SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
Amendment No. 1
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 2000
Commission File No. 1-3660
Owens Corning
One Owens Corning Parkway
Toledo, Ohio 43659
Area Code (419) 248-8000
A Delaware Corporation
I.R.S. Employer Identification No. 34-4323452
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / X / No / /
Shares of common stock, par value $.10 per share, outstanding at June 30, 2000
55,446,027
Owens Corning's Form 10-Q for the quarter ended June 30, 2000, filed on August
14, 2000, is hereby amended by amending Item 1 "Financial Statements" of Part I
to read as set forth below. This amendment corrects a transposition error
involving the entries for the quarter and six months ended June 30, 2000 and
1999 for the line item "NET SALES" on the Consolidated Statement of Income. This
transposition resulted from an undetected error in the software program used for
converting the Form 10-Q to EDGAR filing format.
<PAGE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(In millions of dollars, except share data)
NET SALES $ 1,295 $ 1,310 $ 2,552 $ 2,440
COST OF SALES 996 987 1,968 1,858
-------- --------- -------- ---------
Gross margin 299 323 584 582
-------- --------- --------- ----------
OPERATING EXPENSES
Marketing and administrative expenses 146 152 295 288
Science and technology expenses 14 14 28 28
Provision for asbestos litigation claims (Note 11) 790 - 790 -
Other (Note 4) (13) 2 3 1
---------- ---------- ---------- -----------
Total operating expenses 937 168 1,116 317
-------- --------- -------- ----------
INCOME (LOSS) FROM OPERATIONS (638) 155 (532) 265
OTHER
Cost of borrowed funds 51 39 94 72
Other (Note 12) - - - -
---------- ----------- ----------- ------------
INCOME (LOSS) BEFORE PROVISION (CREDIT)
FOR INCOME TAXES (689) 116 (626) 193
Provision (credit) for income taxes (267) 41 (254) 68
--------- --------- ---------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST
AND EQUITY IN NET INCOME (LOSS) OF
AFFILIATES (422) 75 (372) 125
Minority Interest (2) (1) (4) (3)
Equity in net income (loss) of affiliates (1) 2 (1) (2)
--------- ---------- ----------- ------------
NET INCOME (LOSS) $ (425) $ 76 $ (377) $ 120
======== ========= ========= ==========
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share $ (7.76) $ 1.41 $ (6.90) $ 2.22
-------- -------- --------- ----------
Diluted net income (loss) per share $ (7.76) $ 1.31 $ (6.90) $ 2.08
-------- -------- --------- ----------
Weighted average number of common shares
outstanding and common equivalent
shares during the period (in millions)
Basic 54.8 54.1 54.7 54.0
Diluted 54.8 59.7 54.7 59.5
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE>
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<S> <C> <C> <C>
June 30, December 31, June 30,
2000 1999 1999
---- ---- ----
(In millions of dollars)
ASSETS
------
CURRENT
Cash and cash equivalents $ 497 $ 70 $ 26
Restricted cash (Note 11) 250 - -
Restricted cash and securities - Fibreboard -
current portion (Note 12) 525 900 -
Receivables 519 358 611
Inventories 549 466 502
Insurance for asbestos litigation claims -
current portion (Note 11) - 25 150
Deferred income taxes 182 185 366
Income tax receivable 4 61 3
Other current assets 26 23 24
----------- ------------ -----------
Total current 2,552 2,088 1,682
---------- ----------- ----------
OTHER
Insurance for asbestos litigation claims
(Note 11) 93 205 228
Restricted cash and securities - Fibreboard
(Note 12) 874 938 -
Asbestos costs to be reimbursed - Fibreboard - - 62
Deferred income taxes 827 547 493
Goodwill (Note 4) 654 743 750
Investments in affiliates 90 65 51
Other noncurrent assets 259 208 243
---------- ------------ -----------
Total other 2,797 2,706 1,827
--------- ----------- ----------
PLANT AND EQUIPMENT, at cost
Land 58 70 70
Buildings and leasehold improvements 732 725 810
Machinery and equipment 2,504 2,639 2,502
Construction in progress 278 258 244
---------- ------------ -----------
3,572 3,692 3,626
Less - accumulated depreciation (1,933) (1,992) (1,944)
---------- ------------ -----------
Net plant and equipment 1,639 1,700 1,682
--------- ----------- ----------
TOTAL ASSETS $ 6,988 $ 6,494 $ 5,191
========= =========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (continued)
(unaudited)
<TABLE>
<S> <C> <C> <C>
June 30, December 31, June 30,
2000 1999 1999
---- ---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (In millions of dollars)
------------------------------------
CURRENT
Accounts payable and accrued liabilities $ 692 $ 839 $ 708
Reserve for asbestos litigation claims - current
portion (Note 11) 925 950 1,050
Asbestos-related liabilities - Fibreboard - current
portion (Note 12) 525 900 -
Short-term debt 43 121
68
Long-term debt - current portion 75 159 27
---------- ----------- -----------
Total current 2,260 2,916 1,906
--------- ---------- ----------
LONG-TERM DEBT 2,698 1,764 2,068
--------- ---------- ----------
OTHER
Reserve for asbestos litigation claims (Note 11) 1,482 820 1,210
Asbestos-related liabilities - Fibreboard (Note 12) 874 938 67
Other employee benefits liability 320 318 325
Pension plan liability 37 42 52
Other 352 339 345
---------- ----------- -----------
Total other 3,065 2,457 1,999
--------- ---------- ----------
COMPANY OBLIGATED SECURITIES OF
ENTITIES HOLDING SOLELY PARENT
DEBENTURES 195 194 195
---------- ---------- -----------
MINORITY INTEREST 48 44 45
----------- ----------- ------------
STOCKHOLDERS' EQUITY
Common stock 701 695 698
Deficit (1,894) (1,510) (1,650)
Accumulated other comprehensive income (74) (51) (48)
Other (11) (15) (22)
------------ ------------ ------------
Total stockholders' equity (1,278) (881) (1,022)
---------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,988 $ 6,494 $ 5,191
========= ========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE>
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(In millions of dollars)
NET CASH FLOW FROM OPERATIONS
Net income (loss) $ (425) $ 76 $ (377) $ 120
Reconciliation of net cash provided by
operating activities
Noncash items:
Provision for asbestos litigation claims 790 - 790 -
Provision for depreciation and
amortization 45 50 93 101
Provision (credit) for deferred income
taxes (292) 16 (288) 39
Other (19) - (32) 5
(Increase) decrease in receivables (33) (56) (214) (142)
(Increase) decrease in inventories (63) (7) (120) (60)
Increase (decrease) in accounts payable
and accrued liabilities 20 (45) (60) (226)
(Increase) decrease in income tax
receivable 12 24 62 104
(Increase) decrease in restricted cash 6 - (250) -
Proceeds from insurance for asbestos
litigation claims, excluding Fibreboard
(Note 11) 335 13 347 32
Payments for asbestos litigation claims,
excluding Fibreboard (Note 11) (141) (175) (364) (370)
Other 7 5 (24) (6)
-------- ----------- --------- ----------
Net cash flow from operations $ 242 $ (99) $ (437) $ (403)
-------- ----------- --------- ----------
NET CASH FLOW FROM INVESTING
Additions to plant and equipment $ (97) $ (59) $ (165) $ (99)
Investment in subsidiaries, net of cash
acquired - - (4) -
Proceeds from the sale of affiliate or
business (Note 4) 143 - 193 -
Other (Note 4) (34) (16) (36) (27)
--------- ----------- --------- ----------
Net cash flow from investing $ 12 $ (75) $ (12) $ (126)
--------- ----------- --------- ----------
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE>
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OWENS CORNING AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(In millions of dollars)
NET CASH FLOW FROM FINANCING
