-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NZu7rEkL/phigKpqpxt1Nx0a4zsGxx9HCssriXWUYHrnvAoIgl+N/+c3tm2pzFYA Rf8m+7aJGW+UxJBJXUW/XQ== 0000757011-99-000009.txt : 19990316 0000757011-99-000009.hdr.sgml : 19990316 ACCESSION NUMBER: 0000757011-99-000009 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990301 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USG CORP CENTRAL INDEX KEY: 0000757011 STANDARD INDUSTRIAL CLASSIFICATION: 3270 IRS NUMBER: 363329400 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08864 FILM NUMBER: 99552867 BUSINESS ADDRESS: STREET 1: 125 S FRANKLIN ST STREET 2: DEPT. 188 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3126064000 10-K405 1 FORM 10-K FOR THE PERIOD ENDED 12-31-98 - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K ----------------- (Mark One) X - - ------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For fiscal year ended December 31, 1998 OR - - ------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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 S. Franklin Street, Chicago, Illinois 60606-4678 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (312) 606-4000 ------------------------- Securities Registered Pursuant to Section 12(b) of the Act: Name of Exchange on Title of Each Class Which Registered ------------------- ---------------- New York Stock Exchange Common Stock, $0.10 par value Chicago Stock Exchange ------------------------------- ----------------------- New York Stock Exchange Preferred Share Purchase Rights Chicago Stock Exchange ------------------------------- ----------------------- 8.5% Senior Notes, Due 2005 New York Stock Exchange --------------------------- ----------------------- Securities Registered Pursuant to Section 12(g) of the Act: None - - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ----- 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 January 31, 1999, the aggregate market value of USG Corporation common stock held by nonaffiliates (based upon the New York Stock Exchange closing prices) was approximately $ 2,777,084,000. As of January 31, 1999, 49,570,627, shares of common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Corporation's 1998 Annual Report to Stockholders are incorporated by reference in Parts I, II and IV of this Form 10-K Report. 2. The Corporation's definitive Proxy Statement for use in connection with the annual meeting of stockholders to be held on May 12, 1999, is incorporated by reference in Part III of this Form 10-K Report. 3. A list of exhibits incorporated by reference is presented in this Form 10-K Report beginning on page 13. TABLE OF CONTENTS
PART I Page Item 1. Business........................................................................................ 3 Item 2. Properties...................................................................................... 8 Item 3. Legal Proceedings............................................................................... 9 Item 4. Submission of Matters to a Vote of Security Holders............................................. 9 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters........................ 10 Item 6. Selected Financial Data......................................................................... 10 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition........... 10 Item 8. Financial Statements and Supplementary Data..................................................... 10 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 10 PART III Item 10. Directors and Executive Officers of the Registrant.............................................. 11 Item 11. Executive Compensation.......................................................................... 13 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 13 Item 13. Certain Relationships and Related Transactions.................................................. 13 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 13 Signatures.................................................................................................... 20
PART I Item 1. BUSINESS General United States Gypsum Company ("U.S. Gypsum") was incorporated in 1901. USG Corporation (together with its subsidiaries, called "USG" or the "Corporation") was incorporated in Delaware on October 22, 1984. By a vote of stockholders on December 19, 1984, U.S. Gypsum became a wholly owned subsidiary of the Corporation, and the stockholders of U.S. Gypsum became the stockholders of the Corporation, all effective January 1, 1985. Through its subsidiaries, USG is a leading manufacturer and distributor of building materials producing a wide range of products for use in new residential, new nonresidential and repair and remodel construction, as well as products used in certain industrial processes. Following the completion of a financial restructuring in 1993, USG was engaged in a financial strategy of reducing debt and growing its gypsum, ceilings and distribution businesses through a balanced application of free cash flow between debt reduction and capital expenditures. This strategy had the dual objective of reaching a target debt level of $650 million and achieving investment grade status with respect to its senior public debt issues within five years. These objectives were achieved when USG reached its target debt level in October 1997, Standard & Poor's raised its rating of USG's debt to BBB in December 1997, and Moody's raised its rating of USG's debt to Baa3 in March 1998. USG is currently focused on building long-term stockholder value through a plan designed to provide immediate returns to investors