awards. The SPIP and the 95 Stock Plan (collectively, the "Plans") permit up to 2 percent and 1 percent, respectively, of common shares outstanding at the beginning of each calendar year to be awarded as stock options and restricted stock (with 25% of this amount as the maximum permitted number of restricted stock awards). The Company may carry forward, independently for each plan, unused shares from prior years and may increase the shares available for awards in any calendar year through an advance of up to 25% of the subsequent year's allocation (determined by using 25% of the current year's allocation). These shares are also subject to the 25% limit for restricted stock awards. During 2001, the maximum number of shares available under the Plans for stock awards was 2,345,348 shares. The following are descriptions of the awards granted under the Plans: Stock Options ------------- Under the Plans, the exercise prices of each option equal the market price of the Company's common stock on the date of grant and an option's maximum term is 10 years. Shares issued from the exercise of options are recorded in the common stock accounts at the option price. The awards and vesting periods of such awards are determined at the discretion of the compensation committee of the Board of Directors. No stock options were awarded in 2001. During 2000 and 1999, respectively, 1,531,244 and 1,930,292 stock options were awarded under the Plans. Restricted Stock Awards ----------------------- Under the Plans, compensation expense is measured based on the market price of the stock at date of grant and is recognized on a straight-line basis over the vesting period. Stock restrictions lapse, subject to alternate vesting plans for death, disability, approved early retirement and involuntary termination, over various periods ending in 2006. At December 31, 2001, the Company had 220,978 shares of restricted stock outstanding. There were no restricted stock grants in 2001. During 2000 and 1999, 11,000, and 284,500 shares of restricted stock were granted, respectively. The weighted-average grant-date fair value for shares granted was $15.37 and $34.81 for 2000 and 1999, respectively. Performance Restricted Stock Awards ----------------------------------- Under the Plans, certain officers are awarded performance shares. Performance shares represent the opportunity to earn up to a specified number of shares of the Company's common stock, if the Company achieves specified performance goals during the designated performance period. Any portion of the award not earned during the performance period is forfeited by the officer at the end of such period. Compensation expense is measured based on market price of the Company's common stock and is recognized over the performance period, which is generally three years. At December 31, 2001, the Company had no performance units outstanding and none were granted during 2001, 2000 and 1999. - 90 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 17. STOCK COMPENSATION PLANS (continued) Phantom Performance Units ------------------------- Under the Plans, certain officers are awarded phantom performance units. Each unit provides the holder the opportunity to earn a cash award equal to the fair market value of the Company's common stock upon the attainment of certain performance goals. Any portion of the award not earned during the performance period is forfeited by the officer at the end of such period. Compensation expense is measured based on market price of the Company's common stock and is recognized over the performance period, which is generally three years. At December 31, 2001, the Company had no phantom performance units outstanding and none were granted during 2001, 2000 and 1999. Performance Stock Awards ------------------------ Under the Plans, certain employees are awarded unrestricted stock based upon achievement of certain goals within a designated performance period. Compensation cost for these awards is accrued over the performance period based upon a base compensation level and the performance level achieved. Stock awards are issued in the year subsequent to the performance period. The number of shares issued is based upon the market price of the stock on date of issuance and the level of compensation earned. No performance stock awards were issued in 2001. In 2000 and 1999, respectively, 638,541 and 267,711 shares were issued to employees. The Company also has a plan to award stock and stock options to non-employee directors. The receipt of the stock awards may be deferred at the discretion of the directors. Approximately 349,000 shares were available under this plan at December 31, 2001. As of December 31, 2001, 24,259 deferred awards were outstanding. In 2001 and 2000, there were no options issued, however, 4,500 stock awards were granted and issued in 2001. In 2000, 5,000 stock awards were granted, 1,000 of which were issued. In 1999, 10,000 options and 5,000 stock awards were granted, 500 of which were issued. The weighted-average grant-date fair value for shares granted in 2001, 2000 and 1999 was $2.24, $17.97 and $36.53, respectively. The Company applies Financial Accounting Standards Board Statement No. 123 (SFAS 123) for disclosures of its stock based compensation plans. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations for expense recognition as permitted by SFAS 123. All stock options issued by the Company are exercisable at a price equal to the market price at the date of grant. Accordingly, no compensation cost has been recognized for any of the options granted under the Plans. The compensation cost that has been recorded for awards other than options was $0.3 million in 2001, $1 million in 2000 and $21 million in 1999. - 91 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 17. STOCK COMPENSATION PLANS (continued) A summary of the status of the Company's plans that issue options as of December 31, 2001, 2000, and 1999 and changes during the years ending on those dates is presented below: 2001 2000 1999 ---- ---- ---- Weighted- Weighted- Weighted- Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Beginning of year 8,130,529 $ 32.98 7,720,367 $ 36.29 6,095,968 $ 36.72 Options granted - $ - 1,531,244 $ 15.37 1,940,292 $ 34.81 Options exercised - $ - (183) $ 15.37 (79,850) $ 28.66 Options canceled (924,129) $ 30.92 (1,120,899) $ 31.68 (236,043) $ 38.02 ----------- ----------- ------------ End of year 7,206,400 $ 33.27 8,130,529 $ 32.98 7,720,367 $ 36.29 ========= ========= ========= Exercisable 5,145,431 $ 36.46 4,903,779 $ 37.42 4,426,982 $ 37.22 Weighted-average fair-value of options granted during the year $ - $ 7.03 $ 12.14
The following table summarizes information about options outstanding at December 31, 2001: Options Outstanding Options Exercisable ------------------------------------------------- ------------------------------- Number Weighted-Average Number Weighted- Range of Outstanding Remaining Exercise Exercisable Average Exercise Prices at 12/31/01 Contractual Life Price at 12/31/01 Exercise Price --------------- ----------- ---------------- ----------- ----------- -------------- $14.187 - $28.437 1,986,337 6.81 $20.307 978,300 $25.392 $29.875 - $34.812 2,105,839 5.06 $33.691 1,055,240 $32.576 $34.875 - $40.500 1,525,843 3.46 $38.448 1,523,510 $38.448 $40.687 - $45.000 1,419,387 3.92 $43.765 1,419,387 $43.765 $45.500 - $45.500 168,994 4.26 $45.500 168,994 $45.500
- 92 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 17. STOCK COMPENSATION PLANS (continued) The fair value of each option granted in 2000 and 1999 was estimated on the date of grant using the Black-Scholes option-pricing model and the weighted average assumptions shown below. No options were granted in 2001. Assumptions 2000 1999 ---------------------- --------------------------- Risk-free interest rate 6.50% 4.79% Expected life (in years) 5 5 Expected volatility 40.72% 32.44% Expected dividends .00% .61%