Net additions to long-term credit facilities $ 300 $ 170 $ 955 $ 261
Other additions to long-term debt 22 1 22 251
Other reductions to long-term debt (72) (33) (83) (33)
Net increase (decrease) in short-term debt (44) 10 (9) 28
Dividends paid (4) (4) (8) (8)
Other - 3 - -
------- ----------- ----------- ------------
Net cash flow from financing $ 202 $ 147 $ 877 $ 499
------- --------- --------- ----------
Effect of exchange rate changes on cash - 2 (1) 2
------- ---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 456 (25) 427 (28)
Cash and cash equivalents at beginning of
period 41 51 70 54
-------- ---------- --------- ----------
Cash and cash equivalents at end of period $ 497 $ 26 $ 497 $ 26
======= ========== ======== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE>
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<S> <C> <C> <C> <C>
1. SEGMENT DATA
Quarter Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(In millions of dollars)
NET SALES
Reportable Operating Segments
-----------------------------
Building Materials
United States $ 942 $ 946 $ 1,834 $ 1,760
Europe 31 58 88 121
Canada and other 62 60 117 105
--------- ------------ ---------- ---------
Total Building Materials 1,035 1,064 2,039 1,986
-------- ---------- --------- --------
Composite Materials
United States 157 150 316 278
Europe 87 86 171 168
Canada and other 47 40 91 69
--------- ----------- --------- ---------
Total Composite Materials 291 276 578 515
-------- ---------- --------- --------
Total Reportable Operating
Segments $ 1,326 $ 1,340 $ 2,617 $ 2,501
Reconciliation to Consolidated Net Sales
----------------------------------------
Composite Materials U.S. Sales to
Building Materials U.S. (31) (30) (65) (61)
---------- ------------ ----------- ----------
Net sales $ 1,295 $ 1,310 $ 2,552 $ 2,440
======= ========== ======== ========
External Customer Sales by Geographic Region
--------------------------------------------
United States $ 1,068 $ 1,066 $ 2,085 $ 1,977
Europe 118 144 259 289
Canada and other 109 100 208 174
-------- ----------- --------- ---------
Net Sales $ 1,295 $ 1,310 $ 2,552 $ 2,440
======= ========== ======== ========
</TABLE>
<PAGE>
- 8 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
<TABLE>
<S> <C> <C> <C> <C>
1. SEGMENT DATA (continued)
Quarter Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(In millions of dollars)
INCOME (LOSS) FROM OPERATIONS
Reportable Operating Segments
-----------------------------
Building Materials
United States $ 103 $ 118 $ 174 $ 188
Europe - 1 1 4
Canada and other 9 12 13 16
---------- ---------- --------- ----------
Total Building Materials 112 131 188 208
--------- ---------- -------- ---------
Composite Materials
United States 40 33 88 61
Europe 4 (4) 3 (4)
Canada and other 5 4 12 7
---------- ----------- --------- -----------
Total Composite Materials 49 33 103 64
--------- ---------- -------- ----------
Total Reportable Operating Segments $ 161 $ 164 $ 291 $ 272
-------- --------- -------- ---------
Geographic Regions
------------------
United States $ 143 $ 151 $ 262 $ 249
Europe 4 (3) 4 -
Canada and other 14 16 25 23
--------- ---------- --------- ----------
Total Reportable Operating Segments $ 161 $ 164 $ 291 $ 272
======== ========= ======== =========
Reconciliation to Consolidated Income
-------------------------------------
Before Provision for Income Taxes
---------------------------------
Provision for asbestos litigation claims (790) - (790) -
General corporate income (expense) (9) (9) (33) (7)
Cost of borrowed funds (51) (39) (94) (72)
---------- ---------- ---------- -----------
Consolidated Income (Loss) Before
Provision (Credit) for Income Taxes $ (689) $ 116 $ (626) $ 193
--------- --------- --------- ---------
</TABLE>
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
2. GENERAL
The financial statements included in this Report are condensed and unaudited,
pursuant to certain Rules and Regulations of the Securities and Exchange
Commission, but include, in the opinion of the Company, adjustments necessary
for a fair statement of the results for the periods indicated, which, however,
are not necessarily indicative of results which may be expected for the full
year.
In connection with the condensed financial statements and notes included in this
Report, reference is made to the financial statements and notes thereto
contained in the Company's 1999 Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission.
3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS
During 1997 and 1998, the Company recorded pretax charges of $386 million for
restructuring and other actions to implement the Company's announced program to
close manufacturing facilities, enhance manufacturing productivity and reduce
overhead. Of the total pretax charge of $386 million, $143 million was recorded
in the fourth quarter of 1997 and the remaining $243 million was recorded during
1998.
The $386 million pretax charge was comprised of a $185 million charge associated
with the restructuring of the Company's business segments and a $201 million
charge associated with asset impairments, including investments in certain
affiliates. The components of the restructuring charge include $115 million for
personnel reductions; $68 million for the divestiture of non-strategic
businesses and facilities, of which $52 million represented non-cash asset
revaluations, $16 million for exit cost liabilities, primarily for leased
warehouse and office facilities that were vacated; and $2 million for other
actions. The divestiture of non-strategic businesses and facilities included the
closure of the Candiac, Quebec manufacturing facility. During the second quarter
of 1999, the Candiac manufacturing facility was re-opened in order to meet
market demands.
The $115 million for personnel reductions represented severance costs associated
with the elimination of approximately 2,450 positions worldwide. The primary
groups affected included manufacturing and administrative personnel. As of June
2000, approximately $103 million has been paid and charged against the reserve
for personnel reductions. Charges of approximately $13 million have been made
against exit cost liabilities through June 2000. No adjustments have been made
to the liabilities.
The following table summarizes the status of the liabilities from the
restructure program described above, including cumulative spending and
adjustments and the remaining balance as of June 30, 2000:
<TABLE>
<S> <C> <C> <C>
Beginning Total Ending
Liability Payments Liability
--------- -------- ---------
(In millions of dollars)
Personnel Costs $ 115 $ (103) $ 12
Facility and Business Exit Costs 16 (13) 3
Other 2 (2) -
------- ------- ----------
Total $ 133 $ (118) $ 15
======= ======== =======
</TABLE>
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
3. RESTRUCTURING OF OPERATIONS AND OTHER ACTIONS (continued)
The Company continually evaluates whether events and circumstances have occurred
that indicate that the carrying amount of certain long-lived assets is
recoverable. When factors indicate that a long-lived asset should be evaluated
for possible impairment, the Company uses an estimate of the expected
undiscounted cash flows to be generated by the asset to determine whether the
carrying amount is recoverable or if an impairment exists. When it is determined
that an impairment exists, the Company uses the fair market value of the asset,
usually measured by the discounted cash flows to be generated by the asset, to
determine the amount of the impairment to be recorded in the financial
statements.
