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, 2002
-------------
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, 2002, 43,250,238 shares of USG common stock were outstanding.
TABLE OF CONTENTS
Page
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Earnings:
Three Months and Six Months
Ended June 30, 2002 and 2001 3
Consolidated Balance Sheets:
As of June 30, 2002 and December 31, 2001 4
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 35
Reports of Independent Public Accountants 48
PART II OTHER INFORMATION
Item 1. Legal Proceedings 51
Item 4. Submission of Matters to a Vote of Security Holders 51
Item 6. Exhibits and Reports on Form 8-K 52
SIGNATURES 53
-2-
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USG CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 885 $ 806 $ 1,714 $ 1,632
Cost of products sold 718 736 1,415 1,462
Selling and administrative expenses 80 65 162 133
Chapter 11 reorganization expenses 7 10 9 10
----------- ----------- ----------- -----------
Operating profit (loss) 80 (5) 128 27
Interest expense 2 16 3 30
Interest income (1) (2) (2) (3)
Other (income) expense, net (2) (1) (1) -
----------- ----------- ----------- -----------
Earnings (loss) before income taxes
and cumulative effect of accounting
change 81 (18) 128 -
Income taxes (benefit) 33 (5) 54 2
----------- ----------- ----------- -----------
Earnings (loss) before cumulative
effect of accounting change 48 (13) 74 (2)
----------- ----------- ----------- -----------
Cumulative effect of accounting
change for SFAS No. 142 - - (96) -
----------- ----------- ----------- -----------
Net earnings (loss) 48 (13) (22) (2)
=========== =========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE:
Basic and diluted before
cumulative effect of accounting
change 1.11 (0.29) 1.71 (0.04)
Cumulative effect of accounting
change for SFAS No. 142 - - (2.22) -
----------- ----------- ----------- -----------
Basic and diluted 1.11 (0.29) (0.52) (0.04)
=========== =========== =========== ===========
Dividends paid per common share - - - 0.025
Average common shares 43,250,655 43,430,957 43,309,735 43,413,691
Average diluted common shares 43,250,655 43,430,957 43,309,735 43,431,296
See accompanying Notes to Consolidated Financial Statements.
-3-
USG CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF AS OF
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 615 $ 493
Receivables (net of reserves - $18 and $17) 330 274
Inventories 281 254
Income taxes receivable 61 76
Deferred income taxes 59 66
Other current assets 42 34
----------- -----------
Total current assets 1,388 1,197
Property, plant and equipment (net of reserves
for depreciation and depletion - $641 and $592) 1,786 1,800
Deferred income taxes 215 243
Other assets 131 224
----------- -----------
Total Assets 3,520 3,464
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 183 140
Accrued expenses 215 181
----------- -----------
Total current liabilities 398 321
Long-term debt 2 2
Other liabilities 348 339
Liabilities subject to compromise 2,287 2,311
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (256) (255)
Capital received in excess of par value 411 408
Accumulated other comprehensive loss (16) (31)
Retained earnings 341 364
----------- -----------
Total stockholders' equity 485 491
----------- -----------
Total Liabilities and Stockholders' Equity 3,520 3,464
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
-4-
USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
------------------------
2002 2001
----------- -----------
OPERATING ACTIVITIES:
Net loss $ (22) $ (2)
Adjustments to reconcile net loss to net cash:
Cumulative effect of accounting change 96 -
Depreciation, depletion and amortization 51 53
Deferred income taxes 33 94
(Increase) decrease in working capital:
Receivables (41) (91)
Inventories (27) 13
Payables 43 1
Accrued expenses 37 (39)
Increase in other assets (8) (19)
Increase in other liabilities 9 6
Increase (decrease) in asbestos reserve, net
of receivables 11 (114)
Decrease in liabilities subject to compromise (24) -
Other, net 1 33
----------- -----------
Net cash from (to) operating activities 159 (65)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (38) (57)
Net proceeds from asset dispositions 1 1
----------- -----------
Net cash to investing activities (37) (56)
----------- -----------
FINANCING ACTIVITIES:
Issuance of debt - 262
Repayment of debt - (71)
Short-term borrowings, net - 165
Cash dividends paid - (1)
----------- -----------
Net cash from financing activities - 355
----------- -----------
Net increase in cash and cash equivalents 122 234
Cash and cash equivalents at beginning of period 493 70
----------- -----------
Cash and cash equivalents at end of period 615 304
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 1 30
Income taxes paid (refunded), net 6 (7)
See accompanying Notes to Consolidated Financial Statements.
-5-
USG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) PREPARATION OF FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of USG
Corporation and its subsidiaries ("the Corporation") have been prepared
in accordance with applicable United States Securities and Exchange
Commission guidelines pertaining to interim financial information. The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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
financial statements reflect all adjustments, which are of a normal
recurring nature, necessary for a fair presentation of the
Corporation's financial results for the interim periods. These
financial statements and notes are to be read in conjunction with the
financial statements and notes included in the Corporation's 2001
Annual Report on Form 10-K dated March 1, 2002.
(2) VOLUNTARY REORGANIZATION UNDER CHAPTER 11
On June 25, 2001 (the "Petition Date"), the parent company (the "Parent
Company") of the Corporation and the 10 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 the Corporation'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.
-6-
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 are being 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 an 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 impossible to predict currently how the
plan will treat asbestos and other pre-petition claims and what impact
any reorganization plan may have on the shares of the Corporation's
common stock and other outstanding securities. 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, were organized in
2001. These committees 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. By order dated July 14, 2002, the
Bankruptcy Court appointed the Hon. Dean M. Trafelet as the legal
representative for future asbestos claimants in the Debtors' bankruptcy
proceeding. Mr. Trafelet was formerly a judge of the Circuit Court of
Cook County, Illinois. The Corporation expects that the appointed
committees, together with Mr. Trafelet, will play important roles in
the Chapter 11 Cases and the negotiation of the terms of any plan of
reorganization.
Pursuant to the Bankruptcy Code, the Debtors initially had the
exclusive right to propose a plan of reorganization for 120 days
following the Petition Date, until October 23, 2001, unless extended.
The Bankruptcy Court has granted requests by the Debtors to extend the
period of exclusivity, initially until May 1, 2002, and later until
November 1, 2002. The Debtors are likely to seek one or more additional
extensions of the exclusivity period depending on developments in the
Chapter 11 Cases. If the Debtors fail to file a plan of reorganization
during such extension period, or if such plan is not accepted by the
requisite numbers of creditors and equity holders entitled to vote on
the plan, other parties in interest in the Chapter 11 Cases may be
permitted to propose their own plan(s) of reorganization for the
Debtors.
The Corporation is unable to predict at this time what the treatment of
creditors and equity security holders of the respective Debtors will be
under any proposed plan or plans of reorganization. Such plan or plans
may provide, among other things, that all present and future
asbestos-related liabilities of 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.
Section 524(g) of the Bankruptcy Code provides that,
-7-
if certain specified conditions are satisfied, a court may issue,
in connection with the confirmation of a plan of reorganization, a
permanent injunction barring the assertion of present and future
asbestos-related claims against the reorganized company and channeling
those claims to an independent trust for payment in whole or in part.
Among other things, the trust must own, or have the right to own upon
the occurrence of contingencies specified in the plan of
reorganization, a majority of the voting shares of the debtor or its
parent, and the plan must be approved by 75% of the voting asbestos
claimants whose claims are addressed by the trust. Similar plans of
reorganization have been confirmed in chapter 11 cases of other
companies involved in asbestos-related litigation. However, there is
no assurance that such creation of a trust for the Debtors under
Section 524(g), or the issuance of such a permanent injunction, will
be approved by the Bankruptcy Court.
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. While it is the Corporation's intent to seek a
full recovery for its creditors, 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 are
likely to 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. The Corporation
urges that appropriate caution be exercised with respect to existing
and future investments in these claims and/or securities. Recent
developments in the Corporation's bankruptcy proceeding are discussed
in Part I, Item 1. Financial Statements, Note 11. Litigation.
In connection with the Filing, the Corporation implemented a Bankruptcy
Court-approved key employee retention plan that commenced on July 1,
2001, and
-8-
continues until the date the Corporation emerges from bankruptcy, or
June 30, 2004, whichever occurs first. Under the plan, participants
receive semiannual payments that began in January 2002. Expenses
associated with this plan are being accrued pro rata over the term of
the plan and amounted to $12 million in 2001, $5.6 million in the
second quarter of 2002 and $11 million in the first six months of 2002.
CHAPTER 11 FINANCING
A $350 million debtor-in-possession financing facility from JP Morgan
Chase (the "DIP Facility") was approved by the Bankruptcy Court on July
31, 2001. The DIP Facility, which matures on June 25, 2004, is
available to supplement liquidity and fund operations during the
reorganization process. Borrowing availability under the DIP Facility
is based primarily on accounts receivable and inventory levels and, to
a lesser extent, property, plant and equipment. Given these levels, as
of June 30, 2002, the Corporation had the capacity to borrow up to $344
million. There were no outstanding borrowings under the DIP Facility as
of June 30, 2002. However, $14 million of standby letters of credit
were issued, leaving $330 million of unused borrowing capacity
available as of June 30, 2002.
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 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 $469 million under the
pre-petition bank credit facilities and $536 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-
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 were filed by the Debtors
with the Bankruptcy Court on October 23, 2001, and certain of the
schedules were amended and filed with the Bankruptcy Court on May 31,
2002, 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 proof-of-claim process in the Chapter 11 Cases. The Bankruptcy
Court has approved a bar date of January 15, 2003, by which proofs of
claim must be filed against the Debtors for all claims other than
asbestos personal injury claims.