through dividends and share repurchases and future returns from earnings growth. In 1998, USG paid its first quarterly cash dividend in 10 years. USG also initiated a share repurchase plan that contemplates buying back up to 5 million shares, which is about 10% of its current shares outstanding, over the next several years. USG's plan for earnings growth includes introducing new products and product platforms, improving service, strengthening its brands, adding capacity to serve growing customers and markets, renovating manufacturing capacity to make USG the undisputed low-cost producer, and expanding distribution. These initiatives are supported by the financial flexibility of an investment grade capital structure. USG's operations are organized into two operating segments: North American Gypsum and Worldwide Ceilings. North American Gypsum Business North American Gypsum, which manufactures and markets gypsum and related products in the United States, Canada and Mexico, includes U.S. Gypsum and L&W Supply Corporation ("L&W Supply") in the United States, the gypsum business of CGC Inc. ("CGC") in Canada, and Yeso Panamericano S.A. de C.V. in Mexico. U.S. Gypsum is the largest producer of gypsum wallboard in the United States and accounted for nearly one-third of total domestic gypsum wallboard sales in 1998. L&W Supply is the country's largest distributor of wallboard and related products and in 1998 distributed approximately 10% of all gypsum wallboard in the United States (including approximately 27% of U.S. Gypsum's wallboard production). CGC is the largest producer of gypsum wallboard in eastern Canada. Products North American Gypsum manufactures and markets building and industrial products used in a variety of applications. Gypsum panel products are used to finish the interior walls and ceilings in residential, commercial and institutional construction. These products provide aesthetic as well as sound-dampening and fire-retarding value. The majority of these products are sold under the SHEETROCK brand name. Also sold under the SHEETROCK brand name is a line of joint compounds used for finishing wallboard joints. The DUROCK line of cement board and accessories provides fire-resistant and water-damage-resistant assemblies for both interior and exterior construction. In 1998, USG launched a new product platform: FIBEROCK brand gypsum fiber panels. This product line currently includes abuse- resistant wall panels and floor underlayment. The Corporation produces a variety of plaster products used to provide a custom finish for residential and commercial interiors. Like SHEETROCK brand wallboard, these products provide aesthetic, sound-dampening and fire-retarding value. Plaster products are sold under the trade names of RED TOP, IMPERIAL and DIAMOND. The Corporation also produces gypsum-based products for agricultural and industrial customers to use in a number of applications, including soil conditioning, road repair, fireproofing and ceramics. Manufacturing North American Gypsum's products are manufactured at 45 plants located throughout the United States and Canada and in central Mexico. As a major part of USG's earnings growth strategy, U.S. Gypsum is replacing high-cost wallboard capacity with new, low-cost plants. These projects also will add a net 2 billion square feet of capacity to serve growing markets and customers in five regions of the United States. In the Southeast, U.S. Gypsum is building a new wallboard and joint compound plant in Bridgeport, Ala., that is scheduled for startup in the second quarter of 1999. In the Midwest, the company is building a new wallboard production line at its East Chicago, Ind., plant, that is scheduled for startup in the fourth quarter of 1999. In the Northeast, U.S. Gypsum broke ground in 1998 on a new wallboard plant in Aliquippa, Pa., which is scheduled for startup in 2000. In September 1998, the company announced two projects, one in the Northwest, a new wallboard plant in Ranier, Ore., and one in the Southwest, a modernization of its Plaster City, Calif., plant. The latter two facilities are expected to be fully operational in 2001. Construction also continues on a facility to manufacture FIBEROCK brand gypsum fiber panels at the Gypsum, Ohio, wallboard plant. This new production line is scheduled for startup in the third quarter of 1999 and will complement the gypsum fiber panel plant in Port Hawkesbury, Nova Scotia, which was acquired in 1997. Gypsum rock is mined or quarried at 13 company-owned locations in the United States and Canada. In 1998, these facilities provided approximately 88% of the gypsum used by the Corporation's plants in North America. Certain plants purchase synthetic gypsum or natural gypsum rock from various outside sources. Outside purchases accounted for 12% of the gypsum used in the Corporation's North American plants. The Corporation's geologists estimate that recoverable rock reserves are sufficient for more than 30 years of operation based on the Corporation's average annual production of crude gypsum during the past five years. Proven reserves contain approximately 194 million tons, of which approximately 66% are located in the United States and 34% in Canada. Additional reserves of approximately 153 million tons are found on three properties not in operation. The Corporation's total average annual production of crude gypsum in the United States and Canada during the past five years was 10.1 million tons. The Corporation owns and operates seven paper mills located across the United States. Vertical integration in paper ensures a continuous supply of high-quality