4. ACQUISITIONS AND DIVESTITURES OF BUSINESSES
On May 31, 2000, the Company completed the sale of its European Building
Materials business to an unconsolidated joint venture, Alcopor Owens Corning, in
which the Company has a 40% interest. Proceeds from the sale, net of the
Company's $34 million cash infusion into the joint venture, were $177 million.
In connection with this transaction, the joint venture assumed $62 million of
debt from Owens Corning and the Company incurred fees of approximately $6
million, resulting in net cash proceeds of approximately $109 million. A pretax
gain of approximately $5 million, including a $54 million write-off of goodwill,
was realized from the sale. This pretax gain was recorded as a reduction of
other operating expenses on the consolidated statement of income.
The results of operations of the European Building Materials business are
reflected in the Company's consolidated statement of income through the period
ending May 31, 2000. For the six months ended June 30, 2000 and the year ended
December 31, 1999, the European Building Materials business recorded sales of
approximately $88 million and $234 million, respectively, and income from
operations of approximately $1 million and $12 million, respectively. Effective
May 31, 2000, the Company accounts for its ownership interest in Alcopor Owens
Corning under the equity method. Please see Note 1 to the Consolidated Financial
Statements.
During the first quarter of 2000, the Company completed the sale of the assets
of Falcon Foam, a producer of foam insulation in Michigan and California. Net
proceeds from the sale were $50 million and resulted in a pretax loss of
approximately $5 million, including a $32 write-off of goodwill. This loss was
recorded as other operating expenses on the consolidated statement of income.
During the first quarter of 2000, the Company also realigned its vinyl siding
manufacturing operations, resulting in the closure of its Fair Bluff, North
Carolina manufacturing plant. This realignment resulted in a $9 million pretax
expense, all of which was recorded as other operating expenses on the
consolidated statement of income.
In connection with a proposal received from its Korean joint venture partner,
the Company infused approximately $29 million of cash into this venture in
March, 1999. As a result of this investment, along with additional investments
by the other partner, the Company increased its ownership interest in Owens
Corning Korea to 70%. The Company accounted for this transaction under the
purchase method of accounting whereby the assets acquired and liabilities
assumed, including $84 million in debt, have been recorded at their fair values
and the results of operations have been consolidated since the date of
acquisition. Prior to that date, the Company accounted for this joint venture
under the equity method.
<PAGE>
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. LONG-TERM DEBT
During the first quarter of 1999, the Company issued $250 million of senior debt
securities ("the securities") as unsecured obligations of the Company. These
securities, which mature in 2009, bear an annual rate of interest of 7.0%,
payable semiannually. The proceeds from the issuance of these securities were
used to reduce borrowings under the Company's long-term revolving credit
agreement.
6. INCOME TAXES
The reconciliation between the U.S. federal statutory rate and the Company's
effective income tax rate is:
<TABLE>
<S> <C> <C> <C> <C>
Quarter Six Months
Ended Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
U.S. federal statutory rate (35%) 35% (35%) 35%
State and local income taxes (5) 3 (5) 3
Special tax election (a) - - (2) -
Foreign tax rate differences 1 - 1 -
Other - (3) - (3)
-------- ------- -------- -------
Effective tax rate (39%) 35% (41%) 35%
======== ====== ====== =======
(a) Represents the implementation of a tax strategy associated with one of our foreign subsidiaries.
</TABLE>
7. INVENTORIES
<TABLE>
<S> <C> <C>
June 30, 2000 December 31, 1999
------------- -----------------
(In millions of dollars)
Inventories are summarized as follows:
Finished goods $ 413 $ 374
Materials and supplies 205 158
----------- ----------
FIFO inventory 618 532
Less: Reduction to LIFO basis (69) (66)
----------- ----------
Total Inventory $ 549 $ 466
=========== ==========
Approximately $389 million and $269 million of total inventories were valued using the LIFO method at
June 30, 2000 and December 31, 1999, respectively.
</TABLE>
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
8. CONSOLIDATED STATEMENT OF CASH FLOWS
Cash payments (refunds) for income taxes and cost of borrowed funds are
summarized as follows:
<TABLE>
<S> <C> <C> <C> <C>
Quarter Six Months
Ended Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(In millions of dollars)
Income taxes $ 10 $ 2 $ (34) $ (80)
Cost of borrowed funds 57 46 99 73
</TABLE>
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Please refer to Notes 4 and 12 for disclosure of Non-Cash activities.
9. COMPREHENSIVE INCOME
The Company's comprehensive income for the quarters ended June 30, 2000 and 1999
was a loss of $434 million and income of $76 million, respectively. For the six
months ended June 30, 2000 and 1999, comprehensive income was a loss of $401
million and income of $109 million, respectively. The Company's comprehensive
income includes net income, currency translation adjustments, and deferred gains
and losses on certain hedging transactions.
The comprehensive loss for the quarter and six months ended June 30, 2000
includes a reclassification from other comprehensive income to net income of
approximately $13 million. This reclassification reflects the expense
recognition of currency translation adjustments resulting from the sale of the
European Building Materials business to Alcopor Owens Corning (see Note 4).
<PAGE>
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
10. EARNINGS PER SHARE
The following table reconciles the net income (loss) and weighted average number
of shares used in the basic earnings per share calculation to the net income and
weighted average number of shares used to compute diluted earnings per share.
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
(In millions of dollars, except share data)
Net income (loss) used for
basic earnings per share $ (425) $ 76 $ (377) $ 120
Net income (loss) effect of
assumed conversion of
preferred securities - 2 - 4
--------------- ------------- ------------ ------------
Net income used for diluted
earnings per share $ (425) $ 78 $ (377) $ 124
============== =========== =========== ==========
Weighted average number of
shares outstanding used for
basic earnings per share
(thousands) 54,793 54,116 54,652 54,011
Deferred awards and stock
options (thousands) - 1,014 - 903
Shares from assumed
conversion of preferred
securities (thousands) - 4,566 - 4,566
--------------- ---------- ------------ ---------
Weighted average number of
shares outstanding and
common equivalent shares
used for diluted earnings per
share (thousands) 54,793 59,696 54,652 59,480
============ ========= ========= ========
</TABLE>
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OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. CONTINGENT LIABILITIES
Asbestos Liabilities
--------------------
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD)
Numerous claims have been asserted against Owens Corning alleging personal
injury arising from inhalation of asbestos fibers. Virtually all of these claims
arise out of Owens Corning's manufacture, distribution, sale or installation of
an asbestos-containing calcium silicate, high temperature insulation product,
the manufacture and distribution of which was discontinued in 1972. The vast
majority of these claims are being resolved through the National Settlement
Program described below. As a result of this program, the number of new lawsuits
filed against Owens Corning has been sharply reduced from historical levels, and
compared to other co-defendants in the litigation.
National Settlement Program
---------------------------
Beginning in late 1998, Owens Corning has implemented a National Settlement
Program ("NSP") to resolve personal injury asbestos claims through settlement
agreements with individual plaintiffs' law firms. The number of participating
law firms has expanded from approximately 50 when the NSP was established to 117
as of June 30, 2000. The NSP continues to expand. The NSP is designed to better
manage Owens Corning's asbestos liability, and that of Fibreboard (see Item B
below), and to help Owens Corning better predict the timing and amount of
indemnity payments for both pending and future claims.
