SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 2000
Commission File No. 1-3660
Owens Corning
One Owens Corning Parkway
Toledo, Ohio 43659
Area Code (419) 248-8000
A Delaware Corporation
I.R.S. Employer Identification No. 34-4323452
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / X / No / /
Shares of common stock, par value $.10 per share,
outstanding at September 30, 2000
55,423,132
<PAGE>
- 2 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
On October 5, 2000, 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"). Please see Note 1 to the Consolidated
Financial Statements.
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(In millions of dollars, except share data)
NET SALES $ 1,281 $ 1,333 $ 3,833 $ 3,773
COST OF SALES 1,036 984 3,003 2,837
-------- ---------- -------- ----------
Gross margin 245 349 830 936
-------- ---------- -------- ----------
OPERATING EXPENSES
Marketing and administrative expenses 143 155 437 446
Science and technology expenses 13 14 42 44
Provision for asbestos litigation claims (Note 12) - - 790 -
Restructure costs (Note 4) 6 - 6 -
Other (Note 5) 3 (3) 7 (2)
-------- ---------- -------- ----------
Total operating expenses 165 166 1,282 488
-------- ---------- -------- ----------
INCOME (LOSS) FROM OPERATIONS 80 183 (452) 448
OTHER
Cost of borrowed funds 55 40 149 112
Other (Note 13) - - - -
-------- ---------- -------- ----------
INCOME (LOSS) BEFORE PROVISION
(CREDIT) FOR INCOME TAXES 25 143 (601) 336
Provision (credit) for income taxes 10 50 (244) 118
-------- ---------- -------- ----------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
EQUITY IN NET INCOME (LOSS) OF AFFILIATES 15 93 (357) 218
Minority Interest (3) (2) (6) (5)
Equity in net income (loss) of affiliates 2 (2) - (4)
-------- ---------- -------- ----------
NET INCOME (LOSS) $ 14 $ 89 $ (363) $ 209
========= ========== ======== ==========
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share $ .25 $ 1.64 $ (6.64) $ 3.87
--------- --------- -------- ---------
Diluted net income (loss) per share $ .25 $ 1.53 $ (6.64) $ 3.62
--------- --------- -------- ---------
Weighted average number of common shares
outstanding and common equivalent
shares during the period (in millions)
Basic 55.0 54.3 54.8 54.1
Diluted 55.5 59.5 54.8 59.5
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE>
- 3 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
On October 5, 2000, 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"). Please see Note 1 to the Consolidated
Financial Statements.
<TABLE>
<S> <C> <C> <C>
September 30, December 31, September 30,
2000 1999 1999
---- ---- ----
(In millions of dollars)
ASSETS
------
CURRENT
Cash and cash equivalents $ 378 $ 70 $ 99
Restricted cash (Note 12) 100 - -
Restricted cash and securities - Fibreboard -
current portion (Note 13) 850 900 -
Receivables 507 358 584
Inventories 532 466 532
Insurance for asbestos litigation claims -
current portion (Note 12) 33 25 25
Deferred income taxes 181 185 264
Income tax receivable 4 61 -
Other current assets 25 23 28
--------- --------- ---------
Total current 2,610 2,088 1,532
--------- --------- ---------
OTHER
Insurance for asbestos litigation claims (Note 12) 59 205 206
Restricted cash (Note 12) 44 - -
Restricted cash and securities - Fibreboard (Note 13) 395 938 -
Asbestos costs to be reimbursed - Fibreboard - - 41
Deferred income taxes 828 547 551
Goodwill (Note 5) 649 743 747
Investments in affiliates 87 65 50
Other noncurrent assets 273 208 243
--------- --------- ---------
Total other 2,335 2,706 1,838
--------- --------- ---------
PLANT AND EQUIPMENT, at cost
Land 58 70 70
Buildings and leasehold improvements 672 725 719
Machinery and equipment 2,547 2,639 2,620
Construction in progress 360 258 233
--------- --------- ---------
3,637 3,692 3,642
Less - accumulated depreciation (1,944) (1,992) (1,962)
--------- --------- ---------
Net plant and equipment 1,693 1,700 1,680
--------- --------- ---------
TOTAL ASSETS $ 6,638 $ 6,494 $ 5,050
========= ========= =========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE>
- 4 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (continued)
(unaudited)
On October 5, 2000, 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"). Please see Note 1 to the Consolidated
Financial Statements.
<TABLE>
<S> <C> <C> <C>
September 30, December 31, September 30,
2000 1999 1999
---- ---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars)
------------------------------------
CURRENT
Accounts payable and accrued liabilities $ 696 $ 839 $ 784
Reserve for asbestos litigation claims - current 950
portion (Note 12) 1,250 1,050
Asbestos-related liabilities - Fibreboard - current
portion (Note 13) 850 900 -
Short-term debt 56 68 103
Long-term debt - current portion (Note 6) 2,733 159 84
-------- -------- ---------
Total current 5,585 2,916 2,021
-------- -------- ---------
LONG-TERM DEBT 32 1,764 1,994
-------- -------- ---------
OTHER
Reserve for asbestos litigation claims (Note 12) 980 820 958
Asbestos-related liabilities - Fibreboard (Note 13) 395 938 67
Other employee benefits liability 322 318 324
Pension plan liability 41 42 46
Other 337 339 331
-------- -------- ---------
Total other 2,075 2,457 1,726
-------- -------- ---------
COMPANY OBLIGATED SECURITIES OF
ENTITIES HOLDING SOLELY PARENT
DEBENTURES 195 194 195
-------- -------- ---------
MINORITY INTEREST 47 44 43
-------- -------- ---------
STOCKHOLDERS' EQUITY
Common stock 700 695 698
Deficit (1,884) (1,510) (1,565)
Accumulated other comprehensive income (loss) (103) (51) (41)
Other (9) (15) (21)
-------- -------- ---------
Total stockholders' equity (1,296) (881) (929)
-------- -------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,638 $ 6,494 $ 5,050
======== ======== =========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE>
- 5 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
On October 5, 2000, 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"). Please see Note 1 to the Consolidated
Financial Statements.
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net income $ 14 $ 89 $ (363) $ 209
Reconciliation of net cash provided by operating
activities
Noncash items:
Provision for asbestos litigation claims - - 790 -
Provision for depreciation and amortization 44 53 137 154
Provision (credit) for deferred income taxes (1) 44 (289) 83
Other 9 8 (23) 17
(Increase) decrease in receivables (1) 29 (215) (113)
(Increase) decrease in inventories 15 (29) (105) (89)
Increase (decrease) in accounts payable and
accrued liabilities 17 65 (43) (161)
(Increase) decrease in income tax receivable 1 - 63 104
(Increase) decrease in restricted cash 106 - (144) -
Proceeds from insurance for asbestos
litigation claims, excluding Fibreboard (Note 12) - 147 347 179
Payments for asbestos litigation claims,
excluding Fibreboard (Note 12) (176) (252) (540) (622)
Other (35) (15) (59) (25)
--------- --------- -------- --------
Net cash flow from operations $ (7) $ 139 $ (444) $ (264)
--------- --------- -------- --------
NET CASH FLOW FROM INVESTING
Additions to plant and equipment (113) (39) (278) (138)
Investment in subsidiaries, net of cash
acquired - - (4) -
Proceeds from the sale of affiliate or business
(Note 5) - - 193 -
Other (Note 5) 1 14 (35) (13)
--------- --------- -------- --------
Net cash flow from investing $ (112) $ (25) $ (124) $ (151)
--------- --------- -------- --------
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE>
- 6 -
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(unaudited)
On October 5, 2000, 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"). Please see Note 1 to the Consolidated
Financial Statements.
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(In millions of dollars)
NET CASH FLOW FROM FINANCING
Net additions (reductions) to long-term
credit facilities $ (7) $ (14) $ 948 $ 247
Other additions to long-term debt - 2 22 253
Other reductions to long-term debt (1) (4) (84) (37)
Net increase (decrease) in short-term debt 13 (18) 4 10
Dividends paid (4) (4) (12) (12)
Other - (1) - (1)
---------- -------- --------- ----------
Net cash flow from financing 1 (39) 878 460
---------- -------- --------- ----------
Effect of exchange rate changes on cash (1) (2) (2) -
---------- -------- --------- ----------
Net increase (decrease) in cash and cash
equivalents (119) 73 308 45
Cash and cash equivalents at beginning of
period 497 26 70 54
---------- -------- --------- ----------
Cash and cash equivalents at end of period $ 378 $ 99 $ 378 $ 99
========== ======== ========= ==========
</TABLE>
<PAGE>
- 7 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. SUBSEQUENT EVENT - VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11
On October 5, 2000, 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 "Bankruptcy Court") and are currently
operating their respective businesses as debtors-in-possession in accordance
with provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors are
being jointly administered under Case No. 00-3837 (MFW).
Owens Corning filed for relief under Chapter 11 to address the growing demands
on its cash flow resulting from its multi-billion dollar asbestos liability.
This liability is discussed in greater detail in Note 12 to the Consolidated
Financial Statements. Based upon the recent developments discussed below, Owens
Corning believes that the Filing offers the only viable legal process by which
it and its subsidiaries will achieve a comprehensive resolution of its current
and future asbestos-related liabilities.
Consequence of Filing
---------------------
As a consequence of the Filing, all pending litigation against the Debtors is
stayed and no party may take any action to realize on its pre-petition claims
except pursuant to further order of the Bankruptcy Court. In addition, the
Debtors may reject pre-petition executory contracts and unexpired lease
obligations, and parties affected by these rejections may file claims with the
Bankruptcy Court. The Company anticipates that substantially all liabilities as
of the date of the Filing will be dealt with in accordance with a plan of
reorganization which will be proposed and voted on in accordance with the
provisions of the Bankruptcy Code. Two creditors' committees, one representing
asbestos claimants and the other representing other unsecured creditors, have
been formed and, in accordance with the provisions of the Bankruptcy Code, will
have the right to be heard on all matters that come before the Bankruptcy Court.
Owens Corning expects that the committees, together with a representative of
future asbestos claimants to be appointed by the Bankruptcy Court, will be the
primary entities with which the Company will negotiate the terms of a plan of
reorganization.
The accompanying Consolidated Financial Statements have been prepared 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 normal
course of business, the Company 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, which do not give effect to any adjustments to
the carrying value of assets or amounts of liabilities that might be necessary
as a consequence of a plan of reorganization.
Substantially all of the Company's pre-petition debt is now in default due to
the Filing. Although the Filing occurred after the end of the third quarter, the
accompanying Consolidated Financial Statements reflect the classification of
most of the Company's pre-petition debt as current. This includes debt under
Owens Corning's $1.8 billion bank credit facility, which was in default as a
result of a breach of covenant on October 1, 2000, as described below, and
approximately $1.4 billion of other outstanding debt, which is expected to be
subject to cross-default provisions at some point during the next twelve months.
