1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ -----------
Commission File Number 1-8864
USG CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3329400
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South Franklin Street, Chicago, Illinois 60606-4678
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (312) 606-4000
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
----- -----
As of June 30, 2001, 43,456,145 shares of USG common stock were outstanding.
2
TABLE OF CONTENTS
Page
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Earnings:
Three Months and Six Months
Ended June 30, 2001 and 2000 3
Consolidated Balance Sheets:
As of June 30, 2001 and December 31, 2000 4
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 22
Report of Independent Public Accountants 33
PART II OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 3. Defaults Upon Senior Securities 41
Item 4. Submission of Matters to a Vote of Security Holders 42
Item 6. Exhibits and Reports on Form 8-K 43
SIGNATURES 44
-2-
3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USG CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------- ------------
Net sales $ 806 $ 995 $ 1,632 $ 1,984
Cost of products sold 736 751 1,462 1,472
Selling and administrative expenses 65 79 133 163
Chapter 11 reorganization expenses 10 - 10 -
------------ ------------ ------------ ------------
Operating profit (loss) (5) 165 27 349
Interest expense 16 13 30 25
Interest income (2) (1) (3) (3)
Other (income) expense, net (1) - - 1
------------ ------------ ------------ ------------
Earnings (loss) before income taxes (18) 153 - 326
Income taxes (benefit) (5) 60 2 127
------------ ------------ ------------ ------------
Net earnings (loss) (13) 93 (2) 199
============ ============ ============ ============
Earnings (loss) per common share:
Basic (0.29) 2.06 (0.04) 4.22
Diluted (0.29) 2.04 (0.04) 4.19
Dividends paid per common share - 0.15 0.025 0.30
Average common shares 43,430,957 45,531,863 43,413,691 47,251,951
Average diluted common shares 43,430,957 45,835,053 43,413,691 47,540,056
</Table>
See accompanying Notes to Consolidated Financial Statements.
-3-
4
USG CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF AS OF
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 304 $ 70
Receivables (net of reserves - $17 and $18) 322 305
Inventories 258 271
Income taxes receivable 74 -
Deferred income taxes 87 194
Other current assets 34 36
------- -------
Total current assets 1,079 876
Property, plant and equipment (net of reserves
for depreciation and depletion - $511 and $470) 1,833 1,830
Deferred income taxes 261 257
Other assets 265 251
------- -------
Total Assets 3,438 3,214
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 58 200
Accrued expenses 137 280
Taxes on income - 19
Notes payable - 6
Current portion of long-term debt 60 141
Current portion of asbestos reserve - 250
------- -------
Total current liabilities 255 896
Long-term debt 3 564
Long-term asbestos reserve - 935
Other liabilities 331 355
Liabilities subject to compromise 2,374 -
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (255) (256)
Capital received in excess of par value 408 411
Accumulated other comprehensive loss (30) (45)
Retained earnings 347 349
------- -------
Total stockholders' equity 475 464
------- -------
Total Liabilities and Stockholders' Equity 3,438 3,214
======= =======
See accompanying Notes to Consolidated Financial Statements.
-4-
5
USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
-------------------
2001 2000
------ -------
OPERATING ACTIVITIES:
Net earnings (loss) $ (2) $ 199
Adjustments to reconcile net earnings (loss) to net cash:
Depreciation, depletion and amortization 53 51
Deferred income taxes 94 (25)
Gain on asset dispositions - (1)
(Increase) decrease in working capital:
Receivables (91) (34)
Inventories 13 (23)
Payables 1 (13)
Accrued expenses (39) (36)
Increase in other assets (19) (18)
Increase in other liabilities 6 2
Asbestos reserve, net of receivables (114) 34
Other, net 33 (4)
----- -----
Net cash (to) from operating activities (65) 132
----- -----
INVESTING ACTIVITIES:
Capital expenditures (57) (232)
Net proceeds from asset dispositions 1 2
----- -----
Net cash to investing activities (56) (230)
----- -----
FINANCING ACTIVITIES:
Issuance of debt 262 129
Repayment of debt (71) (105)
Short-term borrowings, net 165 84
Cash dividends paid (1) (14)
Purchases of common stock - (175)
----- -----
Net cash from (to) financing activities 355 (81)
----- -----
Net increase/(decrease) in cash and cash equivalents 234 (179)
Cash and cash equivalents at beginning of period 70 197
----- -----
Cash and cash equivalents at end of period 304 18
===== =====
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 30 25
Income taxes (refunded) paid, net (7) 187
See accompanying Notes to Consolidated Financial Statements.
-5-
6
USG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) PREPARATION OF FINANCIAL STATEMENTS
The consolidated financial statements of USG Corporation ("USG" or "the
Corporation") included herein have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Actual results could differ
from those estimates. In the opinion of management, the statements
reflect all adjustments, which are of a normal recurring nature,
necessary to present fairly the Corporation's financial position as of
June 30, 2001, and December 31, 2000, results of operations for the
three months and six months ended June 30, 2001 and 2000 and cash flows
for the six months ended June 30, 2001 and 2000. Certain amounts in the
prior year financial statements have been reclassified to conform with
the 2001 presentation. While these interim financial statements and
accompanying notes are unaudited, they have been reviewed by Arthur
Andersen LLP, the Corporation's independent public accountants. These
financial statements and notes are to be read in conjunction with the
financial statements and notes included in the Corporation's 2000
Annual Report on Form 10-K dated March 5, 2001.
(2) VOLUNTARY REORGANIZATION UNDER CHAPTER 11
On June 25, 2001 (the "Petition Date"), the Corporation and the ten
United States subsidiaries listed below (collectively, the "Debtors"),
filed voluntary petitions for reorganization (the "Filing") under
chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code")
in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). The chapter 11 cases of the Debtors (collectively,
the "Chapter 11 Cases") have been consolidated for purposes of joint
administration as In re: USG Corporation et al. (case no. 01-2094). The
Chapter 11 Cases do not include any of USG's non-U.S. subsidiaries. The
following subsidiaries filed chapter 11 petitions:
United States Gypsum Company
USG Interiors, Inc.
USG Interiors International, Inc.
L&W Supply Corporation
Beadex Manufacturing, LLC
B-R Pipeline Company
La Mirada Products Co., Inc.
Stocking Specialists, Inc.
USG Industries, Inc.
USG Pipeline Company
-6-
7
This action was taken to resolve asbestos-related claims in a fair and
equitable manner, to protect the long-term value of the Debtors'
businesses, and to maintain the Debtors' leadership positions in their
markets.
CONSEQUENCES OF THE FILING
The Debtors are operating their businesses without interruption as
debtors-in-possession subject to the provisions of the Bankruptcy Code.
All vendors will be paid for all goods furnished and services provided
after the Filing. However, as a consequence of the Filing, all pending
litigation against the Debtors as of the Petition Date is stayed, and
no party may take any action to pursue or collect pre-petition claims
except pursuant to order of the Bankruptcy Court. It is the Debtors'
intention to address all pending and future asbestos-related claims and
all other pre-petition claims in a plan of reorganization. However, it
is currently impossible to predict with any degree of certainty how the
plan will treat asbestos and other pre-petition claims and what impact
the Filing and any reorganization plan may have on the shares of the
Corporation's common stock. The formulation and implementation of the
plan of reorganization could take a significant period of time.
Three creditors' committees, one representing asbestos personal injury
claimants, another representing asbestos property damage claimants and
a third representing general unsecured creditors, have been appointed
as official committees in the Chapter 11 Cases 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. The Corporation
expects that the appointed committees, together with a legal
representative of future asbestos claimants to be appointed by the
Bankruptcy Court, will play important roles in the Chapter 11 Cases and
the negotiation of the terms of any plan of reorganization.
As provided by the Bankruptcy Code, the Debtors initially have the
exclusive right to propose a plan of reorganization for 120 days
following the Petition Date, until October 23, 2001. The Debtors expect
to ask the Bankruptcy Court to extend the period of exclusivity, which
request they expect to be granted. If the Debtors fail to file a plan
of reorganization during such period or any extension thereof, or if
such plan is not accepted by the requisite numbers of creditors and
equity holders entitled to vote on the plan, other parties in interest
in the Chapter 11 Cases may be permitted to propose their own plan(s)
of reorganization for the Debtors.
The Corporation is unable to predict at this time what the treatment of
creditors and equity security holders of the respective Debtors will be
-7-
8
under any proposed plan or plans of reorganization. Such plan or plans
may provide, among other things, that all present and future
asbestos-related liabilities of the Debtors will be discharged and
assumed and resolved by one or more independently administered trusts
established in compliance with Section 524(g) of the Bankruptcy Code.
Such plan or plans may also provide for the issuance of an injunction
by the Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy
Code that will enjoin actions against the reorganized Debtors alleging
asbestos-related claims, which claims will be paid in whole or in part
by one or more Section 524(g) trusts. Similar plans of reorganization
have been confirmed in chapter 11 cases of other companies involved in
asbestos-related litigation. Section 524(g) of the Bankruptcy Code
provides that, if certain specified conditions are satisfied, a court
may issue a supplemental permanent injunction barring the assertion of
asbestos-related claims against the reorganized company and channeling
those claims to an independent trust.
The Corporation is unable to predict at this time what treatment will
be accorded under any such reorganization plan or plans to intercompany
indebtedness, licenses, transfers of goods and services, and other
intercompany arrangements, transactions and relationships that were
entered into prior to the Petition Date. These arrangements,
transactions, and relationships may be challenged by various parties in
the Chapter 11 Cases, and the outcome of those challenges, if any, may
have an impact on the treatment of various claims under such plan or
plans.