Subsequent to the Filing, the Debtors 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, real estate taxes,
environmental obligations, certain customer programs and warranty
claims, and certain other pre-petition claims.
For the second quarter and first six months of 2002, contractual
interest expense not accrued or recorded on pre-petition debt totaled
$19 and $37 million, respectively. From the Petition Date through June
30, 2002, contractual interest expense not accrued or recorded on
pre-petition debt totaled $78 million.
The Corporation believes that cash available from operations and the
DIP Facility will provide sufficient liquidity to allow its businesses
to operate in the normal course without interruption. This includes its
ability to meet post-petition obligations of the Debtors and to meet
obligations of the non-debtor subsidiaries. The appropriateness of
using the going-concern basis for the Corporation's financial
statements is dependent upon, among other things, (i) the Corporation's
ability to comply with the terms of the DIP Facility and the 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
-10-
following such confirmation.
Liabilities subject to compromise in the consolidated and DIP balance
sheets consist of the following items as of June 30, 2002 (dollars in
millions):
Accounts payable $ 158
Accrued expenses 68
Debt 1,005
Asbestos reserve 1,061
Other long-term liabilities 36
-----------
Subtotal 2,328
Elimination of intercompany accounts payable (41)
-----------
Total liabilities subject to compromise 2,287
===========
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, 2002 (dollars in millions):
Three Months Six Months
----------- -----------
Legal and financial advisory fees $ 9 $ 13
Interest income (2) (4)
----------- -----------
Total Chapter 11 reorganization expenses 7 9
=========== ===========
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 the Bankruptcy Code, they are nonetheless
unconsolidated, unaudited and 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 Debtors consist of the Parent Company and the following
wholly owned subsidiaries: 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.; and USG Pipeline
Company. On March 1, 2002, USG Funding, a non-debtor subsidiary of USG
Corporation, declared a dividend in the amount of $50 million
(subsequently
-11-
reduced to $30 million in the second quarter) payable to the Parent
Company, which was paid in effect by eliminating the intercompany
payable from USG Corporation. This payment is included in other
(income) expense, net in the DIP statement of earnings for the six
months ended June 30, 2002. The condensed financial statements of
the Debtors are presented as follows:
USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENTS OF EARNINGS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -------------
Net sales $ 798 $ 721 $ 1,548 $ 1,460
Cost of products sold 658 675 1,298 1,335
Selling and administrative expenses 69 53 140 111
Chapter 11 reorganization expenses 7 10 9 10
Interest expense 1 14 3 26
Other (income) expense, net 19 4 (31) 5
----------- ----------- ----------- -------------
Earnings (loss) before income taxes
and cumulative effect of accounting
change 44 (35) 129 (27)
Income taxes (benefit) 29 (10) 47 (6)
----------- ----------- ----------- -------------
Earnings (loss) before cumulative
effect of accounting change 15 (25) 82 (21)
Cumulative effect of accounting
change for SFAS No. 142 - - (41) -
----------- ----------- ----------- -------------
Net earnings (loss) 15 (25) 41 (21)
=========== =========== =========== =============
-12-
USG CORPORATION
DEBTOR-IN-POSSESSION BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF AS OF
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
ASSETS
Cash and cash equivalents $ 459 $ 346
Receivables (net of reserves - $13 and $13) 276 234
Inventories 240 215
Income taxes receivable 62 77
Deferred income taxes 59 66
Other current assets 42 33
----------- -----------
Total current assets 1,138 971
Property, plant and equipment (net of reserves
for depreciation and depletion - $521 and $481) 1,569 1,581
Deferred income taxes 230 258
Other assets 472 494
----------- -----------
Total Assets 3,409 3,304
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 156 112
Accrued expenses 185 153
----------- -----------
Total current liabilities 341 265
Other liabilities 340 333
Liabilities subject to compromise 2,287 2,311
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (256) (255)
Capital received in excess of par value 98 95
Accumulated other comprehensive income 15 12
Retained earnings 579 538
----------- -----------
Total stockholders' equity 441 395
----------- -----------
Total Liabilities and Stockholders' Equity 3,409 3,304
=========== ===========
-13-
USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
------------------------
2002 2001
----------- -----------
OPERATING ACTIVITIES:
Net earnings (loss) $ 41 $ (21)
Adjustments to reconcile net earnings (loss)
to net cash:
Cumulative effect of accounting change 41 -
Depreciation, depletion and amortization 42 44
Deferred income taxes 34 94
(Increase) decrease in working capital:
Receivables (27) (66)
Inventories (25) 10
Payables 44 2
Accrued expenses 34 (32)
Increase in post-petition intercompany receivable (52) (233)
Decrease (increase) in other assets 23 (42)
Increase in other liabilities 8 6
Increase (decrease) in asbestos reserve, net
of receivables 11 (114)
Decrease in liabilities subject to compromise (24) -
Other, net (7) 47
----------- -----------
Net cash from (to) operating activities 143 (305)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (31) (32)
Net proceeds from asset dispositions 1 1
----------- -----------
Net cash to investing activities (30) (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 (decrease) in cash and cash equivalents 113 69
Cash and cash equivalents at beginning of period 346 37
----------- -----------
Cash and cash equivalents at end of period 459 106
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 1 26
Income taxes refunded, net (1) (16)
-14-
INTERCOMPANY TRANSACTIONS
In the normal course of business, the operating subsidiaries and the
Parent Company engage in intercompany transactions. To document the
relationships created by these transactions, the Parent Company and the
operating subsidiaries, from the formation of USG Corporation in 1985,
have been parties to intercompany loan agreements that evidence their
obligations as borrowers or rights as lenders arising out of
intercompany cash transfers and various allocated intercompany charges
(the "Intercompany Corporate Transactions"). During the first six
months of 2001, the Parent Company 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.
The Corporation operates a consolidated cash management system under
which the cash receipts of the domestic operating subsidiaries are
ultimately concentrated in Parent Company accounts. 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. Net balances,
receivables or payables of such cash transactions are tracked on a
regular basis, with interest earned or paid on the balances. As of June
30, 2002, U.S. Gypsum's net pre-petition payable balance to the Parent
Company for Intercompany Corporate Transactions was $311 million. USG
Interiors, Inc.'s net pre-petition payable balance to the Parent
Company was $110 million. L&W Supply Corporation had a net pre-petition
receivable balance from the Parent Company of $43 million.
In addition to the above transactions, the operating subsidiaries
engage in ordinary course purchase and sale of products with other
operating subsidiaries (the "Intercompany Trade Transactions").
Detailed accounting records also are maintained of all such
transactions, and settlements are made on a monthly basis.
Certain Intercompany Trade Transactions between U.S. and non-U.S.
operating subsidiaries are settled via wire transfer payments
utilizing several payment systems.
-15-
(3) EARNINGS PER SHARE
Basic earnings (loss) per share are based on the weighted average
number of common shares outstanding for the period. Diluted earnings
per share are based on the weighted average number of common shares
outstanding and the dilutive effect of the potential exercise of
outstanding stock options. 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
------------------------------------------------------------------------------------------
2002:
Basic earnings $ 48 43,251 $ 1.11
Dilutive effect of stock options -
------------------------------------------------------------------------------------------
Diluted earnings 48 43,251 1.11
==========================================================================================
2001:
Basic loss (13) 43,431 (0.29)
Dilutive effect of stock options -
------------------------------------------------------------------------------------------
Diluted loss (13) 43,431 (0.29)
==========================================================================================
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------------------
2002:
Basic loss (22) 43,310 (0.52)
Dilutive effect of stock options -
------------------------------------------------------------------------------------------
Diluted loss (22) 43,310 (0.52)
==========================================================================================
2001:
Basic loss (2) 43,414 (0.04)
Dilutive effect of stock options 17
------------------------------------------------------------------------------------------
Diluted loss (2) 43,431 (0.04)
==========================================================================================
(4) STOCK OPTION GRANTS
As of June 30, 2002, common shares totaling 2,726,075 were reserved for
future issuance in conjunction with existing stock option grants. In
addition, 1,954,337 common shares were reserved for future grants.
Shares issued in option exercises may be from original issue or
available treasury shares.
-16-
(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,
------------------------------------------------------------------
2002 2001 2002 2001
NET SALES: ------------------------------------------------------------------
North American Gypsum $ 551 $ 458 $ 1,076 $ 941
Worldwide Ceilings 158 170 306 343
Building Products Distribution 306 287 581 573
Eliminations (130) (109) (249) (225)
------------------------------------------------------------------------------------------------------------
Total USG Corporation 885 806 1,714 1,632
============================================================================================================
OPERATING PROFIT (LOSS):
North American Gypsum 81 (20) 139 (5)
Worldwide Ceilings 11 9 16 18
Building Products Distribution 13 22 20 37
Corporate (17) (7) (37) (15)
Chapter 11 reorganization expenses (7) (10) (9) (10)
Eliminations (1) 1 (1) 2
------------------------------------------------------------------------------------------------------------
Total USG Corporation 80 (5) 128 27
============================================================================================================
(6) COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are summarized in the
following tables (dollars in millions):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------------------------------------------
2002 2001 2002 2001
------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS):
Net earnings (loss) $ 48 $ (13) $ (22) $ (2)
Other comprehensive income (loss) 2 (24) 15 15
------------------------------------------------------------------------------------------------------------
Total 50 (37) (7) 13
============================================================================================================
OTHER COMPREHENSIVE INCOME (LOSS):
After-tax gain (loss) on derivatives (5) (31) 3 18
Deferred currency translation 7 7 12 (3)
------------------------------------------------------------------------------------------------------------
Total 2 (24) 15 15
============================================================================================================
-17-
The tax benefit on the loss on derivatives was $3 million for the
second quarter of 2002 and $20 million for the second quarter of 2001.