Had compensation cost for the Plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method described in SFAS 123, the Company's net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below: 2001 2000 1999 --------- --------- -------- (In millions of dollars, except share data) Net income (loss) As reported $ 39 $ (478) $ 270 Pro forma $ 33 $ (487) $ 260 Basic net income As reported $ 0.72 $ (8.71) $ 4.98 (loss) per share Pro forma $ 0.60 $ (8.88) $ 4.80 Diluted net income As reported $ 0.66 $ (8.71) $ 4.67 (loss) per share Pro forma $ 0.55 $ (8.88) $ 4.50
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. - 93 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 17. STOCK COMPENSATION PLANS (continued) 2001 2000 1999 ---- ---- ---- (In millions of dollars, except share data) Net income (loss) used for basic earnings per share $ 39 $ (478) $ 270 Net income effect of assumed conversion of preferred securities - - 8 --------- --------- ---------- Net income (loss) used for diluted earnings per share $ 39 $ (478) $ 278 ========= ========= ========== Weighted-average number of shares outstanding used for basic earnings per share (thousands) 55,056 54,816 54,083 Non-vested restricted shares (thousands) 299 - 614 Deferred awards (thousands) 24 - 189 Shares from assumed conversion of preferred securities (thousands)(see Note 7) 4,566 - 4,566 --------- -------- ---------- Weighted-average number of shares outstanding and common equivalent shares used for diluted earnings per share (thousands) 59,945 54,816 59,452 ====== ====== ======
Due to their anti-dilutive effect, diluted shares outstanding during 2000 excluded approximately 4.6 million common shares from the potential conversion of preferred securities (see Note 7) and approximately 500 thousand non-vested restricted shares and deferred awards. 18. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Company is a party to financial instruments in the normal course of business to reduce exposure to fluctuating foreign currency exchange rates, interest rates, and commodity prices. The Company is exposed to credit loss in the event of nonperformance by the other parties to the financial instruments described below. However, the Company does not anticipate nonperformance by the other parties. The Company does not engage in trading activities with these financial instruments and does not generally require collateral or other security to support these financial instruments. The amounts of derivatives summarized in the foreign currency exchange risk and interest rate risk management section below do not generally represent the amounts exchanged by the parties and, thus, are not a measure of the exposure of the Company through its use of derivatives. The amounts exchanged were calculated on the basis of the notional amounts and the other terms of the derivatives, which relate to interest rates, exchange rates, securities prices, financial, or other indices. Foreign Currency Exchange Risk and Interest Rate Risk Management ---------------------------------------------------------------- The Company enters into various types of derivative financial instruments to manage its foreign currency exchange risk and interest rate risk, as indicated in the following table. - 94 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 18. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Notional Amount Notional Amount December 31, 2001 December 31, 2000 ----------------- ----------------- (In millions of dollars) Forward currency exchange contracts $ 30 $ 9 Interest rate swaps 19 18 Commodity future contract 540,000 MMBTU - per month
The Company enters into forward currency exchange contracts to manage its exposure against foreign currency fluctuations on certain assets and liabilities denominated in foreign currencies. As of December 31, 2001, the Company has 2 forward currency exchange contracts maturing in 2002 that exchange 75 million Norwegian krone and approximately 14 million euros. As of December 31, 2000, the Company had 3 forward currency exchange contracts that exchanged less than 1 million euros, approximately 1 million U.S. dollars, and less than 1 million British pounds. Through December 31, 2000, gains and losses on these foreign currency hedges were included in the carrying amount of the related assets and liabilities. These transactions are considered a natural hedge as the gain or loss on the hedge offsets the gain or loss from currency value fluctuations. The Company has elected not to apply hedge accounting in 2001, but rather mark the contracts to market through the statement of income, the effect of which was not material during 2001. During 2001 and 2000, the Company also entered into a foreign currency exchange contract to reduce its exposure to certain U.S. dollar denominated debt instruments in China. The 2001 contract, which matures in 2002, will exchange approximately 82 million Chinese renminbi against approximately 10 million U.S. dollars. The 2000 contract, which matured in 2001, exchanged approximately 66 million Chinese renminbi against approximately 8 million U.S. dollars. These transactions are considered a natural hedge as the gain or loss on the hedge offsets the gain or loss from currency value fluctuations. The Company has elected not to apply hedge accounting, but rather mark the contract to market through the statement of income, the effect of which was not material during 2001. During 2001, the Company invested excess cash in South America in Brazilian certificates of deposit, treasury bonds and debentures. At the same time these investments are made, the Brazilian real are swapped into U.S. dollars at a U.S. dollar interest rate with perfectly matching investment amounts and maturity dates. The purpose of this hedge is to reduce the impact of changes in the Brazilian real and U.S. dollar exchange rates. At December 31, 2001, there were 18 such cross-currency interest rate swaps outstanding at a notional amount of $19 million U.S. dollars. At December 31, 2000, there were 17 such cross-currency interest rate swaps outstanding at a notional amount of $18 million U.S. dollars. During 2001, the Company entered into a swap agreement for approximately 5 million MMBTU's of natural gas to hedge its exposure to fluctuating commodity prices. The swap is a cash flow hedge and is recorded in other comprehensive income (loss), except to the extent of inefficiencies which are recorded as other income in the statement of income. At December 31, 2001, accumulated other comprehensive income (loss) related to the swap was a loss of approximately $2 million and the inefficiency recorded as other income (loss) was not material. - 95 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 18. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Other Financial Instruments with Off-Balance-Sheet Risk ------------------------------------------------------- As of December 31, 2001 and 2000, the Company is contingently liable for guarantees of indebtedness owed by certain unconsolidated affiliates of approximately $38 million and $35 million, respectively. As of December 31, 2001, approximately $34 million of such indebtedness was alleged to be in default as a result of the Filing. The affiliate that owed approximately $19 million of such indebtedness is in negotiations with its lenders and other parties, including Owens Corning, concerning the status of this indebtedness. Depending on the outcome of such negotiations, it is possible that the lender will attempt to enforce the related guarantee against Owens Corning. Any such claim would constitute a liability subject to compromise, since the claim would relate to a pre-petition obligation of Owens Corning, and may give rise to a loss of up to the full amount of the claim. Subject to the foregoing uncertainties, the Company is of the opinion that its other unconsolidated affiliates will be able to perform under their respective payment obligations in connection with such guaranteed indebtedness and that no payments will be required and no losses will be incurred by the Company under such guarantees. Concentrations of Credit Risk ----------------------------- As of December 31, 2001 and 2000, the Company has no significant group concentrations of credit risk. Fair Value of Financial Instruments ----------------------------------- The following methods and assumptions were used to estimate the fair value of each category of financial instruments: Cash and short-term financial instruments ----------------------------------------- The carrying amount approximates fair value due to the short maturity of these instruments. Restricted cash, securities and other - Fibreboard -------------------------------------------------- The fair values of cash and marketable securities in the Fibreboard Settlement Trust have been estimated by traded market values or by obtaining quotes from brokers. Long-term notes receivable -------------------------- The fair value has been estimated using the expected future cash flows discounted at market interest rates. Long-term debt -------------- The fair value of the Company's long-term debt, which is not subject to compromise, has been estimated based on quoted market prices for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities. The Company is unable to estimate the fair value of long-term debt of the Debtors which is subject to compromise at December 31, 2001, due to the uncertainties associated with the Filing. - 96 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 18. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Foreign currency swaps and interest rate swaps ---------------------------------------------- The fair values of foreign currency swaps and interest rate swaps have been estimated by traded market values or by obtaining quotes from brokers. Forward currency exchange contracts, option contracts, and financial guarantees ------------------------------------------------------------------------------- The fair values of forward currency exchange contracts, option contracts, and financial guarantees are based on the estimated cost to acquire similar agreements or on the estimated cost to terminate these agreements or otherwise settle the obligations with the counter parties at the reporting date. The estimated fair values of the Company's financial instruments as of December 31, 2001, and 2000, which have fair values different than their carrying amounts, are as follows: 2001 2000 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value ------ ------ ------- ----- (In millions of dollars) Assets ------ Long-term notes receivable $ 26 $ 26 $ 24 $ 24 Liabilities ----------- Long-term debt 5 5 7 7
The Company's estimates of fair value approximate carrying value for all derivative financial instruments. As of December 31, 2001 and 2000, the Company is contingently liable for guarantees of indebtedness owed by certain unconsolidated affiliates. There is no market for these guarantees and they were issued without explicit cost. Therefore, it is not practicable to establish their fair value. 19. 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 - 97 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. CONTINGENT LIABILITIES (continued) Program described below. As a result of the Filing, all pre-petition asbestos claims and pending litigation against the Debtors, including without limitation claims arising under the National Settlement Program, were automatically stayed (see Note 1). Owens Corning expects that all pending and future asbestos claims against Owens Corning and Fibreboard will be resolved pursuant to a plan or plans of reorganization. Owens Corning is unable to determine at this time whether asbestos-related claims asserted against Fibreboard will be treated in the same manner as those asserted against Owens Corning in any such plan or plans. National Settlement Program --------------------------- Beginning in late 1998, Owens Corning implemented a National Settlement Program ("NSP") to resolve personal injury asbestos claims through settlement agreements with individual plaintiffs' law firms. The NSP was intended to better manage the asbestos liabilities of Owens Corning and Fibreboard (see Item B below), and to help Owens Corning better predict the timing and amount of indemnity payments for both pending and future asbestos claims. The number of law firms participating in the NSP expanded from approximately 50 when the NSP was established to approximately 120 as of the Petition Date. Each of these participating law firms agreed to a long-term settlement agreement which varied by firm ("NSP Agreement") extending through at least 2008 which provided for the resolution of their existing asbestos claims, including unfiled claims pending with the participating law firm at the time it entered into an NSP Agreement ("Initial Claims"). The NSP agreements also established procedures and fixed payments for resolving without litigation claims against either Owens Corning or Fibreboard, or both, arising after a participating firm entered into an NSP Agreement ("Future Claims"). Terms and Conditions of NSP Agreements -------------------------------------- Settlement amounts for both Initial Claims and Future Claims were negotiated with each firm participating in the NSP, and each firm was to communicate with its respective clients to obtain authority to settle individual claims. Payments to individual claimants were to vary based on a number of factors, including the type and severity of disease, age and occupation. All such payments were subject to delivery of satisfactory evidence of a qualifying medical condition and exposure to Owens Corning's and/or Fibreboard's products, delivery of customary 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 - 98 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. CONTINGENT LIABILITIES (continued) the settlement agreements, and provided for mediation and further negotiation before a claimant could pursue his or her case in the court system. Through the Petition Date, fewer than 300 claimants had elected to reject the original settlement proposal, and to mediate under the terms of the NSP Agreement. As of the Petition Date, the NSP covered approximately 240,000 Initial Claims, approximately 148,000 of which had satisfied all conditions to final settlement, including receipt of executed releases, or other resolution (the "Final NSP Settlements") at an average cost per claim of approximately $9,000. As of the Petition Date, approximately 88,000 of such Final NSP Settlements had been paid in full or otherwise resolved, and approximately 60,000 were unpaid in whole or in part. As of such date, the remaining balance payable under NSP Agreements in connection with these unpaid Final NSP Settlements was approximately $539 million. Through the Petition Date, Owens Corning had received approximately 3,800 Future Claims under the NSP. At this time, Owens Corning is unable to predict the manner in which the NSP Agreements and the resolution of claims thereunder will be treated under the terms of any plan or plans of reorganization. Non-NSP Claims -------------- As of the Petition Date, approximately 36,000 asbestos personal injury claims were pending against Owens-Corning outside the NSP. This compares to approximately 25,300 such claims pending on December 31, 1999. The information needed for a critical evaluation of pending claims, including the nature and severity of disease and definitive identifying information concerning claimants, typically becomes available only through the discovery process or as a result of settlement negotiations, which often occur years after particular claims are filed. As a result, Owens Corning has limited information about many of such claims, and the actual number of pending claims may vary from the numbers indicated. Owens Corning resolved (by settlement or otherwise) approximately 10,200 asbestos personal injury claims outside the NSP during 1998, 4,800 such claims during 1999 and 3,100 such claims during 2000 prior to the Petition Date. The average cost of resolution was approximately $35,900 per claim for claims resolved during 1998, $34,600 per claim for claims resolved during 1999, and $44,800 per claim for claims resolved during 2000 prior to the Petition Date. As a rule, these claims were settled as they were scheduled for trial, and they typically involved more serious injuries and diseases. Accordingly, Owens Corning does not believe that such average costs of resolution are representative of the value of the non-NSP claims then pending against the Company. At this