The Bankruptcy Court may confirm a plan of reorganization only upon
making certain findings required by the Bankruptcy Code, and a plan may
be confirmed over the dissent of non-accepting creditors and equity
security holders if certain requirements of the Bankruptcy Code are
met. The payment rights and other entitlements of pre-petition
creditors and USG shareholders may be substantially altered by any plan
or plans of reorganization confirmed in the Chapter 11 Cases. There is
no assurance that there will be sufficient assets to satisfy the
Debtors' pre-petition liabilities in whole or in part, and the
pre-petition creditors of some Debtors may be treated differently than
those of other Debtors. Pre-petition creditors may receive under a plan
or plans less than 100% of the face value of their claims, and the
interests of the Corporation's equity security holders may be
substantially diluted or cancelled in whole or in part. As noted above,
it is not possible at this time to predict the outcome of the Chapter
11 Cases, the terms and provisions of any plan or plans of
reorganization, or the effect of the Chapter 11 reorganization process
on the claims of the pre-petition creditors of the Debtors or the
interests of the Corporation's equity security holders.
CHAPTER 11 FINANCING
In connection with the Filing, the Corporation has received commitments
for up to $350 million in debtor-in-possession ("DIP") financing from
JP Morgan Chase to supplement liquidity and fund operations during the
-8-
9
reorganization process. On an interim basis, the Bankruptcy Court has
approved the availability of a $150 million DIP credit facility from JP
Morgan Chase. The $350 million DIP financing was approved at a final
hearing in the Bankruptcy Court on July 31, 2001. The Corporation
believes, based on information presently available to it, that cash
available from operations and DIP financing will provide sufficient
liquidity to allow its businesses to operate without interuption.
As of June 30, 2001, the Corporation had $304 million of cash and cash
equivalents, on a consolidated basis. Of this amount, $114 million was
in the possession of non-Debtor subsidiaries outside of the United
States and $84 million was in the possession of USG Funding
Corporation. On June 26, 2001, USG Funding notified Chase Manhattan
Bank, trustee of a revolving accounts receivable facility, that an
Early Amortization Event, as defined in the agreement, had occurred
effective with the Filing. As a result, transfers of receivables to the
trust ceased and, on July 12, 2001, all outstanding obligations under
the accounts receivable facility, which totaled $60 million, were
repaid and the facility was terminated.
FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with AICPA Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" and on a going concern basis, which contemplates continuity of
operations, realization of assets and liquidation of liabilities in the
ordinary course of business. However, as a result of the Filing, such
realization of assets and liquidation of liabilities, without
substantial adjustments and/or changes of ownership, are subject to
uncertainty. Given this uncertainty, there is doubt about continuing
the going concern basis of presentation. While operating as
debtors-in-possession under the protection of Chapter 11 of the
Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise
as permitted in the ordinary course of business, the Debtors, or some
of them, may sell or otherwise dispose of assets and liquidate or
settle liabilities for some amounts other than those reflected in the
consolidated financial statements. Further, a plan of reorganization
could materially change the amounts and classifications in the
historical consolidated financial statements.
As of the date of this report, virtually all of the Corporation's
pre-petition debt is in default due to the Filing. As described below,
the accompanying consolidated financial statements present the Debtors'
pre-petition debt under the caption "Liabilities Subject to
Compromise." This includes debt outstanding of $467 million under the
pre-petition bank credit facilities and $537 million of other
outstanding debt. The Corporation accelerated the amortization of its
debt-related costs attributable to the Debtors and recorded a pretax
expense of $2 million during the second quarter of 2001, which was
included under the caption "Chapter 11 Reorganization Expenses."
-9-
10
As reflected in the consolidated financial statements, liabilities
subject to compromise refers to Debtors' liabilities incurred prior to
the commencement of the Chapter 11 Cases. The amounts of the various
liabilities that are subject to compromise are set forth below. These
amounts represent the Corporation's estimate of known or potential
pre-petition claims to be resolved in connection with the Chapter 11
Cases. Such claims remain subject to future adjustments. Adjustments
may result from (i) negotiations; (ii) actions of the Bankruptcy Court;
(iii) further developments with respect to disputed claims; (iv)
rejection of executory contracts and unexpired leases; (v) the
determination as to the value of any collateral securing claims; (vi)
proofs of claim; or (vii) other events. Payment terms for these amounts
will be established in connection with the Chapter 11 Cases.
Pursuant to the Bankruptcy Code, schedules will be filed by the Debtors
with the Bankruptcy Court setting forth the assets and liabilities of
the Debtors as of the date of the Filing. Differences between amounts
recorded by the Debtors and claims filed by creditors will be
investigated and resolved as part of the proceedings in the Chapter 11
Cases. No bar dates have been set for the filing of proofs of claim
against the Debtors. Accordingly, the ultimate number and allowed
amount of such claims are not presently known.
The Debtors have received approval from the Bankruptcy Court to pay or
otherwise honor certain of their pre-petition obligations, including
employee wages, salaries, benefits and other employee obligations, and
from limited available funds, pre-petition claims of certain critical
vendors, certain customer programs and warranty claims and certain
other pre-petition claims.
Contractual interest expense not accrued or recorded on pre-petition
debt totaled $1 million for the second quarter of 2001.
The Corporation believes, based on information presently available to
it, that cash available from operations and DIP financing will provide
sufficient liquidity to allow its businesses to operate without
interuption (including its ability to meet post-petition obligations of
the Debtors and to meet obligations of the non-debtor subsidiaries),
and the appropriateness of using the going concern basis for its
financial statements is dependent upon, among other things, (i) the
Corporation's ability to comply with the terms of the DIP financing and
any cash management order entered by the Bankruptcy Court in connection
with the Chapter 11 Cases; (ii) the ability of the Corporation to
maintain adequate cash on hand; (iii) the ability of the Corporation to
generate cash from operations; (iv) confirmation of a plan or plans of
reorganization under the Bankruptcy Code; and (v) the Corporation's
ability to achieve profitability following such confirmation.
-10-
11
Liabilities subject to compromise in the consolidated and DIP balance
sheets consist of the following items as of June 30, 2001 (dollars in
millions):
Accounts payable $ 204
Accrued expenses 108
Debt 1,004
Asbestos reserve 1,066
Other long-term liabilities 33
-------
Total consolidated 2,415
Payables to the Debtors (41)
-------
Total Debtors 2,374
=======
Chapter 11 reorganization expenses in the consolidated and DIP
statements of earnings consist of the following for the quarter and six
months ended June 30, 2001 (dollars in millions):
Legal and financial advisory fees $ 8
Accelerated amortization of debt issuance costs 2
---
Total Chapter 11 reorganization expenses 10
===
DIP FINANCIAL STATEMENTS
Under the Bankruptcy Code, the Corporation is required to file
periodically with the Bankruptcy Court various documents including
financial statements of the Debtors (the "Debtor-In-Possession" or
"DIP" Financial Statements). The Corporation cautions that these
financial statements are prepared according to requirements under the
Bankruptcy Code. While these financial statements accurately provide
information required under bankruptcy law, they are nonetheless
unconsolidated, unaudited, and are prepared in a format different from
that used in the Corporation's consolidated financial statements filed
under the securities laws. Accordingly, the Corporation believes the
substance and format do not allow meaningful comparison with the
Corporation's regular publicly disclosed consolidated financial
statements. The condensed financial statements of the Debtors are
presented as follows:
-11-
12
USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENTS OF EARNINGS
(DOLLARS IN MILLIONS)
(UNAUDITED)
PERIODS ENDED JUNE 30, 2001 THREE MONTHS SIX MONTHS
------------ ----------
Net sales $ 721 $ 1,460
Cost of products sold 675 1,335
Selling and administrative expenses 53 111
Chapter 11 reorganization expenses 10 10
Interest expense 14 26
Interest income (2) (2)
Other expense, net 6 7
------- -------
Loss before income taxes (35) (27)
Income tax benefit (10) (6)
------- -------
Net loss (25) (21)
======= =======
-12-
13
USG CORPORATION
DEBTOR-IN-POSSESSION BALANCE SHEET
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF
JUNE 30,
2001
-------------
ASSETS
Cash and cash equivalents $ 106
Receivables 157
Inventories 211
Income taxes receivable 75
Deferred income taxes 87
Other current assets 33
-------
Total current assets 669
Property, plant and equipment, net 1,592
Deferred income taxes 281
Other assets 688
-------
Total Assets 3,230
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 32
Accrued expenses 120
-------
Total current liabilities 152
Other liabilities 324
Liabilities subject to compromise 2,374
Stockholders' Equity:
Preferred stock -
Common stock 5
Treasury stock (255)
Capital received in excess of par value 95
Accumulated other comprehensive income 9
Retained earnings 526
-------
Total stockholders' equity 380
-------
Total Liabilities and Stockholders' Equity 3,230
=======
-13-
14
USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
SIX MONTHS
ENDED
JUNE 30, 2001
-------------
OPERATING ACTIVITIES:
Net loss $ (21)
Adjustments to reconcile net loss to net cash:
Depreciation, depletion and amortization 44
Deferred income taxes 94
(Increase) decrease in working capital:
Receivables (66)
Inventories 10
Payables 2
Accrued expenses (32)
Intercompany receivable (233)
Increase in other assets (42)
Increase in other liabilities 6
Asbestos reserve, net of receivables (114)
Other, net 47
-----
Net cash to operating activities (305)
-----
INVESTING ACTIVITIES:
Capital expenditures (32)
Net proceeds from asset dispositions 1
-----
Net cash to investing activities (31)
-----
FINANCING ACTIVITIES:
Issuance of debt 262
Repayment of debt (56)
Short-term borrowings, net 200
Cash dividends paid (1)
-----
Net cash from financing activities 405
-----
Net increase in cash and cash equivalents 69
Cash and cash equivalents at beginning of period 37
-----
Cash and cash equivalents at end of period 106
=====
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 26
Income taxes refunded, net (16)
-14-
15
INTERCOMPANY TRANSACTIONS
In the normal course of business, the operating subsidiaries and the
parent company of the Corporation engage in intercompany transactions.