As required by Statement of Position 90-7 (SOP 90-7), "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code," the Company, beginning in
the fourth quarter of 2000, will be required to record its debt
<PAGE>
- 8 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. SUBSEQUENT EVENT - VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11
(continued)
instruments at the allowed amount, as defined by SOP 90-7. Accordingly, the
Company will accelerate the amortization of its debt-related costs attributable
to the Debtors and record a pretax expense of approximately $29 million during
October 2000. This expense will be classified as a Reorganization Cost and is
comprised of a $27 million charge for unamortized financing costs, including $5
million associated with the Monthly Income Preferred Securities (MIPS), and $2
million for unamortized discounts.
The Company has negotiated a debtor-in-possession revolving credit facility with
Bank of America, N.A. in the aggregate amount of $500 million, which financing
is subject, among other conditions, to approval by the Bankruptcy Court.
The Company has received approval from the Bankruptcy Court to pay or otherwise
honor certain of its pre-petition obligations, including claims of critical
vendors and employee wages and benefits in the ordinary course of business.
Background of Filing
--------------------
Since the adoption of its National Settlement Program ("NSP") in the fourth
quarter of 1998, Owens Corning's strategy has been to use that program to avoid
the costly and unpredictable traditional tort system and to quantify the amount
of payments to asbestos claimants and control the timing of those payments to
match the Company's ability to make such payments. The NSP achieved these goals
in many respects and also facilitated the negotiation of the deferral of
payments to NSP participants earlier this year. As discussed in more detail
below, however, Owens Corning's inability to obtain ongoing financing on
acceptable terms, the lack of support for additional payment deferrals, the
higher than anticipated number of asbestos-related claims (which adversely
affected the Company's estimated liquidity needs through 2004), and the recent
deterioration of Owens Corning's operations, resulted in the decision by Owens
Corning to make the Filing.
Refinancing. As previously disclosed, Owens Corning had agreed to make
------------
substantial payments for asbestos-related liabilities through at least 2004;
those payments were expected to require the dedication of a significant portion
of Owens Corning's sources of liquidity during the period; and, depending on
operational cash flow and other sources of cash, Owens Corning might require
additional financing. During the third quarter of 2000, Owens Corning met on a
number of occasions with the agent for its bank group to discuss a refinancing
of its $1.8 billion bank credit facility, which was scheduled to expire in June
2002 (the "Refinancing"). Owens Corning requested that the Refinancing extend
into 2005 and be increased to an amount sufficient to meet its expected
liquidity needs, including the repayment on maturity of $300 million of
debentures in 2005. Following extended negotiations, Owens Corning concluded at
the end of the third quarter that its lenders would not be willing to agree to a
Refinancing that would meet the Company's needs. Moreover, Owens Corning
concluded that the lenders would require that, as a part of any Refinancing,
Owens Corning pledge its assets to secure the loans and agree to limits on
payments for asbestos liabilities that would be inconsistent with its
anticipated asbestos payment obligations.
Support for Payment Deferrals. During the course of the third quarter, support
-----------------------------
for asbestos payment deferrals was adversely impacted by several factors. First,
as a result of the downturn in the Company's operations in the third quarter of
2000 (discussed below), Owens Corning approached certain NSP firms to
<PAGE>
- 9 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. SUBSEQUENT EVENT - VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11
(continued)
request additional payment deferrals. Based on those discussions, Owens Corning
determined that it would not be feasible to obtain additional payment deferrals
and that the likely terms of the Refinancing would be unacceptable to the NSP
participants. Second, the NSP Executive Committee and other participants in the
NSP declined to agree to any deferral in payments due from Fibreboard. Finally,
several NSP firms declined to grant the deferrals previously agreed upon in
principle and initiated legal proceedings to enforce the terms of their
respective NSP Agreements.
Asbestos-Related Claims. Prior to the Filing, Owens Corning noted several trends
----------------------- which indicated that it would likely be required to
defer asbestos-related payments in excess of deferrals previously negotiated
with law firms participating in the NSP. First, Owens Corning began to see
evidence that a higher than anticipated number of new asbestos-related claims,
particularly higher value claims, was being filed by non-NSP firms, including
new firms (where the timing of resolution is uncertain and the amount and timing
of payments may be determined by the traditional tort system). Second, Owens
Corning noted a substantial increase in the rate of claims filed, particularly
during September 2000. Approximately 7,800 asbestos-related claims were received
by Owens Corning (excluding Fibreboard) during the third quarter of 2000,
compared to approximately 3,400 and 4,200 claims received during the first and
second quarters, respectively. While Owens Corning believes that this increase
in claims filings represented an acceleration of claims from future periods as a
result of the downgrading of Owens Corning's credit rating in mid-2000, rather
than an increase in the total number of asbestos-related claims to be expected,
this trend would have had the effect of accelerating the related settlement
payments and increasing liquidity needs through 2004 and/or the need to
negotiate further deferrals of asbestos payments.
Downturn in Operations. Owens Corning's results of operations deteriorated
-----------------------
significantly in the third quarter of 2000, with expectations for the quarter
declining particularly during the last half of the period. As a result of, among
other factors, the fall in demand for building materials, elevated energy and
raw materials costs and the inability of Owens Corning to fully recapture these
costs in price adjustments, Owens Corning's margins and income from operations
were significantly reduced. As a result, Owens Corning's ability to service its
ongoing asbestos payments and continue to comply with its pre-Filing loan
covenants was adversely affected. Owens Corning concluded at the end of the
third quarter of 2000 that, unless it used a substantial portion of its cash to
repay a portion of its bank debt, Owens Corning would be in violation of the
leverage ratio covenant under its $1.8 billion bank credit facility. Moreover,
in view of reduced expectations concerning operating results in the fourth
quarter and beyond, the Company concluded that its long-term liquidity needs
(driven in large measure by asbestos payment obligations) could not likely be
met by its cash and available credit under its bank credit facility (which was
limited by leverage ratio and other loan covenants).
Timing of Chapter 11 Filing
---------------------------
As a result of the above factors, Owens Corning management determined late in
the third quarter that it was unlikely that Owens Corning would be able to meet
its long-term liquidity needs, including agreed and other required asbestos
payments and repayment of debt on maturity. While Owens Corning held $378
million of Cash and Cash Equivalents at the end of the third quarter of 2000,
and Owens Corning's operations (excluding the effects of asbestos) are
traditionally profitable and generate strong positive cash flow, management
determined that a Chapter 11 filing in October would be in the best interest of
all Owens Corning stakeholders.
<PAGE>
- 10 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. SUBSEQUENT EVENT - VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11
(continued)
Post-Filing Liquidity
---------------------
At September 30, 2000, Owens Corning had $378 million of Cash and Cash
Equivalents. In connection with the Filing, Owens Corning has obtained a $500
million debtor-in-possession financing commitment from Bank of America, N.A.
(the "DIP Financing"), which is subject to certain conditions including
Bankruptcy Court approval.
The accounts receivable securitization facility between Owens Corning, certain
lenders, and Owens Corning Funding Corporation (a bankruptcy remote and wholly
owned subsidiary of Owens Corning), scheduled to expire in October 2000, has
been terminated due to the Filing. As of October 31, 2000, all of the $125
million of receivables sold to lenders under this facility have been settled as
collected.
Owens Corning expects that cash from operations (and, if concluded and approved,
the DIP Financing) will provide sufficient funds to allow it to continue its and
its subsidiaries' operating activities and to meet its post-Filing debt and
capital requirements for the foreseeable future, while a plan of reorganization
is developed and considered.
<PAGE>
- 11 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. SEGMENT DATA
Effective July 1, 2000, the Company realigned its internal operating segments.
Following this realignment, the Company reviewed its operating segments in
accordance with SFAS 131 and concluded that the aggregation of its operating
segments into two reportable operating segments was still appropriate. As a
result of this realignment, however, intersegment transactions no longer exist.
Net sales and income from operations have been restated for all periods
presented to reflect this change.
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(In millions of dollars)
NET SALES
Reportable Operating Segments
-----------------------------
Building Materials
United States $ 994 $ 1,025 $ 2,901 $ 2,837
Europe 1 54 89 174
Canada and other 53 48 143 133
-------- -------- ------- --------
Total Building Materials 1,048 1,127 3,133 3,144
-------- -------- ------- --------
Composite Materials
United States 104 92 309 277
Europe 85 75 256 243
Canada and other 44 39 135 109
-------- -------- ------- --------
Total Composite Materials 233 206 700 629
-------- -------- ------- --------
Total Reportable Operating Segments $ 1,281 $ 1,333 $ 3,833 $ 3,773
======== ======== ======= ========
External Customer Sales by Geographic Region
--------------------------------------------
United States $ 1,098 $ 1,117 $ 3,210 $ 3,114
Europe 86 129 345 417
Canada and other 97 87 278 242
-------- -------- ------- --------
Net Sales $ 1,281 $ 1,333 $ 3,833 $ 3,773
======== ======== ======= ========
</TABLE>
<PAGE>
- 12 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2. SEGMENT DATA (continued) 2000 1999 2000 1999
---- ---- ---- ----
(In millions of dollars)
INCOME (LOSS) FROM OPERATIONS
Reportable Operating Segments
-----------------------------
Building Materials
United States $ 73 $ 160 $ 285 $ 381
Europe - 1 2 5
Canada and other 12 8 26 24
--------- -------- --------- --------
Total Building Materials 85 169 313 410
--------- -------- --------- --------
Composite Materials
United States 5 15 54 42
Europe 7 (4) 10 (7)
Canada and other 4 4 16 11
--------- -------- --------- --------
Total Composite Materials 16 15 80 46
--------- -------- --------- --------
Total Reportable Operating Segments $ 101 $ 184 $ 393 $ 456
--------- -------- --------- --------
Geographic Regions
------------------
United States $ 78 $ 175 $ 339 $ 423
Europe 7 (3) 12 (2)
Canada and other 16 12 42 35
--------- -------- --------- --------
Total Reportable Operating Segments $ 101 $ 184 $ 393 $ 456
========= ======== ========= ========
Reconciliation to Consolidated Income
-------------------------------------
Before Provision for Income Taxes
---------------------------------
Provision for asbestos litigation claims - - (790) -
General corporate income (expense) (21) (1) (55) (8)
Cost of borrowed funds (55) (40) (149) (112)
--------- -------- --------- --------
Consolidated Income Before
Provision for Income Taxes $ 25 $ 143 $ (601) $ 336
--------- -------- --------- --------
</TABLE>
<PAGE>
- 13 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
3. GENERAL
The financial statements included in this Report are condensed and unaudited,
pursuant to certain Rules and Regulations of the Securities and Exchange
Commission, but include, in the opinion of the Company, adjustments necessary
for a fair statement of the results for the periods indicated, which, however,
are not necessarily indicative of results which may be expected for the full
year.
In connection with the condensed financial statements and notes included in this
Report, reference is made to the financial statements and notes thereto
contained in the Company's 1999 Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission.
Certain reclassifications have been made to the 1999 Consolidated Financial
Statements to conform with the classifications used in 2000.
4. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS
In September 2000, the Company recorded a $26 million pretax charge for
restructuring and other actions. This charge is comprised of a $6 million pretax
restructure charge and a $20 million pretax charge for other actions. The $6
million restructure charge has been classified separately as a component of
operating expenses on the consolidated statement of income and represents asset
impairments associated with the planned closing of two lines at our Newark, Ohio
manufacturing facility. This restructure charge represents the first phase of
the Company's plan to realign operations at the Newark facility. The remaining
$20 million of other actions is comprised of a $14 million pretax charge to
other operating expenses, representing an $11 million charge associated with
asset impairments within our Cultured Stone and other businesses, and a $3
million charge associated with severance costs for certain employees; and a $6
million pretax charge to marketing and administrative expenses, representing a
settlement loss associated with one of our U.S. pension plans.
During 1997 and 1998, the Company recorded pretax charges of $386 million for
restructuring and other actions to implement the Company's announced program to
close manufacturing facilities, enhance manufacturing productivity and reduce
overhead. Of the total pretax charge of $386 million, $143 million was recorded
in the fourth quarter of 1997 and the remaining $243 million was recorded during
1998.
The $386 million pretax charge was comprised of a $185 million charge associated
with the restructuring of the Company's business segments and a $201 million
charge associated with asset impairments, including investments in certain
affiliates. The components of the restructuring charge include $115 million for
personnel reductions; $68 million for the divestiture of non-strategic
businesses and facilities, of which $52 million represented non-cash asset
revaluations, $16 million for exit cost liabilities, primarily for leased
warehouse and office facilities that were vacated; and $2 million for other
actions. The divestiture of non-strategic businesses and facilities included the
closure of the Candiac, Quebec manufacturing facility. During the second quarter
of 1999, the Candiac manufacturing facility was re-opened in order to meet
market demands.
The $115 million for personnel reductions represented severance costs associated
with the elimination of approximately 2,450 positions worldwide. The primary
groups affected included manufacturing and administrative personnel. As of
September 2000, approximately $105 million has been paid and charged against the
reserve for personnel reductions. Charges of approximately $14 million have been
made against exit cost liabilities through September 2000. No adjustments have
been made to the liabilities.
<PAGE>
- 14 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
4. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS (continued)
The following table summarizes the status of the liabilities from the
restructure program described above, including cumulative spending and
adjustments and the remaining balance as of September 30, 2000:
<TABLE>
<S> <C> <C> <C>
Beginning Total Ending
Liability Payments Liability
(In millions of dollars) --------- -------- ---------
Personnel Costs $ 115 $ (105) $ 10
Facility and Business Exit Costs 16 (14) 2
Other 2 (2) -
------ -------- --------
Total $ 133 $ (121) $ 12
====== ======== ========
</TABLE>
The Company continually evaluates whether events and circumstances have occurred
that indicate that the carrying amount of certain long-lived assets is
recoverable. When factors indicate that a long-lived asset should be evaluated
for possible impairment, the Company uses an estimate of the expected
undiscounted cash flows to be generated by the asset to determine whether the
carrying amount is recoverable or if an impairment exists. When it is determined
that an impairment exists, the Company uses the fair market value of the asset,
usually measured by the discounted cash flows to be generated by the asset, to
determine the amount of the impairment to be recorded in the financial
statements.
5. ACQUISITIONS AND DIVESTITURES OF BUSINESSES
On May 31, 2000, the Company completed the sale of its European Building
Materials business to an unconsolidated joint venture, Alcopor Owens Corning, in
which the Company has a 40% interest. Proceeds from the sale, net of the
Company's $34 million cash infusion into the joint venture, were $177 million.
In connection with this transaction, the joint venture assumed $62 million of
debt from Owens Corning and the Company incurred fees of approximately $6
million, resulting in net cash proceeds of approximately $109 million. A pretax
gain of approximately $5 million, including a $54 million write-off of goodwill,
was realized from the sale. This pretax gain was recorded as a reduction of
other operating expenses on the consolidated statement of income.
The results of operations of the European Building Materials business are
reflected in the Company's consolidated statement of income through the period
ending May 31, 2000. For the nine months ended September 30, 2000 and the year
ended December 31, 1999, the European Building Materials business generated
sales of approximately $88 million and $234 million, respectively, and income
from operations of approximately $1 million and $12 million, respectively.
Effective May 31, 2000, the Company accounts for its ownership interest in
Alcopor Owens Corning under the equity method. Please see Note 2 to the
Consolidated Financial Statements.
During the first quarter of 2000, the Company completed the sale of the assets
of Falcon Foam, a producer of foam insulation in Michigan and California. Net
proceeds from the sale were $50 million and resulted in a pretax loss of
approximately $5 million, including a $32 write-off of goodwill. This loss was
recorded as other operating expenses on the consolidated statement of income.
During the first quarter of 2000, the Company also realigned its vinyl siding
manufacturing operations, resulting in the closure of its Fair Bluff, North
Carolina manufacturing plant. This realignment resulted in a $9 million pretax
expense, all of which was recorded as other operating expenses on the
consolidated statement of income.
<PAGE>
- 15 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. ACQUISITIONS AND DIVESTITURES OF BUSINESSES (continued)
In connection with a proposal received from its Korean joint venture partner,
the Company infused approximately $29 million of cash into this venture in
March, 1999. As a result of this investment, along with additional investments
by the other partner, the Company increased its ownership interest in Owens
Corning Korea to 70%. The Company accounted for this transaction under the
purchase method of accounting whereby the assets acquired and liabilities
assumed, including $84 million in debt, have been recorded at their fair values
and the results of operations have been consolidated since the date of
acquisition. Prior to that date, the Company accounted for this joint venture
under the equity method.
6. LONG-TERM DEBT
During the first quarter of 1999, the Company issued $250 million of senior debt
securities (maturing in 2009 and bearing an annual rate of interest of 7.0%
payable semiannually) as unsecured obligations of the Company. The proceeds from
the issuance of these securities were used to reduce borrowings under the
Company's $1.8 billion bank credit facility.
As of October 1, 2000, the Company was in violation of the leverage ratio
covenant under its $1.8 billion bank credit facility. As a result of this
condition, the Company anticipates that substantially all of its debt
obligations will be subject to cross-default provisions at some point during the
next twelve months. Accordingly, approximately $2.7 billion of outstanding
borrowings, including $1.3 billion of outstanding borrowings, under the credit
facility and $1.4 billion of other outstanding borrowings at September 30, 2000,
have been classified as a current liability on the consolidated balance sheet.
7. INCOME TAXES
The reconciliation between the U.S. federal statutory rate and the Company's
effective income tax rate is:
<TABLE>
<S> <C> <C> <C> <C>
Quarter Nine Months
Ended Ended
September 30, September 30,
-------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
U.S. federal statutory rate 35% 35% (35%) 35%
State and local income taxes (3) 2 (5) 3
Operating losses of foreign subsidiaries 11 1 1 1
Special tax election (a) - (6) (2) (3)
Foreign tax rate differences (1) - - -
Other - 3 - (1)
------ ------ ------ ------
Effective tax rate 42% 35% (41%) 35%
====== ====== ====== ======
(a) Represents the implementation of a tax strategy associated with one of our foreign subsidiaries.
</TABLE>
<PAGE>
- 16 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
8. INVENTORIES (continued)
<TABLE>
<S> <C> <C>
September 30, 2000 December 31, 1999
------------------ -----------------
(In millions of dollars)
Inventories are summarized as follows:
Finished goods $ 406 $ 374
Materials and supplies 199 158
------------ ------------
FIFO inventory 605 532
Less: Reduction to LIFO basis (73) (66)
------------ ------------
Total Inventory $ 532 $ 466
============ ============
</TABLE>
Approximately $381 million and $269 million of total inventories were valued
using the LIFO method at September 30, 2000 and December 31, 1999, respectively.
9. CONSOLIDATED STATEMENT OF CASH FLOWS
Cash payments (refunds) for income taxes and cost of borrowed funds are
summarized as follows:
<TABLE>
<S> <C> <C> <C> <C>
Quarter Nine Months
Ended Ended
September 30, September 30,
-------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(In millions of dollars)
Income taxes $ 5 $ 1 $ (30) $ (82)
Cost of borrowed funds 54 34 154 87
The Company considers all highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
</TABLE>
As discussed in Note 1 to the Consolidated Financial Statements and in
Management's Discussion and Analysis, all pre-petition liabilities of the
Debtors have been stayed due to the Filing. As a result, interest related to
pre-petition debt instruments of the Debtors is not expected to be paid or
accrued in future periods and cost of borrowed funds is expected to decrease
significantly beginning in the fourth quarter of 2000.
Please refer to Notes 4 and 12 for disclosure of Non-Cash activities.
10. COMPREHENSIVE INCOME
The Company's comprehensive income for the quarters ended September 30, 2000 and
1999 was a loss of $15 million and income of $96 million, respectively. For the
nine months ended September 30, 2000 and 1999, comprehensive income was a loss
of $415 million and income of $206 million, respectively. The Company's
comprehensive income includes net income, currency translation adjustments, and
deferred gains and losses on certain hedging transactions. The comprehensive
loss for the quarter and nine months ended September 30, 2000 includes
unfavorable currency translation adjustments of $29 million and $52 million,
respectively, reflecting the impact of the strengthening U.S. dollar during the
year.
The comprehensive loss for the nine months ended September 30, 2000 includes a
reclassification from other comprehensive income to net income of approximately
$13 million. This reclassification reflects the expense recognition of
accumulated currency translation adjustments resulting from the sale of the
European Building Materials business to Alcopor Owens Corning during the second
quarter of 2000 (see Note 5).
<PAGE>
- 17 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. EARNINGS PER SHARE
The following table reconciles the net income (loss) and weighted average number
of shares used in the basic earnings per share calculation to the net income and
weighted average number of shares used to compute diluted earnings per share.
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(In millions of dollars, except share data)
Net income (loss) used for basic earnings
per share $ 14 $ 89 $ (363) $ 209
Net income (loss) effect of assumed
conversion of preferred securities - 2 - 6
-------- -------- -------- -------
Net income used for diluted earnings per share $ 14 $ 91 $ (363) $ 215
======== ======== ======== =======
Weighted average number of shares
outstanding used for basic earnings per share
(thousands) 55,008 54,292 54,759 54,111
Deferred awards and stock options
(thousands) 457 664 - 789
Shares from assumed conversion of preferred
securities (thousands) - 4,566 - 4,566
-------- -------- -------- -------
Weighted average number of shares
outstanding and common equivalent shares used
for diluted earnings per share
(thousands) 55,465 59,522 54,759 59,466
======== ======== ======== =======
</TABLE>
<PAGE>
- 18 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
Asbestos Liabilities
--------------------
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD)
Numerous claims have been asserted against Owens Corning alleging personal
injury arising from inhalation of asbestos fibers. Virtually all of these claims
arise out of Owens Corning's manufacture, distribution, sale or installation of
an asbestos-containing calcium silicate, high temperature insulation product,
the manufacture and distribution of which was discontinued in 1972. Owens
Corning received approximately 7,800 asbestos personal injury claims during the
third quarter of 2000, approximately 15,400 such claims during the first three
quarters of 2000, and approximately 32,000 such claims during 1999.