Under the NSP, each participating law firm has agreed to a long-term settlement
agreement ("NSP Agreement") that extends through at least 2008. All NSP
Agreements provide for the resolution of asbestos claims, including unfiled
claims, pending with a participating law firm at the time it enters into an NSP
Agreement ("Initial Claims") and also establishes procedures and fixed payments
for resolving without litigation those claims that may arise after a
participating firm enters into an NSP Agreement ("Future Claims") against either
Owens Corning or Fibreboard, or both. The NSP is designed to allow both holders
of Initial Claims and Future Claims to receive prompt payment without incurring
the significant delays and uncertainties of litigation, while enabling Owens
Corning and Fibreboard to manage their respective businesses predictably and
efficiently.
Terms and Conditions of NSP Agreements
--------------------------------------
Settlement amounts for both Initial and Future Claims have been negotiated with
each participating firm, and each firm has communicated with its respective
current clients to obtain authority to settle individual claims. Payments to
each claimant may vary based on a number of factors, including the type and
severity of disease, age and occupation. All payments are subject to delivery of
satisfactory evidence of a qualifying medical condition and exposure to Owens
Corning's and/or Fibreboard's products, delivery of customary releases by each
claimant, and other conditions. Certain claimants settling non-malignancy claims
with Owens Corning and/or Fibreboard are or will be entitled to an agreed
pre-determined amount of additional compensation if they later develop a more
severe asbestos-related medical condition.
<PAGE>
- 15 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
As to Future Claims, each participating NSP firm has agreed (consistent with
applicable legal requirements) to recommend to its future clients, based on
appropriately exercised professional judgment, to resolve their asbestos
personal injury claims against Owens Corning and/or Fibreboard through an
administrative processing arrangement, rather than litigation. In the case of
Future Claims involving non-malignancy, claimants must present medical evidence
of functional impairment, as well as the product exposure criteria and other
requirements set forth above, to be entitled to compensation.
Owens Corning and Fibreboard (see Item B below) each retains the right to
terminate any individual NSP Agreement if in any year more than a specified
number of plaintiffs represented by the plaintiffs' firm in question reject and
ultimately opt out of such agreement. Opt out procedures are specified in the
settlement agreements, and provide for mediation and further negotiation before
a claimant may pursue his or her case in the court system. Through June 2000,
fewer than 200 claimants have elected to reject the original settlement
proposal, and to mediate under the terms of the NSP Agreement.
As of June 30, 2000, Owens Corning has settled, through the NSP, a total of more
than 237,000 Initial Claims. To date, Owens Corning has paid more than $1
billion (including Administrative Deposits as described below) of the settlement
amounts payable under the NSP in connection with these Initial Claims; the
balance is scheduled to be paid as part of Owens Corning's estimated
asbestos-related payments through 2004 (described below under "Asbestos-Related
Payments"). Through July 2000, Owens Corning has received approximately 1,300
Future Claims under the NSP for payment in 2003, provided that such claims meet
the criteria for payment under the NSP Agreements. If all such claims were
approved for payment, estimated payments for those claims would be less than $50
million.
Claims approval and payments to claimants for both Initial and Future Claims are
being managed by Integrex, a wholly-owned Owens Corning subsidiary that
specializes in, among other things, claims processing.
NSP Initial Claims Payment Schedules
------------------------------------
Payments under the NSP for Initial Claims will generally be made through 2004.
It is anticipated that payments for a limited number of "exigent" Future Claims
(principally those of living malignancy claimants) will continue to be made as
promptly as possible, limited by Owens Corning's available cash flow.
In addition to the right to defer payments for Future Claims as described below,
Owens Corning has requested that NSP participating firms agree to defer payments
in 2000 through 2002 on Initial Claims to the extent necessary to ensure that
Owens Corning limits its total asbestos-related payments to the following
schedule: $950 million in 2000, $400 million in 2001, and $250 million in 2002
("Deferral Program"). An Executive Committee appointed by the NSP firms to
consider the request, conduct appropriate due diligence, and make a
recommendation concerning the program has agreed to recommend the Deferral
Program. To facilitate implementation of the Deferral Program, each NSP firm
will receive a revised payment schedule. The Deferral Program is designed to
facilitate continued predictability and manageability of Owens Corning's cash
flow, while taking into account the ongoing expansion of the NSP, the timing of
<PAGE>
- 16 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
expected future insurance recoveries, efficient tax planning, and compliance
with ongoing loan covenants. On the basis of preliminary information, Owens
Corning estimates that the Deferral Program may result in the deferral of
approximately $500 million of anticipated NSP payments. As part of the Deferral
Program, Owens Corning has agreed to pay any such deferred amounts in two equal
installments in 2003 and 2004, subject to then applicable loan covenants.
NSP Future Claims Payment Schedules
------------------------------------
Payments for other qualifying Future Claims will begin in 2003, and will be made
on the following schedule, based on when such claims are accepted by Owens
Corning for payment:
<TABLE>
<S> <C>
-------------------------------------------------------- ----------------------------------------------------
Date Accepted for Payment Year in which Claim Will be Paid
-------------------------------------------------------- ----------------------------------------------------
-------------------------------------------------------- ----------------------------------------------------
January 1, 1999 through June 30, 2000 2003
-------------------------------------------------------- ----------------------------------------------------
-------------------------------------------------------- ----------------------------------------------------
July 1, 2000 through December 31, 2001 2004
-------------------------------------------------------- ----------------------------------------------------
-------------------------------------------------------- ----------------------------------------------------
January 1, 2002 through June 30, 2003 2005
-------------------------------------------------------- ----------------------------------------------------
-------------------------------------------------------- ----------------------------------------------------
July 1, 2003 through December 31, 2004 2006
-------------------------------------------------------- ----------------------------------------------------
-------------------------------------------------------- ----------------------------------------------------
January 1, 2005 through June 30, 2006 2007
-------------------------------------------------------- ----------------------------------------------------
-------------------------------------------------------- ----------------------------------------------------
July 1, 2006 or later 60 days to one year after acceptance
-------------------------------------------------------- ----------------------------------------------------
</TABLE>
The schedule of payments provided for qualifying Future Claims under NSP
Agreements that have been entered into during the fourth quarter of 1999 and
thereafter will be delayed by at least one year from the dates for payment set
forth above.
Pursuant to existing NSP Agreements, if, in any calendar year after 2002, the
payment of any amounts under the NSP in respect of Future Claims would not be
permitted under Owens Corning's then prevailing loan covenants, Owens Corning
will have the right to defer payment of such amounts until February 15 of the
following year. Commencing in 2003, subject to the variables and uncertainties
discussed below, Owens Corning expects that its payments for Future Claims will
not exceed $150 million per year, plus any amounts payable pursuant to the
Deferral Program discussed above. Additional settlement payments will be made by
Fibreboard (see Item B below).
Non-NSP Claims
--------------
As of June 30, 2000, approximately 27,000 asbestos personal injury claims were
pending against Owens Corning outside the NSP. Owens Corning notes that
information necessary to allow critical evaluation of these claims, including
the nature and severity of disease and definitive identifying information
concerning the claimant, typically becomes available only through the discovery
process or as a result of settlement negotiations, often not occurring until
years after the claim is filed. In view of the indefiniteness of the available
information, the actual number of pending claims may vary from the number
indicated. From the information available, it appears that fewer than 5 percent
of the claims in this non-NSP backlog are mesothelioma claims. However, Owens
Corning cautions that the number of new mesothelioma filings from non-NSP law
firms, including new firms without prior asbestos litigation experience, exceeds
those filed by NSP firms during the same period.