To document the relations created by these transactions, the parent
company and the operating subsidiaries have, from the formation of USG
Corporation in 1985, been parties to intercompany loan agreements which
evidence their obligations as borrowers or rights as lenders arising
out of intercompany cash transfers and various allocated intercompany
charges.
The Corporation operates a consolidated cash management system under
which the cash receipts of the operating subsidiaries are ultimately
concentrated in accounts of the parent company and cash disbursements
for those operating subsidiaries originate from those parent company
concentration accounts. Allocated intercompany charges from the parent
company to the operating subsidiaries primarily include expenses
related to rent, property taxes, information technology and research
and development, while allocated intercompany charges between certain
operating subsidiaries primarily include expenses for shared marketing,
sales, customer service, engineering and accounting services. Detailed
accounting records are maintained of all cash flows and intercompany
charges through the system in either direction and net balances,
receivables or payables, of such cash transactions are tracked on a
regular basis with interest earned or paid on the balances.
During the first six months of 2001, USG took steps to secure the
obligations from each of the principal operating subsidiaries under the
intercompany loan agreements when it became clear that U.S. Gypsum's
asbestos liability claims were becoming an increasingly greater burden
on the Corporation's cash resources.
In addition to the above transactions, the operating subsidiaries
engage in ordinary course purchase and sale of products with other
operating subsidiaries. Detailed accounting records also are maintained
of all such transactions, and settlements are made on a monthly basis.
Certain purchase and sale transactions between U.S. and non-U.S.
operating subsidiaries are settled via wire transfer payments. These
settlements are netted and the parent company acts as a clearinghouse.
The purpose of the clearinghouse activity is to achieve a net balance
(receivable or payable) for such transactions relative to each
subsidiary for each accounting period. The parent company and operating
subsidiaries maintain the accounting detail to support a
transaction-by-transaction buildup for each net balance on their
respective books of account.
-15-
16
(3) EARNINGS PER SHARE
Basic earnings (loss) per share were computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding for
the period. The dilutive effect of the potential exercise of
outstanding options to purchase shares of common stock is calculated
using the treasury stock method. The reconciliation of basic earnings
(loss) per share to diluted earnings (loss) per share is shown in the
following table (dollars in millions except share data):
NET SHARES PER SHARE
THREE MONTHS ENDED JUNE 30, EARNINGS (LOSS) (000) AMOUNT
----------------------------------------------------------------------------
2001
Basic loss $ (13) 43,431 $ (0.29)
Dilutive effect of stock options -
----------------------------------------------------------------------------
Diluted Loss (13) 43,431 (0.29)
============================================================================
2000
Basic earnings $ 93 45,532 $ 2.06
Dilutive effect of stock options 303
----------------------------------------------------------------------------
Diluted Earnings 93 45,835 2.04
============================================================================
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------
2001
Basic loss $ (2) 43,414 $ (0.04)
Dilutive effect of stock options -
----------------------------------------------------------------------------
Diluted Loss (2) 43,414 (0.04)
============================================================================
2000
Basic earnings $ 199 47,252 $ 4.22
Dilutive effect of stock options 288
----------------------------------------------------------------------------
Diluted Earnings 199 47,540 4.19
============================================================================
Because of the market value of the Corporation's shares of common stock
in 2001, there were no common stock equivalents for the three months
and six months ended June 30, 2001.
-16-
17
(4) STOCK OPTION GRANTS
As of June 30, 2001, common shares totaling 2,756,100 were reserved for
future issuance in conjunction with existing stock option grants. In
addition, 1,718,811 common shares were reserved for future grants.
Shares issued in option exercises may be from original issue or
available treasury shares.
(5) OPERATING SEGMENTS
USG's operations are organized into three operating segments: North
American Gypsum, which manufactures and markets gypsum wallboard and
related products in the United States, Canada and Mexico; Worldwide
Ceilings, which manufactures and markets ceiling tile, ceiling grid and
other interior systems products worldwide; and Building Products
Distribution, which distributes gypsum wallboard, drywall metal,
ceiling products, joint compound and other building products throughout
the United States. Operating segment results were as follows (dollars
in millions):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ----------------
NET SALES: 2001 2000 2001 2000
----- ------ ------ ------
North American Gypsum 458 615 941 1,225
Worldwide Ceilings 170 176 343 354
Building Products Distribution 287 368 573 724
Eliminations (109) (164) (225) (319)
------ ------ ------ ------
Total USG Corporation 806 995 1,632 1,984
====== ====== ====== ======
OPERATING PROFIT (LOSS):
North American Gypsum (20) 129 (5) 283
Worldwide Ceilings 9 18 18 35
Building Products Distribution 22 28 37 55
Corporate (7) (10) (15) (26)
Chapter 11 reorganization expenses (10) - (10) -
Eliminations 1 - 2 2
------ ------ ------ ------
Total USG Corporation (5) 165 27 349
====== ====== ====== ======
-17-
18
(6) COMPREHENSIVE INCOME (LOSS)
Total comprehensive loss for the second quarter of 2001 amounted to $37
million, consisting of a net loss of $13 million and accumulated other
comprehensive loss of $24 million. Accumulated other comprehensive loss
consisted of a net after-tax loss of $31 million ($51 million pretax)
on designated derivative instruments, partially offset by $7 million
related to foreign currency translation adjustments. For the respective
2000 period, total comprehensive income amounted to $87 million (net
earnings of $93 million less $6 million related to foreign currency
translation adjustments). There was no tax impact on the foreign
currency translation adjustments.
Total comprehensive income for the first six months of 2001 amounted to
$13 million, consisting of a net loss of $2 million and accumulated
other comprehensive income of $15 million. Accumulated other
comprehensive income consisted of a net after-tax gain of $18 million
($29 million pretax) on designated derivative instruments less $3
million related to foreign currency translation adjustments. For the
respective 2000 period, total comprehensive income amounted to $190
million (net earnings of $199 million less $9 million related to
foreign currency translation adjustments). There was no tax impact on
the foreign currency translation adjustments.
(7) FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS Nos.
137 and 138. These statements require that all derivative instruments
be recorded on the balance sheet at fair value. For derivatives
designated as fair value hedges, the changes in the fair values of both
the derivative instrument and the hedged item are recognized in
earnings in the current period. For derivatives designated as cash flow
hedges, the effective portion of changes in the fair value of the
derivative is recorded to accumulated other comprehensive income and is
reclassified to earnings when the underlying transaction impacts
earnings. As of January 1, 2001, and June 30, 2001, the net after-tax
derivative gain in accumulated other comprehensive income was $64
million and $18 million, respectively. During the second quarter of
2001, $5 million of accumulated after-tax gains were reclassified from
accumulated other comprehensive income to earnings. As of June 30,
2001, the estimated after-tax gain expected to be reclassified within
the next twelve months from accumulated other comprehensive loss into
earnings is $4 million.
Commodity Risk: The Corporation uses swap contracts to hedge
anticipated purchases of wastepaper and fuel to be used in its
manufacturing and shipping operations. These contracts, all of which
mature by December 31, 2003,
-18-
19
are designated as cash flow hedges and changes in fair value are
recorded in accumulated other comprehensive income until the hedged
transaction occurs at which time it is reclassified to earnings.
The Corporation also uses swap contracts from time to time to hedge
anticipated purchases of natural gas. During the second quarter of
2001, the Corporation received proceeds of $35 million from the
termination of all natural gas swap contracts that were scheduled to
mature through 2005. In accordance with SFAS No. 133, the net after-tax
gain of $21 million resulting from the termination of these contracts
will remain in accumulated other comprehensive income and will be
reclassified into earnings in the same periods during which the hedged
forecasted transactions were scheduled to occur. As of June 30, 2001,
the Corporation had no outstanding natural gas swap agreements.
Foreign Exchange Risk: The Corporation has operations in a number of
countries and uses forward contracts to hedge the risk of changes in
cash flows resulting from forecasted intercompany and third party sales
or purchases in foreign currencies. These contracts are designated as
cash flow hedges and changes in fair value are recorded in accumulated
other comprehensive income (loss) until the underlying transaction
impacts earnings. All foreign currency forward contracts expire within
twelve months.
Interest Rate Risk: The Corporation is exposed to interest rate changes
and uses swap agreements from time to time to manage this exposure. As
of June 30, 2001, the Corporation had no outstanding interest rate swap
agreements.
(8) RESTRUCTURING
In the fourth quarter of 2000, USG announced a restructuring plan that
included a salaried workforce reduction and the shutdown of three
gypsum wallboard manufacturing lines and other operations. The
restructuring, which the Corporation intends to complete in 2001, is
designed to streamline operations and improve business efficiency.
At the time the restructuring was announced, a reserve was established
for all severance and exit costs. Payments totaling $17 million during
the first six months of 2001 were charged against the restructuring
reserve, leaving a balance of $17 million in the reserve as of June 30,
2001. The restructuring reserve was included in accrued expenses as of
December 31, 2000, and in liabilities subject to compromise as of June
30, 2001, on the consolidated balance sheets. All restructuring-related
payments are being funded with cash from normal operations. The
following table details the restructuring reserve and first six months
activity (dollars in millions):
-19-
20
RESERVE RESERVE
BALANCE RESERVE BALANCE
12/31/00 UTILIZATION 6/30/01
-----------------------------------------------------------------------
Severance (salaried) $ 15 $ 15 $ -
Razing buildings and equipment 12 - 12
Line shutdown and removal 5 1 4
Contract cancellations
and severance (hourly) 2 1 1
-----------------------------------------------------------------------
Total 34 17 17
=======================================================================
As of June 30, 2001, the salaried workforce reduction program has been
completed with the termination of 394 salaried employees and the
elimination of 179 open salaried positions. In addition, 73 hourly
employees have been terminated and 44 open hourly positions have been
eliminated.