time, Owens Corning is unable to predict the manner in which non-NSP claims will be treated under the terms of any plan or plans of reorganization. Asbestos-Related Payments ------------------------- As a result of the Filing, Owens Corning has not made any asbestos-related payments since the Petition Date except for approximately $14 million paid on its behalf by third parties pursuant to appeal bonds issued prior to the Petition Date. During 1999 and 2000 (prior to the Petition Date), Owens Corning (excluding Fibreboard) made asbestos-related payments falling within four major categories: (1) Settlements in respect of verdicts incurred or claims resolved prior to the implementation of the NSP ("Pre-NSP Settlements"); (2) NSP settlements; (3) Non-NSP settlements covering cases not resolved by the NSP; and (4) Defense, claims processing and administrative expenses, as follows: - 99 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. CONTINGENT LIABILITIES (continued) (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 December 31, 2001, approximately $113 million of Administrative Deposits previously made by Owens Corning had not been finally distributed to claimants ("Undistributed Administrative Deposits") and, accordingly, are reflected in Owens Corning's consolidated balance sheet as restricted assets (under the caption "Restricted cash - asbestos and insurance related") and have not been subtracted from Owens Corning's reserve for asbestos personal injury claims (discussed below). At this time, Owens Corning is unable to predict what the treatment of funds held in Undistributed Administrative Deposits will be under the terms of any plan or plans of reorganization. However, in 2001, the holder of approximately $49 million of Undistributed Administrative Deposits for Owens Corning (and approximately $28 million of similar Undistributed Administrative Deposits for Fibreboard) filed a motion with the Bankruptcy Court requesting an order authorizing distribution of the deposits it holds to the escrow beneficiaries. At a February 25, 2002 hearing on this motion, the Bankruptcy Court ruled that escrow beneficiaries that had received both written notice of approval for payment and an initial payment from the escrow deposits prior to the Petition Date would be entitled to receive their remaining payments from the principal of the escrow deposits, with the balance of the deposits, if any, plus any investment proceeds to be returned to Owens Corning (or Fibreboard). The ruling is subject to entry of a final order by the Bankruptcy Court and appeal by any of the parties in interest. 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. - 100 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. CONTINGENT LIABILITIES (continued) On June 14, 2001, a companion bill identical to HR 1412 was introduced in the United States Senate (S 1048). This bill also has strong bipartisan support. Despite the strong bipartisan support for both bills, the apparent movement of the Federal budget from surplus to deficit is expected to adversely impact the chances for passage of tax bills such as HR 1412 and S 1048. Consequently, there can be no assurance that any such legislation ultimately will be enacted. Moreover, as a result of the Filing, there is uncertainty regarding the impact of the proposed tax legislation on the Debtors' respective estates even if such legislation were enacted. Other Asbestos-Related Litigation --------------------------------- As previously reported, the Company believes that it has spent significant amounts to resolve claims of asbestos claimants whose injuries were caused or exacerbated by cigarette smoking. Owens Corning and Fibreboard are pursuing litigation against tobacco companies (discussed below) to obtain payment of monetary damages (including punitive damages) for payments made by Owens Corning and Fibreboard to asbestos claimants who developed smoking related diseases. There can be no assurance that any such litigation will go to trial or be successful. In October 1998, the Circuit Court for Jefferson County, Mississippi granted leave to file an amended complaint in an existing action to add claims by Owens Corning against seven tobacco companies and several other tobacco industry defendants. On June 17, 2001, the Jefferson court entered an order dismissing Owens Corning's case in response to the defendants' motion for summary judgment on the basis that Owens Corning's injuries were indirect and thus too remote under Mississippi law to allow recovery. The Company has appealed such dismissal to the Supreme Court of Mississippi. In addition to the Mississippi lawsuit, a lawsuit brought in December 1997 by Owens Corning and Fibreboard is pending in the Superior Court for Alameda County, California against the same tobacco companies. In August 2001, the defendants filed motions to dismiss Owens Corning's and Fibreboard's claims on the basis of the decision in the Mississippi lawsuit as well as California law. As the result of a hearing on these motions on November 20, 2001, the California court denied the motion to dismiss Fibreboard's claims on the basis of the decision in the Mississippi lawsuit and otherwise stayed the proceeding pending the outcome of the Mississippi suit. 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. 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 and insurance related." During the third and fourth quarters of 2001, Owens Corning also received payments of approximately $5 million and $2 million, respectively, in respect of previous settlements with bankrupt insurance carriers. These amounts were recorded in income in the relevant periods. - 101 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. CONTINGENT LIABILITIES (continued) As of December 31, 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. As of December 31, 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 $ 1.10 Non-NSP backlog 0.30 Future Claims 0.70 Defense, Claims Processing and Administrative Expenses 0.10
In connection with this asbestos reserve, Owens Corning notes that: - The "NSP backlog" component represented the remaining estimated cost of resolving Initial Claims under the NSP. - The "Non-NSP backlog" component represented the estimated cost of resolving asbestos personal injury claims pending against Owens Corning outside the NSP. - The "Future claims" component represented the estimated cost of resolving (i) Future Claims under the NSP and (ii) non-NSP claims subsequently made. - 102 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. CONTINGENT LIABILITIES (continued) As Owens Corning has discussed in previous public filings, any estimate of its liabilities for pending and expected future asbestos claims is subject to considerable uncertainty because such liabilities are influenced by numerous variables that are inherently difficult to predict. As discussed further below, such uncertainties significantly increased as a result of the Chapter 11 Cases. Prior to the Petition Date, such variables included, among others, the cost of resolving pending non-NSP claims; the disease mix and severity of disease of pending NSP claims; the number, severity of disease, and jurisdiction of claims filed in the future (especially the number of mesothelioma claims); how many future claimants were covered by an NSP Agreement; the extent, if any, to which individual claimants exercised a right to opt out of an NSP Agreement and/or engage counsel not participating in the NSP; the extent, if any, to which counsel not bound by an NSP Agreement undertook the representation of asbestos personal injury plaintiffs against Owens Corning; the extent, if any, to which Owens Corning exercised its right to terminate one or more of the NSP Agreements due to excessive opt-outs or for other reasons; and Owens Corning's success in controlling the costs of resolving future non-NSP claims. As one example of the difficulties inherent in estimating future asbestos claims, Owens Corning notes that the Manville Personal Injury Settlement Trust, a trust established to settle asbestos claims against Johns Manville Corporation, announced in June 2001 that it was reducing its initial