The tax expense on the gain on derivatives was $2 million for the first
six months of 2002 and $11 million for the first six months of 2001.
There was no tax impact on the foreign currency translation
adjustments.
Accumulated other comprehensive loss was $16 million as of June 30,
2002, and $31 million as of December 31, 2001. Included in accumulated
other comprehensive loss were net after-tax derivative gains of $19
million and $16 million as of the respective dates. During the second
quarter of 2002, $5 million of accumulated net after-tax gains ($8
million pretax) were reclassified from accumulated other comprehensive
loss to earnings. As of June 30, 2002, the estimated net after-tax gain
expected to be reclassified within the next 12 months from accumulated
other comprehensive loss into earnings is $11 million.
(7) FINANCIAL INSTRUMENTS
The Corporation uses derivative instruments to manage well-defined
commodity price and foreign currency exposures. The Corporation does
not use derivative instruments for trading purposes. Under Statement of
Financial Accounting Standards ("SFAS") No. 133, as amended, all
derivative instruments must 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 (loss) and is reclassified to earnings when the
underlying transaction has an impact on earnings.
Commodity Derivative Instruments: The Corporation uses swap contracts
to hedge anticipated purchases of natural gas to be used in its
manufacturing operations. These contracts are designated as cash flow
hedges, and changes in fair value are recorded in accumulated other
comprehensive income (loss) until the hedged transaction occurs, at
which time it is reclassified to earnings.
During the second quarter of 2001, the Corporation received proceeds of
$35 million ($21 million after-tax) from the termination of natural gas
swap contracts scheduled to mature through 2005. In accordance with
SFAS No. 133, the net after-tax gain resulting from the termination of
these contracts remains in accumulated other comprehensive loss and is
reclassified into earnings in the period which the hedged forecasted
transactions are scheduled to occur. As of June 30, 2002, $24 million
($15 million after-tax) remained in accumulated other comprehensive
loss.
-18-
During the first half of 2002, the Corporation entered into additional
natural gas swap contracts. The fair value of all outstanding natural
gas swap contracts was $8 million as of June 30, 2002, and all of these
contracts mature by December 31, 2003.
The Corporation also had swap agreements, maturing through 2003, with
Enron to hedge the cost of wastepaper. During the second quarter of
2002, the Corporation paid $2.1 million to terminate all outstanding
wastepaper swaps. Effective with Enron's bankruptcy filing in December
2001, the Corporation discontinued hedge accounting with respect to
these swap contracts and changes in the fair value of these hedges were
recognized in earnings during the period in which the change occurred.
The fair value of the outstanding contracts in accumulated other
comprehensive loss as of Enron's bankruptcy filing on December 2, 2001,
was $2.4 million. In accordance with SFAS No. 133, this amount will be
reclassified into earnings in the period when the hedged forecasted
transactions are scheduled to occur. As of June 30, 2002, the amount
remaining in accumulated other comprehensive loss was $1.5 million
($0.9 million after-tax).
Foreign Exchange Derivative Instruments: The Corporation has operations
in a number of countries and uses forward contracts from time to time
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 has an impact on earnings. As of June
30, 2002, the Corporation had no outstanding forward contracts.
Interest Rate Derivative Instruments: The Corporation is exposed to
interest rate changes and uses swap agreements from time to time to
manage this exposure. As of June 30, 2002, the Corporation had no
outstanding interest rate swap agreements.
(8) RESTRUCTURING
2001 Restructuring Plan: In the fourth quarter of 2001, the Corporation
recorded a pretax charge of $12 million related to a restructuring plan
that included the shutdown of a gypsum wallboard plant in Fremont,
Calif., a drywall steel plant in Prestice, Czech Republic, a ceiling
tile plant in San Juan Ixhuatepec, Mexico, a ceiling tile manufacturing
line in Greenville, Miss., and other restructuring activities. The
restructuring plan, which is expected to be completed in 2002, is
intended to allow the Corporation to optimize its manufacturing
operations.
Included in the $12 million charge was $8 million for severance related
to a workforce reduction of more than 350 positions (primarily hourly
positions), $2 million for the write-off of property, plant and
equipment,
-19-
and $2 million for line shutdown and removal and contract
cancellations.
The reserve for this plan is included in accrued expenses on the
consolidated balance sheets. Fourth quarter 2001 charges against the
reserve included the $2 million write-off of property, plant and
equipment and payments totaling $2 million. An additional $2 million of
payments were charged against the reserve in the first six months of
2002. All payments for the 2001 restructuring plan are being funded
with cash from normal operations.
As of June 30, 2002, the ceiling tile manufacturing line at Greenville,
Miss., and the plants in San Juan Ixhuatepec, Mexico, and Prestice,
Czech Republic, have been shutdown and 258 employees have been
terminated, and 26 open positions have been eliminated. The Fremont,
Calif., plant ceased production in April 2002.
2000 Restructuring Plan: In the fourth quarter of 2000, the Corporation
recorded a pretax charge of $50 million related to a restructuring plan
that included a salaried workforce reduction and the shutdown of three
gypsum wallboard manufacturing lines and other operations. This
restructuring was designed to streamline operations and improve
business efficiency.
Included in the $50 million charge was $16 million for severance
related to the salaried workforce reduction of more than 500 positions,
$15 million for the write-off of property, plant and equipment, $12
million for razing buildings and equipment, $5 million for line
shutdown and removal, and $2 million for contract cancellations and
severance for more than 100 hourly positions. An additional
restructuring-related charge of $4 million was included in cost of
products sold for the writedown of certain inventory.
During the third quarter of 2001, the Corporation reversed $9 million
pretax of the restructuring reserve recorded in the fourth quarter of
2000 due to changes from previous estimates and to reflect a change in
the scope of restructuring activities undertaken. The primary change
involved a decision made in September to eliminate a portion of the
closure activities originally planned at the Alabaster, Mich.,
facility.
The reserve for the 2000 restructuring was included in liabilities
subject to compromise on the consolidated balance sheets and payments
totaling $22 million were charged against this reserve through December
31, 2001. The remaining $4 million was charged against this reserve in
the first six months of 2002. All payments for this plan were funded
with cash from normal operations.
The salaried workforce reduction program was completed as of June 30,
2001, with the termination of 394 salaried employees and the
elimination of 179 open salaried positions. In addition, 73 hourly
employees were terminated, and 44 open hourly positions were
eliminated. Closure of the three gypsum
-20-
wallboard manufacturing lines and other operations was completed by
December 31, 2001.
The following table details the restructuring reserves and first six
months 2002 activity (dollars in millions):
Writedown of
Provisions Assets to Net Reversal Reserve
for Realizable Cash of Balance
Restructuring Value Payments Reserve 6/30/02
-----------------------------------------------------------------------------------------------------------
2001 RESTRUCTURING:
Severance (primarily hourly) $ 8 $ - $ (3) $ - $ 5
Property, plant and
equipment write-off 2 (2) - - -
Line shutdown/removal and
contract cancellations 2 - (1) - 1
-----------------------------------------------------------------------------------------------------------
Subtotal 12 (2) (4) - 6
-----------------------------------------------------------------------------------------------------------
2000 RESTRUCTURING:
Severance (salaried) 16 - (16) - -
Property, plant and
equipment write-off 15 (15) - - -
Razing buildings and equipment 12 - (6) (6) -
Line shutdown and removal 5 - (3) (2) -
Contract cancellations
and severance (hourly) 2 - (1) (1) -
-----------------------------------------------------------------------------------------------------------
Subtotal 50 (15) (26) (9) -
-----------------------------------------------------------------------------------------------------------
Total 62 (17) (30) (9) 6
===========================================================================================================
(9) NEW ACCOUNTING PRONOUNCEMENTS
The Corporation adopted three new accounting standards in the first
quarter of 2002.
SFAS No. 141, "Business Combinations," requires all business
combinations initiated after June 30, 2001, to be accounted for using
the purchase method. This standard, which became effective for the
Corporation on January 1, 2002, had no impact on its financial
statements upon adoption.
SFAS No. 142, "Goodwill and Other Intangible Assets," eliminates the
amortization of goodwill over its estimated useful life. See Note 10,
"Adoption of SFAS No. 142" for information regarding the adoption of
this standard and the resulting impairment charge.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," supersedes SFAS No. 121 and a portion of APB Opinion No. 30.
This
-21-
statement establishes a single accounting model for the disposal of
long-lived assets and resolves significant implementation issues
related to SFAS No. 121. This standard, which became effective for the
Corporation on January 1, 2002, had no impact on its financial
statements upon adoption.
The Corporation will adopt SFAS No. 143, "Accounting for Asset
Retirement Obligations," in January 2003. This standard requires
entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. This
standard becomes effective January 1, 2003, and is likely to have an
impact on the Corporation's financial statements. However, as of the
date of this report, the Corporation has not determined what impact the
adoption of this standard may have on its financial statements.
(10) ADOPTION OF SFAS NO. 142
On January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." Although SFAS No. 142 eliminates the
amortization of goodwill and certain other intangible assets, it
initiates an annual assessment of goodwill for impairment.
During the second quarter of 2002, the Corporation completed its
transition date assessment of goodwill. The assessment was performed
for each reporting unit (as defined by SFAS No. 142) that has goodwill.