(9) LITIGATION
One of the Corporation's subsidiaries, United States Gypsum Company
("U.S. Gypsum"), is a defendant in asbestos lawsuits alleging both
property damage and personal injury. See Part II, Item 1. "Legal
Proceedings" for information concerning the asbestos litigation.
The Corporation and certain of its subsidiaries have been notified by
state and federal environmental protection agencies of possible
involvement as one of numerous "potentially responsible parties" in a
number of so-called "Superfund" sites in the United States. The
Corporation believes that neither these matters nor any other known
governmental proceeding regarding environmental matters will have a
material adverse effect upon its results of operations or financial
position. See Part II, Item 1. "Legal Proceedings" for additional
information on environmental litigation.
(10) ACCOUNTS RECEIVABLE FACILITY
Under a revolving accounts receivable facility, the trade receivables
of U.S. Gypsum and USG Interiors, Inc. were being purchased up to June
25, 2001, by USG Funding Corporation and transferred to a trust
administered by Chase Manhattan Bank, as trustee. Certificates
representing an ownership interest of up to $130 million in the trust
were originally issued to an affiliate of Citicorp North America, Inc.
and later assumed by Citibank N.A. USG Funding is a separate corporate
entity with its own
-20-
21
separate creditors that are entitled to be satisfied out of USG
Funding's assets prior to any value in USG Funding becoming available
to its shareholder.
On June 26, 2001, USG Funding notified the trustee that an Early
Amortization Event, as defined in the agreement, had occurred effective
with the bankruptcy filing of USG Corporation on June 25, 2001. As a
result, transfers of receivables to the trust ceased and, on July 12,
2001, all outstanding obligations under the accounts receivable
facility were repaid and the facility was terminated. Receivables and
debt outstanding in connection with the accounts receivable facility
($60 million as of June 30, 2001), were included in receivables and
current portion of long-term debt, respectively, on the Corporation's
June 30, 2001, consolidated balance sheet.
(11) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued three new
accounting standards.
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" requires all business combinations initiated after June
30, 2001, to be accounted for using the purchase method. This statement
becomes effective January 1, 2002.
SFAS No. 142, "Goodwill and Other Intangible Assets" eliminates the
amortization of goodwill over its estimated useful life. Instead, most
goodwill will be subject to at least an annual assessment for
impairment by applying a fair-value-based test. In addition, acquired
intangible assets will be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights,
or if the intangible asset can be sold, transferred, licensed, rented
or exchanged. This statement becomes effective January 1, 2002.
SFAS No. 143, "Accounting for Asset Retirement Obligations" requires
entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. This
statement becomes effective January 1, 2003.
The Corporation has not determined the impact that the adoption of
these statements will have on its financial statements.
-21-
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
VOLUNTARY REORGANIZATION UNDER CHAPTER 11
On June 25, 2001 (the "Petition Date"), USG Corporation ("USG" or the
"Corporation") and the ten United States subsidiaries listed below
(collectively, the "Debtors"), filed voluntary petitions for reorganization (the
"Filing") under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). The chapter 11 cases of the Debtors (collectively, the
"Chapter 11 Cases") have been consolidated for purposes of joint administration
as In re: USG Corporation et al. (case no. 01-2094). The Chapter 11 Cases do not
include any of USG's non-U.S. subsidiaries. The following subsidiaries filed
chapter 11 petitions:
United States Gypsum Company
USG Interiors, Inc.
USG Interiors International, Inc.
L&W Supply Corporation
Beadex Manufacturing, LLC
B-R Pipeline Company
La Mirada Products Co., Inc.
Stocking Specialists, Inc.
USG Industries, Inc.
USG Pipeline Company
This action was taken to resolve asbestos-related claims in a fair and equitable
manner, to protect the long-term value of the Debtors' businesses, and to
maintain the Debtors' leadership positions in their markets.
BACKGROUND OF THE FILING
One of the Corporation's subsidiaries, United States Gypsum Company ("U.S.
Gypsum") is a defendant in asbestos lawsuits alleging both property damage and
personal injury cases. Recent chapter 11 filings by other companies subject to
asbestos litigation have dramatically increased U.S. Gypsum's asbestos costs
beyond its legitimate liability. The Corporation has been committed to finding a
legislative solution to the increase in asbestos costs. However, it became
apparent that a timely resolution to the problem through legislation was not
feasible, and the Corporation determined that voluntary protection under chapter
11 would be the best alternative for obtaining a fair and final resolution of
U.S. Gypsum's asbestos liability and the best way to preserve value for
stakeholders. See Part II, Item 1. "Legal Proceedings" for additional
information on asbestos litigation.
-22-
23
USG is the eighth major company with a large number of asbestos claims that has
filed a chapter 11 petition in the past 18 months. Since 1994, U.S. Gypsum has
been named in more than 250,000 asbestos-related personal injury claims and paid
approximately $575 million (before insurance recoveries) to manage and resolve
asbestos-related litigation. Based on an independent study conducted in 2000 and
on U.S. Gypsum's historical experience of litigating asbestos claims in the tort
system, the Corporation estimated that U.S. Gypsum's probable liability for
costs associated with asbestos cases currently pending and expected to be filed
through 2003 to be between $889 million and $1,281 million. In the fourth
quarter of 2000, U.S. Gypsum recorded a noncash, pretax provision of $850
million, increasing its total reserve for asbestos claims to $1,185 million as
of December 31, 2000. Since January 1, 2001, U.S. Gypsum has received more than
26,000 new claims. U.S. Gypsum's asbestos-related personal injury costs (before
insurance) rose from $30 million in 1997 to more than $160 million in 2000, and
were expected to exceed $275 million in 2001. Because of the Filing, there is
greater uncertainty concerning the liability associated with asbestos cases, as
discussed below.
CONSEQUENCES OF THE FILING
The Debtors are operating their businesses without interruption as
debtors-in-possession subject to the provisions of the Bankruptcy Code. All
vendors will be paid for all goods furnished and services provided after the
Filing. However, as a consequence of the Filing, all pending litigation against
the Debtors as of the Petition Date is stayed, and no party may take any action
to pursue or collect pre-petition claims except pursuant to order of the
Bankruptcy Court. It is the Debtors' intention to address all pending and future
asbestos-related claims and all other pre-petition claims in a plan of
reorganization. However, it is currently impossible to predict with any degree
of certainty how the plan will treat asbestos and other pre-petition claims and
what the impact of Filing and any reorganization plan may have on the shares of
the Corporation's common stock. The formulation and implementation of the plan
of reorganization could take a significant period of time.
Three creditors' committees, one representing asbestos personal injury
claimants, another representing asbestos property damage claimants and a third
representing general unsecured creditors, have been appointed as official
committees in the Chapter 11 Cases 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. The Corporation expects that the appointed committees,
together with a legal representative of future asbestos claimants to be
appointed by the Bankruptcy Court, will play important roles in the Chapter 11
Cases and the negotiation of the terms of any plan of reorganization.
CHAPTER 11 FINANCING
In connection with the Filing, the Corporation has received commitments for up
to $350 million in debtor-in-possession ("DIP") financing from JP Morgan Chase
to supplement liquidity and fund operations during the reorganization process.
-23-
24
On an interim basis, the Bankruptcy Court has approved the availability of a
$150 million DIP credit facility from JP Morgan Chase. The $350 million DIP
financing was approved at a final hearing in the Bankruptcy Court on July 31,
2001. The Corporation believes, based on information presently available to it,
that cash available from operations and DIP financing will provide sufficient
liquidity to allow its businesses to operate without interuption.
As of June 30, 2001, the Corporation had $304 million of cash and cash
equivalents, on a consolidated basis. Of this amount, $114 million was in the
possession of non-Debtor subsidiaries outside of the United States and $84
million was in the possession of USG Funding Corporation. On June 26, 2001, USG
Funding notified Chase Manhattan Bank, trustee of a revolving accounts
receivable facility, that an Early Amortization Event, as defined in the
agreement, had occurred effective with the Filing. As a result, transfers of
receivables to the trust ceased and, on July 12, 2001, all outstanding
obligations under the accounts receivable facility, which totaled $60 million,
were repaid and the facility was terminated.
ACCOUNTING IMPACT
As of June 30, 2001, the Corporation is required to follow AICPA Statement of
Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code." Pursuant to SOP 90-7, the Corporation's pre-petition
liabilities that are subject to compromise will be reported separately on the
consolidated balance sheet. Virtually all of the Corporation's pre-petition debt
is currently in default and was recorded at face value and classified within
liabilities subject to compromise. U.S. Gypsum's asbestos liability was also
classified within liabilities subject to compromise. See Note 2. "Voluntary
Reorganization Under Chapter 11" which includes information related to financial
statement presentation, the debtor-in-possession statements and detail of the
liabilities subject to compromise and Chapter 11 reorganization expenses.
CONSOLIDATED RESULTS
NET SALES
Net sales in the second quarter of 2001 were $806 million, down 19% from $995
million in the second quarter of 2000. For the first six months of 2001, net
sales totaled $1,632 million, down 18% from $1,984 million in the comparable
2000 period. Conditions in the U.S. wallboard market, USG's largest single
market, continue to be difficult due to pricing pressure and slightly lower
demand. Excess supply and increased competition in 2001 have led to significant
declines in market prices for gypsum wallboard, including U.S. Gypsum's
SHEETROCK brand gypsum wallboard, which, for the second quarter of 2001, fell
50% from the prior-year period.
Sales for USG's North American Gypsum and Building Products Distribution
segments were down primarily due to the lower selling prices on SHEETROCK brand
gypsum wallboard. Sales for Worldwide Ceilings were affected by lower shipments
of
-24-
25
domestic ceiling tile and lower demand in international markets.