settlement distributions by fifty percent on the basis of the continued record pace of asbestos claim filings and the prediction of its consultants that the trust might receive 1.5 to 2.5 million additional claims. The Chapter 11 Cases 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. - 103 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. CONTINGENT LIABILITIES (continued) Additional uncertainties raised by the Chapter 11 Cases include the following: - The impact, if any, the Administrative Consolidation will have on the timing, outcome or other aspects of the Chapter 11 Cases. - As a result of the Filing, all of the holders of pre-petition asbestos claims against Owens Corning or Fibreboard will be required to file proofs of claim in the form and manner prescribed by the Bankruptcy Court. The filing of a proof of claim will be a precondition to any pre-petition claim being considered for payment as an allowed claim. Moreover, the Filing, including the significant publicity associated with the Chapter 11 Cases and notices required by the Bankruptcy Code that must be given to creditors and other parties in interest, has significantly increased the inherent difficulties and uncertainties involved in estimating the number and cost of resolution of not only pre-petition claims but also additional claims that may be asserted in the course of the Chapter 11 Cases. Among other things, it is not possible to predict at this time how many proofs of claim will be timely filed, how many proofs of claim will represent allowed claims, or the aggregate value of such allowed claims. - Owens Corning anticipates that the number and estimated aggregate value of allowed future claims will be determined as a result of negotiations involving the legal representative for the class of future asbestos claimants and the other interested constituencies or, if necessary, by the Bankruptcy Court. It is not possible to predict the outcome of such negotiations at this time. In connection with such negotiations, it is anticipated that a number of interested constituencies, including the representatives of the pre-petition and future asbestos claimants and other pre-petition creditors, will develop analyses of liability for both pre-petition and future asbestos claims. Owens Corning and Fibreboard will also prepare analyses for use in the negotiation process. Such analyses are also required in connection with the establishment, as part of the plan of reorganization, of a Section 524(g) trust for the benefit of asbestos claimants. These analyses could vary substantially from one another and from the amounts of Owens Corning's and Fibreboard's existing reserves. Such analyses will be prepared solely for use in the negotiation of a plan of reorganization and will not involve the same type of estimation process required in connection with the preparation of financial statements under generally accepted accounting principles. Ultimately, Owens Corning's (and Fibreboard's) total liability for asbestos claims will be determined after a lengthy period of negotiations and, if necessary, by the Bankruptcy Court, taking into account numerous factors not present in Owens Corning's pre-petition environment. Such factors include the claims of competing creditor groups as to the appropriate treatment of their allowed claims in the plan or plans of reorganization, the size of the total asbestos liability, the total number of present asbestos claims allowed, the total amount of future asbestos claims allowed, and the impact of the Administrative Consolidation. At December 31, 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) $ 0.60 Other Pending and Future Claims 1.60
- 104 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. CONTINGENT LIABILITIES (continued) 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. 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 - 105 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. CONTINGENT LIABILITIES (continued) 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. At this time, Owens Corning is unable to predict the manner in which Fibreboard non-NSP claims will be treated under the terms of any plan or plans of reorganization. Insurance Settlement -------------------- In 1993, Fibreboard and two of its insurers, Continental Casualty Company ("Continental") and Pacific Indemnity Company ("Pacific"), entered into the Insurance Settlement. The Insurance Settlement became effective in the fourth quarter of 1999, is final and is not subject to appeal. Since 1993, Continental and Pacific paid, either directly or through an escrow account funded by them, for substantially all settlements of asbestos claims reached prior to the initiation of the NSP. Under the Insurance Settlement, Continental and Pacific provided $1,873 million during the fourth quarter of 1999 to fund costs of resolving pending and future Fibreboard asbestos-related liabilities, whether under the NSP, in the tort system, or otherwise. As of December 31, 2001, the Insurance Settlement funds were held in and invested by the Fibreboard Settlement Trust. As of that date, $1,151 million (net of outstanding payables) was held in the Fibreboard Settlement Trust and $133 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. - 106 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. CONTINGENT LIABILITIES (continued) 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 December 31, 2001, these assets were reflected as non-current assets, under the category "Restricted cash, securities and other - Fibreboard." See Note 20 for additional information concerning the Fibreboard Settlement Trust. At this time, Owens Corning is unable to predict what the treatment of funds held in the Fibreboard Settlement Trust and in Undistributed Administrative Deposits in respect of Fibreboard claims (see Item A) will be under the terms of any plan or plans of reorganization. Asbestos-Related Payments ------------------------- As a result of the Filing, Fibreboard has not made any asbestos-related payments since the Petition Date. During 2000 (prior to the Petition Date), gross payments for asbestos-related claims against Fibreboard, all of which were paid/reimbursed by the Fibreboard Settlement Trust, fell within four major categories, as follows: (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 =========
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 December 31, 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 20). 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: - 107 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. CONTINGENT LIABILITIES (continued) 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. At December 31, 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) $ 0.40 Other Pending and Future Claims 0.90
In connection with this asbestos reserve, Owens Corning notes that: - The "Unpaid Final Settlements" component represented the remaining estimated cost for all asbestos personal injury claims pending against Fibreboard which were subject to final settlement agreements for which releases from claimants were obtained, and under which all other conditions to settlement had been satisfied, as of the Petition Date. - The "Other Pending and Future Claims" component represented the estimated cost of resolving (i) asbestos personal injury claims pending against Fibreboard which were subject to resolution under NSP Agreements but for which releases were not obtained from claimants prior to the Petition Date; (ii) all other asbestos personal injury claims pending against - 108 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. CONTINGENT LIABILITIES (continued) 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 20). Owens Corning will continue to review Fibreboard's asbestos reserve on a periodic basis and make such adjustments as may be appropriate. However, it is possible that Owens Corning will not be in a position to conclude that a revision to the reserve is appropriate until significant developments occur during the course of the Chapter 11 Cases, including resolution of the uncertainties described above. Any such revision could, however, be material to the Company's consolidated