For the Corporation, the reporting units with goodwill were the North
American Gypsum and the Building Products Distribution operating
segments.
The Corporation determined that goodwill for its Building Products
Distribution segment was not impaired, but will be reviewed at least
annually for impairment. However, goodwill for its North American
Gypsum segment was impaired. This impairment was attributable to U.S.
Gypsum's asbestos liability and related filing for bankruptcy
protection on June 25, 2001. As a result, the Corporation recorded a
noncash, nontaxable impairment charge of $96 million. This charge,
which includes a $6 million deferred currency translation write-off, is
reflected on the Corporation's consolidated statement of earnings as a
cumulative effect of a change in accounting principle as of January 1,
2002. In accordance with SFAS No. 142, the Corporation is reflecting
this charge in its financial statements for the three months ended
March 31, 2002.
The reconciliation of pro forma net earnings, basic earnings per share
and diluted earnings per share for the three months and six months
ended June 30, 2001, is shown in the following table (dollars in
millions except per-share data):
-22-
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------------------
NET EARNINGS (LOSS):
Reported net earnings (loss) $ 48 $ (13) $ (22) $ (2)
Add back:
Goodwill amortization, net of tax - 1 - 2
Cumulative effect of accounting
change for SFAS No. 142 - - 96 -
------------------------------------------------------------------------------------------------------------
Pro forma net earnings (loss) 48 (12) 74 -
============================================================================================================
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE:
Reported basic and diluted 1.11 (0.29) (0.52) (0.04)
Add back:
Goodwill amortization - 0.02 - 0.04
Cumulative effect of accounting
change for SFAS No. 142 - - 2.22 -
------------------------------------------------------------------------------------------------------------
Pro forma basic and diluted 1.11 (0.27) 1.71* -
============================================================================================================
* The sum of the per-share components is not the same as the total.
(11) LITIGATION
ASBESTOS AND RELATED BANKRUPTCY LITIGATION
One of the Corporation's subsidiaries, U.S. Gypsum, is among many
defendants in lawsuits arising out of the manufacture and sale of
asbestos-containing materials. On June 25, 2001 (the "Petition Date"),
U.S. Gypsum, the Parent Company, and other domestic subsidiaries (the
"Debtors") filed voluntary petitions for relief under chapter 11 of the
U.S. Bankruptcy Code (the "Filing") 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. 01-2094 in the
United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court").
U.S. Gypsum's asbestos liability derives from its sale of certain
asbestos-containing products beginning in the late 1920s; in most
cases, the products were discontinued or asbestos was removed from the
formula by 1972, and no asbestos-containing products were produced
after 1978. Certain of the asbestos lawsuits against U.S. Gypsum 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"). A
-23-
more detailed description of the Property Damage and Personal Injury
Cases is set forth below.
As a result of the Filing, all pending Personal Injury and Property
Damage Cases against U.S. Gypsum are stayed, and no party may take any
action to pursue or collect on such asbestos lawsuits absent specific
authorization of the Bankruptcy Court. Since the Filing, U.S. Gypsum
has ceased making both cash payments and accruals with respect to
asbestos lawsuits, including cash payments and accruals pursuant to
settlements of asbestos lawsuits. The Bankruptcy Court has approved
creditors' committees that represent claimants in Personal Injury and
Property Damage Cases and, as noted below, a legal representative for
future asbestos claimants. 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.
U.S. Gypsum 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. The Debtors' exclusive right
to propose such a plan of reorganization has been extended by the
Bankruptcy Court to November 1, 2002. The Debtors are likely to seek
one or more additional extensions of the exclusivity period. It is the
Debtors' intention that the 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 present and future asbestos claims,
and, 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. However,
there is no assurance that creation of a trust under Section 524(g) or
the issuance of such a permanent injunction will be approved by the
Bankruptcy Court. 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 U.S. Gypsum, the Corporation, and all other Debtor
affiliates.
Recent Developments in the Reorganization Proceeding: During the fourth
quarter of 2001, the Corporation's bankruptcy proceeding, along with
four other asbestos-related bankruptcy proceedings pending in the
federal courts in the District of Delaware, were assigned to the
Honorable Alfred M. Wolin of the United States District Court for the
District of New Jersey. This assignment was accomplished through orders
of the United States Court of Appeals for the Third Circuit and the
United States District Court for the District of Delaware dated
November 27 and November 29, 2001, respectively.
In orders subsequent to the reassignment, Judge Wolin has indicated
that he will handle all issues relating to asbestos personal injury
claims and that other bankruptcy claims and issues in the Chapter 11
Cases, including issues relating to asbestos property damage claims,
will remain assigned to Bankruptcy Judge Randall J. Newsome in the
United States Bankruptcy Court
-24-
for the District of Delaware.
The Debtors have filed a motion requesting Judge Wolin to conduct
hearings to substantively estimate the Debtors' liability for asbestos
personal injury claims. The Debtors propose that, in these substantive
estimation hearings, the court will hear evidence and make rulings
regarding the characteristics of valid asbestos personal injury claims
against the Debtors, and the Court will then estimate the Debtors'
liability for present and future asbestos personal injury claims based
upon these rulings. The committee representing asbestos personal injury
claimants opposes the substantive estimation hearings proposed by
Debtors. The committee contends that U.S. Gypsum's liability for
present and future asbestos personal injury claims should be based on
extrapolation from U.S. Gypsum's settlement history of such claims and
not on litigating liability issues in the bankruptcy proceeding.
Pursuant to a schedule set by Judge Wolin, the Debtors and the
committees are to complete the submission of briefs to the court on the
issue of estimation hearings in late August 2002. At present, it is not
known whether Judge Wolin will conduct the hearings requested by the
Debtors or when these hearings might be held. The estimated amount of
the Debtors' liability for present and future asbestos personal injury
claims could be significantly different depending upon whether the
estimated liability is based on substantive estimation, as proposed by
Debtors, or based on the estimation protocol proposed by the committee
representing the asbestos personal injury claimants.
If the hearings on liability issues relating to asbestos personal
injury claims do not go forward, or a consensual resolution is not
reached as a result of the hearings or otherwise, the Corporation will
employ other means to resolve the Debtors' asbestos personal injury
liability. These other means may include, but are not limited to,
setting a bar date for filing asbestos personal injury claims and
determining which of the claims are entitled to vote on and participate
in an asbestos trust under 11 U.S.C. ss.524(g) of the Bankruptcy Code.
A bar date proceeding likely would lengthen the bankruptcy case
significantly.
By order dated July 14, 2002, the Bankruptcy Court appointed the Hon.
Dean M. Trafelet as the legal representative for future asbestos
claimants in the Debtors' bankruptcy proceeding. Mr. Trafelet was
formerly a judge of the Circuit Court of Cook County, Illinois.
The Corporation expects that U.S. Gypsum's liability for asbestos
property damage claims will also be resolved in the reorganization
proceeding, whether by including those liabilities in a ss.524(g) trust
or by other means. Toward that end, the Bankruptcy Court has set a bar
date of January 15, 2003, by which all entities with asbestos property
damage claims or any other types of claims (except asbestos personal
injury claims or claims derivative thereof) must file their claims
against the Debtors in the bankruptcy proceeding. The Debtors have
mailed and published notice of the
-25-
claims bar date to potential asbestos property damage claimants as
well as other claimants affected by the bar date. The Official
Committee of Asbestos Property Damage Claimants has appealed the
Bankruptcy Court's order establishing a bar date for property damage
claims. The appeal is pending before Judge Wolin, and he has not yet
ruled on the appeal.
Given the current status of the Chapter 11 Cases, the Corporation is
unable to forecast with any reasonable degree of certainty the timing
or substance of the resolution of the Debtors' asbestos-related
liability or the reorganization proceeding.
The following is a summary of the Property Damage and Personal Injury
Cases pending against U.S. Gypsum as of the Petition Date. Property
Damage Cases: As of the Petition Date, U.S. Gypsum was a defendant in
eleven Property Damage Cases, most of which involved multiple
buildings. One of the 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 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 U.S. Gypsum. U.S. Gypsum's estimated cost of
resolving the Property Damage Cases is discussed below (see "Estimated
Cost").
Personal Injury Cases: As reported by the Center for Claims Resolution
(the "Center"), as described below, U.S. Gypsum was a defendant in
approximately 106,000 pending Personal Injury Cases as of the Petition
Date, as well as an additional approximately 52,000 Personal Injury
Cases that are the subject of settlement agreements. In the first half
of 2001, up to the Petition Date, approximately 26,200 new Personal
Injury Cases were filed against U.S. Gypsum, as reported by the Center,
as compared to 27,800 new filings in the first half of 2000. Filings of
new Personal Injury Cases totaled approximately 53,000 claims in 2000,
48,000 claims in 1999, and 80,000 claims in 1998.
-26-
Prior to the Filing, U.S. Gypsum managed the handling and settlement of
Personal Injury Cases through its membership in the Center. From 1988
up to February 1, 2001, the Center administered, and arranged for the
defense and settlement of, Personal Injury cases against U.S. Gypsum
and other Center members. During that period, 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. The Center continued to
administer and arrange for the defense and settlement of the Personal
Injury Cases, but liability payments were not shared among the Center
members. As of the Petition Date and as a result of the stay of
asbestos lawsuits against U.S. Gypsum, U.S. Gypsum no longer requires
the services of the Center in negotiating or defending Personal Injury
Cases.