COST OF PRODUCTS SOLD
Cost of products sold in the second quarter and first six months of 2001 were
down 2% and 1%, respectively, versus the respective 2000 periods. These modest
declines primarily reflect the absence in 2001 of asbestos-related charges
recorded by U.S. Gypsum in 2000, offset by higher energy costs. Asbestos-related
charges amounted to $28 million and $50 million in the second quarter and first
six months of 2000, respectively.
Production of gypsum wallboard and ceiling tile products is energy intensive,
and market prices for energy, including natural gas and electric power, are
significantly higher in 2001. Higher gas prices in the second quarter resulted
in a $4 per thousand square foot increase in the manufacturing costs of
SHEETROCK brand gypsum wallboard. Natural gas prices, which rose throughout
2000, peaked in January 2001, but remained above the levels of a year ago.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for both the second quarter and first six
months of 2001 decreased 18% versus the comparable 2000 periods. These declines
primarily reflect lower expenses related to compensation and benefits. However,
as a percent of net sales, selling and administrative expenses for the quarter
increased to 8.1% from 7.9% a year ago due to the lower level of 2001 net sales.
For the first six months, expenses were 8.1% of net sales compared with 8.2%
last year.
CHAPTER 11 REORGANIZATION EXPENSES
Chapter 11 reorganization expenses were incurred in connection with the Filing
and consisted of legal and financial advisory fees of $8 million and accelerated
amortization of debt issuance costs of $2 million.
OPERATING PROFIT (LOSS)
An operating loss of $5 million was reported for the second quarter of 2001
compared with an operating profit of $165 million in the second quarter of 2000.
Operating profit of $27 million was reported for the first six months of 2001,
down 92% from the same 2000 period. These declines primarily reflect the
significant drop in gypsum wallboard selling prices combined with the impact of
increased energy costs on the production of gypsum wallboard and ceiling tile
and the chapter 11 reorganization expenses. These unfavorable factors were
offset in part by lower selling and administrative expenses and the absence in
2001 of asbestos-related charges.
INTEREST EXPENSE
Interest expense of $16 million and $30 million was incurred in the second
quarter and first six months of 2001, respectively, compared with $13 million
and $25 million in the respective 2000 periods. As of the Petition Date,
interest
-25-
26
expense on debt included in liabilities subject to compromise is no longer being
accrued and recorded.
INCOME TAXES (BENEFIT)
Income tax (benefit) expense amounted to $(5) million and $2 million in the
second quarter and first six months of 2001, respectively, compared with $60
million and $127 million for the prior-year periods.
NET EARNINGS (LOSS)
A net loss of $13 million, or $0.29 per share, was reported for the second
quarter of 2001 compared with net earnings of $93 million, or $2.04 per diluted
share, for the second quarter of 2000.
For the first six months of 2001, a net loss of $2 million, or $0.04 per share,
was incurred compared with net earnings of $199 million, or $4.19 per diluted
share for the first half of 2000.
CORE BUSINESS RESULTS
(dollars in millions) THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
NET SALES: 2001 2000 2001 2000
------ ------ ------ ------
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company 420 567 862 1,134
CGC Inc. (gypsum) 49 56 99 106
Other subsidiaries* 29 27 53 51
Eliminations (40) (35) (73) (66)
------ ------ ------ ------
Total 458 615 941 1,225
------ ------ ------ ------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 124 131 250 258
USG International 54 56 108 115
CGC Inc. (ceiling) 10 10 21 21
Eliminations (18) (21) (36) (40)
------ ------ ------ ------
Total 170 176 343 354
------ ------ ------ ------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 287 368 573 724
------ ------ ------ ------
Eliminations (109) (164) (225) (319)
------ ------ ------ ------
Total USG Corporation 806 995 1,632 1,984
====== ====== ====== ======
-26-
27
(dollars in millions) THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
OPERATING PROFIT (LOSS): 2001 2000 2001 2000
---- ---- ---- ----
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company (32) 114 (27) 255
CGC Inc. (gypsum) 5 9 11 17
Other subsidiaries* 7 6 11 11
---- ---- ---- ----
Total (20) 129 (5) 283
---- ---- ---- ----
WORLDWIDE CEILINGS:
USG Interiors, Inc. 10 17 18 32
USG International (2) - (2) 1
CGC Inc. (ceiling) 1 1 2 2
---- ---- ---- ----
Total 9 18 18 35
---- ---- ---- ----
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 22 28 37 55
---- ---- ---- ----
Corporate (7) (10) (15) (26)
Chapter 11 reorganization expenses (10) - (10) -
Eliminations 1 - 2 2
---- ---- ---- ----
Total USG Corporation (5) 165 27 349
==== ==== ==== ====
*Includes USG Mexico, S.A. de C.V., a building products business in Mexico,
Gypsum Transportation Limited, a shipping company in Bermuda, and USG Canadian
Mining Ltd., a mining operation in Nova Scotia.
NORTH AMERICAN GYPSUM
Net sales in the second quarter and first six months of 2001 declined 26% and
23% from the respective prior-year periods. Operating losses of $20 million and
$5 million were reported for the second quarter and first six months of 2001,
respectively, compared with operating profit of $129 million in the second
quarter and $283 million in the first six months of 2000.
Net sales for U.S. Gypsum fell 26% as its nationwide average realized price per
thousand square feet (the selling price less freight to the customer) of
wallboard was $72.42 in the second quarter of 2001. This price was down 22% from
the average realized price of $92.31 in the first quarter of 2001, and down 50%
from $145.25 in the second quarter of 2000. Because of excess capacity in the
industry and increased competition, wallboard selling prices have been under
pressure. Prices declined throughout the second quarter and averaged about $68
per thousand square feet in June. Despite slightly lower shipments for the
industry, U.S. Gypsum sold 2.5 billion square feet of SHEETROCK brand gypsum
wallboard during the second quarter of 2001, a record for any quarter for the
company and a 6% increase over second quarter 2000 shipments.
-27-
28
At current shipment levels, every $10 drop in price reduces U.S. Gypsum's
operating profit by $90 to $100 million on an annualized basis. A second quarter
operating loss for U.S. Gypsum reflected the lower selling prices and high
manufacturing costs for gypsum wallboard. Costs were up primarily due to high
prices for natural gas and electric power. U.S. Gypsum's plants operated at 88%
of capacity in the second quarter of 2001 compared with the estimated average
rate of 80% for the U.S. wallboard industry.
Net sales for the gypsum business of Canada-based CGC Inc. were down 13% from
the second quarter a year ago primarily due to a lower Canadian dollar exchange
rate and lower selling prices for gypsum wallboard. Shipments of wallboard were
virtually unchanged year-on-year. Second quarter operating profit fell 44%
primarily due to higher energy costs, a lower Canadian dollar exchange rate and
the lower selling prices.
WORLDWIDE CEILINGS
Net sales of $170 million and operating profit of $9 million declined 3% and
50%, respectively, from the second quarter of 2000. For the first six months,
net sales of $343 million and operating profit of $18 million declined 3% and
49%, respectively, from the comparable 2000 period.
Results in 2001 for Worldwide Ceilings have been adversely affected by lower
shipments of domestic ceiling tile, higher production costs, primarily related
to energy and raw materials, and a slowdown in demand internationally.
BUILDING PRODUCTS DISTRIBUTION
Second quarter 2001 net sales of $287 million and operating profit of $22
million declined 22% and 21%, respectively, from the second quarter of 2000. For
the first six months of 2001, net sales declined 21% and operating profit fell
33%.
Declining prices for wallboard and complementary products resulted in lower
revenues at USG's specialty building products distribution subsidiary, L&W
Supply Corporation. Nearly half of L&W's sales come from gypsum wallboard.
During the second quarter, the profit margin on wallboard sold by L&W declined
by almost $9.00 per thousand square feet compared to the margin experienced in
the second quarter of 2000. L&W Supply currently operates 190 locations in the
United States distributing a variety of gypsum, ceilings and related building
materials.
MARKET CONDITIONS AND OUTLOOK
Excess supply and increased competition have led to significant declines in
market prices for gypsum wallboard. However, due to a recent improvement in
market conditions caused by seasonally strong demand and industry capacity
closures, U.S. Gypsum implemented a 15% price increase on its SHEETROCK brand
gypsum wallboard effective July 16, 2001. An additional 15% price increase to be
effective August 13, 2001, was subsequently announced. Addressing excess supply
-28-
29
in the industry, Georgia-Pacific Corp. recently announced plans to close plants
and indefinitely curtail other operations that will result in a decrease
equaling approximately 45%, or 1.4 billion square feet, of that company's gypsum
wallboard production capacity in the United States and Canada.
USG is currently forecasting U.S. housing starts in 2001 to approximate the
1.569 million units in 2000.
The repair and remodel market accounts for the second-largest portion of USG's
sales. Because many buyers remodel an existing home within two years of
purchase, opportunity from this market in 2001 is expected to remain strong as
sales of existing homes in 2000 and 2001 remain at historically high levels.
Sales of USG products to the new nonresidential construction market are expected
to be up modestly in 2001. Future demand for USG products from new
nonresidential construction is determined by floor space for which contracts are
signed. Installation of gypsum and ceilings products follows signing of
construction contracts by about a year. Floor space for which contracts were
signed was up 1% in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Because of the Filing and current business conditions, USG's financial
priorities in 2001 are focused on increasing cash flow and optimizing operating
performance. The plan includes reducing capital expenditures, reducing costs and
expenses, improving working capital performance and seeking opportunities for
the sale of surplus assets. In addition, in the first quarter of 2001, USG
reduced its quarterly cash dividend to $0.025 per share and in the second
quarter of 2001, USG eliminated its quarterly cash dividend. This action will
eliminate annual dividend payments and save the company approximately $22
million per year.
CAPITAL EXPENDITURES
Capital spending amounted to $57 million in the first six months of 2001
compared with $232 million in the corresponding 2000 period. As of June 30,
2001, remaining capital expenditure commitments for the replacement,
modernization and expansion of operations amounted to $73 million, compared with
$58 million as of December 31, 2000.