<PAGE>
- 17 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
From the beginning of 1999 through June 30, 2000, Owens Corning has resolved (by
settlement or otherwise) approximately 6,000 asbestos personal injury claims
outside the NSP. Generally, these claims were settled as they were scheduled for
trial, and typically involved more serious injuries and diseases.
During the implementation of the NSP, Owens Corning has attempted to settle
individual non-NSP claims for payments generally consistent with payments to NSP
claimants. Such settlements are preferable to trials, provided that the agreed
settlement is fair in relation to similarly situated NSP claimants, because both
the timing and amount of such payments are more predictable. Owens Corning notes
that, since late 1999, it has received a number of settlement demands from
non-NSP plaintiffs' counsel which have exceeded historical settlement averages
for like cases. In the event this trend continues, and Owens Corning is unable
to reach acceptable settlements, Owens Corning may have to take certain cases to
trial in order to attempt to obtain fair and appropriate resolution of those
cases, and to pay settlement amounts that more closely approximate NSP
settlement values. If this strategy is successful, non-participating plaintiffs'
counsel may elect to join the NSP rather than continue to seek excessive
settlement values. However, the possibility of adverse verdicts which exceed NSP
settlement values, the increased costs of defense and appeals, and the delays
inherent in litigation, may affect the aggregate payments for non-NSP claims.
Asbestos-Related Payments
-------------------------
In the second quarter of 2000, Owens Corning made approximately $135 million of
asbestos-related payments, falling within four major categories: (1) Settlements
in respect of verdicts incurred or claims resolved prior to the implementation
of the NSP ("Pre-NSP Settlements"); (2) NSP settlements; (3) Non-NSP settlements
covering cases not resolved by the NSP; and (4) Defense, claims processing and
administrative expenses, as follows:
<TABLE>
<S> <C>
(In millions of dollars)
Pre-NSP Settlements $ 20
NSP Settlements 78
Non-NSP Settlements 19
Defense, Claims Processing and Administrative Expenses 18
------
$ 135
</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 June 30, 2000,
approximately $250 million of Administrative Deposits previously made by Owens
Corning had not been finally distributed to claimants ("Undistributed
Administrative Deposits") and, accordingly, are reflected in Owens Corning's
consolidated balance sheet as restricted assets, under the caption "Restricted
cash", and have not been subtracted from Owens Corning's reserve for asbestos
personal injury claims (discussed below).
<PAGE>
- 18 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
All amounts discussed above are before tax and application of insurance
recoveries. Owens Corning currently estimates that it will make asbestos-related
payments (including Administrative Deposits) before tax and application of
insurance recoveries of approximately $950 million during 2000 (of which
approximately $614 million had been made as of June 30), $400 million in 2001,
$250 million in 2002 and $400 million in each of 2003 and 2004. The amounts
shown for 2003 and 2004 include $250 million in each year to pay the estimated
$500 million amount that may be deferred under the Deferral Program described
above. The actual amounts of such payments will depend on numerous variables,
including: (1) the rate at which NSP claims are submitted and processed; (2) the
severity of disease involved in such claims; (3) the number and type of non-NSP
claims resolved; (4) the cost of resolving such claims, including defense costs;
(5) the amount of insurance recoveries obtained; and (6) the implementation and
continued applicability of the Deferral Program described above.
Asbestos Legislation
--------------------
In the fall of 1999, both the United States Senate and House of Representatives
held hearings on proposed legislation (S 758 and HR 1283) intended to address
the problem of asbestos litigation. Although the original House and Senate
proposals were virtually identical, the House has been active in considering
revisions to HR 1283. In the first quarter of 2000, the House Judiciary
Committee approved HR 1283, amended to protect private settlement plans and to
make such plans enforceable. Owens Corning believes that key members of Congress
view the NSP favorably and that, if any asbestos legislation is eventually
enacted, it will be consistent with the continued implementation of the NSP.
Tax Legislation
---------------
In the spring of 2000, the United States House of Representatives introduced
proposed legislation (HR 4543) which would exempt investment income earned by an
asbestos-related trust from federal income tax, and would allow asbestos
defendants to carry-back net operating losses ("NOLs") created by asbestos
payments to the years in which the products containing asbestos were
manufactured in order to obtain a refund of federal income taxes paid in those
periods. In the case of Owens Corning, this would entitle the Company to
carry-back its NOLs to the early 1950s. The exemption of investment income would
benefit the Fibreboard Settlement Trust (described below) by having the effect
of enlarging the corpus of the trust through tax-free interest accumulation. The
Senate is considering a similar bill (S 2955). There can be no assurance that
any such legislation will be enacted.
Other Asbestos-Related Litigation
---------------------------------
As previously reported, Owens Corning believes that it has spent significant
amounts to resolve claims of asbestos claimants whose injuries were caused or
exacerbated by cigarette smoking. Owens Corning is pursuing litigation against
tobacco companies (discussed below) to obtain payment of monetary damages
(including punitive damages) for payments made by Owens Corning and Fibreboard
to asbestos claimants who developed smoking related diseases.
<PAGE>
- 19 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
In October 1998, the Circuit Court for Jefferson County, Mississippi granted
leave to file an amended complaint in an existing action to add claims by Owens
Corning against seven tobacco companies and several other tobacco industry
defendants. The court has set a February 2001 trial date for this action. In
addition to the Mississippi lawsuit, a lawsuit brought in December 1997 by Owens
Corning and Fibreboard is pending in the Superior Court for Alameda County,
California against the same tobacco companies.
Insurance
---------
During the second quarter of 2000, Owens Corning received a $335 million
settlement payment from a group of excess insurers, resolving a dispute
concerning coverage from such insurers for non-products asbestos-related
personal injury claims. Of this amount, $125 million had been reflected on Owens
Corning's financial statements as a probable insurance recovery. The balance of
$210 million was recorded as pre-tax income in the second quarter.
As of June 30, 2000, Owens Corning's financial statements reflect $93 million in
unexhausted insurance coverage (net of deductibles and self-insured retentions)
under its liability insurance policies applicable to asbestos personal injury
claims. Most of this amount represents unconfirmed potential non-products
coverage with excess level insurance carriers, as to which Owens Corning has
estimated its probable recoveries. Owens Corning also has a significant amount
of other unconfirmed potential non-products coverage with excess level carriers.
Owens Corning is actively pursuing non-products insurance recoveries under these
policies. The amount and timing of recoveries from excess level policies will
depend on subsequent negotiations and/or proceedings.
Reserve
-------
Owens Corning estimates a reserve in accordance with generally accepted
accounting principles to reflect asbestos-related liabilities that have been
asserted or are probable of assertion, in which liabilities are probable and
estimable. This reserve was established initially through a charge to income in
1991, with additional charges to income of $1.1 billion in 1996 and $1.4 billion
in 1998. During the second quarter of 2000, Owens Corning reviewed the
sufficiency of its provision for asbestos-related liabilities in light of recent
trends and developments in the administration of the NSP and in asbestos
litigation generally. These trends and developments included:
o Additional information obtained in reviewing, processing and approving for
payment more than 90,000 of the claims submitted under the NSP. This
information allowed Owens Corning to better determine the disease type and
value of the claims submitted under the NSP, including the substantial
number of claims originally classified as of "unknown" disease type and the
more than 60,000 claims that have been added to the NSP since its
inception. As the result of such information, Owens Corning's estimate of
the average value of an NSP claim has increased by approximately $2,000.
o Increased settlement demands (as described above) and higher than expected
costs, particularly in 2000, to settle non-NSP claims.