In 2000 and years prior, U.S. Gypsum and other Center members
negotiated a number of settlements with plaintiffs' law 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, cash payments by U.S. Gypsum under these Long-Term Settlements
have ceased, and U.S. Gypsum expects that its obligations under these
settlements will be determined in the bankruptcy proceeding and plan of
reorganization.
In 2000, U.S. Gypsum closed approximately 57,000 Personal Injury Cases.
U.S. Gypsum's cash payments in 2000 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. U.S. Gypsum made cash
payments of $100 million in 1999 and $61 million in 1998 to resolve
Personal Injury Cases, of which $85 million and $45.5 million,
respectively, were paid or reimbursed by insurance.
In the first and second quarters of 2001, prior to the Filing, cash
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 bankrupt defendants. In response to these
increased settlement demands, U.S. Gypsum attempted to manage its
asbestos liability by contesting, rather than
-27-
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 half of 2001 (up to the Petition Date), U.S. Gypsum closed
approximately 18,900 Personal Injury Cases. In the first half of 2001
(up to the Petition Date), U.S. Gypsum's total asbestos-related cash
payments, including defense costs, were approximately $124 million, of
which approximately $10 million was paid or reimbursed by insurance. A
portion of these payments was for settlements agreed to in prior
periods. As of March 31, 2001, U.S. Gypsum had estimated that cash
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, U.S. Gypsum
concluded that it would not be able to manage and resolve its asbestos
liability in the tort system, and, on June 25, 2001, the Debtors filed
a voluntary petition under Chapter 11 of the Bankruptcy Code. As a
result of the Filing, all Personal Injury Cases are stayed against U.S.
Gypsum, new cases may not be filed due to the automatic stay, and
payments relating to settlements of Personal Injury Cases before the
Filing may not be made.
In addition to the 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, was named as a defendant in
approximately 21 pending Personal Injury Cases as of the Petition Date.
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 based on 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
should 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 to date and the lack of development of the
cases against L&W, the Corporation does not have sufficient information
at this time to predict 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.
One of U.S. Gypsum's subsidiaries and a Debtor in the bankruptcy
proceeding, Beadex Manufacturing, LLC ("Beadex"), manufactured and sold
joint compound containing asbestos from 1963 through 1978 in the
northwest United States. As of the Petition Date, Beadex was a named
defendant in approximately 40
-28-
Personal Injury Cases pending primarily in the states of Washington and
Oregon. Beadex has approximately $11 million in primary or umbrella
insurance coverage available to pay asbestos-related costs, as well as
$15 million in available excess coverage. The Corporation expects that
any asbestos-related liability of Beadex will be addressed in the plan
of reorganization. However, because of the small number of Personal
Injury Cases pending against Beadex to date, the Corporation does not
have sufficient information at this time to predict as to how any plan
or plans of reorganization will address any asbestos-related liability
of Beadex.
Insurance Coverage: As of the Petition Date, after deducting insurance
used to date, U.S. Gypsum had approximately $76.3 million of insurance
remaining to cover asbestos-related costs. After insurance payments to
U.S. Gypsum in the third and fourth quarters of 2001, approximately $52
million remained as of December 31, 2001. After insurance payments of
approximately $11 million in the first six months of 2002,
approximately $41 million remained as of June 30, 2002. This insurance
is scheduled to be paid over a period of approximately three years
through 2004.
Estimated Cost: In evaluating U.S. Gypsum's estimated asbestos
liability prior to the Filing, the Corporation considered numerous
uncertainties that made it difficult to estimate reliably U.S. Gypsum'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 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
-29-
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 U.S.
Gypsum entered into Long-Term Settlements of Personal Injury Cases, 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 U.S. Gypsum'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' law firms of non-malignant or unimpaired
claimants. The study attempted to weigh relevant variables and assess
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 uncertainty 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
-30-
non-cash 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. Substantially all of
this reserve relates to the estimated costs of resolving then-pending
asbestos personal injury claims and those expected to be filed through
2003, and the reserve reflected management's expectation that U.S.
Gypsum's average payment per asbestos personal injury claim would
increase at least in the short term due to distortions caused by the
bankruptcy filings of other asbestos personal injury defendants
discussed above. Less than 10 percent of the reserve is attributable to
defense and administrative costs.
At the time of recording this reserve, it was expected that the reserve
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 2001 up to the Filing, U.S. Gypsum's cash payments for asbestos
claims and related legal fees totaled approximately $124 million,
reducing its reserve for asbestos claims to $1,061 million as of June
30, 2001. The reserve remained at $1,061 million as of June 30, 2002.
Insurance recoveries during 2001 totaled $34 million, leaving U.S.
Gypsum with a receivable from insurance carriers (the estimated portion
of the reserved amount that is expected to be paid or reimbursed by
insurance) of approximately $52 million as of December 31, 2001.
Insurance recoveries in the first six months of 2002 totaled
approximately $11 million, leaving U.S. Gypsum with a receivable from
insurance carriers of approximately $41 million as of June 30, 2002.
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, these uncertainties include 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 estimated in connection with
preparing 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; 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.
These factors, as well as the uncertainties discussed above in
connection with the resolution of asbestos
-31-
cases in the tort system, increase the uncertainty of any estimate of
asbestos liability.
As a result of the increased uncertainty of estimating asbestos
liability due to the Filing, it is the Corporation's view that no
change should be made at this time to the previously recorded reserve
for asbestos claims. However, it is possible that the cost of resolving
asbestos claims will be greater than that set forth in the high end of
the estimated 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.
When a reasonable estimate can be made of the Debtors' probable
liability for asbestos claims and such estimate differs from the
existing reserve, the reserve will be adjusted to reflect the estimate,
and it is possible that a charge to results of operations will be
necessary at that time.
Bond to Secure Certain CCR Obligations: In January 2001, U.S. Gypsum
obtained a performance bond from Safeco Insurance Company of America
("Safeco") in the amount of $60.3 million to secure certain obligations
of U.S. Gypsum for extended payout settlements of Personal Injury Cases
and other obligations owed by U.S. Gypsum to the Center. The bond is
secured by an irrevocable letter of credit obtained by the Corporation
in the amount of $60.3 million and issued by Chase Manhattan Bank to
Safeco. After the Filing, by letter dated July 6, 2001, the Center
stated that certain amounts allegedly covered by the bond, totaling
approximately $15.7 million, were overdue from U.S. Gypsum to the
Center. In subsequent letters dated November 19, 2001, and December 11,
2001, the Center stated that additional amounts allegedly covered by
the bond totaling approximately $14 million and $113 million,
respectively, were also overdue from U.S. Gypsum. The amounts for which
the Center made demand were for the payment of, among other things,
settlements of Personal Injury Cases that were entered into
pre-petition. By letter dated November 16, 2001, the Center made a
demand to Safeco for payment of $15.7 million under the bond, and by
letter dated December 28, 2001, the Center made a demand to Safeco for
payment of approximately $127 million under the bond. The total amount
demanded by the Center under the bond, approximately $143 million,
exceeds the original penal sum of the bond, which is $60.3 million.
Safeco has not made any payment under the bond, but, to the extent that
Safeco were to pay any portion of the bond, it is likely that Safeco
would draw down the Chase letter of credit to cover the bond payment
and Chase would assert a pre-petition claim in a corresponding amount
against the Corporation in the bankruptcy proceeding.
On November 30, 2001, the Corporation and U.S. Gypsum filed an
Adversary Complaint in the Chapter 11 Cases to, among other things,
enjoin the Center from drawing on the bond and enjoin Safeco from
paying on the bond during the pendency of these bankruptcy proceedings.
This Adversary Proceeding is
-32-
pending in the United States Bankruptcy Court for the District of
Delaware and is captioned USG Corporation and United States Gypsum
Company v. Center for Claims Resolution, Inc. and Safeco Insurance
Company of America, No. 01-08932. Judge Wolin has consolidated the
Adversary Proceeding with similar adversary proceedings brought by
Federal-Mogul Corp., et al., and Armstrong World Industries, Inc., et
al., in their bankruptcy proceedings. Due to the status of the
Adversary Proceeding, the Corporation cannot predict whether or when
any portion of the bond proceeds will be paid, what amount, if any,
will be paid, and whether the letter of credit will be drawn.
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 estimated in connection with preparing 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. The Corporation will continue to review its
asbestos liability as the Chapter 11 Cases progress. When a reasonable
estimate can be made of the Debtors' probable liability for asbestos
claims, if such estimate differs from the existing reserve, the reserve
will be adjusted, and it is possible that a charge to results of
operations will be necessary at that time. 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 is continuing to review 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
-33-
Corporation-owned property also are covered by reserves established in
accordance with the foregoing. The Debtors have been given permission
by the Bankruptcy Court to satisfy environmental obligations up to $12
million. 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.
-34-
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"), the parent company (the "Parent
Company") of the Corporation and the 10 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 the Corporation'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
U.S. Gypsum is a defendant in asbestos lawsuits alleging both property damage
and personal injury. Chapter 11 filings during 2000 and early 2001 by other
companies subject to asbestos litigation dramatically increased U.S. Gypsum's
asbestos costs beyond its legitimate liability. The Corporation has been and
continues to be committed to finding a legislative solution to the increase in
asbestos costs. However, in 2001 it became apparent that a timely resolution to
the problem through legislation was not feasible. 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.