Prior to October 5, 2000, when Owens Corning and 17 of its United States
subsidiaries (collectively, the "Debtors"), including Fibreboard (see Item B
below), filed voluntary petitions for relief (the "Filing") under Chapter 11 of
the United States Bankruptcy Code, the vast majority of asbestos personal injury
claims were in the process of being resolved through the National Settlement
Program described below. As a result of the Filing, all claims against the
Debtors have been stayed (see Note 1). The final resolution of all pending and
future asbestos claims against Owens Corning and Fibreboard will be dealt with
as part of Owens Corning's plan of reorganization.
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
Owens Corning's asbestos liability, and that of Fibreboard (see Item B below),
and to help Owens Corning better predict the timing and amount of indemnity
payments for both pending and future claims.
The number of law firms participating in the NSP expanded from approximately 50
when the NSP was established to approximately 120 as of September 30, 2000. Each
of these participating law firms agreed to a long-term settlement agreement
("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 and Future Claims were negotiated with each
participating firm, and each firm communicated with its respective current
clients to obtain authority to settle individual claims. Payments to individual
claimants varied based on a number of factors, including the type and severity
of disease, age and occupation. All 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.
<PAGE>
- 19 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
As to Future Claims, each participating NSP firm agreed (consistent with
applicable legal requirements) to recommend to its future clients, based on
appropriately exercised professional judgment, to resolve their asbestos
personal injury claims against Owens Corning and/or Fibreboard through an
administrative processing arrangement, rather than litigation. In the case of
Future Claims involving non-malignancy, claimants were required to present
medical evidence of functional impairment, as well as the product exposure
criteria and other requirements set forth above, to be entitled to compensation.
Owens Corning and Fibreboard (see Item B below) each retained the right to
terminate any individual NSP Agreement if in any year more than a specified
number of plaintiffs represented by the plaintiffs' firm in question rejected
and ultimately opted out of such agreement. Opt out procedures were specified in
the settlement agreements, and provided for mediation and further negotiation
before a claimant could pursue his or her case in the court system. Through
September 2000, fewer than 300 claimants had elected to reject the original
settlement proposal, and to mediate under the terms of the NSP Agreement.
As of September 30, 2000, Owens Corning had agreed to settle, through the NSP, a
total of approximately 240,000 Initial Claims. As of that date, Owens Corning
had paid more than $900 million (including Administrative Deposits as described
below) of the estimated $1.9 billion total settlement amounts payable under the
NSP in connection with the resolution of these Initial Claims. Through September
2000, Owens Corning had received approximately 3,800 Future Claims under the
NSP, approximately 2,600 of which were received in the third quarter of 2000.
NSP Initial Claims Payment Schedules
------------------------------------
Payments under the NSP for Initial Claims were generally scheduled to be made
through 2002. Prior to the Filing, Owens Corning had requested that NSP
participating firms agree to defer payments in 2000 through 2002 on Initial
Claims to the extent necessary to ensure that Owens Corning limited its total
asbestos-related payments to the following schedule: $950 million in 2000, $400
million in 2001, and $250 million in 2002 ("Deferral Program"). On the basis of
preliminary information, Owens Corning had estimated that the Deferral Program
might result in the deferral of approximately $500 million of anticipated NSP
payments, with any such deferred amounts to be paid in two equal installments in
2003 and 2004, subject to then applicable loan covenants.
NSP Future Claims Payment Schedules
-----------------------------------
Payments for qualifying Future Claims were scheduled to begin in 2003, with the
timing of such payments generally being based on the 18 month period in which
the claims were accepted by Owens Corning for payment. Subject to the variables
and uncertainties discussed below, Owens Corning had expected that the payments
for Future Claims beginning in 2003 would not exceed $150 million per year, plus
any amounts
<PAGE>
- 20 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
payable pursuant to the Deferral Program discussed above. Additional settlement
payments were expected to be made by Fibreboard (see Item B below).
As a result of the Filing, there is substantial additional uncertainty as to the
number of Future Claims that will be made.
Non-NSP Claims
--------------
As of September 30, 2000, approximately 31,000 asbestos personal injury claims
were pending against Owens Corning outside the NSP. This compares to
approximately 25,800 and 25,300 such claims pending on September 30 and December
31, 1999, respectively. The information needed for a critical evaluation of
pending claims, including the nature and severity of disease and definitive
identifying information concerning the claimant, typically becomes available
only through the discovery process or as a result of settlement negotiations,
often not occurring until years after the claim is filed. In view of the
indefiniteness of the available information, the actual number of pending claims
may vary from the numbers indicated.
As a result of the Filing, there is substantial additional uncertainty as to the
number of non-NSP claims that will be made.
Owens Corning resolved (by settlement or otherwise) approximately 4,800 asbestos
personal injury claims outside the NSP during 1999 and 3,000 such claims during
the first three quarters of 2000, of which 1,700 claims were resolved during the
third quarter of 2000. The average cost of resolution was approximately $34,600
per claim for claims resolved during 1999, $45,600 per claim for claims resolved
during the first three quarters of 2000, and $18,200 per claim for claims
resolved during the third quarter of 2000. As a rule, these claims were settled
as they were scheduled for trial, and they typically involved more serious
injuries and diseases. Consequently, Owens Corning does not believe that the
average costs of resolution indicated above are representative of the value of
non-NSP claims generally.
During the implementation of the NSP, Owens Corning attempted to settle
individual non-NSP claims for amounts generally consistent with payments to NSP
claimants. Such settlements were preferable to trials, provided that the agreed
settlement was fair in relation to similarly situated NSP claimants, because
both the timing and amount of such payments were more predictable. Beginning in
late 1999, Owens Corning received a number of settlement demands from non-NSP
plaintiffs' counsel which exceeded historical settlement averages for similar
cases and were higher than the settlement values of such cases within the NSP.
In addition, during the third quarter of 2000 Owens Corning began to see
evidence that a higher than anticipated number of new asbestos-related claims,
particularly higher value claims, was being filed by non-NSP firms, including
new firms without prior asbestos litigation experience.
<PAGE>
- 21 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
Asbestos-Related Payments
-------------------------
In the third quarter of 2000, Owens Corning made approximately $70 million of
asbestos-related payments, falling within four major categories: (1) Settlements
in respect of verdicts incurred or claims resolved prior to the implementation
of the NSP ("Pre-NSP Settlements"); (2) NSP settlements; (3) Non-NSP settlements
covering cases not resolved by the NSP; and (4) Defense, claims processing and
administrative expenses.
Payments for asbestos-related liabilities during 1999, the first three quarters
of 2000, and the third quarter of 2000 fell within these four categories as
follows:
<TABLE>
<S> <C> <C> <C>
(In millions of dollars)
2000 (through
1999 September 30) 3rd Quarter
---- ------------- -----------
Pre-NSP Settlements $ 170 $ 51 $ 6
NSP Settlements 570 538 27
Non-NSP Settlements 30 42 12
Defense, Claims Processing and
Administrative Expenses 90 53 25
------- ------ -------
$ 860 $ 684 $ 70
======= ======= =======
</TABLE>
Owens Corning has deposited certain amounts in escrow accounts to facilitate
claims processing under the NSP ("Administrative Deposits"). Amounts deposited
into escrow in Administrative Deposits during a reporting period are included in
the payments shown for NSP Settlements during the period. At September 30, 2000,
approximately $144 million of Administrative Deposits previously made by Owens
Corning had not been finally distributed to claimants ("Undistributed
Administrative Deposits") and, accordingly, are reflected in Owens Corning's
consolidated balance sheet as restricted assets (under the caption "Restricted
cash") and have not been subtracted from Owens Corning's reserve for asbestos
personal injury claims (discussed below).
All amounts discussed above are before tax and application of insurance
recoveries.
Asbestos Legislation
--------------------
In the fall of 1999, both the United States Senate and House of Representatives
held hearings on proposed legislation (S 758 and HR 1283) intended to address
the problem of asbestos litigation. Although the original House and Senate
proposals were virtually identical, the House was active in considering
revisions to HR 1283. In the first quarter of 2000, the House Judiciary
Committee approved HR 1283, amended to protect private settlement plans and to
make such plans enforceable. During the summer, the bill was reported out of the
Committee but no further action has been taken. While Congress is expected to
return for an extended lame-duck session after election day, no action is
currently expected on this bill. Despite the failure to enact asbestos-related
legislation during 2000, the action taken on HR 1283 reflects ongoing interest
in this matter and the Company believes it is likely that such legislation will
receive further consideration when the 107th Congress convenes in 2001. However,
there can be no assurance that any such legislation will be enacted.
<PAGE>
- 22 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
Tax Legislation
---------------
In the spring of 2000, the United States House of Representatives introduced
proposed legislation (HR 4543) which would exempt investment income earned by an
asbestos-related trust from federal income tax, and would allow asbestos
defendants to carry-back net operating losses ("NOLs") created by asbestos
payments to the years in which the products containing asbestos were 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 exemption of
investment income would benefit the Fibreboard Settlement Trust (described
below) by having the effect of enlarging the corpus of the trust through
tax-free interest accumulation. The bill has received strong bipartisan support
in the form of 92 cosponsors, including 25 members of the Ways and Means
Committee. A year-end comprehensive tax bill, to which it was hoped HR 4543
would be attached, has been set aside in light of a threatened Presidential
veto. Given the broad bipartisan support for HR 4543, the Company believes it is
likely that asbestos tax legislation will receive further attention when the
current or next Congress reconsiders a comprehensive tax package. However, there
can be no assurance that any such legislation will be enacted.
Other Asbestos-Related Litigation
---------------------------------
As previously reported, Owens Corning believes that it has spent significant
amounts to resolve claims of asbestos claimants whose injuries were caused or
exacerbated by cigarette smoking. Owens Corning is pursuing litigation against
tobacco companies (discussed below) to obtain payment of monetary damages
(including punitive damages) for payments made by Owens Corning and Fibreboard
to asbestos claimants who developed smoking related diseases.
In October 1998, the Circuit Court for Jefferson County, Mississippi granted
leave to file an amended complaint in an existing action to add claims by Owens
Corning against seven tobacco companies and several other tobacco industry
defendants. The court has set a February 2001 trial date for this action. In
addition to the Mississippi lawsuit, a lawsuit brought in December 1997 by Owens
Corning and Fibreboard is pending in the Superior Court for Alameda County,
California against the same tobacco companies.
As a result of the Filing, the defendants in these cases removed each case to
Federal District Court. Upon motion by Owens Corning, the U.S. District Court
for the Northern District of California has remanded the California proceeding
back to the state court. A similar motion is pending with the U.S. District
Court for the Southern District of Mississippi for remand of the Mississippi
proceeding.
Insurance
---------
As of September 30, 2000, Owens Corning's financial statements reflect $92
million in unexhausted insurance coverage (net of deductibles and self-insured
retentions) under its liability insurance policies applicable to asbestos
personal injury claims. Most of this amount represents unconfirmed potential
non-products coverage with excess level insurance carriers, as to which Owens
Corning has estimated its probable recoveries. Owens Corning also has a
significant amount of other unconfirmed potential non-products coverage with
excess level carriers. Owens Corning is actively pursuing non-products insurance
recoveries under these policies. The amount and timing of recoveries from excess
level policies will depend on subsequent negotiations and/or proceedings.