<PAGE>
- 20 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
o Recent large verdict awards against other asbestos defendants in several
jurisdictions, including Madison County, Illinois and Orange County, Texas.
o Additional information from plaintiffs' firms as to their expectations
concerning the number and nature of future filings.
As the result of its review, Owens Corning increased its asbestos reserves by $1
billion in the second quarter of 2000. The approximate balances of the
components of the reserve at June 30, 2000 are:
<TABLE>
<S> <C>
----------------------------------------------------------- -------------------------------------
Balance
----------------------------------------------------------- -------------------------------------
----------------------------------------------------------- -------------------------------------
(In billions of dollars)
----------------------------------------------------------- -------------------------------------
----------------------------------------------------------- -------------------------------------
NSP backlog 1.2
----------------------------------------------------------- -------------------------------------
----------------------------------------------------------- -------------------------------------
Non-NSP backlog 0.3
----------------------------------------------------------- -------------------------------------
----------------------------------------------------------- -------------------------------------
Future claims 0.7
----------------------------------------------------------- -------------------------------------
----------------------------------------------------------- -------------------------------------
Defense and administrative processing costs 0.1
----------------------------------------------------------- -------------------------------------
----------------------------------------------------------- -------------------------------------
Pre-NSP Settlements 0.1
----------------------------------------------------------- -------------------------------------
</TABLE>
In connection with its asbestos reserve, Owens Corning notes that:
o The "NSP backlog" component represents the remaining estimated cost of
resolving Initial Claims (as of June 30, 2000) under the NSP. Owens Corning
is scheduled to pay these costs as part of its estimated asbestos-related
payments through 2004 (described above under "Asbestos-Related Payments").
o The "Non-NSP backlog" component represents the estimated cost of resolving
asbestos personal injury claims pending against Owens Corning outside the
NSP as of June 30, 2000.
o The "Future claims" component represents the estimated cost of resolving
(i) Future Claims under the NSP and (ii) non-NSP claims made after June 30,
2000.
o The reserve as a whole reflects $250 million of Undistributed
Administrative Deposits.
Owens Corning cautions that its estimate of its liabilities for pending and
expected future asbestos claims is influenced by numerous variables that are
difficult to predict and that such estimate therefore remains subject to
considerable uncertainty. Such variables include, among others, the cost of
resolving pending non-NSP claims; the disease mix and severity of disease of
pending NSP claims; the number, severity of disease, and jurisdiction of claims
filed in the future (especially the number of mesothelioma claims); how many
future claimants are covered by an NSP Agreement; the extent, if any, to which
an individual claimant exercises his or her right to opt out of an NSP Agreement
and/or utilize counsel not participating in the NSP; the extent, if any, to
which counsel that are not bound by an NSP Agreement undertake the
representation of asbestos personal injury plaintiffs against Owens Corning; the
extent, if any, to which Owens Corning exercises its right to terminate one or
more of the NSP Agreements due to excessive opt-outs or for other reasons; and
Owens Corning's success in controlling the costs of resolving future non-NSP
claims.
<PAGE>
- 21 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
As referenced above, Owens Corning also notes that in recent months it has
received a number of settlement demands from non-NSP plaintiffs' counsel which
have exceeded historical settlement averages for like cases. In addition, there
have been recent large verdict awards against other asbestos defendants in
several jurisdictions, including Madison County, Illinois and Orange County,
Texas. While the impact of these events to date was considered in connection
with the increase in Owens Corning's asbestos reserves during the second quarter
of 2000 (described above), these events, and the possibility that either or both
will continue at the same or worse levels, further contributes to the
uncertainty surrounding Owens Corning's estimate of its liabilities for asbestos
claims. Recent bankruptcies of two other defendants in the personal injury
litigation may also have an adverse impact on future NSP claimants' willingness
to accept agreed NSP values to resolve their claims, as well as on the cost of
resolving future non-NSP claims.
Owens Corning will continue to review the adequacy of its estimates of
liabilities and insurance on a periodic basis and make such adjustments as may
be appropriate.
Management Opinion
------------------
As described above, Owens Corning has agreed to make payments for asbestos
liabilities through at least 2004. These payments will require dedication of a
significant portion of Owens Corning's sources of liquidity expected to be
available during this period. Depending on operational cash flow and other
sources of cash, such as insurance recoveries, divestitures and tax refunds, it
is possible that Owens Corning will require additional financing. In this
respect, Owens Corning notes that its current $1.8 billion long-term bank credit
facility expires in June 2002. As a result, such facility will become a current
liability in the second quarter of 2001. Prior to its expiration, Owens Corning
will need to replace it, in a similar or larger amount, or obtain alternate
financing, on acceptable terms ("Refinancing"). Management believes that it is
likely that such Refinancing will place limits on payments for asbestos
liabilities and may impose other restrictive terms and conditions. Therefore,
accommodations in addition to the Deferral Program may be required. Although
Owens Corning intends to continue to work with the Executive Committee appointed
by the NSP firms, there can be no assurance that such additional accommodations
or other conditions of the Refinancing will be acceptable to plaintiffs'
attorneys.
In addition to the foregoing risk factors, Owens Corning notes that, in view of
the variables and uncertainties described above, additional uninsured and
unreserved costs may arise out of personal injury asbestos claims, and such
additional costs may be substantial over time.
<PAGE>
- 22 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. CONTINGENT LIABILITIES
ITEM A. - OWENS CORNING (EXCLUDING FIBREBOARD) (continued)
Although any opinion is necessarily judgmental and must be based on an
assessment of the variables and uncertainties described above, provided that
Refinancing can be obtained on acceptable terms, NSP firms continue to support
the Deferral Program and agree to any necessary additional accommodations or
other conditions of the Refinancing, Owens Corning is not required to make
asbestos-related payments during the period through 2004 in excess of its
estimated payments described above under "Asbestos-Related Payments", and Owens
Corning's results of operations do not deteriorate significantly during the
period, management believes that asbestos-related costs will not impair the
ability of Owens Corning to meets its obligations. The process of obtaining the
Refinancing, obtaining necessary additional accommodations, and limiting total
asbestos-related payments will involve complex negotiations among numerous
parties with varying interests. Moreover, many factors not in the control of
Owens Corning affect the Company's financial performance. As a result, there can
be no assurance that the necessary steps will be successfully completed.
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING)
Prior to 1972, Fibreboard manufactured insulation products containing asbestos.
Fibreboard has since been named as defendant in many thousands of personal
injury claims for injuries allegedly caused by asbestos exposure. The vast
majority of these claims are being resolved through the NSP, as described below.