paper that is tailored to the specific needs of USG's wallboard production processes. The Corporation does research and development at the USG Research and Technology Center in Libertyville, Ill. The staff at this center provides specialized technical services to the operating units and does product and process research and development. The center is especially well-equipped for carrying out fire, acoustical, structural and environmental evaluations of products and building assemblies. The center also has an analytical laboratory for chemical analysis and characterization of materials. Development activities can be taken to the pilot plant level before being transferred to a full-size plant. Marketing and Distribution Distribution is carried out through L&W Supply, building materials dealers, home improvement centers and other retailers, contractors and specialty wallboard distributors. Sales of gypsum products are seasonal to the extent that sales are generally greater from spring through the middle of autumn than during the remaining part of the year. Based on the Corporation's estimates using publicly available data, internal surveys, and gypsum wallboard shipment data from the Gypsum Association, management estimates that during 1998, about 45% of total industry volume demand for gypsum wallboard was generated by new residential construction activity, 38% of volume demand was generated by residential and nonresidential repair and remodel activity, 10% of volume demand was generated by new nonresidential construction activity and the remaining 7% of volume demand was generated by other activities such as exports and temporary construction. L&W Supply, which was organized in 1971 by U.S. Gypsum, currently has 187 distribution locations in 36 states. It is a service-oriented organization that stocks a wide range of construction materials and delivers less-than-truckload quantities of construction materials to a job site and places them in areas where work is being done, thereby reducing or eliminating the need for handling by contractors. Although L&W Supply specializes in distribution of gypsum wallboard (which accounts for approximately 50% of its total net sales), joint compound and other products manufactured primarily by U.S. Gypsum, it also distributes products manufactured by USG Interiors such as acoustical ceiling tile and grid, as well as products of other manufacturers including drywall metal, insulation, roofing products and accessories. L&W Supply leases approximately 86% of its facilities from third parties. Usually, initial leases run from three to five years with a five-year renewal option. Competition The Corporation competes in North America as the largest of 13 producers of gypsum wallboard products and in 1998 accounted for nearly one-third of total gypsum wallboard sales in the United States. In 1998, U.S. Gypsum shipped 8.8 billion square feet of wallboard, the highest level in the Corporation's history, out of total U.S. industry shipments (including imports) estimated at 28.2 billion square feet, also a record. Principal competitors in the United States are: National Gypsum Company, Georgia-Pacific Corporation, James Hardie Gypsum, The Celotex Corporation, Temple- Inland Forest Products Corporation, American Gypsum and several smaller, regional competitors. Major competitors in Canada include BPB Westroc and Georgia-Pacific Corporation. In Mexico, the Corporation's major competitor is Panel Rey. L&W Supply's largest competitor, Gypsum Management Supply, is an independent distributor with locations in the southern, central and western United States. There are several regional competitors, such as, GDMA/RINKER in the southeast (primarily in Florida) and Strober Building Supply in the northeastern United States. L&W Supply's many local competitors include lumber dealers, hardware stores, home improvement centers and acoustical tile distributors. Worldwide Ceilings Business Worldwide Ceilings, which manufactures and markets interior systems products worldwide, includes USG Interiors, Inc., ("USG Interiors"), the international interior systems business managed as USG International and the ceilings business of CGC. Worldwide Ceilings is a leading supplier of interior ceilings products used primarily in commercial applications. In 1998, Worldwide Ceilings was estimated to be the largest producer of ceiling grid and the second largest producer of ceiling tile in the world. Products Worldwide Ceilings manufactures and markets ceiling grid, ceiling tile, relocatable wall systems and, in Europe and the Asia-Pacific region, access floor systems. USG's integrated line of ceilings products provides qualities such as sound absorption, fire retardation, and convenient access to the space above the ceiling for electrical and mechanical systems, air distribution and maintenance. USG Interiors' significant trade names include the AURATONE and ACOUSTONE brands of ceiling tile and the DX, FINELINE, CENTRICITEE, CURVATURA and DONN brands of ceiling grid. Manufacturing Worldwide Ceilings' products are manufactured at 20 plants located in North America, Europe and Asia-Pacific. These include 10 ceiling grid plants, 5 ceiling tile plants, 2 plants that produce other interior products and 3 plants that produce or prepare raw materials for ceiling tile and grid. Principal raw materials used in the production of Worldwide Ceilings' products include mineral fiber, steel, perlite, starch and high-pressure laminates. Certain of these raw materials are produced internally, while others are obtained from various outside suppliers. Shortages of raw