USG expects to have limited external sources of capital available and limited
financial resources and liquidity to fund potential future growth opportunities
such as new products, acquisitions and joint ventures.
WORKING CAPITAL
Working capital (current assets less current liabilities) as of June 30, 2001,
amounted to $824 million and the ratio of current assets to current liabilities
was 4.23 to 1. Working capital information as of June 30, 2001 reflects the
-29-
30
reclassification of pre-petition current liabilities (accounts payable, accrued
expenses, notes payable and the current portions of debt and asbestos reserves)
of the Debtors to liabilities subject to compromise. As of December 31, 2000,
current liabilities exceeded current assets by $20 million and the ratio of
current assets to current liabilities was .98 to 1.
Cash and cash equivalents as of June 30, 2001, amounted to $304 million, up from
$70 million as of December 31, 2000. During the first six months of 2001, net
cash flows to operating activities totaled $65 million. Net cash flows to
investing activities (primarily capital spending) were $56 million. Net cash
flows from financing activities (primarily increased borrowings) were $355
million.
Receivables increased to $322 million as of June 30, 2001, from $305 million as
of December 31, 2000, reflecting a 16% increase in net sales for the month of
June 2001 as compared to December 2000. Inventories decreased to $258 million
from $271 million. Accounts payable decreased to $58 million from $200 million
reflecting the reclassification of $204 million of the Debtors' pre-petition
accounts payable to liabilities subject to compromise.
RESTRUCTURING RESERVE
In the fourth quarter of 2000, USG announced a restructuring plan that included
a salaried workforce reduction and the shutdown of three gypsum wallboard
manufacturing lines and other operations. The restructuring, which the
Corporation intends to complete in 2001, is designed to streamline operations
and improve business efficiency. Annual pretax savings from the restructuring
initiatives are estimated at $40 million.
At the time the restructuring was announced, a reserve was established for all
severance and exit costs. Payments totaling $17 million during the first six
months of 2001 were charged against the restructuring reserve, leaving a balance
of $17 million in the reserve as of June 30, 2001. The restructuring reserve was
included in accrued expenses as of December 31, 2000, and in liabilities subject
to compromise as of June 30, 2001, on the consolidated balance sheets. All
restructuring-related payments are being funded with cash from normal
operations. The following table details the restructuring reserve and first six
months activity (dollars in millions):
RESERVE RESERVE
BALANCE RESERVE BALANCE
12/31/00 UTILIZATION 6/30/01
- --------------------------------------------------------------------------------
Severance (salaried) $ 15 $ 15 $ -
Razing buildings and equipment 12 - 12
Line shutdown and removal 5 1 4
Contract cancellations
and severance (hourly) 2 1 1
- --------------------------------------------------------------------------------
Total 34 17 17
================================================================================
As of June 30, 2001, the salaried workforce reduction program has been completed
with the termination of 394 salaried employees and the elimination of 179 open
-30-
31
salaried positions. In addition, 73 hourly employees have been terminated and 44
open hourly positions have been eliminated.
DEBT
As of June 30, 2001, total debt amounted to $1,067 million, of which $1,004
million was included in liabilities subject to compromise. As of December 31,
2000, total debt amounted to $711 million. The higher level of debt as of June
30, 2001 primarily reflects a $388 million net increase in credit facility
borrowings, partially offset by a $15 million repayment of a Mexican term loan,
a $6 million repayment of international short-term notes and an $11 million
repurchase of 9.25% senior notes due 2001.
OTHER MATTERS
EURO CURRENCY CONVERSION
Effective January 1, 1999, 11 of the 15 countries that are members of the
European Union introduced a new, single currency unit, the euro. Prior to full
implementation of the new currency for the participating countries on January 1,
2002, there is a three-year transition period during which parties may use
either the existing currencies or the euro. However, during the transition
period, all exchanges between currencies of the participating countries are
required to be first converted through the euro.
USG has proceeded to prepare for the conversion to the euro. USG's efforts are
focused on two phases. The first phase addresses USG's European operations
during the transition period. The second phase covers full conversion of these
operations to the euro. USG was ready for the transition period that began on
January 1, 1999, and expects to be ready for full conversion by January 1, 2002,
the mandatory conversion date. USG also is prepared to deal with its critical
suppliers and customers during the transition period and has been communicating
with them as necessary. Based on its experience during the first two years of
the transition period, USG does not expect the introduction of the euro currency
to have a material adverse impact on its business, results of operations or
financial position.
LEGAL CONTINGENCIES
As a result of the Filing, all pending asbestos lawsuits against the Company are
stayed, and no party may take any action to pursue or collect on such asbestos
claims absent specific authorization of the Bankruptcy Court. Since the Filing,
the Company has ceased making payments with respect to asbestos lawsuits,
including payments pursuant to settlements of asbestos lawsuits. Creditors'
committees have been approved representing asbestos personal injury and property
damage claimants with pending claims against the Company, and the Bankruptcy
Court is expected to appoint a legal representative for the interests of
potential future asbestos claimants. The Bankruptcy Court likely will set a
deadline for the filing of all present asbestos-related claims, including claims
-31-
32
by plaintiffs who entered into settlement agreements with the Company which have
not been paid. As part of the bankruptcy proceeding, it will be determined which
asbestos claims should be allowed, or compensated, and the aggregate value of
such claims.
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. The Corporation believes that neither these matters
nor any other known governmental proceeding regarding environmental matters will
have a material adverse effect upon its results of operations or financial
position. See Part II, Item 1. "Legal Proceedings" for additional information on
asbestos and environmental litigation.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements related to management's
expectations about future conditions. Actual business or other conditions may
differ significantly from management's expectations and accordingly affect the
Corporation's sales and profitability or other results. The effects of the
Filing and the conduct, outcome and costs of the Chapter 11 Cases, as well as
the ultimate costs associated with the Corporation's asbestos litigation may
differ from management's expectations as a result of factors over which the
Corporation has little or no control. Actual results also may differ due to
factors over which the Corporation has no control, including economic activity
such as construction activity, interest rates and consumer confidence;
competitive conditions such as price and product competition; increases in raw
material and energy costs; euro currency issues such as the ability and
willingness of third parties to convert affected systems in a timely manner and
the actions of governmental agencies or other third parties. The Corporation
assumes no obligation to update any forward-looking information contained in
this report.
-32-
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of USG Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of USG
CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of June 30, 2001, and
the related condensed consolidated statements of earnings for the three-month
and six-month periods ended June 30, 2001 and 2000 and the condensed
consolidated statements of cash flows for the six-month periods ended June 30,
2001 and 2000. These financial statements are the responsibility of the
Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
The accompanying condensed consolidated financial statements have been prepared
assuming that the Corporation will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Corporation voluntarily
filed for Chapter 11 bankruptcy protection on June 25, 2001. Management's plans
in regard to these matters are also described in Note 2. This action, which was
taken primarily as a result of asbestos litigation as discussed in Note 9 to the
condensed consolidated financial statements, raises substantial doubt about the
Corporation's ability to continue as a going concern. Such doubt includes, but
is not limited to, a possible change in control of the Corporation as well as a
potential change in the composition of the Corporation's business portfolio. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 24, 2001
-33-
34
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ASBESTOS AND RELATED INSURANCE LITIGATION
One of the Corporation's subsidiaries, U.S. Gypsum or ("the Company") is among
many defendants in lawsuits arising out of the manufacture and sale of
asbestos-containing materials. On June 25, 2001, the Company, the Corporation,
and other domestic subsidiaries ("the Debtors"), filed voluntary petitions for
relief (the "Filing") under chapter 11 of the U.S. Bankruptcy Code to manage the
growing costs of resolving asbestos claims and to achieve a fair and final
resolution of liability for both pending and future asbestos claims. The chapter
11 cases are being jointly administered under Case No. 01-02094 in the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
The Company's asbestos claims liability derives from its sale of certain
asbestos-containing products beginning in the 1930s; in most cases, the products
were discontinued or asbestos was removed from the formula by 1972, and no
asbestos-containing products were produced after 1977. Certain of the asbestos
lawsuits against the Company seek to recover compensatory and, in many cases,
punitive damages for costs associated with the maintenance or removal and
replacement of asbestos-containing products in buildings (the "Property Damage
Cases"). Other asbestos lawsuits seek compensatory and, in many cases, punitive
damages for personal injury allegedly resulting from exposure to
asbestos-containing products (the "Personal Injury Cases").
As a result of the Filing, all pending asbestos lawsuits against the Company are
stayed, and no party may take any action to pursue or collect on such asbestos
claims absent specific authorization of the Bankruptcy Court. Since the Filing,
the Company has ceased making payments with respect to asbestos lawsuits,
including payments pursuant to settlements of asbestos lawsuits. Creditors'
committees have been approved representing asbestos personal injury and property
damage claimants with pending claims against the Company, and the Bankruptcy
Court is expected to appoint a legal representative for the interests of
potential future asbestos claimants. The Bankruptcy Court likely will set a
deadline for the filing of all present asbestos-related claims, including claims
by plaintiffs who entered into settlement agreements with the Company which have
not been paid. As part of the bankruptcy proceeding, it will be determined which
asbestos claims should be allowed, or compensated, and the aggregate value of
such claims.
The Company anticipates that its liability for pending and future asbestos
claims will be addressed in a plan of reorganization developed and approved in
the bankruptcy proceeding. Pursuant to the Bankruptcy Code, the Debtors, have
the exclusive right to propose a plan of reorganization up to 120 days after the
Filing date, or October 23, 2001, unless extended. It is the Debtor's intention
that such plan of reorganization will include the creation of a trust under
Section 524(g) of the Bankruptcy Code which will be funded to allow payment of
-34-
35
asbestos claims and that, as a result of creation of the trust, the bankruptcy
court will issue a permanent injunction channeling all asbestos-related claims
to the trust and barring the assertion of pending or future asbestos-related
claims against the reorganized companies.