USG was the eighth major company with a large number of asbestos claims that
filed a chapter 11 petition in the 18 months prior to the Petition Date. Since
1994, U.S. Gypsum has been named in more than 250,000 asbestos-related personal
injury
-35-
claims and made cash payments of 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
pending as of December 31, 2000, 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 accrued reserve for asbestos claims to $1,185 million as of December 31,
2000. Substantially all of this reserve related to personal injury claims and
reflected management's expectation that U.S. Gypsum's average cost per case
would increase, at least in the short term, due to distortions in the tort
system resulting from the bankruptcies of other defendants that led to increased
settlement demands from asbestos plaintiffs. Less than 10% of the reserve
related to defense and administrative costs. Between January 1, 2001, and the
Petition Date, according to the Center for Claims Resolution, U.S. Gypsum was
served with more than 26,000 new claims. On a cash basis, U.S. Gypsum's
asbestos-related personal injury costs (before insurance) rose from $30 million
in 1997 to $162 million in 2000 and, absent the Filing, 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 as debtors-in-possession
subject to the provisions of the Bankruptcy Code. All vendors are being 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 an 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
impossible to predict currently how the plan will treat asbestos and other
pre-petition claims and what impact any reorganization plan may have on the
shares of the Corporation's common stock and other outstanding securities. 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, were organized in 2001. These
committees 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. By order
dated July 14, 2002, the Bankruptcy Court appointed the Hon. Dean M. Trafelet as
the legal representative for future asbestos claimants in the Debtors'
bankruptcy proceeding. Mr. Trafelet was formerly a judge of the Circuit Court of
Cook County, Illinois. The Corporation expects that the appointed committees,
together with Mr. Trafelet, will play important roles in the Chapter 11 Cases
and the negotiation of the terms of any plan of reorganization. Recent
-36-
developments in the Corporation's bankruptcy proceeding are discussed in Part I,
Item 1. Note 11. "Litigation."
CHAPTER 11 FINANCING
A $350 million debtor-in-possession financing facility from JP Morgan
Chase (the "DIP Facility") was approved by the Bankruptcy Court on July 31,
2001. The DIP Facility is available to supplement liquidity and fund operations
during the reorganization process. The Corporation believes that cash available
from operations and the DIP Facility will provide sufficient liquidity to allow
its businesses to operate in the normal course without interruption. The DIP
Facility matures on June 25, 2004. See "Available Liquidity" below for more
information on the DIP Facility.
ACCOUNTING IMPACT
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 are 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 also is
classified within liabilities subject to compromise. See Part I, Item 1. 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.
OUTCOME OF THE FILING
The Corporation is unable to predict at this time what the treatment of
creditors and equity holders of the respective Debtors will be under any
proposed plan or plans of reorganization. While it is the Corporation's intent
to seek a full recovery for its creditors, 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 are likely to be
substantially diluted or cancelled in whole or in part. 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.
CONSOLIDATED RESULTS
NET SALES
Net sales in the second quarter of 2002 were $885 million, up 10% from $806
million in the second quarter of 2001. For the first six months of 2002, net
sales totaled $1,714 million, up 5% from $1,632 million in the comparable 2001
period.
Increased demand for gypsum wallboard from the new housing and residential
remodeling markets in 2002 resulted in higher operating rates in the gypsum
-37-
industry and higher selling prices for gypsum wallboard. These factors led to
increased net sales for the Corporation's North American Gypsum and Building
Products Distribution segments in the second quarter and first six months of
2002. However, demand for ceiling tile and grid has weakened in Europe and other
foreign markets. Consequently, net sales declined for Worldwide Ceilings
primarily due to lower export shipments of ceiling tile and lower shipments of
internationally-produced ceiling tile and grid.
COST OF PRODUCTS SOLD
Cost of products sold in the second quarter and first six months of 2002 were
down 2% and 3%, respectively, versus the respective 2001 periods primarily due
to lower energy and raw material costs and improved operating efficiencies for
the North American Gypsum segment.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased $15 million, or 23%, for the
second quarter and $29 million, or 22%, for the first six months of 2002 versus
the comparable 2001 periods. A large portion of these increases related to a
Bankruptcy-Court-approved key employee retention program. Expenses for this
program, which began in the third quarter of 2001, amounted to $5.6 million in
the second quarter and $11 million in the first six months of 2002. Higher
expenses in 2002 also reflect a higher level of accruals for incentive
compensation programs. As a percent of net sales, selling and administrative
expenses for the quarter increased to 9.0% from 8.1% a year ago. For the first
six months, expenses were 9.5% of net sales compared with 8.1% last year.
CHAPTER 11 REORGANIZATION EXPENSES
In connection with the Filing, the Corporation recorded pretax chapter 11
reorganization expenses of $7 million and $9 million in the second quarter and
first six months of 2002, respectively. These expenses consisted of legal and
financial advisory fees, partially offset by bankruptcy-related interest income.
Comparable expenses of $10 million, including accelerated amortization of debt
issuance costs of $2 million were recorded in the second quarter of 2001.
OPERATING PROFIT (LOSS)
Operating profit in the second quarter of 2002 was $80 million, up from an
operating loss of $5 million in the second quarter of 2001. During the first six
months of 2002, operating profit was $128 million compared with $27 million
during the first six months of 2001. These increases primarily reflect higher
volume, increased selling prices and lower manufacturing costs for SHEETROCK
brand gypsum wallboard.
INTEREST EXPENSE
Interest expense of $2 million and $3 million was incurred in the second quarter
and first six months of 2002, respectively. Interest expense amounted to $16
million and $30 million in the respective 2001 periods. Under SOP 90-7,
virtually all of the Corporation's outstanding debt is classified as liabilities
subject to compromise, and interest expense on this debt has not been accrued or
-38-
recorded since the Petition Date. Consequently, comparisons of interest expense
for 2002 and 2001 are not meaningful. For the second quarter and first six
months of 2002, contractual interest expense not accrued or recorded on
pre-petition debt totaled $19 million and $37 million, respectively.
INTEREST INCOME
Interest income was $1 million in the second quarter and $2 million in the first
six months of 2002. These amounts represent interest earned on cash held by
non-debtor subsidiaries.
INCOME TAXES (BENEFIT)
Income tax expense amounted to $33 million in the second quarter of 2002,
compared with a benefit of $5 million in the second quarter of 2001. For the
first six months, income tax expense amounted to $54 million in 2002 and $2
million in 2001. The Corporation's effective tax rate was 42.3% for the first
six months of 2002. Because the Corporation's earnings before income taxes for
the first six months of 2001 was zero, a comparison of the effective tax rates
for the first six months of 2002 and 2001 is not meaningful.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR SFAS NO. 142
On January 1, 2002, USG Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." In
accordance with the provisions of SFAS No. 142, the Corporation determined that
goodwill for its North American Gypsum segment was impaired and recorded a
noncash, nontaxable impairment charge of $96 million. This charge, which
includes a $6 million deferred currency translation write-off, is reflected on
the Corporation's consolidated statement of earnings as a cumulative effect of a
change in accounting principle as of January 1, 2002. See Recent Accounting
Pronouncements below for more information related to the adoption of SFAS No.
142.
NET EARNINGS (LOSS)
Net earnings in the second quarter of 2002 were $48 million, or $1.11 per share,
compared with a net loss of $13 million, or $0.29 per share, in the second
quarter of 2001.
For the first six months of 2002, a net loss of $22 million, or $0.52 per share,
was recorded. This loss included the goodwill impairment charge of $96 million,
or $2.22 per share, described above. Excluding the goodwill impairment charge,
pro forma net earnings for the first six months of 2002 were $74 million, or
$1.71 per share. A net loss of $2 million, or $0.04 per share, was recorded in
the first half of 2001.
-39-
CORE BUSINESS RESULTS
(dollars in millions) THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------------------
NET SALES: 2002 2001 2002 2001
------------------------------------------
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 503 $ 420 $ 986 $ 862
CGC Inc. (gypsum) 56 49 106 99
Other subsidiaries* 34 29 64 53
Eliminations (42) (40) (80) (73)
- --------------------------------------------------------------------------------
Total 551 458 1,076 941
- --------------------------------------------------------------------------------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 117 124 228 250
USG International 44 54 86 108
CGC Inc. (ceiling) 11 10 21 21
Eliminations (14) (18) (29) (36)
- --------------------------------------------------------------------------------
Total 158 170 306 343
- --------------------------------------------------------------------------------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 306 287 581 573
- --------------------------------------------------------------------------------
Eliminations (130) (109) (249) (225)
- --------------------------------------------------------------------------------
Total USG Corporation 885 806 1,714 1,632
================================================================================
OPERATING PROFIT (LOSS):
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company 68 (32) 114 (27)
CGC Inc. (gypsum) 7 5 13 11
Other subsidiaries* 6 7 12 11
- --------------------------------------------------------------------------------
Total 81 (20) 139 (5)
- --------------------------------------------------------------------------------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 11 10 18 18
USG International (2) (2) (5) (2)
CGC Inc. (ceiling) 2 1 3 2
- --------------------------------------------------------------------------------
Total 11 9 16 18
- --------------------------------------------------------------------------------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 13 22 20 37
- --------------------------------------------------------------------------------
Corporate (17) (7) (37) (15)
Chapter 11 reorganization expenses (7) (10) (9) (10)
Eliminations (1) 1 (1) 2
- --------------------------------------------------------------------------------
Total USG Corporation 80 (5) 128 27
================================================================================
*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.
-40-
NORTH AMERICAN GYPSUM
Second quarter net sales of $551 million reflect an increase of 20% from the
second quarter of 2001, while operating profit rose to $81 million from an
operating loss of $20 million in the second quarter of 2001. First six months
net sales of $1,076 million reflect an increase of 14% from the first six months
of 2001. Operating profit for the first six months of 2002 was $139, compared
with an operating loss of $5 million during the first half of 2001.