financial position and results of operations in any given period. Non-Asbestos Liabilities ------------------------ Securities Litigation --------------------- On or about April 30, 2001, certain of the Company's current and former directors and officers, as well as certain underwriters, were named as defendants in a lawsuit captioned John Hancock Life Insurance Company, et al. v. Goldman, Sachs & Co., et al. in the United States District Court for the District of Massachusetts. An amended complaint was filed by the plaintiffs on or about July 5, 2001. Owens Corning is not named in the lawsuit. The suit purports to be a securities class action on behalf of purchasers of certain unsecured debt securities of Owens Corning in offerings occurring on or about April 30, 1998 and July 23, 1998. The complaint alleges that the registration statements pursuant to which the offerings were made contained untrue and misleading statements of material fact and omitted to state material facts which were required to be stated therein and which were necessary to make the statements therein not misleading, in violation of sections 11, 12(a)(2) and 15 of the Securities Act of 1933. The amended complaint seeks an unspecified amount of damages or, where appropriate, rescission of the plaintiffs' purchases. The defendants filed a motion to dismiss the action on November 20, 2001. The Company believes that the claim is without merit. Tax Claim --------- Owens Corning's federal income tax returns typically are audited by the Internal Revenue Service ("IRS") in multi-year audit cycles. The audit for the years 1992-1995 was completed in late 2000. Due to the Filing, the IRS also accelerated and completed the audit for the years ended 1996-1999 by March of 2001. As the result of these audits and unresolved issues from prior audit cycles, the IRS is asserting claims for approximately $390 million in income taxes plus interest of approximately $175 million. Pending audit of Owens Corning's federal income tax return for the year 2000, the IRS has also filed a protective claim in the amount of approximately $50 million, covering a tax refund received by Owens Corning for such year, plus interest. In accordance with generally accepted accounting principles, Owens Corning maintains tax reserves to cover audit issues. While Owens Corning believes that the existing reserves are appropriate in light of the audit issues involved, its defenses, its prior experience in resolving audit issues, and its ability to realize certain challenged deductions in subsequent tax returns if the IRS were successful, there can be no assurance that such reserves will be sufficient. Owens Corning will continue to review its tax reserves on a periodic basis - 109 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. CONTINGENT LIABILITIES (continued) 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. 20. FIBREBOARD SETTLEMENT TRUST Under the Insurance Settlement described in Note 19, two of Fibreboard's insurers provided $1.873 billion during the fourth quarter of 1999 to fund the costs of resolving pending and future Fibreboard asbestos-related liabilities. As of December 31, 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 19, Item A, will be enacted by Congress, such legislation would benefit the Trust during the pendency of the Chapter 11 proceedings by eliminating the tax on income, thereby enlarging the corpus of the Trust through tax-free income accumulation. At this time, Owens Corning is unable to predict what the treatment of the Fibreboard Settlement Trust will be under the terms of any plan or plans of reorganization. General Accounting Treatment ---------------------------- The assets of the Trust are comprised of cash and marketable securities (collectively, the "Trust Assets") and, with Fibreboard's Undistributed Administrative Deposits, are reflected on Owens Corning's consolidated balance sheet as restricted assets. At December 31, 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 19, Part B). As of December 31, 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 December 31, 2001, the Consolidated Financial Statements reflect Fibreboard's liabilities for asbestos litigation claims at $1.213 billion, with a residual obligation to charity of $71 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 - 110 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 20. FIBREBOARD SETTLEMENT TRUST (continued) 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 December 31, 2001 and 2000 -------------------------------------------------------- During 2001 and 2000, respectively, Trust Assets generated interest/dividend earnings of approximately $55 million and $71 million, which have been recorded as an increase in the carrying amount of the assets on Owens Corning's consolidated balance sheet and as other income on the consolidated statement of income. This income, however, has been offset by an equal charge to other expense, which represents the increase in the residual liability to charity. Payments for asbestos litigation claims from the Trust during 2000 were approximately $820 million. As a result of the Filing, there were no payments from the Trust during 2001. However, approximately $12 million was paid for taxes related to earnings of the Trust. Such payments were funded by existing cash in the Trust or proceeds from the sale of securities. The sale of securities during 2001 and 2000 resulted in a realized gain of $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 December 31, 2001 and 2000, the fair market value adjustment for those securities designated as available for sale resulted in an unrealized gain of less than $1 million and approximately $1 million, respectively. These amounts have been reflected in the Company's consolidated balance sheet as a change to the carrying amount of the asset and to other comprehensive income. These amounts have also been reflected as a change to the liability to charity, with a corresponding effect to other comprehensive income. At December 31, 2001, the fair value of Trust Assets was $1.284 billion, which was comprised of $1.169 billion of marketable securities, $18 million of outstanding payables and $133 million of restricted cash, which represents undistributed administrative deposits. These marketable securities have been classified as noncurrent assets. - 111 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 20. FIBREBOARD SETTLEMENT TRUST (continued) The amortized cost, gross unrealized holding gains and losses and fair value of the investment securities available for sale at December 31, 2001, are as follows: Gross Gross Amortized Unrealized Unrealized Cost Gain Loss Fair Value ---- ---- ---- ---------- (In millions of dollars) Municipal Bonds $ 1,150 $ - $ - $ 1,150 Mutual Funds 19 - - 19 ---------- ---------- --------- ----------- Total $ 1,169 $ - $ - $ 1,169 ======= ========= ======== ========
The amortized cost, gross unrealized holding gains and losses and fair value of the investment securities available for sale at December 31, 2000, are as follows: Gross Gross Amortized Unrealized 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 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. 2001 2000 ---- ---- Amortized Amortized Cost Fair Value Cost Fair Value ---- ---------- ---- ---------- Due within one year $ 91 $ 91 $ 656 $ 656 Due after one year through five years 679 679 2 2 Due after five years through ten years 171 171 51 51 Due after ten years 228 228 382 383 --------- --------- --------- --------- Total $1,169 $ 1,169 $ 1,091 $ 1,092 ========= ========= ======= =======