It is anticipated that the plan or plans of reorganization ultimately approved
will include all Debtors in the final resolution of asbestos-related claims that
are or might be asserted against the Company, the Corporation, and all other
Debtor affiliates. In addition to the asbestos Personal Injury Cases pending
against U.S. Gypsum, one of the Corporation's subsidiaries and a Debtor in the
bankruptcy proceeding, L&W Supply Corporation, is named as a defendant in
approximately 21 pending Personal Injury Cases. L&W, a distributor of building
products manufactured by U.S. Gypsum and other building products manufacturers,
has not made any payments in the past to resolve Personal Injury Cases. It is
believed that L&W has been named as a defendant in Personal Injury Cases in its
role as a distributor of U.S. Gypsum products. Therefore, the Corporation
expects that any asbestos-related liability of L&W would be derivative of the
liability of U.S. Gypsum, and that any plan or plans of reorganization would
reflect that L&W's liability, if any, rests with U.S. Gypsum as the
manufacturer. However, because of the small number of Personal Injury Cases
against L&W and the lack of development of the cases against L&W, the
Corporation does not have sufficient information at this time to opine as to how
any plan or plans of reorganization will address any asbestos-related liability
of L&W and whether any such liability will be limited to L&W's role as a
distributor of U.S. Gypsum products.
The following is a summary of the Property Damage and Personal Injury Cases
pending against U.S. Gypsum at the time of the Filing. For a more comprehensive
discussion of these cases, see Note 17 to the financial statements in the
Corporation's 10-K for the year ended December 31, 2000.
Property Damage Cases: As of March 31, 2001, U.S. Gypsum was a defendant in ten
Property Damage Cases, most of which involved multiple buildings. One of the ten
cases is a conditionally certified class action comprising all colleges and
universities in the United States, which certification is presently limited to
the resolution of certain allegedly "common" liability issues. (Central Wesleyan
College v. W.R. Grace & Co., et al., U.S.D.C. S.C.).
On June 15, 2001, a Property Damage Case was filed by The County of Orange,
Texas, in the district court of Orange County, Texas, naming as defendants U.S.
Gypsum and other manufacturers of asbestos-containing materials. This was the
first Property Damage case filed against U.S. Gypsum since June 1998. The Orange
County case is a putative class action brought by The County of Orange on behalf
of an alleged class comprising the State of Texas, its public colleges and
universities, and all political subdivisions of the State of Texas. As to U.S.
Gypsum, the putative class also includes all private and/or non-public colleges,
universities, junior colleges, community colleges, and elementary and secondary
schools in the State of Texas. The Orange County action seeks recovery of the
costs of removing and replacing asbestos-containing materials in buildings at
issue as well as punitive damages. The complaint does not specify how many
-35-
36
buildings are at issue.
As a result of the Filing, all Property Damage Cases, including the Central
Wesleyan and Orange County cases, are stayed against the Company.
U.S. Gypsum's estimated cost of resolving the Property Damage Cases is discussed
below (see "Estimated Cost").
Personal Injury Cases: U.S. Gypsum is also a defendant in approximately 106,000
Personal Injury Cases pending on June 25, 2001 (the date of the Filing), as well
as an additional approximately 52,000 Personal Injury Cases that are the subject
of settlement agreements. In the second quarter 2001 (up to June 25, 2001),
approximately 13,200 new Personal Injury Cases were filed against U.S. Gypsum,
as compared to 15,800 new filings in the second quarter of 2000. Filings of new
Personal Injury Cases totaled approximately 53,000 claims in 2000, 48,000 claims
in 1999, 80,000 claims in 1998, and 23,500 claims in 1997. As a result of the
Filing, all Personal Injury Cases are stayed against the Company.
Prior to the filing for relief under the U.S. Bankruptcy Code, U.S. Gypsum
managed the handling and settlement of Personal Injury Cases through its
membership in the Center for Claims Resolution (the "Center"). From 1988 up to
February 1, 2001, costs of defense and settlement of Personal Injury Cases were
shared among the members of the Center pursuant to predetermined sharing
formulae. Effective February 1, 2001, the Center members, including U.S. Gypsum,
ended their prior settlement sharing arrangement, and each Center member,
including U.S. Gypsum, was responsible for negotiating and paying its own
settlements separately. The Center continued to perform certain claims
administration, negotiation, and defense functions for its members, the costs of
which were shared among the members. As of the date of Filing and as a result of
the stay of asbestos lawsuits against the Company, U.S. Gypsum will not be
negotiating or paying settlements of Personal Injury Cases and will not require
the services of the Center in negotiating or defending Personal Injury Cases.
U.S. Gypsum may, however, continue to use the Center to provide data regarding
Personal Injury Cases as needed in the bankruptcy proceeding.
-36-
37
In 2000 and years prior, U.S. Gypsum and other Center members negotiated a
number of settlements with plaintiffs' firms that included agreements to resolve
over time the firms' pending Personal Injury Cases as well as certain future
claims ("Long-Term Settlements"). With regard to future claims, these Long-Term
Settlements typically provide that the plaintiffs' firms will recommend to their
future clients that they defer filing, or accept nominal payments on, personal
injury claims that do not meet established disease criteria, and, with regard to
those claims meeting established disease criteria, that the future clients
accept specified amounts to settle those claims. These Long-Term Settlements
typically resolve claims for amounts consistent with historical per claim
settlement costs paid to the plaintiffs' firms involved. As a result of the
Filing, payments by U.S. Gypsum under these Long-Term Settlements have ceased,
and the Company expects that its obligations under these settlements will be
determined in the bankruptcy proceeding and plan of reorganization.
In 2000, U.S. Gypsum's payments to defend and resolve Personal Injury Cases
totaled $162 million, of which $90 million was paid or reimbursed by insurance.
In 2000, the average settlement per case was approximately $2,600, exclusive of
defense costs. The Company paid $100 million in 1999 and $61 million in 1998 to
resolve Personal Injury Cases, compared to insurance payments totaling $85
million and $45.5 million, respectively.
In the first and second quarters of 2001, payments to resolve Personal Injury
Cases increased dramatically, primarily as a result of the bankruptcy filings of
other defendants in asbestos personal injury lawsuits. As a result of these
bankruptcy filings, plaintiffs substantially increased their settlement demands
to the remaining defendants, including U.S. Gypsum, to replace the expected
payments of the now-bankrupt defendants. In response to these increased
settlement demands, U.S. Gypsum attempted to manage its asbestos liability by
contesting, rather than settling, a greater number of cases that it believed to
be non-meritorious. As a result, in the first and second quarters of 2001, U.S.
Gypsum agreed to settle fewer Personal Injury Cases, but at a significantly
higher cost per case.
In the first quarter 2001, U.S. Gypsum's total asbestos-related payments, net of
insurance recoveries, were approximately $52 million, and, in the second quarter
of 2001 (up to June 25, 2001), total asbestos-related payments, net of insurance
recoveries, were approximately $62 million. As of March 31, 2001, U.S. Gypsum
had estimated that expenditures for Personal Injury Cases in 2001 would total
approximately $275 million before insurance recoveries of approximately $37
million.
As a result of these increasing settlement demands and the concern that federal
legislation addressing the asbestos litigation problem likely would not be
enacted within the necessary timeframe, the Company concluded that it would not
be able to manage and resolve its asbestos liability in the tort system, and, on
June 25, 2001, the Company filed a voluntary petition under Chapter 11 of the
Bankruptcy Code.
U.S. Gypsum's estimated cost of resolving Personal Injury Cases is discussed
below (see "Estimated Cost").
Insurance Coverage: As of June 25, 2001, after deducting insurance used to date,
U.S. Gypsum had approximately $76.3 million of insurance remaining to cover
asbestos-related costs. This insurance is scheduled to be paid over a period of
approximately four years.
Estimated Cost: In evaluating the Company's estimated asbestos liability prior
to the Filing, the Corporation considered numerous uncertainties that made it
difficult to estimate reliably the Company's asbestos liability in the tort
system for both pending and future asbestos claims.
In the Property Damage Cases, such uncertainties included, but were not limited
to, the identification and volume of asbestos-containing products in the
-37-
38
buildings at issue in each case, which is often disputed; the claimed damages
associated therewith; the viability of statute of limitations, product
identification and other defenses, which varies depending upon the facts and
jurisdiction of each case; the amount for which such cases can be resolved,
which normally (but not uniformly) has been substantially lower than the claimed
damages; and the viability of claims for punitive and other forms of multiple
damages.
Uncertainties in the Personal Injury Cases included, but were not limited to,
the number, disease and occupational characteristics, and venue of Personal
Injury Cases that are filed against U.S. Gypsum; the age and level of physical
impairment of claimants; the viability of claims for conspiracy or punitive
damages; the elimination of indemnity sharing among Center members for future
settlements and its negative impact on U.S. Gypsum's ability to continue to
resolve claims at historical or acceptable levels; the adverse impact on U.S.
Gypsum's settlement costs of recent bankruptcies of co-defendants; the continued
solvency of other defendants and the possibility of additional bankruptcies; the
possibility of significant adverse verdicts due to recent changes in settlement
strategies, and related effects on liquidity; the inability or refusal of former
Center members to fund their share of existing settlements and its effect on
such settlement agreements; the continued ability to negotiate settlements or
develop other mechanisms that defer or reduce claims from unimpaired claimants;
and the possibility that federal legislation addressing asbestos litigation will
be enacted. The Corporation reported that adverse developments with respect to
any of these uncertainties could have a material impact on U.S. Gypsum's
settlement costs and could materially increase the cost above the estimated
range discussed below.