materials used in this segment are not expected. In 1998, the replacement of two old production lines with one modern, high-speed line at USG Interiors' ceiling tile plant in Cloquet, Minn. was completed. This project will reduce manufacturing costs and add capacity to meet increasing worldwide demand. USG Interiors' primary research and development are carried out at the Corporation's research and development center in Libertyville, Ill., and at its "Solutions Center"SM in Chicago, Ill. An additional metal forming research and development facility in Avon, Ohio, provides product design, engineering and testing services in addition to manufacturing development. Marketing and Distribution Worldwide Ceilings' products are sold primarily in markets related to the new construction and renovation of commercial buildings. Marketing and distribution are conducted through a network of distributors, installation contractors, L&W Supply, and home improvement centers. Competition The Corporation estimates that it is the second-largest producer/marketer of acoustical ceiling tile in the world. Principal global competitors include Armstrong World Industries, Inc. (the largest manufacturer), OWA Faserplattenwerk GmbH (Odenwald) and The Celotex Corporation. The Corporation estimates that it is the world's largest manufacturer of ceiling grid. Principal competitors in ceiling grid include WAVE (a joint venture between Armstrong World Industries, Inc. and Worthington Industries) and Chicago Metallic Corporation. Other Information The Corporation's plants are substantial users of energy. Five major fuel types are used in a mix consisting of 79% natural gas, 10% electricity, 7% oil, 2% coke and 2% purchased hot air. With few exceptions, plants that use natural gas are equipped with fuel standby systems, principally oil. Primary fuel supplies have been adequate, and no curtailment of plant operations has resulted from insufficient supplies. Supplies are likely to remain sufficient for projected requirements. Energy price swap agreements are used by the Corporation to hedge the cost of certain purchased fuel. Neither operating segment has any special working capital requirements or is materially dependent on a single customer or a few customers on a regular basis. No single customer of the Corporation accounted for more than 10% of the Corporation's 1998 or 1997 consolidated net sales. Because orders are filled upon receipt, neither operating segment has any significant backlog. Loss of one or more of the patents or licenses held by the Corporation would not have a major impact on the Corporation's business or its ability to continue operations. No material part of any of the Corporation's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government. All of the Corporation's products regularly require improvement to remain competitive. The Corporation also develops and produces comprehensive systems employing several of its products. In order to maintain its high standards and remain a leader in the building materials industry, the Corporation performs ongoing extensive research and development activities and makes the necessary capital expenditures to maintain production facilities in good operating condition. One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos lawsuits alleging both property damage and personal injury. Information pertaining to legal proceedings is included in "Notes to Financial Statements Note 15. Litigation" of the Corporation's 1998 Annual Report to Stockholders and is incorporated herein by reference. Financial information pertaining to operating segments, foreign and domestic operations and export sales is included in "Notes to Financial Statements - Note 14. Segments" of the Corporation's 1998 Annual Report to stockholders and is incorporated herein by reference. Item 2. PROPERTIES The Corporation's plants, mines, quarries, transport ships and other facilities are located in North America, Europe and Asia-Pacific. Many of these facilities are operating at or near full capacity. The locations of the production properties of the Corporation's subsidiaries, grouped by operating segment, are as follows (plants are owned unless otherwise indicated): North American Gypsum
Gypsum Wallboard and Other Gypsum Products Baltimore, Md. Jacksonville, Fla. Southard, Okla. Boston (Charlestown), Mass. New Orleans, La. Sperry, Iowa Detroit (River Rouge), Mich. Norfolk, Va. Stony Point, N.Y. East Chicago, Ind. Oakfield, N.Y. Sweetwater, Texas Empire, Nev. Plaster City, Calif. Hagersville, Ontario, Canada Fort Dodge, Iowa Plasterco (Saltville), Va. Montreal, Quebec, Canada Fremont, Calif. Santa Fe Springs, Calif. St. Jerome, Quebec, Canada (currently idle) Galena Park, Texas Shoals, Ind. Puebla, Puebla, Mexico Gypsum, Ohio Sigurd, Utah
Joint Compound (surface preparation and joint treatment products) Chamblee, Ga. Jacksonville, Fla. Montreal, Quebec, Canada Dallas, Texas Port Reading, N.J. Calgary, Alberta, Canada East Chicago, Ind. Sigurd, Utah Puebla, Puebla, Mexico Fort Dodge, Iowa Tacoma, Wash. (leased) Port Klang, Malaysia (leased) Galena Park, Texas Torrance, Calif. Gypsum, Ohio Hagersville, Ontario, Canada
Gypsum Rock (mines and quarries) Alabaster (Tawas City), Mich. Shoals, Ind. Hagersville, Ontario, Canada Empire, Nev. Sigurd, Utah Little Narrows, Nova Scotia, Canada Fort Dodge, Iowa Southard, Okla. Windsor, Nova Scotia, Canada Plaster City, Calif. Sperry, Iowa Plasterco (Saltville), Va. Sweetwater, Texas Synthetic gypsum is processed at Belledune, New Brunswick, Canada. Mining operations at Oakfield, N.Y., were shut down on July 3, 1998.