Second quarter net sales for U.S. Gypsum increased 20% reflecting increased
shipments and higher selling prices for SHEETROCK brand gypsum wallboard. U.S.
Gypsum sold 2.6 billion square feet of SHEETROCK brand gypsum wallboard during
the second quarter of 2002, a second quarter record for the company and a 4%
increase over 2.5 billion square feet sold in the second quarter of 2001. The
average realized price per thousand square feet (selling price less freight to
the customer) was $102.13 in the second quarter of 2002. This price was up 41%
from the average realized price of $72.42 in the second quarter of 2001, and up
7% from $95.84 in the first quarter of 2002. Net sales for U.S. Gypsum also
reflect record second quarter shipments of SHEETROCK brand joint compounds and
DUROCK brand cement board.
Second quarter 2002 operating profit for U.S. Gypsum increased to $68 million
from an operating loss of $32 million in the second quarter of 2001. Most of
this improvement was attributable to higher selling prices for gypsum wallboard.
Increased shipments and lower manufacturing costs also were contributing
factors. Manufacturing costs for gypsum wallboard were down primarily due to
lower energy and raw material costs and improved operating efficiencies.
U.S. Gypsum's wallboard plants operated at 95% of capacity in the second quarter
of 2002 versus an estimated average rate of 84% for the U.S. wallboard industry.
This compares with operating rates for the second quarter of 2001 of 88% for
U.S. Gypsum and an estimated 80% for the industry. Industry shipments of gypsum
wallboard in the second quarter of 2002 were up approximately 1% versus the same
period in 2001.
Improved results also were recorded for the gypsum business of Canada-based CGC
Inc. Second quarter net sales of $56 million and operating profit of $7 million
represented increases of 14% and 40%, respectively, compared to 2001. For the
first six months, net sales of $106 million and operating profit of $13 million
were up 7% and 18%, respectively. These favorable results primarily reflect a
higher level of shipments of wallboard in Canada due to a strong level of
housing starts in the first half of 2002 and growth in Canadian repair and
remodeling.
WORLDWIDE CEILINGS
Second quarter 2002 net sales of $158 million declined 7% versus the second
quarter of 2001, while operating profit increased to $11 million from $9
million. For the first six months, net sales of $306 million and operating
profit of $16 million each were down 11% from the comparable 2001 period.
-41-
USG's domestic ceilings business, USG Interiors, Inc., reported a 6% drop in
second quarter 2002 net sales as compared with the second quarter of 2001. This
decline was largely attributable to a 26% decrease in export shipments of
ceiling tile primarily due to lower demand in Europe where the market for
commercial ceiling products has weakened. Domestic shipments of ceiling tile
increased slightly (up 1%). Shipments of ceiling grid, which are primarily to
U.S. customers, were down 1%. Operating profit for USG Interiors increased to
$11 million from $10 million a year ago primarily due to lower costs. Cost
reductions resulted from lower energy and raw material cost and from the closure
of a high-cost ceiling tile production line in the fourth quarter of 2001.
Sales for USG International were down primarily due to lower demand for ceiling
tile and grid in Europe. An operating loss for USG International of $2 million
was experienced in the second quarter of 2002, unchanged from a year ago.
Net sales and operating profit for the ceilings division of CGC Inc. each
increased by $1 million compared with the second quarter of 2001.
BUILDING PRODUCTS DISTRIBUTION
L&W Supply Corporation, the leading specialty building products distribution
business in the United States, reported second quarter 2002 net sales of $306
million, a 7% increase over the comparable 2001 period. However, operating
profit of $13 million for the quarter declined 41%. The higher level of net
sales was attributable to increases in L&W Supply's wallboard shipments (up 2%)
and selling prices (up 12%). The decline in operating profit resulted from a 26%
increase in wallboard unit costs, which primarily reflects manufacturers'
selling prices.
For the first six months of 2002, net sales of $581 million rose 1%, while
operating profit of $20 million fell 46% compared with the first six months of
2001. These results primarily reflect increased wallboard shipments (up 2%),
higher selling prices (up 4%) and higher unit costs (up 12%).
L&W Supply currently operates 179 locations in the United States distributing a
variety of gypsum, ceilings and related building materials.
MARKET CONDITIONS AND OUTLOOK
During 2001, excess industry capacity led to significant declines in market
prices for gypsum wallboard. However, market conditions for gypsum wallboard
improved somewhat during the second half of 2001 due to growth in demand, the
closure of some excess industry capacity and reduced operations by the
Corporation and other gypsum wallboard manufacturers.
The new housing market has remained strong through the first six months of 2002.
Growth in new housing and a strong level of residential remodeling resulted in
first and second quarter records for gypsum wallboard shipments. The favorable
levels of activity in these markets, which together account for nearly
two-thirds
-42-
of all demand for gypsum wallboard, and increased operating rates in the gypsum
industry allowed selling prices to rise. Continued strength in these markets is
uncertain and will depend on favorable demand factors such as levels of consumer
confidence, interest rates and home affordability.
Commercial construction has been affected by reduced corporate earnings,
resulting in lower investments in office and other commercial space. Commercial
construction is expected to continue to decline in 2002.
During the second half of 2002, the Corporation will remain focused on managing
the fundamentals of its businesses such as customer satisfaction, costs and
profitability and will diligently continue its attempt to resolve the Chapter 11
proceedings, consistent with the goal of achieving a fair, comprehensive and
final resolution to its asbestos liability.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital (current assets less current liabilities) as of June 30, 2002,
amounted to $990 million, and the ratio of current assets to current liabilities
was 3.49-to-1. As of December 31, 2001, working capital amounted to $876
million, and the ratio of current assets to current liabilities was 3.73-to-1.
Cash and cash equivalents as of June 30, 2002, amounted to $615 million,
compared with $493 million as of December 31, 2001. During the first six months
of 2002, net cash flows from operating activities totaled $159 million. Net cash
flows to investing activities totaled $37 million and consisted of capital
spending of $38 million, offset slightly by proceeds of $1 million from asset
sales. Because of the Filing, there were no financing activities during the
first half of 2002.
Receivables increased to $330 million as of June 30, 2002, from $274 million as
of December 31, 2001, primarily reflecting a 17% increase in net sales for the
month of June 2002 as compared with December 2001. Inventories and payables also
were up from December 31, 2001, primarily due to the increased level of
business. Inventories increased to $281 million from $254 million, and accounts
payable increased to $183 million from $140 million.
DEBT
As of June 30, 2002, total debt amounted to $1,007 million, of which $1,005
million was included in liabilities subject to compromise. These amounts were
unchanged from the December 31, 2001, levels.
AVAILABLE LIQUIDITY
A $350 million DIP Facility is available to supplement liquidity and fund
operations during the reorganization process. Borrowing availability under the
DIP Facility is based primarily on accounts receivable and inventory levels and,
to a lesser extent, property, plant and equipment. As of June 30, 2002, the
-43-
Corporation had the capacity to borrow up to $344 million. There were no
outstanding borrowings under the DIP Facility as of June 30, 2002. However, $14
million of standby letters of credit were issued, leaving $330 million of unused
borrowing capacity available as of June 30, 2002. The Corporation believes that
cash available from operations and the DIP Facility will provide sufficient
liquidity to allow its businesses to operate in the normal course without
interruption. As of June 30, 2002, the Corporation had $615 million of cash and
cash equivalents on a consolidated basis. Of this amount, $156 million was in
the possession of non-Debtor subsidiaries.
CAPITAL EXPENDITURES
Capital spending amounted to $38 million in the first six months of 2002
compared with $57 million in the corresponding 2001 period. In response to
demand for joint compounds and cement board, new production facilities are under
construction. A plant to produce SHEETROCK brand joint compounds is under
construction in Glendale, Arizona, and a production line to manufacture DUROCK
brand cement board is being built at U.S. Gypsum's Baltimore, Maryland, plant.
As of June 30, 2002, remaining capital expenditure commitments for the
replacement, modernization and expansion of operations amounted to $67 million,
compared with $63 million as of December 31, 2001.
During the bankruptcy proceeding, the Corporation expects to have limited
ability to access capital other than its own cash flows to fund potential future
growth opportunities such as new products, acquisitions and joint ventures. In
addition, one of the terms of the DIP Facility limits capital spending.
RESTRUCTURING ACTIVITIES
2001 Restructuring Plan: In the fourth quarter of 2001, the Corporation recorded
a pretax charge of $12 million related to a restructuring plan that included the
shutdown of a gypsum wallboard plant in Fremont, Calif., a drywall steel plant
in Prestice, Czech Republic, a ceiling tile plant in San Juan Ixhuatepec,
Mexico, a ceiling tile manufacturing line in Greenville, Miss., and other
restructuring activities. The restructuring plan, which is expected to be
completed in 2002, is intended to allow the Corporation to optimize its
manufacturing operations.
Included in the $12 million charge was $8 million for severance related to a
workforce reduction of more than 350 positions (primarily hourly positions), $2
million for the write-off of property, plant and equipment, and $2 million for
line shutdown and removal and contract cancellations.
The reserve for this plan is included in accrued expenses on the consolidated
balance sheets. Fourth quarter 2001 charges against the reserve included the $2
million write-off of property, plant and equipment and payments totaling $2
million. An additional $2 million of payments were charged against the reserve
in the first six months of 2002. All payments for the 2001 restructuring plan
are being funded with cash from normal operations.