<PAGE>
- 23 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
Reserve
-------
As of September 30, 2000, Owens Corning estimated a reserve in accordance with
generally accepted accounting principles to reflect asbestos-related liabilities
that had been asserted or were probable of assertion, in which liabilities were
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 during the second
quarter of 2000.
The approximate balances of the components of the reserve at September 30, 2000
were:
<TABLE>
<S> <C>
Balance
-------
(In billions of dollars)
NSP backlog 1.1
Non-NSP backlog 0.3
Future claims 0.7
Defense, claims processing and administrative expenses 0.1
</TABLE>
In connection with its asbestos reserve, Owens Corning notes that:
o The "NSP backlog" component represented the remaining estimated cost of
resolving Initial Claims (as of September 30, 2000) under the NSP.
o The "Non-NSP backlog" component represented the estimated cost of resolving
asbestos personal injury claims pending against Owens Corning outside the
NSP as of September 30, 2000.
o The "Future claims" component represented the estimated cost of resolving
(i) Future Claims under the NSP and (ii) non-NSP claims made after
September 30, 2000.
o The reserve as a whole reflected $144 million of Undistributed
Administrative Deposits.
Owens Corning cautions that its 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. Such variables include, among others, the cost of
resolving pending non-NSP claims; the disease mix and severity of disease of
pending NSP claims; the number, severity of disease, and jurisdiction of claims
filed in the future (especially the number of mesothelioma claims); how many
future claimants are covered by an NSP Agreement; the extent, if any, to which
individual claimants exercise 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 that are not bound by an NSP Agreement undertake the representation of
asbestos personal injury plaintiffs against Owens Corning; the extent, if any,
to which Owens Corning would exercise 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.
The Filing could affect the number of asbestos-related claims received by Owens
Corning. In addition, because Owens Corning expects that all claims will be
resolved in accordance with a plan of reorganization approved by the Bankruptcy
Court, future asbestos liabilities will likely be affected by the plan of
reorganization.
<PAGE>
- 24 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING)
Prior to 1972, Fibreboard manufactured insulation products containing asbestos.
Fibreboard has since been named as defendant in many thousands of personal
injury claims for injuries allegedly caused by asbestos exposure. Fibreboard
received approximately 10,000 asbestos personal injury claims during the third
quarter of 2000 and approximately 19,000 such claims during the first three
quarters of 2000. Prior to the Filing, 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 claims against the Debtors have
been stayed (see Note 1).
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 September
30, 2000, Fibreboard had settled, through the NSP, approximately 212,000 Initial
Claims. As of that date, Fibreboard had paid more than $650 million (including
Administrative Deposits) of the estimated $1.3 billion total settlement amounts
payable under the NSP in connection with the resolution of these Initial Claims.
The NSP Agreements also provided for the resolution of Future Claims against
Fibreboard through the administrative processing arrangement described in Item
A. Through September 2000, Fibreboard had received approximately 3,800 Future
Claims under the NSP, approximately 2,600 of which were received in the third
quarter of 2000. The timing of payments for Initial and Future Claims against
Fibreboard were to be generally consistent with the timing of Owens Corning
payments, described in Item A.
Non-NSP Claims
--------------
As of September 30, 2000, approximately 8,000 asbestos personal injury claims
were pending against Fibreboard outside the NSP. This compares to approximately
1,000 such claims pending on December 31, 1999. Fibreboard resolved (by
settlement or otherwise) approximately 2,000 asbestos personal injury claims
outside the NSP during the first three quarters of 2000, of which 600 claims
were resolved during the third quarter of 2000. The average cost of resolution
was approximately $48,000 per claim for claims resolved during the first three
quarters of 2000, and $33,000 per claim for claims resolved during the third
quarter of 2000. As a rule, these claims were settled as they were scheduled for
trial, and they typically involved more serious injuries and diseases.
Consequently, Owens Corning does not believe that the average costs of
resolution indicated above are representative of the value of non-NSP claims
generally.
Insurance Settlement
--------------------
In 1993, Fibreboard and two of its insurers, Continental Casualty Company
("Continental") and Pacific Indemnity Company ("Pacific"), entered into the
Insurance Settlement. The Insurance Settlement became effective in the fourth
quarter of 1999 and is final and not subject to appeal.
<PAGE>
- 25 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued)
Since 1993, Continental and Pacific paid, either directly or through an escrow
account funded by them, for substantially all settlements of asbestos claims
reached prior to the initiation of the NSP. Under the Insurance Settlement,
Continental and Pacific provided $1,873 million during the fourth quarter of
1999 to fund Fibreboard's costs of resolving pending and future asbestos claims,
whether under the NSP, in the tort system, or otherwise.
As of September 30, 2000, the Insurance Settlement funds were held in and
invested by the Fibreboard Settlement Trust and were available to satisfy
Fibreboard's pending and future asbestos-related liabilities. As of that date,
$1,085 million (net of outstanding payables) was held in the Fibreboard
Settlement Trust and $160 million was held in Undistributed Administrative
Deposits on behalf of Fibreboard. On an ongoing basis, the funds held in the
Trust will be subject to investment earnings/losses and will be reduced if and
as applied to satisfy Fibreboard's asbestos-related liabilities. Under the terms
of the Trust, any of such assets that ultimately are not used to fund
Fibreboard's asbestos-related liabilities must be distributed to charity.
Funds held in the Fibreboard Settlement Trust and Fibreboard's Undistributed
Administrative Deposits are reflected on Owens Corning's consolidated balance
sheet as restricted assets. At September 30, 2000, these assets were reflected
as current assets or other assets, with each category denoted "Restricted cash
and securities - Fibreboard". See Note 13 for additional information concerning
the Fibreboard Settlement Trust.
Reserve
-------
As of September 30, 2000, Owens Corning estimated a reserve for Fibreboard in
accordance with generally accepted accounting principles to reflect
asbestos-related liabilities. These liabilities (denoted as "Asbestos-related
liabilities - Fibreboard") are reflected as current or other liabilities,
depending on the period in which payment was expected. These liabilities are
always at least equal to the funds held in the Trust and Fibreboard's
Undistributed Administrative Deposits since the funds held in the Trust must be
expended either in connection with Fibreboard's asbestos-related liabilities or
to satisfy the obligation under the Trust to distribute to charity the assets,
if any, remaining in the Trust after satisfaction of all such liabilities (see
Note 13).
At September 30, 2000, Owens Corning estimated Fibreboard's asbestos-related
liabilities at $1.240 billion. This amount includes an increase of $51 million
during the third quarter of 2000 as the result of Owens Corning's ongoing review
of Fibreboard's asbestos-related liabilities.
The approximate balances of the components of the reserve at September 30, 2000
were:
<TABLE>
<S> <C>
Balance
-------
(In billions of dollars)
NSP backlog .80
Non-NSP backlog .10
Future claims .30
Defense, claims processing and administrative expenses .05
</TABLE>
<PAGE>
- 26 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. CONTINGENT LIABILITIES
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued)
The Filing could affect the number of asbestos-related claims received by
Fibreboard. In addition, because Owens Corning expects that all claims will be
resolved in accordance with a plan of reorganization approved by the Bankruptcy
Court, future asbestos liabilities will likely be affected by the plan of
reorganization.
Asbestos-Related Payments
-------------------------
In the third quarter of 2000, gross payments for asbestos-related claims against
Fibreboard were approximately $186 million, all of which were paid/reimbursed by
the Fibreboard Settlement Trust. Gross payments for asbestos-related claims
against Fibreboard during the first three quarters of 2000 and the third quarter
of 2000 fell within four major categories, as follows:
<TABLE>
<S> <C> <C>
(In millions of dollars)
2000
(through September 30) 3rd Quarter
---------------------- -----------
Pre-1993 and Interim Claims $ 29 $ 11
NSP Settlements 705 150
Non-NSP Settlements 41 9
Defense, Claims Processing and Administrative Expenses 45 16
------- -------
$ 820 $ 186
======= =======
</TABLE>
The payments for NSP Settlements include Administrative Deposits during the
quarter on behalf of Fibreboard. At September 30, 2000, there were approximately
$160 million of Undistributed Administrative Deposits made on behalf of
Fibreboard. As described above, these Undistributed Administrative Deposits are
included as restricted assets (under the caption "Restricted cash and securities
- Fibreboard") on Owens Corning's consolidated balance sheet.
<PAGE>
- 27 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13. FIBREBOARD SETTLEMENT TRUST
Under the Insurance Settlement described in Note 12, two of Fibreboard's
insurers provided $1.873 billion during the fourth quarter of 1999 to fund
Fibreboard's costs of resolving pending and future asbestos claims. As of
September 30, 2000, the Insurance Settlement funds were held in and invested by
the Fibreboard Settlement Trust (the "Trust") and were available to satisfy
Fibreboard's pending and future asbestos-related liabilities. On an ongoing
basis, the funds held in the Trust will be subject to investment earnings/losses
and will be reduced if and as applied to satisfy Fibreboard's 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.
General Accounting Treatment
----------------------------
The assets of the Trust are comprised of cash and marketable securities
(collectively, the "Trust Assets") and, with Fibreboard's Undistributed
Administrative Deposits, are reflected on Owens Corning's consolidated balance
sheet as restricted assets. At September 30, 2000, these assets were reflected
as current assets or other assets (with each category denoted "Restricted cash
and securities - Fibreboard"). As of September 30, 2000, Owens Corning estimated
a reserve for Fibreboard in accordance with generally accepted accounting
principles to reflect asbestos-related liabilities. These liabilities (denoted
as "Asbestos-related liabilities - Fibreboard") are reflected as current or
other liabilities, depending on the period in which payment was expected. These
liabilities are always at least equal to the funds held in the Trust and
Fibreboard's Undistributed Administrative Deposits since 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. At September 30, 2000, Owens Corning estimated Fibreboard's
asbestos-related liabilities at $1.240 billion, with a residual obligation to
charity of $5 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 Company's
Consolidated Financial Statements in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Accordingly, marketable
securities classified as available for sale are recorded at fair market value
and marketable securities designated as held to maturity are recorded at
amortized cost.
Any unrealized increase/decrease in fair market value is reflected as a change
in the carrying amount of the asset on the consolidated balance sheet as well as
an increase/decrease to other comprehensive income within stockholders' equity,
net of tax. The residual liability to be paid to charity will also
increase/decrease, with a related decrease/increase to other comprehensive
income within stockholders' equity, net of tax.
Any earnings and realized gains/losses on the Trust Assets are reflected as an
increase/decrease in the carrying amount of such assets on the consolidated
balance sheet as well as other income/expense on the consolidated statement of
income.
<PAGE>
- 28 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13. FIBREBOARD SETTLEMENT TRUST (continued)
The residual liability to be paid to charity will also increase/decrease, with
related other expense/ income on the consolidated statement of income. Cost for
purposes of computing realized gains/losses is determined using the specific
identification method.
Adjustments
-----------
Periodically, the Company evaluates the amount of Fibreboard's asbestos-related
liabilities. During the third quarter of 2000, the Company determined that
Fibreboard's asbestos-related liabilities required an increase of $51 million
(see Note 12). Accordingly, the Company increased Fibreboard's asbestos-related
liabilities and reduced the amount payable to charity by this amount during the
third quarter of 2000.