- 112 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 20. FIBREBOARD SETTLEMENT TRUST (continued) The table below summarizes Trust and Administrative Deposits activity for the year ended December 31, 2001: Net Interest Unrealized Purchases Realized Balance and Gain/ of Gain/ Balance 12/31/00 Dividends (Loss) Securities (Loss) Other Payments 12/31/01 -------- --------- ------ ---------- ------ ----- -------- -------- Assets ------ (In millions of dollars) Cash (payable for purchase of securities) $ 12 $ - $ - $ (30) $ - $ - $ - $ (18) Restricted Cash 170 - - - - (37) - 133 Marketable Securities: Available for Sale 1,092 55 - 30 4 - (12) 1,169 ------- --------- ---------- --------- ------- ------- ------- ------- Total Assets $ 1,274 $ 55 $ - $ - $ 4 $ (37) $ (12) $ 1,284 ======= ========= ========== ========= ======= ======= ======= ======= Liabilities ----------- Asbestos Litigation Claims $ 1,250 $ - $ - $ - $ - $ (37) $ - $ 1,213 Charity 24 55 - - 4 - (12) 71 ------- --------- ---------- --------- ------- ------- ------- ------- Total Liabilities $ 1,274 $ 55 $ - $ - $ 4 $ (37) $ (12) $ 1,284 ======= ========= ========== ========= ======= ======= ======= =======
- 113 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 20. FIBREBOARD SETTLEMENT TRUST (continued) The table below summarizes Trust activity for the year ended December 31, 2000: Interest Unrealized Net Sales Realized Balance and Gain/ of Gain/ Balance 12/31/99 Dividends (Loss) Securities (Loss) Adjustments Other Payments 12/31/00 -------- --------- ------ ---------- ------ ----------- ----- -------- -------- (In millions of dollars) Assets ------ Cash $ - $ - $ - $ 832 $ - $ - $ - $(820) $ 12 Restricted Cash - - - - - - 170 - 170 Marketable Securities: Available for Sale $1,838 $ 71 $ 1 $(832) 2 - 12 - $1,092 ------ ---- ---- ------ ----- ----- ------ ------ ------ Total Assets $1,838 $ 71 $ 1 $ - $ 2 $ - $ 182 $(820) $1,274 ====== ==== ==== ====== ===== ===== ====== ====== ====== Liabilities ----------- Asbestos Litigation Claims $1,750 $ - $ - $ - $ - $ 150 $ 170 $(820) $1,250 Charity $ 88 $ 71 $ 1 - 2 (150) 12 - $ 24 ------ ---- ---- ----- ----- ----- ------ ------ ------ Total Liabilities $1,838 $ 71 $ 1 $ - $ 2 $ - $ 182 $(820) $1,274 ====== ==== ==== ===== ===== ===== ====== ====== ======
- 114 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 21. QUARTERLY FINANCIAL INFORMATION (unaudited) Quarter ------------------------------------------------------------- First Second Third Fourth ------- -------- ------- -------- (In millions of dollars, except share data) 2001 ---- Net sales $ 1,067 $ 1,239 $ 1,291 $ 1,165 Cost of sales 896 1,014 1,046 982 --------- --------- --------- ---------- Gross margin $ 171 $ 225 $ 245 $ 183 ======== ========= ========= ========= Tax Provision (credit) $ (5) $ 25 $ 26 $ 11 ========== ========== ========= ========== Net income (loss) $ (10) $ 29 $ 27 $ (7) ========= ========== ========= ========== Net income (loss) per share: Basic net income (loss) per share $ (.19) $ .53 $ .50 $ (.12) ========= ========== ========= ========== Diluted net income (loss) per share $ (.19) $ .49 $ .46 $ (.12) ========= ========== ========= ==========
Quarter ------------------------------------------------------------- First Second Third Fourth ------- -------- ------- -------- (In millions of dollars, except share data) 2000 ---- Net sales $ 1,257 $ 1,295 $ 1,281 $ 1,107 Cost of sales 972 996 1,036 1,010 ---------- --------- ---------- --------- Gross margin $ 285 $ 299 $ 245 $ 97 ========== ========= ========== ========= Tax Provision (credit) $ 13 $ (267) $ 10 $ (68) ========== ========== ========== ========== Net income (loss) $ 48 $ (425) $ 14 $ (115) ========== ========== ========== ========== Net income (loss) per share: Basic net income (loss) per share $ .88 $ (7.76) $ .25 $ (2.08) ========== ========== ========== ========= Diluted net income (loss) per share $ .84 $ (7.76) $ .25 $ (2.08) ========== ========== ========== =========
- 115 - OWENS CORNING AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 22. ACCOUNTING PRONOUNCEMENTS Business Combinations - The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", the provisions of which apply to all business combinations initiated after June 30, 2001. This statement requires that all business combinations be accounted for under the purchase method. In addition, this statement requires the separate recognition of certain intangible assets. Goodwill and Other Intangibles - The FASB has issued SFAS No. 142, "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 eliminates the amortization of goodwill and indefinite-lived intangible assets and initiates an annual review for impairment. Identifiable intangible assets with a determinable useful life will continue to be amortized. Goodwill acquired prior to June 30, 2001 will be affected upon adoption, requiring the Company to perform an impairment test of its existing goodwill by applying a fair-value test. The Company is currently assessing the potential impact of SFAS No. 142 related to the impairment analysis of goodwill. Based on the steps the Company has taken thus far to prepare for the adoption of SFAS No. 142, it is likely that between $450 and $500 million of the goodwill related to Building Materials Systems will be impaired. As of December 31, 2001, the Company has net unamortized goodwill of $610 million and recognized amortization expense of $18 million, $19 million and $21 million for the years ended December 31, 2001, 2000 and 1999, respectively. The Company plans to complete the measurement of the impairment loss in the second quarter of 2002 and will address the tax implications, if any, on this impairment loss at that time. Asset Retirement Obligations - The FASB has issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which is effective for fiscal years beginning after June 15, 2002. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The Company does not expect the effects of the adoption to be significant. Impairment or Disposal of Long-Lived Assets - The FASB has issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which is effective for fiscal years beginning after December 15, 2001. This statement addresses the financial accounting and reporting for the impairment of or disposal of long-lived assets. The impact of adoption has not yet been determined. - 116 - INDEX TO FINANCIAL STATEMENT SCHEDULES -------------------------------------- Number Description Page ------ ----------- ---- II Valuation and Qualifying Accounts and Reserves - for the years ended December 31, 2001, 2000, and 1999.................................117
- 117 - OWENS CORNING AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Additions --------------------------------- Balance at Charged to Charged to Balance Beginning Costs and Other at End Classification of Period Expenses Accounts Deductions of Period -------------- ----------- ------------ ------------ ---------- --------- (In millions of dollars) FOR THE YEAR ENDED DECEMBER 31, 2001: Allowance deducted from asset to which it applies - Doubtful Accounts $ 29 $ 11 $ - $ 11(A) $ 29 Reserve to which it applies - Restructure Costs 33 21 29(B) 25(E) FOR THE YEAR ENDED DECEMBER 31, 2000: Allowance deducted from asset to which it applies - Doubtful Accounts $ 26 $ 5 $ - $ 2(A) $ 29 Reserve to which it applies - Restructure Costs 21 23 - 11(B) 33(D) FOR THE YEAR ENDED DECEMBER 31, 1999: Allowance deducted from asset to which it applies - Doubtful Accounts $ 23 $ 5 $ - $ 2(A) $ 26 Reserve to which it applies - Restructure Costs 49 - - 28(B) 21(C)