-44-
As of June 30, 2002, the ceiling tile manufacturing line at Greenville, Miss.,
and the plants in San Juan Ixhuatepec, Mexico, and Prestice, Czech Republic,
have been shutdown and 258 employees have been terminated, and 26 open positions
have been eliminated. The Fremont, Calif., plant ceased production in April
2002. Annual savings from the full implementation of the 2001 restructuring
initiatives are estimated at $11 million.
2000 Restructuring Plan: In the fourth quarter of 2000, the Corporation recorded
a pretax charge of $50 million related to a restructuring plan that included a
salaried workforce reduction and the shutdown of three gypsum wallboard
manufacturing lines and other operations. This restructuring was designed to
streamline operations and improve business efficiency.
Included in the $50 million charge was $16 million for severance related to the
salaried workforce reduction of more than 500 positions, $15 million for the
write-off of property, plant and equipment, $12 million for razing buildings and
equipment, $5 million for line shutdown and removal, and $2 million for contract
cancellations and severance for more than 100 hourly positions. An additional
restructuring-related charge of $4 million was included in cost of products sold
for the writedown of certain inventory.
During the third quarter of 2001, the Corporation reversed $9 million pretax of
the restructuring reserve recorded in the fourth quarter of 2000 due to changes
from previous estimates and to reflect a change in the scope of restructuring
activities undertaken. The primary change involved a decision made in September
to eliminate a portion of the closure activities originally planned at the
Alabaster, Mich., facility.
The reserve for the 2000 restructuring was included in liabilities subject to
compromise on the consolidated balance sheets and payments totaling $22 million
were charged against this reserve through December 31, 2001. The remaining $4
million was charged against this reserve in the first six months of 2002. All
payments for this plan were funded with cash from normal operations.
The salaried workforce reduction program was completed as of June 30, 2001, with
the termination of 394 salaried employees and the elimination of 179 open
salaried positions. In addition, 73 hourly employees were terminated, and 44
open hourly positions were eliminated. Closure of the three gypsum wallboard
manufacturing lines and other operations was completed by December 31, 2001.
Annual savings from the 2000 restructuring initiatives are estimated at $40
million.
See Part I, Item 1. Note 8. "Restructuring" for additional information related
to restructuring payments and reserve balances.
-45-
OTHER MATTERS
LEGAL CONTINGENCIES
As a result of the Filing, all pending asbestos lawsuits against U.S. Gypsum 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,
U.S. Gypsum has ceased making both cash payments and accruals with respect to
asbestos lawsuits, including cash payments and accruals pursuant to settlements
of asbestos lawsuits. U.S. Gypsum continues to receive payments from its
insurance carriers pursuant to previous settlements. Creditors' committees have
been appointed representing asbestos personal injury and property damage
claimants with pending claims against U.S. Gypsum, and the Bankruptcy Court has
appointed the Hon. Dean M. Trafelet as the legal representative for the
interests of potential future asbestos claimants. As part of the bankruptcy
proceeding, it will be determined which present and future asbestos claims
should be allowed, or compensated, and the aggregate value of such claims. The
Corporation is unable to predict the value that the court will assign to 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 I, Item 1. Note 11. "Litigation" for additional information
on asbestos and environmental litigation.
RECENT ACCOUNTING PRONOUNCEMENTS
The Corporation adopted three new accounting standards in the first quarter of
2002.
On January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Although SFAS No. 142 eliminates the amortization of
goodwill and certain other intangible assets, it initiates an annual assessment
of goodwill for impairment. During the second quarter of 2002, the Corporation
completed its transition date assessment of goodwill. The assessment was
performed for each reporting unit (as defined by SFAS No. 142) that has
goodwill. For the Corporation, the reporting units with goodwill were the North
American Gypsum and the Building Products Distribution operating segments. The
Corporation determined that goodwill for its Building Products Distribution
segment was not impaired, but will be reviewed at least annually for impairment.
However, goodwill for its North American Gypsum segment was impaired. This
impairment was attributable to U.S. Gypsum's asbestos liability and related
filing for bankruptcy protection on June 25, 2001. As a result, the Corporation
recorded a noncash, nontaxable impairment charge of $96 million. This charge,
which includes a $6 million deferred currency translation write-off, is
reflected on the Corporation's consolidated statement of earnings as a
cumulative effect of a change in accounting principle as of January 1, 2002. In
accordance with SFAS No. 142, the Corporation is reflecting
-46-
this charge in its financial statements for the three months ended March 31,
2002.
SFAS No. 141, "Business Combinations," requires all business combinations
initiated after June 30, 2001, to be accounted for using the purchase method.
This standard, which became effective for the Corporation on January 1, 2002,
had no impact on its financial statements upon adoption.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
supersedes SFAS No. 121 and a portion of APB Opinion No. 30. This statement
establishes a single accounting model for the disposal of long-lived assets and
resolves significant implementation issues related to SFAS No. 121. This
standard, which became effective for the Corporation on January 1, 2002, had no
impact on the Corporation's financial statements upon adoption.
The Corporation will adopt SFAS No. 143, "Accounting for Asset Retirement
Obligations," in January 2003. This standard requires entities to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred. This standard becomes effective January 1, 2003, and is
likely to have an impact on the Corporation's financial statements. However, as
of the date of this report, the Corporation has not determined what impact the
adoption of this standard may have on its financial statements.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements related to management's
expectations about future conditions. 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. Actual business or other conditions may also differ
significantly from management's expectations and accordingly affect the
Corporation's sales and profitability or other results. Actual results may
differ due to various other factors, including economic conditions such as the
levels of construction activity, interest rates and consumer confidence;
competitive conditions such as price and product competition; increases in raw
material and energy costs; and the unpredictable effects of the global war on
terrorism upon domestic and international economies and financial markets. The
Corporation assumes no obligation to update any forward-looking information
contained in this report.
-47-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of USG Corporation:
We have reviewed the accompanying consolidated balance sheet of USG Corporation
and subsidiaries as of June 30, 2002, and the related consolidated statements of
earnings for the three and six month periods ended June 30, 2002 and the
consolidated statement of cash flows for the six-month period ended June 30,
2002. 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 of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, 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 such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Corporation will continue as a going concern. As discussed in Notes 2
and 11 to the consolidated financial statements, certain conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Notes 2 and 11 to the
financial statements.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Chicago, Illinois
July 26, 2002
-48-
INFORMATION REGARDING PREDECESSOR INDEPENDENT PUBLIC ACCOUNTANTS' REVIEW REPORTS
This is a copy of a review report previously issued by Arthur Andersen LLP
("Andersen"). The report has not been reissued by Andersen nor has Andersen
provided an awareness letter for the inclusion of its report in this Current
Report on Form 10-Q.
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 March 31,
2002, and the related condensed consolidated statements of earnings for the
three-month periods ended March 31, 2002 and 2001 and the condensed consolidated
statements of cash flows for the three-month periods ended March 31, 2002 and
2001. 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 11 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
April 24, 2002
-49-
INFORMATION REGARDING PREDECESSOR INDEPENDENT PUBLIC ACCOUNTANTS' REVIEW REPORTS
This is a copy of a review report previously issued by Andersen. The report has
not been reissued by Andersen nor has Andersen provided an awareness letter for
the inclusion of its report in this Current Report on Form 10-Q.
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
-50-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Item 1. Note 11. "Litigation" for information concerning the
asbestos and related bankruptcy litigation and environmental litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) In accordance with the Corporation's notice and proxy statement dated
March 29, 2002, the matter set forth in paragraph (b) below was
submitted to a vote of stockholders at the annual meeting of
stockholders held on May 8, 2002.
(b) The four director-nominees who received the highest vote totals, who
were each re-elected to a three-year term of office, and whose terms in
office will expire in 2005 were: Robert L. Barnett, David W. Fox,
Valerie B. Jarrett and Marvin E. Lesser. The directors whose terms of
office continued after the annual meeting of stockholders were: Keith
A. Brown, James C. Cotting, Lawrence M. Crutcher, William C. Foote, W.
Douglas Ford, John B. Schwemm and Judith A. Sprieser.
Votes Abstentions
Votes Withheld and Broker
For or Against Non-Votes
------------------------------------------
Election of Directors:
Robert L. Barnett 38,667,146 307,464 -
David W. Fox 38,651,851 322,759 -
Valerie B. Jarrett 38,661,997 312,613 -
Marvin E. Lesser 38,647,050 327,560 -
-51-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
15. Letter from Deloitte & Touche LLP regarding unaudited financial
information.
(b) Reports on Form 8-K:
A Form 8-K was filed on May 13, 2002, to report under Item 4 "Changes
in Registrant's Certifying Accountant" that the Corporation dismissed
Arthur Andersen LLP as its independent public accountants and engaged
Deloitte & Touche LLP to serve as the Corporation's independent public
accountants for the year ending December 31, 2002.
A Form 8-K/A was filed on May 17, 2002, as an amendment of the Form 8-K
that was filed on May 13, 2002.
A Form 8-K was filed on July 18, 2002, to report under Item 5 "Other
Events" that the Corporation, in accordance with SFAS No. 142 "Goodwill
and Other Intangible Assets," recorded a goodwill impairment charge of
$96 million that was reported as a cumulative effect of a change in
accounting principle as of January 1, 2002.
-52-
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/ William C. Foote
---------------------------------
William C. Foote,
Chairman, President and
Chief Executive Officer
By /s/ Richard H. Fleming
---------------------------------
Richard H. Fleming
Executive Vice President and
Chief Financial Officer,
By /s/ Raymond T. Belz
---------------------------------
Raymond T. Belz,
Senior Vice President and
Controller,
August 13, 2002
-53-