Results for the Period Ending September 30, 2000
------------------------------------------------
Trust Assets generated interest/dividend earnings of approximately $15 million
in the third quarter of 2000 and $53 million year to date, which have been
recorded as an increase in the carrying amount of the assets on Owens Corning's
consolidated balance sheet and as other income on the consolidated statement of
income. This income, however, has been offset by an equal charge to other
expense, which represents the increase in the residual liability to be paid to
charity.
Payments for asbestos-related claims from the Trust (including Administrative
Deposits) during the third quarter of 2000 were approximately $186 million and
total $820 million year-to-date. Such payments were funded by existing cash in
the Trust or proceeds from the sale of securities. The sale of securities
resulted in a net realized gain of approximately $1 million during the third
quarter of 2000 and approximately $2 million year to date. Realized gains or
losses from the sale of securities are reflected on the Company's financial
statements in the same manner as actual returns on Trust Assets, described
above.
During 2000, fair market value adjustments for securities designated as
available for sale have resulted in a net unrealized gain of $1 million since
their valuation at December 31, 1999. As the investments had an unrealized loss
of approximately $1 million at December 31, 1999, there is no net unrealized
gain or loss on these investments at September 30, 2000. The gain in the current
year has been reflected in the Company's consolidated balance sheet as an
increase to the carrying amount of the asset and an increase to other
comprehensive income. This gain has also been reflected as an increase to the
charity liability, with a corresponding decrease to other comprehensive income.
At September 30, 2000, the fair value of Trust Assets was $1.245 billion and was
comprised of $1.032 billion of marketable securities, $71 million of cash, $18
million of outstanding payables, and $160 million of restricted cash. The
restricted cash represents Undistributed Administrative Deposits. $850 million
of the Trust Assets have been classified as a current asset while the remaining
securities have been classified as noncurrent assets.
<PAGE>
- 29 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13. FIBREBOARD SETTLEMENT TRUST (continued)
The amortized cost, gross unrealized holding gains and losses and fair value of
the investment securities available for sale at September 30, 2000 and December
31, 1999 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
September 30, 2000
------------------
Amortized Gross Unrealized Gross Unrealized
Cost Gain Loss Fair Value
--------- ---------------- ---------------- ----------
(In millions of dollars)
Corporate Bonds $ 32 $ - $ - $ 32
Corporate Notes 473 - - 473
Municipal Bonds 272 - - 272
Mutual Funds 56 - - 56
Time Deposits 43 - - 43
US Government Bonds 156 - - 156
--------- ----------- ----------- ---------
Total $ 1,032 $ - $ - $ 1,032
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
December 31, 1999
-----------------
Amortized Gross Unrealized Gross Unrealized
Cost Gain Loss Fair Value
--------- ---------------- ---------------- ----------
(In millions of dollars)
Corporate Bonds $ 85 $ - $ - $ 85
Corporate Notes 1,334 - (1) 1,333
Municipal Bonds 199 - - 199
US Government Bonds 221 - - 221
--------- --------- --------- ---------
Total $ 1,839 $ - $ (1) $ 1,838
Maturities of investment securities classified as available for sale at September 30, 2000 and December 31,
1999 by contractual maturity are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to recall or prepay obligations with or without call or prepayment penalties.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
September 30, 2000 December 31, 1999
------------------ -----------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
(In millions of dollars)
Due within one year $ 527 $ 527 $ 1,152 $ 1,152
Due after one year through five years 75 75 72 72
Due after five years through ten years 46 46 87 87
Due after ten years 384 384 528 527
--------- -------- -------- --------
Total $ 1,032 $ 1,032 $ 1,839 $ 1,838
</TABLE>
<PAGE>
- 30 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
13. FIBREBOARD SETTLEMENT TRUST (continued)
The table below summarizes Trust and Administrative Deposits activity for the
period ended September 30, 2000:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Unrealized Sale Realized
Balance and Gain/ of Gain/ Balance
12/31/99 Dividends (Loss) Securities (Loss) Adjustments Other Payments 9/30/00
-------- --------- ------ ---------- ------ ----------- ----- -------- -------
Assets
------
Cash
(Note 12) $ - $ - $ - $ 873 $ - $ - $ - $ (820) $ 53
Restricted
Cash (Note 12) - - - - - - 160 - 160
Marketable
Securities:
Available
for Sale 1,838 53 1 (873) 2 - 11 - 1,032
-------- ------- ------ --------- ------- --------- ----- ------- ------
Total Assets $1,838 $ 53 $ 1 $ - $ 2 $ - $ 171 $ (820) $1,245
======== ======= ====== ========= ======= ========= ===== ======= ======
Liabilities
-----------
Asbestos Litigation
Claims
(Note 12) $1,750 $ - $ - $ - $ - $ 150 $ 160 $ (820) $1,240
Charity 88 53 1 - 2 (150) 11 - 5
-------- -------- ------ -------- ------- ------- ----- ------- ------
Total
Liabilities $1,838 $ 53 $ 1 $ - $ 2 $ - $ 171 $ (820) $1,245
======== ======== ====== ======== ======= ======= ===== ======= ======
</TABLE>
<PAGE>
- 31 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(All per share information in Item 2 is on a diluted basis.)
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements are subject
to risks and uncertainties that could cause actual results to differ materially
from those projected in the statements. Some of the important factors that may
influence possible differences are continued competitive factors and pricing
pressures, material costs, construction activity, interest rate movements,
issues involving implementation of new business systems, achievement of expected
cost reductions, 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, 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 "Bankruptcy Court") and are currently
operating their respective businesses as debtors-in-possession in accordance
with provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors are
being jointly administered under Case No. 00-3837 (MFW).
Owens Corning filed for relief under Chapter 11 to address the growing demands
on its cash flow resulting from its multi-billion dollar asbestos liability.
This liability is discussed in greater detail in Note 12 to the Consolidated
Financial Statements. Based upon the recent developments discussed below, Owens
Corning believes that the Filing offers the only viable legal process by which
it and its subsidiaries will achieve a comprehensive resolution of its current
and future asbestos-related liabilities.
Consequence of Filing
---------------------
As a consequence of the Filing, all pending litigation against the Debtors is
stayed and no party may take any action to realize on its pre-petition claims
except pursuant to further order of the Bankruptcy Court. In addition, the
Debtors may reject pre-petition executory contracts and unexpired lease
obligations, and parties affected by these rejections may file claims with the
Bankruptcy Court. The Company anticipates that substantially all liabilities as
of the date of the Filing will be dealt with in accordance with a plan of
reorganization which will be proposed and voted on in accordance with the
provisions of the Bankruptcy Code. Two creditors' committees, one representing
asbestos claimants and the other representing other unsecured creditors, have
been formed and, in accordance with the provisions of the Bankruptcy Code, will
have the right to be heard on all matters that come before the Bankruptcy Court.
Owens Corning expects that the committees, together with a representative of
future asbestos claimants to be appointed by the Bankruptcy Court, will be the
primary entities with which the Company will negotiate the terms of a plan of
reorganization.
<PAGE>
- 32 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The accompanying Consolidated Financial Statements have been prepared 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 normal
course of business, the Company 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, which do not give effect to any adjustments to
the carrying value of assets or amounts of liabilities that might be necessary
as a consequence of a plan of reorganization.
Substantially all of the Company's pre-petition debt is now in default due to
the Filing. Although the Filing occurred after the end of the third quarter, the
accompanying Consolidated Financial Statements reflect the classification of
most of the Company's pre-petition debt as current. This includes debt under
Owens Corning's $1.8 billion bank credit facility, which was in default as a
result of a breach of covenant on October 1, 2000, as described below, and
approximately $1.4 billion of other outstanding debt, which is expected to be
subject to cross-default provisions at some point during the next twelve months.
As required by Statement of Position 90-7 (SOP 90-7), "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code," the Company, beginning in
the fourth quarter of 2000, will be required to record its debt instruments at
the allowed amount, as defined by SOP 90-7. Accordingly, the Company will
accelerate the amortization of its debt-related costs attributable to the
Debtors and record a pretax expense of approximately $29 million during October
2000. This expense will be classified as a Reorganization Cost and is comprised
of a $27 million charge for unamortized financing costs, including $5 million
associated with the Monthly Income Preferred Securities (MIPS), and $2 million
for unamortized discounts.
The Company has negotiated a debtor-in-possession revolving credit facility with
Bank of America, N.A. in the aggregate amount of $500 million, which financing
is subject, among other conditions, to approval by the Bankruptcy Court.
The Company has received approval from the Bankruptcy Court to pay or otherwise
honor certain of its pre-petition obligations, including claims of critical
vendors and employee wages and benefits in the ordinary course of business.
Background of Filing
--------------------
Since the adoption of its National Settlement Program ("NSP") in the fourth
quarter of 1998, Owens Corning's strategy has been to use that program to avoid
the costly and unpredictable traditional tort system and to quantify the amount
of payments to asbestos claimants and control the timing of those payments to
match the Company's ability to make such payments. The NSP achieved these goals
in many respects and also facilitated the negotiation of the deferral of
payments to NSP participants earlier this year. As discussed in more detail
below, however, Owens Corning's inability to obtain ongoing financing on
acceptable terms, the lack of support for additional payment deferrals, the
higher than anticipated number of asbestos-related claims (which adversely
affected the Company's estimated liquidity needs through 2004), and the recent
deterioration of Owens Corning's operations, resulted in the decision by Owens
Corning to make the Filing.
<PAGE>
- 33 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Refinancing. As previously disclosed, Owens Corning had agreed to make
------------
substantial payments for asbestos-related liabilities through at least 2004;
those payments were expected to require the dedication of a significant portion
of Owens Corning's sources of liquidity during the period; and, depending on
operational cash flow and other sources of cash, Owens Corning might require
additional financing. During the third quarter of 2000, Owens Corning met on a
number of occasions with the agent for its bank group to discuss a refinancing
of its $1.8 billion bank credit facility, which was scheduled to expire in June
2002 (the "Refinancing"). Owens Corning requested that the Refinancing extend
into 2005 and be increased to an amount sufficient to meet its expected
liquidity needs, including the repayment on maturity of $300 million of
debentures in 2005. Following extended negotiations, Owens Corning concluded at
the end of the third quarter that its lenders would not be willing to agree to a
Refinancing that would meet the Company's needs. Moreover, Owens Corning
concluded that the lenders would require that, as a part of any Refinancing,
Owens Corning pledge its assets to secure the loans and agree to limits on
payments for asbestos liabilities that would be inconsistent with its
anticipated asbestos payment obligations.
Support for Payment Deferrals. During the course of the third quarter, support
------------------------------
for asbestos payment deferrals was adversely impacted by several factors. First,
as a result of the downturn in the Company's operations in the third quarter of
2000 (discussed below), Owens Corning approached certain NSP firms to request
additional payment deferrals. Based on those discussions, Owens Corning
determined that it would not be feasible to obtain additional payment deferrals
and that the likely terms of the Refinancing would be unacceptable to the NSP
participants. Second, the NSP Executive Committee and other participants in the
NSP declined to agree to any deferral in payments due from Fibreboard. Finally,
several NSP firms declined to grant the deferrals previously agreed upon in
principle and initiated legal proceedings to enforce the terms of their
respective NSP Agreements.