Paper for Gypsum Wallboard Clark, N.J. Jacksonville, Fla. South Gate, Calif. Galena Park, Texas North Kansas City, Mo. Gypsum, Ohio Oakfield, N.Y.
Other Products A mica-processing plant is located at Spruce Pine, N.C.; perlite ore is produced at Grants, N.M.; and drywall metal products are manufactured at Medina, Ohio (leased). Metal lath, plaster and drywall accessories and light gauge steel framing products are manufactured at Puebla, Mexico. Various other products are manufactured at La Mirada, Calif. (adhesives and finishes); New Orleans, La. (lime products); and Port Hawkesbury, Nova Scotia, Canada (gypsum fiber panel products). Ocean Vessels Gypsum Transportation Limited, a wholly owned subsidiary of the Corporation headquartered in Bermuda, owns and operates a fleet of three self-unloading ocean vessels. Under contract of affreightment, these vessels transport gypsum rock from Nova Scotia to the East Coast plants of U.S. Gypsum. Excess ship time, when available, is offered for charter on the open market. Worldwide Ceilings
Ceiling Tile Cloquet, Minn. Walworth, Wis. Aubange, Belgium Greenville, Miss. San Juan Ixhuatepec, Mexico Ceiling Grid Cartersville, Ga. Dreux, France Viersen, Germany Stockton, Calif. Oakville, Ontario, Canada Taipei, Taiwan (leased) Westlake, Ohio Peterlee, England (leased) Auckland, New Zealand (leased) Port Klang, Malaysia (leased)
A coil coater and slitter plant used in the production of ceiling grid also is located in Westlake, Ohio and a slitter plant is located in Stockton, Calif. (leased). Other Products Access floor systems products are manufactured at Peterlee, England (leased), and Port Klang, Malaysia (leased). Mineral fiber products are manufactured at Red Wing, Minn. and Walworth, Wis. Wall system products are manufactured at Medina, Ohio (leased). Drywall metal products are manufactured at Prestice, Czech Republic (leased). Item 3. LEGAL PROCEEDINGS Information pertaining to legal proceedings is included in "Notes to Financial Statements - Note 15. Litigation" of the Corporation's 1998 Annual Report to Stockholders and is incorporated herein by reference. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None during the fourth quarter of 1998. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Information with respect to the principal market on which the Corporation's common stock is traded, the range of high and low market prices and number of stockholders of record is included in "Selected Quarterly Financial Data" of the Corporation's 1998 Annual Report to Stockholders and is incorporated herein by reference. On September 18, 1998, USG declared a cash dividend of $0.10 per common share that was paid on December 16, 1998, to stockholders of record as of November 27, 1998. This was USG's first quarterly cash dividend since the third quarter of 1988. On November 22, 1996, the Corporation entered into a retention agreement with an employee, formerly the principal stockholder of a corporation certain of whose assets were purchased by the Corporation, whereby the Corporation agreed to grant shares of unregistered common stock, $0.10 par value, having an aggregate value equal to $250,000, in five separate annual installments each having a value equal to $50,000, in reliance on the private offering exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. The second annual grant in the amount of 1,062 shares was made on November 24, 1997. The third annual grant in the amount of 1,021 shares was made on November 23, 1998. The unregistered common stock is restricted from transfer, resale or other disposition until