National Settlement Program
---------------------------
Fibreboard is a participant in the NSP and is a party to the NSP Agreements
discussed in Item A. The NSP Agreements became effective as to Fibreboard in the
fourth quarter of 1999, when the Insurance Settlement (discussed below) became
effective. The NSP Agreements settle asbestos personal injury claims that had
been filed against Fibreboard by participating plaintiffs' law firms and claims
that could have been filed against Fibreboard by such firms following the
lifting, in the third quarter of 1999, of an injunction which had barred the
filing of asbestos personal injury claims against Fibreboard. As of June 30,
2000, Fibreboard has settled, through the NSP, approximately 200,000 Initial
Claims. The NSP Agreements also provide for the resolution of Future Claims
against Fibreboard through the administrative processing arrangement described
in Item A. The timing of payments for Initial and Future Claims against
Fibreboard will be consistent, generally, with the timing of Owens Corning
payments, described in Item A.
Insurance Settlement
--------------------
In 1993, Fibreboard and two of its insurers, Continental Casualty Company
("Continental") and Pacific Indemnity Company ("Pacific"), entered into the
Insurance Settlement. The Insurance Settlement became effective in the fourth
quarter of 1999 and is final and not subject to appeal.
<PAGE>
- 23 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. CONTINGENT LIABILITIES
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued)
Since 1993, Continental and Pacific paid, either directly or through an escrow
account funded by them, for substantially all settlements of asbestos claims
reached prior to the initiation of the NSP. Under the Insurance Settlement,
Continental and Pacific provided $1,873 million during the fourth quarter of
1999 to fund Fibreboard's costs of resolving pending and future asbestos claims,
whether under the NSP, in the tort system, or otherwise.
The Insurance Settlement funds are held in and invested by the Fibreboard
Settlement Trust and are available to satisfy Fibreboard's pending and future
asbestos-related liabilities. As of June 30, 2000, $1,249 million (net of
outstanding payables) was held in the Fibreboard Settlement Trust and $150
million was held in Undistributed Administrative Deposits on behalf of
Fibreboard. On an ongoing basis, the funds held in the Trust will be subject to
investment earnings/losses and will be reduced as applied to satisfy
Fibreboard's asbestos-related liabilities. Generally, it is expected that
payments of Fibreboard's asbestos-related liabilities will be paid directly by
the Fibreboard Settlement Trust on behalf of Fibreboard. Any asbestos-related
amounts paid directly by Fibreboard are subject to reimbursement from the
Trust's assets. Under the terms of the Trust, any of such assets that ultimately
are not used to fund Fibreboard's asbestos-related liabilities must be
distributed to charity.
Funds held in the Fibreboard Settlement Trust and Fibreboard's Undistributed
Administrative Deposits are reflected on Owens Corning's consolidated balance
sheet as restricted assets. These assets are reflected as current assets or
other assets, with each category denoted "Restricted cash and securities -
Fibreboard". The funds held in the Trust must be expended either in connection
with Fibreboard's asbestos-related liabilities or to satisfy the obligation
under the Trust to distribute to charity the assets, if any, remaining in the
Trust after satisfaction of all such liabilities. Accordingly, Owens Corning's
consolidated balance sheet also reflects liabilities in an aggregate amount
equal to the funds held in the Trust and Fibreboard's Undistributed
Administrative Deposits. These liabilities, denoted as "Asbestos-related
liabilities - Fibreboard", are reflected as current or other liabilities,
depending on the period in which payment is expected. At June 30, 2000, Owens
Corning estimates Fibreboard's asbestos-related liabilities at $1,365 million.
This amount includes an increase of $99 million during the second quarter of
2000 as the result of Owens Corning's review of Fibreboard's asbestos-related
liabilities. See Note 12 for additional information concerning the Fibreboard
Settlement Trust.
Asbestos-Related Payments
-------------------------
In the second quarter of 2000, gross payments for asbestos-related claims
against Fibreboard were approximately $249 million, all of which were
paid/reimbursed by the Fibreboard Settlement Trust. These payments fell within
four major categories, as follows:
<TABLE>
<S> <C>
(In millions of dollars)
Pre-1993 and Interim Claims $ 7
NSP Settlements 208
Non-NSP Settlements 17
Defense, Claims Processing and Administrative Expenses 17
-------
$ 249
</TABLE>
<PAGE>
- 24 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
11. CONTINGENT LIABILITIES
ITEM B. - FIBREBOARD (EXCLUDING OWENS CORNING) (continued)
The payments for NSP Settlements include Administrative Deposits during the
quarter on behalf of Fibreboard. At June 30, 2000, there were approximately $150
million of Undistributed Administrative Deposits made on behalf of Fibreboard.
As described above, these Undistributed Administrative Deposits are included as
restricted assets, under the caption "Restricted cash and securities -
Fibreboard", on Owens Corning's consolidated balance sheet.
In addition to the Deferral Program for Owens Corning asbestos-related payments
(described in Item A), Owens Corning has requested that NSP participating firms
agree to modify the Fibreboard NSP payment obligations so as to slow early year
payments and allow earnings in the Fibreboard Settlement Trust to accumulate.
Owens Corning is currently working with the NSP Executive Committee to develop
an acceptable payment schedule. There can be no assurance that an acceptable
schedule will be agreed upon. Owens Corning currently estimates that Fibreboard
will incur total asbestos-related payments (including Administrative Deposits)
of approximately $700 million in 2000, all of which are payable/reimbursable by
the Fibreboard Settlement Trust as described above. Fibreboard payments beyond
2000 will depend upon whether an acceptable alternative payment schedule is
agreed upon. Fibreboard payments will also depend on the same variables and
uncertainties as those described above affecting Owens Corning's payments.
Management Opinion
------------------
Owens Corning cautions that its estimate of Fibreboard's asbestos-related
liabilities is influenced by the same types of variables and is subject to
similar uncertainty as in the case of Owens Corning. Although any opinion is
necessarily judgmental and must be based on an assessment of the variables and
uncertainties described above, Owens Corning believes the amounts available from
the Fibreboard Settlement Trust will be adequate to fund Fibreboard's ongoing
defense and indemnity costs associated with asbestos-related personal injury
claims for the foreseeable future.
Other Liabilities
-----------------
Various other lawsuits and claims arising in the normal course of business are
pending against Owens Corning, some of which allege substantial damages.
Management believes that the outcome of these lawsuits and claims will not have
a materially adverse effect on Owens Corning's financial position or results of
operations.
<PAGE>
- 25 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. FIBREBOARD SETTLEMENT TRUST
Under the Insurance Settlement described in Note 11, two of Fibreboard's
insurers provided $1.873 billion during the fourth quarter of 1999 to fund
Fibreboard's costs of resolving pending and future asbestos claims. The
Insurance Settlement funds are held in and invested by the Fibreboard Settlement
Trust (the "Trust") and are available to satisfy Fibreboard's pending and future
asbestos-related liabilities. On an ongoing basis, the funds held in the Trust
will be subject to investment earnings/losses and will be reduced as applied to
satisfy Fibreboard's asbestos liabilities. Under the terms of the Trust, any
Trust assets which ultimately are not used to fund Fibreboard's asbestos
liabilities must be distributed to charity.
The Trust is a qualified settlement fund for federal income tax purposes, and is
taxed separately from Owens Corning on its net taxable income, after deduction
for related administrative expenses.