Notes: (A) Uncollectible accounts written off, net of recoveries. (B) Cash payments. (C) Includes non-current liabilities of $4 million. (D) Includes non-current liabilities of $7 million. (E) Includes non-current liaiblities of $15 million. - 118 - 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). (4) Instruments Defining the Rights of Security Holders, Including Indentures. Final Order Under 11 U.S.C. ss.ss. 105, 345(b) and 363 (I) Authorizing (A) Maintenance of Certain Existing Bank Accounts, (B) Continued Use of Existing Business Forms, (C) Use of Modified Cash Management System, and (D) Transfers of Funds to Debtor and Non-Debtor Affiliates; and (II) Waiving Investment and Deposit Requirements of 11 U.S.C. ss. 345(b) (filed herewith). Standstill and Waiver Agreement among Owens Corning, certain affiliates of Owens Corning, Credit Suisse First Boston, and certain bank lenders (incorporated herein by reference to Exhibit (99) to Owens Corning's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended June 30, 2001). The following documents are incorporated herein by reference to Exhibit (4) to Owens Corning's annual report on Form 10-K (File No. 1-3660) for the year ended December 31, 2000: - Post-Petition Credit Agreement, dated as of December 8, 2000, among Owens Corning and the subsidiaries of Owens Corning named therein, the financial institutions named therein, and Bank of America, N.A., as Agent. - License Agreement, made as of October 1, 1991, between Owens Corning and Owens-Corning Fiberglas Technology Inc. and Amendment thereto, dated as of December 8, 1993. - Standstill Agreement, dated as of January 30, 2001, between Owens Corning and Owens-Corning Fiberglas Technology Inc. - License Agreement, made as of April 27, 1999, between Owens-Corning Fiberglas Technology Inc. and AmeriMark Building Products, Inc. (now Exterior Systems, Inc.). - Standstill Agreement, dated as of January 30, 2001, between Exterior Systems, Inc. and Owens-Corning Fiberglas Technology Inc. Indenture, dated as of May 5, 1997, between Owens Corning and The Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.5.1 to Owens Corning's current report on Form 8-K (File No. 1-3660), filed May 14, 1997). - 119 - EXHIBIT INDEX ------------- Exhibit Number Document Description ------- -------------------- Credit Agreement, dated as of June 26, 1997, among Owens Corning, other Borrowers and Guarantors, the Banks listed on Annex A thereto, and Credit Suisse First Boston, as Agent (incorporated herein by reference to Exhibit (4) to Owens Corning's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended June 30, 1997), as amended by Amendment No. 1 thereto (incorporated herein by reference to Exhibit (4) to Owens Corning's annual report on Form 10-K (File No. 1-3660) for the year ended December 31, 1997) and Amendment No. 2 thereto (incorporated herein by reference to Exhibit (4) to Owens Corning's annual report on Form 10-K (File No. 1-3660) for the year ended December 31, 1998). Owens Corning agrees to furnish to the Securities and Exchange Commission, upon request, copies of all instruments defining the rights of holders of long-term debt of Owens Corning where the total amount of securities authorized under each issue does not exceed ten percent of Owens Corning's total assets. (10) Material Contracts. Standstill and Waiver Agreement among Owens Corning, certain affiliates of Owens Corning, Credit Suisse First Boston, and certain bank lenders (incorporated herein by reference to Exhibit (99) to Owens Corning's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended June 30, 2001). The following documents are incorporated herein by reference to Exhibit (4) to Owens Corning's annual report on Form 10-K (File No. 1-3660) for the year ended December 31, 2000: - Post-Petition Credit Agreement, dated as of December 8, 2000, among Owens Corning and the subsidiaries of Owens Corning named therein, the financial institutions named therein, and Bank of America, N.A., as Agent. - License Agreement, made as of October 1, 1991, between Owens Corning and Owens-Corning Fiberglas Technology Inc. and Amendment thereto, dated as of December 8, 1993. - Standstill Agreement, dated as of January 30, 2001, between Owens Corning and Owens-Corning Fiberglas Technology Inc. - License Agreement, made as of April 27, 1999, between Owens-Corning Fiberglas Technology Inc. and AmeriMark Building Products, Inc. (now Exterior Systems, Inc.). - Standstill Agreement, dated as of January 30, 2001, between Exterior Systems, Inc. and Owens-Corning Fiberglas Technology Inc. - 120 - EXHIBIT INDEX ------------- Exhibit Number Document Description ------- -------------------- Credit Agreement, dated as of June 26, 1997, among Owens Corning, other Borrowers and Guarantors, the Banks listed on Annex A thereto, and Credit Suisse First Boston, as Agent (incorporated herein by reference to Exhibit (4) to Owens Corning's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended June 30, 1997), as amended by Amendment No. 1 thereto (incorporated herein by reference to Exhibit (4) to Owens Corning's annual report on Form 10-K (File No. 1-3660) for the year ended December 31, 1997) and Amendment No. 2 thereto (incorporated herein by reference to Exhibit (4) to Owens Corning's annual report on Form 10-K (File No. 1-3660) for the year ended December 31, 1998). * Director's Charitable Award Program, as amended (filed herewith). * Key Management Severance Agreement with David L. Johns (filed herewith). * Owens Corning Senior Leader Emergence Incentive Plan (incorporated herein by reference to Exhibit (10) to Owens Corning's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended March 31, 2001). * Key Management Severance Agreement with Michael H. Thaman (incorporated herein by reference to Exhibit (10) to Owens Corning's annual report on Form 10-K (File No. 1-3660) for the year ended December 31, 2000). * Owens Corning Key Employee Retention Incentive Plan (incorporated herein by reference to Exhibit (10) to Owens Corning's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended June 30, 2000). * Key Management Severance Agreement with David T. Brown (incorporated herein by reference to Exhibit (10) to Owens Corning's annual report on Form 10-K (File No. 1-3660) for the year ended December 31, 1999). * Corporate Incentive Plan Terms Applicable to Key Employees Other Than Certain Executive Officers (incorporated herein by reference to Exhibit (10) to Owens Corning's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended June 30, 1999). The following documents are incorporated herein by reference to Exhibit (10) to Owens Corning's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended March 31, 1999: * - Owens Corning Deferred Compensation Plan. * - Corporate Incentive Plan Terms Applicable to Certain Executive Officers. The following documents are incorporated herein by reference to Exhibit (10) to Owens Corning's annual report on Form 10-K (File No. 1-3660) for the year ended December 31, 1998: * - Stock Performance Incentive Plan, as amended. - 121 - EXHIBIT INDEX ------------- Exhibit Number Document Description ------- -------------------- * - Key Management Severance Agreement with Maura Abeln Smith. * - Letter to Maura Abeln Smith. * Owens Corning Supplemental Executive Retirement Plan, effective as of January 1, 1998, (incorporated herein by reference to Exhibit (10) to Owens Corning's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended June 30, 1998). * Renewal Agreement, effective as of July 31, 1999, with Glen H. Hiner (incorporated herein by reference to Exhibit (10) to Owens Corning's annual report on Form 10-K (File No. 1-3660) for the year ended December 31, 1997). * 1987 Stock Plan for Directors, as amended (incorporated herein by reference to Exhibit (10) to Owens Corning's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended June 30, 1997). * Executive Supplemental Benefit Plan, as amended (incorporated herein by reference to Exhibit (10) to Owens Corning's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended March 31, 1993). * Employment Agreement, dated as of December 15, 1991, with Glen H. Hiner (incorporated herein by reference to Exhibit (10) to Owens Corning's annual report on Form 10-K (File No. 1-3660) for the year ended December 31, 1991), as amended by First Amending Agreement made as of April 1, 1992 (incorporated herein by reference to Exhibit (19) to Owens Corning's quarterly report on Form 10-Q (File No. 1-3660) for the quarter ended June 30, 1992). * Form of Directors' Indemnification Agreement (incorporated herein by reference to Exhibit (10) to Owens Corning's annual report on Form 10-K (File No. 1-3660) for the year ended December 31, 1989). * Deferred Compensation Plan for Directors, as amended (incorporated herein by reference to Exhibit (10) to Owens Corning's annual report on Form 10-K (File No. 1-3660) for the year ended December 31, 1987). (11) Statement re Computation of Per Share Earnings (filed herewith). (21) Subsidiaries of Owens Corning (filed herewith). (23) Consent of Arthur Andersen LLP (filed herewith). (99) Additional Exhibits Owens Corning letter to the Securities and Exchange Commission concerning audit representations of Arthur Andersen LLP (filed herewith). * Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.