Prior to the fourth quarter of 2000, the Corporation, in the opinion of
management, was unable to reasonably estimate the probable cost of resolving
future asbestos claims in the tort system, although the Corporation had
estimated and reserved for costs associated with then-pending claims. However,
in 1999 and increasingly in 2000, as the Company entered into Long-Term
Settlements of Personal Injury Cases (discussed above), the Corporation
undertook a detailed, independent study of U.S. Gypsum's current and potential
future asbestos liability. This analysis was based on the assumption that the
Company's asbestos liability would continue to be resolved in the tort system.
The analysis was completed in the fourth quarter of 2000. As part of this
analysis, the Corporation reviewed, among other things, historical case filings
and increasing settlement costs; the type of products sold by U.S. Gypsum and
the occupations of claimants expected to bring future asbestos-related claims;
epidemiological data concerning the incidence of past and projected future
asbestos-related diseases; trends in the propensity of persons alleging
asbestos-related disease to sue U.S. Gypsum; the adverse effect on settlement
costs of historical reductions in the number of solvent defendants available to
pay claims, including reductions in membership of the Center; the pre-agreed
settlement recommendations in, and the continued viability of, the Long-Term
Settlements described above; and anticipated trends in recruitment by
plaintiffs' firms of non-malignant or unimpaired claimants. The study attempted
to weigh relevant variables and assess
-38-
39
the impact of likely outcomes on future case filings and settlement costs. In
addition, the Corporation considered future defense costs, as well as
allegations that U.S. Gypsum and the other Center members bear joint liability
for the share of certain settlement agreements that was to be paid by former
members that now have refused or are unable to pay.
In the fourth quarter of 2000, the Corporation concluded that it was possible to
provide a reasonable estimate of U.S. Gypsum's liability in the tort system for
asbestos cases to be filed through 2003 as well as those currently pending.
Based on an independent study, the Corporation determined that, although
substantial uncertainly remained, it was probable that asbestos claims currently
pending against U.S. Gypsum and future asbestos claims to be filed against it
through 2003 (both property damage and personal injury) could be resolved in the
tort system for an amount between $889 million and $1,281 million, including
defense costs, and that within this range the most likely estimate was $1,185
million. Consistent with this analysis, in the fourth quarter of 2000, the
Corporation recorded a pretax charge of $850 million to results of operations,
which, combined with the previously existing reserve, increased U.S. Gypsum's
reserve for asbestos claims to $1,185 million. However, at the time of recording
this reserve, it was expected that these amounts would be expended over a period
extending several years beyond 2003, because asbestos cases have historically
been resolved an average of three years after filing. The Corporation concluded
that it did not have adequate information to allow it to reasonably estimate the
number of claims to be filed after 2003, or the liability associated with such
claims.
During the first and second quarters of 2001 (up to June 25, 2001), U.S.
Gypsum's payments for asbestos claims and related legal fees totaled
approximately $123 million, reducing its reserve for asbestos claims to $1,062
million as of June 30, 2001. Insurance recoveries during the first and second
quarters of 2001 amounted to approximately $9.4 million, leaving U.S. Gypsum
with a corresponding receivable from insurance carriers (the estimated portion
of the reserved amount that is expected to be paid or reimbursed by insurance)
of approximately $76.3 million as of June 30, 2001, down from $86 million as of
December 31, 2000. The above amounts are stated before tax benefit and are not
discounted to present value.
It is the Corporation's view that, as a result of the Filing, there is even
greater uncertainty in estimating the reasonably possible range of asbestos
liability for pending and future claims as well as the most likely estimate of
liability within this range. There are significant differences in the treatment
of asbestos claims in a bankruptcy proceeding as compared to the tort litigation
system. Among other things, it is uncertain at this time how the Long-Term
Settlements will be treated in the bankruptcy proceeding and plan of
reorganization, and whether those settlements will be set aside; the number of
asbestos-related claims that will be filed in the proceeding; the number of
future claims that will be included in a plan of reorganization; how claims for
punitive damages and claims by persons with no asbestos-related physical
impairment will be treated and whether such claims will be allowed; and the
-39-
40
impact historical settlement values for asbestos claims may have on the
estimation of asbestos liability in the bankruptcy proceeding. These
uncertainties, as well as the uncertainties discussed above in connection with
the resolution of asbestos cases in the tort system, increase the uncertainty of
any estimate of asbestos liability.
Due to the increased uncertainty of estimating asbestos liability due to the
Filing, it is the Corporation's view that no change should be made to the
previously recorded reserve for asbestos claims, except as necessary to reduce
the reserve to reflect payments made in the second quarter of 2001. However, it
is possible that the cost of resolving asbestos claims will be greater than that
set forth in the recorded reserve range. As the bankruptcy proceeding continues,
it is expected that the Corporation will obtain additional information that may
provide greater certainty to the expected range of liability.
Bond to Secure Certain CCR Obligations: In January 2001, the Company obtained a
performance bond from Safeco Insurance Company of America ("Safeco") in the
amount of $60.3 million to secure certain obligations of the Company for
extended payout settlements of Personal Injury Cases and other obligations owed
by the Company to the Center. The bond is secured by an irrevocable letter of
credit in the amount of $60.3 million issued by Chase Manhattan Bank to Safeco.
After the Filing, by letter dated July 6, 2001, the Center notified the Company
that certain amounts covered by the bond, totaling approximately $15.7 million,
were overdue from the Company to the Center. These amounts were for the payment
of, among other things, past settlements of Personal Injury Cases. At present,
it is not known whether, if the Center makes a demand to Safeco under the bond,
Safeco will make payment to the Center under the performance bond and whether
Safeco will make a demand under the Chase irrevocable letter of credit. To the
extent that the letter of credit is drawn down, Chase likely will assert a
pre-petition claim in the bankruptcy proceeding against the Company for the
corresponding amount. The Corporation believes that it is likely that the Center
will make additional demands under the performance bond, which, in turn, may
result in further drawing down the Chase letter of credit. However, the
Corporation does not have sufficient information at this time to estimate the
amount, if any, that may be paid out under the performance bond or the amount,
if any, that may be drawn on the letter of credit.
Conclusion: There are many uncertainties associated with the resolution of
asbestos liability in the bankruptcy proceeding. These uncertainties include,
among others, the number of asbestos-related claims that will be filed against
the Debtors in the proceeding; the number of future claims that will be included
in a plan of reorganization; how the Long-Term Settlements will be treated in
the bankruptcy proceeding and plan of reorganization, and whether those
settlements will be set aside; how claims for punitive damages and claims by
persons with no asbestos-related physical impairment will be treated and whether
such claims will be allowed; the impact historical settlement values for
asbestos claims may have on the estimation of asbestos liability in the
bankruptcy proceeding; and the impact any relevant potential federal legislation
may have on the proceeding. The Corporation has not revised its previously
recorded reserve for asbestos liability, except as necessary to reflect payments
made in the second quarter of
-40-
41
2001. The Corporation will continue to review its asbestos liability as the
bankruptcy proceeding progresses. It is possible that the Corporation's asbestos
liability may vary significantly from the recorded estimate of liability and
that this difference could be material to the results of operations in the
period recorded.
ENVIRONMENTAL LITIGATION
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. In most of these sites, the involvement of the
Corporation or its subsidiaries is expected to be minimal. The Corporation
believes that appropriate reserves have been established for its potential
liability in connection with all Superfund sites but continuously reviews its
accruals as additional information becomes available. Such reserves take into
account all known or estimated costs associated with these sites, including site
investigations and feasibility costs, site cleanup and remediation, legal costs,
and fines and penalties, if any. In addition, environmental costs connected with
site cleanups on USG-owned property also are covered by reserves established in
accordance with the foregoing. The Corporation believes that neither these
matters nor any other known governmental proceeding regarding environmental
matters will have a material adverse effect upon its results of operations or
financial position.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Virtually all of the Corporation's pre-petition debt is in default due
to the Filing. See Note 2. "Voluntary Reorganization Under Chapter 11"
to the Corporation's consolidated financial statements.
-41-
42
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) In accordance with the Corporation's notice and proxy statement dated
April 6, 2001, the matters set forth in paragraphs (b) through (d) below
were submitted to a vote of stockholders at the annual meeting of
stockholders held on May 9, 2001.
(b) The three director-nominees who received the highest vote totals, who
were each reelected to a three-year term of office, and whose terms in
office will expire in 2004 were: Lawrence A. Crutcher, William C. Foote
and Judith A. Sprieser. The directors whose terms of office continued
after the annual meeting of stockholders were: Robert A. Barnett, Keith
A. Brown, James C. Cotting, W. Douglas Ford, David W. Fox, Valerie B.
Jarrett, Marvin E. Lesser and John B. Schwemm.
Votes Abstentions
Votes Withheld and Broker
For or Against Non-Votes
-----------------------------------
Election of Directors:
Lawrence A. Crutcher 39,092,551 317,245 -
William C. Foote 38,944,253 465,543 -
Judith A Sprieser 39,060,074 349,621 -
(c) The following proposal was recommended by the Corporation's Board of
Directors and was approved by a majority of the shares voted.
Votes Abstentions
Votes Withheld and Broker
For or Against Non-Votes
-----------------------------------
Ratification of Appointment of Arthur
Andersen LLP as Independent Public
Accountants 39,204,519 148,381 56,895
-42-
43
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
15. Letter from Arthur Andersen LLP regarding unaudited financial
information.
(b) Reports on Form 8-K:
A Form 8-K was filed on June 28, 2001, to report under Item 3
"Bankruptcy or Receivership" information related to the Corporation's
(i) filing of voluntary petitions for reorganization under chapter 11
of the Bankruptcy Code and (ii) debtor-in-possession financing
arrangements.
-43-
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USG CORPORATION
By /s/ Dean H. Goossen
-------------------------------------
Dean H. Goossen,
Corporate Secretary,
USG Corporation
By /s/ Raymond T. Belz
-------------------------------------
August 13, 2001
Raymond T. Belz,
Senior Vice President and Controller,
USG Corporation
-44-