November 22, 2001. Item 6. SELECTED FINANCIAL DATA Selected financial data are included in "Comparative Five-Year Summary" of the Corporation's 1998 Annual Report to Stockholders and is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION "Management's Discussion and Analysis of Results of Operations and Financial Condition" of the Corporation's 1998 Annual Report to Stockholders is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data included in "Consolidated Statement of Earnings," "Consolidated Balance Sheet," "Consolidated Statement of Cash Flows," "Consolidated Statement of Stockholders' Equity," "Consolidated Statement of Comprehensive Income," "Notes to Financial Statements" and "Report of Independent Public Accountants" of the Corporation's 1998 Annual Report to Stockholders is incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors is included in the Corporation's definitive Proxy Statement, which is incorporated herein by reference. Executive Officers of the Registrant (as of February 10, 1999) Name, Age Prior Business Experience in Past Five Years Has Held and Present Position Present Position Since - - -------------------------------------------------------------------------------------------- ---------------------
William C. Foote, 47 President and Chief Operating Officer from January 1994 to June 1997 Chairman and Chief Executive January 1996; President and Chief Executive Officer to April Officer 1996; Chairman, President and Chief Executive Officer from April 1996 to June 1997. P. Jack O'Bryan, 63 Senior Vice President and Chief Technology Officer, USG February 1999 President and Chief Operating Corporation to August 1994; Senior Vice President - Officer; President and Chief Worldwide Manufacturing and Technology to October 1995; Executive Officer, L&W Supply Executive Vice President - Worldwide Ceilings to September Corporation. 1996; Executive Vice President - Operations to June 1997; President and Chief Executive Officer, United States Gypsum Company from October 1996 to February 1999; President and Chief Executive Officer, USG Interiors, Inc. from October 1995 to February 1999; President and Chief Operating Officer since June 1997. Richard H. Fleming, 51 Vice President and Chief Financial Officer to January 1995; February 1999 Executive Vice President and Chief Senior Vice President and Chief Financial Officer to February Financial Officer 1999. Raymond T. Belz, 58 Vice President and Controller, USG Corporation from January February 1999 Senior Vice President and 1994 to February 1999; Vice President Financial Services, Controller; Executive Vice United States Gypsum Company from January 1994 to January President, Financial Operations, 1995; Vice President and Chief Financial Officer, North North American Gypsum American Gypsum from January 1995 to September 1996; Vice and Worldwide Ceilings President Financial Operations, North American Gypsum and Worldwide Ceilings from September 1996 to February 1999. Arthur G. Leisten, 57 Same Position February 1994 Senior Vice President and General Counsel Harold E. Pendexter, Jr., 64 Same position. January 1991 Senior Vice President and Chief Administrative Officer Edward M. Bosowski, 44 Vice President Market Development and Planning, United States February 1999 Vice President; President and Gypsum Company to February 1995; Vice President and Chief Chief Excutive Officer, United Financial Officer, Worldwide Ceilings and Vice President, USG States Gypsum Company Interiors, Inc. to September 1996; Executive Vice President- Marketing, United States Gypsum Company to February 1999.