General Accounting Treatment
----------------------------
The assets of the Trust are comprised of cash and marketable securities
(collectively, the "Trust Assets") and, with Fibreboard's Undistributed
Administrative Deposits, are reflected on Owens Corning's consolidated balance
sheet as restricted assets. These assets are reflected as current assets or
other assets, with each category denoted "Restricted cash and securities -
Fibreboard". The funds held in the Trust must be expended either in connection
with Fibreboard's asbestos-related liabilities or to satisfy the obligation
under the Trust to distribute to charity the assets, if any, remaining in the
Trust after satisfaction of all such liabilities. Accordingly, Owens Corning's
consolidated balance sheet also reflects liabilities in an aggregate amount
equal to the funds held in the Trust and Fibreboard's Undistributed
Administrative Deposits. These liabilities, denoted as "Asbestos-related
liabilities - Fibreboard," are reflected as current or other liabilities,
depending on the period in which payment is expected. At June 30, 2000, Owens
Corning estimates Fibreboard's asbestos-related liabilities at $1.365 billion,
with a residual obligation to charity of $34 million. Payments from the Trust
and distributions from Undistributed Administrative Deposits for
asbestos-related liabilities reduce both the assets and related liabilities on
the consolidated balance sheet.
For accounting purposes, the Trust Assets are classified from time to time as
"available for sale" or "held to maturity" and are reported in the Company's
consolidated financial statements in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Accordingly, marketable
securities classified as available for sale are recorded at fair market value
and marketable securities designated as held to maturity are recorded at
amortized cost.
Any unrealized increase/decrease in fair market value is reflected as a change
in the carrying amount of the asset on the consolidated balance sheet as well as
an increase/decrease to other comprehensive income within stockholders' equity,
net of tax. The residual liability to be paid to charity will also
increase/decrease, with a related decrease/increase to other comprehensive
income within stockholders' equity, net of tax.
Any earnings and realized gains/losses on the Trust Assets are reflected as an
increase/decrease in the carrying amount of such assets on the consolidated
balance sheet as well as other income/expense on the consolidated statement of
income.
<PAGE>
- 26 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. FIBREBOARD SETTLEMENT TRUST (continued)
The residual liability to be paid to charity will also increase/decrease, with
related other expense/ income on the consolidated statement of income. Cost for
purposes of computing realized gains/losses is determined using the specific
identification method.
Adjustments
-----------
Periodically, the Company evaluates the amount of Fibreboard's asbestos-related
liabilities. During the second quarter of 2000, the Company determined that
Fibreboard's asbestos-related liabilities required an increase of $99 million
(see Note 11). Accordingly, the Company increased Fibreboard's asbestos-related
liabilities and reduced the amount payable to charity by this amount during the
second quarter of 2000.
Results for the Period Ending June 30, 2000
-------------------------------------------
Trust Assets generated interest/dividend earnings of approximately $18 million
in the second quarter of 2000 and $38 million year to date, which have been
recorded as an increase in the carrying amount of the assets on Owens Corning's
consolidated balance sheet and as other income on the consolidated statement of
income. This income, however, has been offset by an equal charge to other
expense, which represents the increase in the residual liability to be paid to
charity.
Payments for asbestos-related claims from the Trust (including Administrative
Deposits) during the second quarter of 2000 were approximately $249 million and
total $634 million for the year. Such payments were funded by existing cash in
the Trust or proceeds from the sale of securities. The sale of securities
resulted in a net realized gain of less than $1 million during the second
quarter of 2000 and approximately $1 million year to date. Realized gains or
losses from the sale of securities are reflected on the Company's financial
statements in the same manner as actual returns on Trust Assets, described
above.
During 2000, fair market value adjustments for securities designated as
available for sale have resulted in a net unrealized gain of $1 million since
their valuation at December 31, 1999. As the investments had an unrealized loss
of approximately $1 million at December 31, 1999, there is no net unrealized
gain or loss on these investments at June 30, 2000. The gain in the current year
has been reflected in the Company's consolidated balance sheet as an increase to
the carrying amount of the asset and an increase to other comprehensive income.
This gain has also been reflected as an increase to the charity liability, with
a corresponding decrease to other comprehensive income.
At June 30, 2000, the fair value of Trust Assets was $1.399 billion, net of $29
million in outstanding payables. Total trust assets of $1.278 billion were
invested in marketable securities. The fair value of Undistributed
Administrative Deposits was $150 million and was held as restricted cash. $525
million of these assets have been classified as a current asset while the
remaining securities have been classified as noncurrent assets.
The amortized cost, gross unrealized holding gains and losses and fair value of
the investment securities available for sale at June 30, 2000 and December 31,
1999 are as follows:
<PAGE>
- 27 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. FIBREBOARD SETTLEMENT TRUST (continued)
<TABLE>
<S> <C> <C> <C> <C>
June 30, 2000
-------------
Amortized Gross Unrealized Gross Unrealized
Cost Gain Loss Fair Value
--------- ---------------- ---------------- ----------
(In millions of dollars)
Corporate Bonds $ 532 $ - $ - $ 532
Corporate Notes 73 - - 73
Municipal Bonds 204 - - 204
Mutual Funds 247 - - 247
US Government Bonds 222 - - 222
--------- ---------- -------- ---------
Total $ 1,278 $ - $ - $ 1,278
</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
</TABLE>
Maturities of investment securities classified as available for sale at June 30,
2000 and December 31, 1999 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to recall or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<S> <C> <C> <C> <C>
June 30, 2000 December 31, 1999
------------- -----------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
(In millions of dollars)
Due within one year $ 537 $ 537 $ 1,152 $ 1,152
Due after one year through five years 47 47 72 72
Due after five years through ten years 26 26 87 87
Due after ten years 668 668 528 527
---------- --------- ------------ -----------
Total $ 1,278 $ 1,278 $ 1,839 $ 1,838
</TABLE>
<PAGE>
- 28 -
OWENS CORNING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
12. FIBREBOARD SETTLEMENT TRUST (continued)
The table below summarizes Trust and Administrative Deposits activity for the
first half of 2000:
<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 6/30/00
-------- --------- ------ ---------- ------ ----------- ----- -------- -------
Assets
------
Cash (Note 11) $ - $ - $ - $ 605 $ - $ - $ - $ (634) $ (29)
Restricted Cash
(Note 11) - - - - - - 150 - 150
Marketable
Securities:
Available
for Sale 1,838 38 1 (605) 1 - 5 - 1,278
--------- --------- ------ --------- ------ ---------- ----- ------- -------
Total Assets $ 1,838 $ 38 $ 1 $ - $ 1 $ - $ 155 $ (634) $ 1,399
========= ========= ====== ========= ====== ========== ===== ======== ========
Liabilities
-----------
Asbestos
Litigation
Claims (Note 11) $ 1,750 $ - $ - $ - $ - $ 99 $ 150 $ (634) $ 1,365
Charity 88 38 1 - 1 (99) 5 - 34
--------- -------- ------ --------- ------ ---------- ----- -------- --------
Total
Liabilities $ 1,838 $ 38 $ 1 $ - $ 1 $ - $ 155 $ (634) $ 1,399
========= ======== ====== ========= ====== ========== ===== ======== ========
</TABLE>
<PAGE>
- 29 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Owens
Corning has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
OWENS CORNING
Registrant
Date: August 16, 2000 By: /s/ Michael H. Thaman
------------------------ -------------------------
Michael H. Thaman
Senior Vice President and
Chief Financial Officer
(as duly authorized officer)
Date: August 16, 2000 By: /s/ Deyonne F. Epperson
------------------------ ---------------------------
Deyonne F. Epperson
Vice President and Controller
</TABLE>