Asbestos-Related Claims. Prior to the Filing, Owens Corning noted several trends
------------------------ which indicated that it would likely be required to
defer asbestos-related payments in excess of deferrals previously negotiated
with law firms participating in the NSP. First, Owens Corning began to see
evidence that a higher than anticipated number of new asbestos-related claims,
particularly higher value claims, was being filed by non-NSP firms, including
new firms (where the timing of resolution is uncertain and the amount and timing
of payments may be determined by the traditional tort system). Second, Owens
Corning noted a substantial increase in the rate of claims filed, particularly
during September 2000. Approximately 7,800 asbestos-related claims were received
by Owens Corning (excluding Fibreboard) during the third quarter of 2000,
compared to approximately 3,400 and 4,200 claims received during the first and
second quarters, respectively. While Owens Corning believes that this increase
in claims filings represented an acceleration of claims from future periods as a
result of the downgrading of Owens Corning's credit rating in mid-2000, rather
than an increase in the total number of asbestos-related claims to be expected,
this trend would have had the effect of accelerating the related settlement
payments and increasing liquidity needs through 2004 and/or the need to
negotiate further deferrals of asbestos payments.
Downturn in Operations. Owens Corning's results of operations deteriorated
------------------------
significantly in the third quarter of 2000, with expectations for the quarter
declining particularly during the last half of the period. As a result of, among
other factors, the fall in demand for building materials, elevated energy and
raw materials costs and the inability of Owens Corning to fully recapture these
costs in price adjustments, Owens Corning's margins and income from operations
were significantly reduced. As a result, Owens Corning's ability to service its
ongoing asbestos payments and continue to comply with its pre-Filing loan
covenants was adversely affected. Owens Corning concluded at the end of the
third quarter of 2000 that, unless it used a substantial portion of its cash to
repay a portion of its bank debt, Owens Corning would be in violation of the
leverage ratio covenant under its $1.8 billion bank credit
<PAGE>
- 34 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
facility. Moreover, in view of reduced expectations concerning operating results
in the fourth quarter and beyond, the Company concluded that its long-term
liquidity needs (driven in large measure by asbestos payment obligations) could
not likely be met by its cash and available credit under its bank credit
facility (which was limited by leverage ratio and other loan covenants).
Timing of Chapter 11 Filing
---------------------------
As a result of the above factors, Owens Corning management determined late in
the third quarter that it was unlikely that Owens Corning would be able to meet
its long-term liquidity needs, including agreed and other required asbestos
payments and repayment of debt on maturity. While Owens Corning held $378
million of Cash and Cash Equivalents at the end of the third quarter of 2000,
and Owens Corning's operations (excluding the effects of asbestos) are
traditionally profitable and generate strong positive cash flow, management
determined that a Chapter 11 filing in October would be in the best interest of
all Owens Corning stakeholders.
RESULTS OF OPERATIONS
Business Overview
-----------------
In spite of the challenges presented by our Filing, which was made to resolve
asbestos liabilities resulting from business activities more than 25 years ago,
we maintain our commitment to strengthen our core 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. Our two major initiatives, the System Thinking(TM) strategy and
Advantage 2000, have favorably impacted sales and productivity across all
businesses. We are also very committed to taking full advantage of e-Business
opportunities. Through alliances with BuildNet and ImproveNet, for example, we
are working directly with consumers to help them find solutions for their needs.
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 Systems
Business, Owens Corning has partnered with end users, OEMs, systems suppliers
and other players within the supply chain for development of substitution
opportunities for composite systems.
Owens Corning's strategy also includes the divestiture of non-strategic
businesses and the realignment of existing businesses. During the third quarter
of 2000, we announced the intended restructure of the Newark, Ohio insulation
manufacturing facility. This will include moving residential insulation
production from this facility to other insulation plants. It will also include
shutting down two operating lines that will become obsolete and redesigning
Newark to produce more industrial insulation products. This restructure
represents the first phase of the Company's plan to realign operations at the
Newark facility. This strategy also resulted in the sale of our Falcon Foam
business in the U.S. during the first quarter of 2000 and the sale of our
Building Materials business in Europe during the second quarter of 2000 to an
unconsolidated joint venture, Alcopor Owens Corning, in which we have a 40%
ownership interest. The joint venture partnership with Alcopor enables us to
continue our presence in the European building materials market. Please see
Notes 2 and 5 to the Consolidated Financial Statements.
During 1999, we realized the benefits of pricing improvements applicable to many
of our products and cost reductions resulting from our strategic restructuring
program and other profitability and
<PAGE>
- 35 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
productivity initiatives. These cost reductions and pricing improvements have
continued into 2000. However, during the first nine months of 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 the quarter. These increases, coupled with a fall in demand for
building materials, have significantly reduced our margins and income from
operations, particularly during the third quarter of 2000.
Quarter and Nine Months Ended September 30, 2000
------------------------------------------------
Sales and Profitability
-----------------------
Net sales for the quarter ended September 30, 2000 were $1.281 billion, a
decline from the third quarter 1999 level of $1.333 billion. Adjusted for the
disposition of the Falcon Foam and Building Materials Europe businesses, sales
reflect an increase of approximately 2 percent compared to the third quarter of
1999. The sales increase reflects the benefits of volume increases in the
Composites business, most notably in Europe, and price increases in the Building
Materials business, primarily in the U.S. The price increases in the U.S.
reflect, in part, the partial pass-through of raw material cost increases.
Partially offsetting these increases was a significant decline in volume in the
U.S. Building Materials business. This downward trend appears to be industry
wide, as the housing market appears to be slowing, including declines in housing
starts and the remodeling market. The impact of currency translation on sales
denominated in foreign currencies was slightly unfavorable during the third
quarter of 2000, compared to the third quarter of 1999, reflecting a stronger
U.S. dollar during 2000. Please see Note 2 to the Consolidated Financial
Statements.
Gross margin in the third quarter of 2000 was 19% of net sales, compared to 26%
in the third quarter of 1999. The decrease in gross margin percentage reflects
the increase in raw material costs of approximately $60 million ($185 million
year-to-date), approximately half of which was passed through to customers, and
increased energy costs during the third quarter of 2000. Lower volumes in
Building Materials, along with production inefficiencies at certain
manufacturing plants, also contributed to the decline in gross margin.
For the quarter ended September 30, 2000, Owens Corning reported net income of
$14 million, or $.25 per share, compared to net income of $89 million, or $1.53
per share, for the quarter ended September 30, 1999. Net income in the third
quarter of 2000 reflects the decrease in gross margin, primarily reflecting the
adverse impact of increased raw material and energy costs, as discussed above.
Net income for the quarter ended September 30, 2000 also includes the following
special charges: a $6 million pretax restructure charge representing asset
impairments associated with the planned closing of two lines at our Newark, Ohio
manufacturing facility, an $11 million pretax charge associated with asset
impairments within our Cultured Stone and other businesses, a $6 million pretax
charge representing a settlement loss associated with one of our U.S. pension
plans, and a $3 million pretax charge representing severance costs for certain
employees. Please see Note 4 to the Consolidated Financial Statements. Cost of
borrowed funds during the third quarter of 2000 was $55 million, $15 million
higher than the third quarter of 1999, reflecting increased borrowings mostly to
support asbestos payments and higher rates on floating rate debt.
Marketing and administrative expenses were $143 million during the third quarter
of 2000, compared to $155 million in the third quarter of 1999. The decrease is
primarily attributable to cost-cutting measures introduced during the second
quarter of 2000.
<PAGE>
- 36 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Net sales for the nine months ended September 30, 2000 were $3.833 billion,
compared to $3.773 billion for the first nine months of 1999. Price increases
across North American Building Materials markets, including partial pass-through
of raw material cost increases, and price and volume increases in the Composites
business resulted in the sales growth.
The net loss for the nine months ended September 30, 2000 was $363 million, or
$6.64 per share, compared to net income of $209 million, or $3.62 per share, for
the first nine months of 1999. Included in the net loss during 2000 are the
special items from the third quarter discussed above, as well as the following
items from the first six months: a $790 million pretax asbestos-related charge
($486 million after-tax) and a $5 million pretax gain from the Building
Materials Europe transaction during the second quarter, and a $5 million pretax
loss from the sale of Falcon Foam, a $9 million pretax charge for the
realignment of our Fair Bluff, North Carolina plant, and an $11 million tax
benefit associated with one of our foreign subsidiaries during the first quarter
of 2000. Also contributing is a $37 million increase in cost of borrowed funds,
due to increased debt supporting payments associated with the National
Settlement Program, and higher rates on floating rate debt. As a result of
cost-cutting measures introduced during 2000, marketing and administrative
expenses are down $9 million year to date. Additionally, net income for the
period ended September 30, 2000 reflects a raw material increase of $185
million, approximately half of which has been passed through to customers.
Please see Notes 4, 5 and 12 to the Consolidated Financial Statements.
Building Materials
------------------
In the Building Materials segment, sales decreased 7% in the third quarter of
2000, compared to the third quarter of 1999, resulting mostly from the Building
Materials Europe transaction. There were also volume decreases in insulation,
roofing and vinyl products, only partially offset by price improvements
attributable to U.S. roofing and vinyl siding products. The decrease in sales in
Building Materials is associated with an overall softness in the industry, as
indicated by a decline in housing starts and the remodeling market during 2000.
Income from operations was $85 million during the third quarter of 2000,
compared to $169 million during the third quarter of 1999. Income from
operations in 2000 reflects raw material and energy cost increases and volume
decreases slightly offset by price increases. The roofing and vinyl markets
suffered most from the raw material cost increases, with asphalt and PVC resin
increases of approximately $55 million during the quarter ($165 million year to
date). Due to the rapid rise in crude oil prices and significantly increased
demand for PVC during 2000, Owens Corning has been unable to fully pass through
to customers the rapidly rising costs of asphalt and PVC resin. Actions taken
during the year to improve productivity have partially narrowed the gap. Please
see Note 2 to the Consolidated Financial Statements.
Composite Materials
-------------------
In the Composite Materials segment, sales were up 13%, to $233 million during
the third quarter of 2000, compared to the third quarter of 1999, due to price
improvements and significant volume increases. Price and volume increases were
seen across almost all markets, especially in Europe. The translation impact of
sales denominated in foreign currencies was a decline of approximately 6% of
total Composite Materials sales during the third quarter of 2000, reflecting a
stronger U.S. dollar during 2000. Income from operations was $16 million in the
third quarter of 2000, the same as in the prior-year period. Income from
operations reflects price and volume increases, most notably in Europe, offset
by unanticipated production inefficiencies in the U.S. Please see Note 2 to the
Consolidated Financial Statements.
<PAGE>
- 37 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Accounting Changes
------------------
We are assessing the impact of SFAS 133 on our financial statements and plan to
adopt this accounting change effective January 1, 2001. We have completed an
inventory of both our freestanding derivatives, including forward contracts,
option contracts, currency swaps and interest rate swaps, and derivatives which
are embedded in other contracts. We have assessed our current derivatives
position and have determined that adoption at October 1, 2000 would not have had
a material effect on net income or comprehensive income. We are reviewing our
risk management policies, performing an information systems assessment, and
modifying our business processes as needed in order to comply with SFAS 133 and
to temper the volatility in earnings and other comprehensive income.
LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS
Cash flow from operations was a negative $7 million for the third quarter of
2000 versus positive $139 million for the same period of 1999. The decline in
cash flow from operations is largely due to the significant decline in earnings
during the third quarter of 2000 compared to 1999. Additionally, compared to the
third quarter of 1999, cash flow from operations in 2000 reflects an increase in
payments for asbestos litigation claims, net of insurance. During the third
quarter of 2000, payments for asbestos litigation claims were $176 million and
there were no proceeds from insurance, compared to $252 million and $147
million, respectively, during the third quarter of 1999. Payments for the
Company's asbestos litigation claims have been stayed due to the Filing and,
accordingly, the Company does not expect to make any payments for such claims in
the near term. Please see Notes 1, 9 and 12 to the Consolidated Financial
Statements. Also reducing cash flow from operations was a decrease in accounts
payable and accrued liabilities of approximately $52 million and an increase in
receivables of $30 million. Partially offsetting these cash outflows was a $44
million decrease resulting from a change in the level of inventories.
Inventories at September 30, 2000 were $532 million, an increase of $66 million
from the December 31, 1999 level, due largely to the seasonal build of
inventories. We have continued production at normal seasonal levels, but we have
felt the effect of unexpected reductions in product demand, especially in
Building Materials. Receivables at September 30, 2000 were $507 million, a $149
million increase over the December 31, 1999 level, attributable to the seasonal
pattern of business activity and high level of collections at the end of 1999.
The decrease in accounts payable and accrued liabilities from $839 million at
December 31, 1999 to $692 million at September 30, 2000 reflects typical payment
patterns as well as the payout of approximately $40 million of incentive and
other employee performance awards and other payments in the third quarter. At
September 30, 2000, the Company's net working capital was negative $2.975
billion and its current ratio was .47, compared to negative $828 million and
.72, respectively, at December 31, 1999 and negative $489 million and .76,
respectively, at September 30, 1999. This calculation reflects the
reclassification as a current liability of approximately $2.7 billion of debt at
September 30, 2000, including the $1.3 billion of outstanding borrowings under
the Company's bank credit facility due to the violation of a leverage ratio
covenant at October 1, 2000, and approximately $1.4 billion of other outstanding
debt, which is expected to be subject to cross-default provisions at some point
during the next twelve months. Please see Notes 1 and 6 to the Consolidated
Financial Statements. Cash and cash equivalents at September 30, 2000 reflect an
increase of $279 million compared to September 30, 1999. Accounts receivable at
September 30, 2000 decreased by $77 million compared to September 30, 1999,
reflecting a slight decline in sales during the third quarter of 2000, as well
as the sale of the European Building Materials business. The decrease in
accounts payable and accrued liabilities of $88 million reflects the payout of
incentive and other employee performance awards and other payments.
<PAGE>
- 38 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company's total borrowings at September 30, 2000 were $2.821 billion, $830
million higher than at year-end 1999, reflecting increased payments for asbestos
litigation claims and seasonal working capital increases. As a result of the
Filing, substantially all of the lines of credit formerly available to Owens
Corning are no longer accessible.
Post-Filing Liquidity
---------------------
At September 30, 2000, Owens Corning had $378 million of Cash and Cash
Equivalents. In connection with the Filing, Owens Corning has obtained a $500
million debtor-in-possession financing commitment from Bank of America, N.A.
(the "DIP Financing"), which is subject to certain conditions including
Bankruptcy Court approval.
The accounts receivable securitization facility between Owens Corning, certain
lenders, and Owens Corning Funding Corporation (a bankruptcy remote and wholly
owned subsidiary of Owens Corning), scheduled to expire in October 2000, has
been terminated due to the Filing. As of October 31, 2000, all of the $125
million of receivables sold to lenders under this facility have been settled as
collected.
Owens Corning expects that cash from operations (and, if concluded and approved,
the DIP Financing) will provide sufficient funds to allow it to continue its and
its subsidiaries' operating activities and to meet its post-Filing debt and
capital requirements for the foreseeable future, while a plan of reorganization
is developed and considered.
Capital spending for property, plant and equipment, excluding acquisitions, was
$113 million in the third quarter of 2000. The Company anticipates that 2000
capital spending, exclusive of acquisitions and investments in affiliates, will
be approximately $376 million, most of which has been expended. The Company
expects that funding for these expenditures will be from the Company's
operations and the expected credit availability from the DIP Financing.
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 or claims against the
Company as a PRP for contribution under such federal, state or local laws.
During the third quarter of 2000, the Company was not designated as a PRP for
any additional sites. At September 30, 2000, a total of 43 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 $28 million reserve for its Superfund (and similar
state, local and private action) contingent liabilities. Based upon information
presently available to the Company, and without regard to the application of
insurance, the Company believes that, considered in the aggregate, the
additional costs associated with such contingent liabilities, including any
related litigation costs, will not have a materially adverse effect on the
Company's results of operations, financial condition or long-term liquidity.
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. In June 1999,
the EPA issued regulations for wool fiberglas and mineral wool. During the first
quarter of 2000, EPA issued regulations for secondary aluminum smelting and
amino/phenolic resin production. During 2000, EPA proposed regulations for metal
coil
<PAGE>
- 39 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
coating and wet formed fiberglass mat production, anticipating final issue in
2001. The Company anticipates that its other sources to be regulated will be
asphalt processing and roofing, and open molded fiber-reinforced plastics. The
EPA's currently announced schedule is to issue regulations covering
fiber-reinforced plastics production and asphalt roofing and processing in 2002,
with implementation as to existing sources up to three years thereafter. Based
on information now known to the Company, including the nature and limited number
of regulated materials it emits, the Company does not expect the Act to have a
materially adverse effect on the Company's results of operations, financial
condition or long-term liquidity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of changes in foreign currency exchange
rates and interest rates in the normal course of business. The Company manages
such exposures through the use of certain financial and derivative financial
instruments. The Company's objective with these instruments is to reduce
exposure to fluctuations in earnings and cash flows associated with changes in
foreign currency exchange rates and interest rates.
The Company enters into various forward contracts and options, which change in
value as foreign currency exchange rates change, to preserve the carrying amount
of foreign currency-denominated assets, liabilities, commitments, and certain
anticipated foreign currency transactions and earnings.
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's policy is to use foreign currency and interest rate derivative
financial instruments only to the extent necessary to manage exposures as
described above. The Company does not enter into foreign currency or interest
rate derivative transactions for speculative purposes.
The Company uses a variance-covariance Value at Risk (VAR) computation model to
estimate the potential loss in the fair value of its interest rate-sensitive
financial instruments and its foreign currency-sensitive financial instruments.
The VAR model uses historical foreign exchange rates and interest rates as an
estimate of the volatility and correlation of these rates in future periods. It
estimates a loss in fair market value using statistical modeling techniques.
The amounts presented below represent the maximum potential one-day loss in fair
value that the Company would expect from adverse changes in foreign currency
exchange rates or interest rates assuming a 95% confidence level:
<TABLE>
<S> <C> <C>
September 30, December 31,
Risk Category 2000 1999
------------- ---- ----
(In millions of dollars)
Foreign currency $ 1 $ -
Interest rate $ 5 $ 6
</TABLE>
Virtually all of the potential loss associated with interest rate risk is
attributable to fixed-rate long-term debt instruments.
<PAGE>
- 40 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 12, Contingent Liabilities, to Owens Corning's Consolidated Financial
Statements above, which is incorporated here by reference.
On October 5, 2000, Owens Corning and 17 of its United States subsidiaries,
including Fibreboard Corporation (collectively, the "Debtors"), filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware and are currently operating their respective businesses as
debtors-in-possession in accordance with provisions of the Bankruptcy Code. The
Chapter 11 cases of the Debtors are being jointly administered under Case No.
00-3837 (MFW). In this proceeding, the Debtors will seek approval of a Plan of
Reorganization (the "Plan") and intend to implement the Plan upon obtaining
court approval of the Plan. Pursuant to the automatic stay provision of the
Bankruptcy Code, all pending litigation matters against the Debtors are
currently stayed. Please see Note 1 to the Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None of the constituent instruments defining the rights of the holders of
any class of Owens Corning's registered securities was materially modified
in the quarter ended September 30, 2000.
(b) None of the rights evidenced by any class of Owens Corning's registered
securities was materially limited or qualified in the quarter ended
September 30, 2000 by the issuance or modification of any other class of
securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) During the quarter ended September 30, 2000, there was no material default
in the payment of principal, interest, sinking or purchase fund
installments, or any other material default not cured within 30 days, with
respect to any indebtedness of Owens Corning or any of our significant
subsidiaries exceeding 5 percent of the total assets of Owens Corning and
consolidated subsidiaries.
(b) During the quarter ended September 30, 2000, no material arrearage in the
payment of dividends occurred, and there was no other material delinquency
not cured within 30 days, with respect to any class of preferred stock of
Owens Corning which is registered or which ranks prior to any class of
registered securities, or with respect to any class of preferred stock of
any significant subsidiary of Owens Corning.
See Note 1, Subsequent Event - Voluntary Petition For Relief Under Chapter 11,
to Owens Corning's Consolidated Financial Statements above for certain events
subsequent to September 30, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter ended
September 30, 2000.
<PAGE>
- 41 -
PART II. OTHER INFORMATION (continued)
ITEM 5. OTHER INFORMATION
Owens Corning does not elect to report any information under this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See Exhibit Index below, which is incorporated here by reference.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 2000.
<PAGE>
- 42 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Owens
Corning has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OWENS CORNING
Registrant
Date: November 14, 2000 By: /s/ Michael H. Thaman
-------------------- -------------------------
Michael H. Thaman
Senior Vice President and
Chief Financial Officer
(as duly authorized officer)
Date: November 14, 2000 By: /s/ Deyonne F. Epperson
-------------------- ---------------------------
Deyonne F. Epperson
Vice President and Controller
<PAGE>
- 43 -
EXHIBIT INDEX
Exhibit
Number Document Description
------- --------------------
(3) Articles of Incorporation and By-Laws.
(i) Certificate of Incorporation of Owens Corning, as amended
(incorporated herein by reference to Exhibit (3) to Owens
Corning's quarterly report on Form 10-Q (File No. 1-3660) for
the quarter ended March 31, 1997).
(ii) By-Laws of Owens Corning, as amended (incorporated herein by
reference to Exhibit (3) to Owens Corning's annual report on
Form 10-K (File No. 1-3660) for the year 1999).
(11) Statement re Computation of Per Share Earnings (filed herewith).
(27) Financial Data Schedule (filed herewith).
(99) Additional Exhibits
Subsidiaries of Owens Corning, as amended (filed herewith).