Name, Age Prior Business Experience in Past Five Years Has Held and Present Position Present Position Since - - -------------------------------------------------------------------------------------------- ---------------------
Brian W. Burrows, 59 Same position. March 1987 Vice President, Research and Technology Brian J. Cook, 41 Director, Employee Relations, Training and Corporate December 1998 Vice President, Human Resources Employee Counsel to April 1996; Director, Human Resources Planning and Development and Corporate Employee Counsel to December 1997; Director, Human Resources - Operations to December 1998. Stanley L. Ferguson, 46 Associate General Counsel to February 1999. February 1999 Vice President and Associate General Counsel Jean K. Holley, 39 Manager, Computer Services, WMX Environmental August 1998 Vice President and Chief Monitoring Laboratories (a subsidiary of Waste Management Information Officer Corporation) to March 1994; Director, Information Technology, WMX Environmental Monitoring Laboratories to March 1996; Director, Information Systems, Rust Industrial Services (a subsidiary of Waste Management Corporation) to December 1996; Senior Director, Information Technology, Waste Management Corporation to August 1998. Marci N. Kaminsky, 40 Director, Public Relations, The Nutrasweet Company to March October 1998 Vice President, Communications 1995; Vice President, U.S. Communications, Bank of Montreal/Harris Bank to January 1997; Senior Vice President, Public Affairs, Bank of Montreal/Harris Bank to October 1998. D. Rick Lowes, 44 Vice President and Chief Financial Officer, CGC Inc. to January 1999 Vice President and Treasurer January 1999. Peter K. Maitland, 57 Director, Employee Benefits and Office Facilities to June February 1999 Vice President, Compensation, 1997; Director, Employee Benefits and Office Management to Benefits and Administration February 1999. John E. Malone, 55 Vice President - Finance, USG International from March January 1999 Vice President 1993 to February 1995; Vice President and Treasurer from January 1994 to January 1999. John H. Meister, 41 Director, Marketing East, United States Gypsum Company February 1999 Vice President; President and July 1994; Vice President Marketing - East, United States Chief Executive Officer, USG Gypsum Company to November 1995; Executive Vice President Interiors, Inc. and Chief Operating Officer, L&W Supply Corporation to May 1996; President and Chief Executive Officer, L&W Supply Corporation to February 1999. Daniel J. Nootens, 60 Vice President Manufacturing, United States Gypsum Company June 1997 Vice President; Executive Vice from November 1990 to July 1994; Executive Vice President President, Strategic Manufacturing & Chief Operating Officer, United Sates Gypsum Company from & Capital Investments, North July 1994 to September 1996; Executive Vice President- American Gypsum and Worldwide Operations, North American Gypsum from September 1996 to Ceilings June 1997. Robert B. Sirgant, 58 Vice President, National Accounts and Marketing - East, January 1995 Vice President, Corporate Accounts United States Gypsum Company to July 1994; Vice President, National Accounts, United States Gypsum Company to January 1995. Dean Goossen, 51 Same position. February 1994 Corporate Secretary
Item 11. EXECUTIVE COMPENSATION Information required by Item 11 is included in the Corporation's definitive Proxy Statement, which is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by Item 12 is included in the Corporation's definitive Proxy Statement, which is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by Item 13 is included in the Corporation's definitive Proxy Statement, which is incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this 10-K Report:
1. The consolidated financial statements, notes to financial statements and report of independent public accountants included in the Corporation's 1998 Annual Report to Stockholders and listed below are incorporated herein by reference: Consolidated Statement of Earnings - Years ended December 31, 1998, 1997 and 1996. Consolidated Balance Sheet - As of December 31, 1998 and 1997. Consolidated Statement of Cash Flows - Years ended December 31, 1998, 1997 and 1996. Consolidated Statement of Stockholders' Equity - Years ended December 31, 1998, 1997 and 1996. Consolidated Statement of Comprehensive Income - Years ended December 31, 1998, 1997 and 1996. Notes to Financial Statements. Report of Independent Public Accountants. 2. Supplemental Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts. Report of Independent Public Accountants With Respect to Financial Statement Schedule. All other schedules have been omitted because they are not required, are not applicable, or the information is included in the financial statements or notes thereto. 3. Exhibits (Reg. S-K, Item 601):
Exhibit No. Page 3 Articles of incorporation and by-laws:
(a) Restated Certificate of Incorporation of USG Corporation (incorporated by reference to Exhibit 3.1 of USG Corporation's Form 8-K, dated May 7, 1993). (b) Certificate of Designation of Junior Participating Preferred Stock, series D, of USG Corporation (incorporated by reference to Exhibit A of Exhibit 4 to USG Corporation's Form 8-K dated March 27, 1998). (c) Amended and Restated By-Laws of USG Corporation, dated as of March 27, 1998 (incorporated by reference to Exhibit 3(ii) of USG Corporation's Form 10-Q, dated May 1, 1998).
4 Instruments defining the rights of security holders, including indentures:
(a) Indenture dated as of October 1, 1986 between USG Corporation and Harris Trust and Savings Bank, Trustee (incorporated by reference to Exhibit 4(a) of USG Corporation's Registration Statement No. 33-9294 on Form S-3, dated October 7, 1986). (b) Rights Agreement dated March 27, 1998, between USG Corporation and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 4 of USG Corporation's Form 8-K, dated March 27, 1998). (c) Form of Common Stock certificate (incorporated by reference to Exhibit 4.4 to USG Corporation's Form 8-K, dated May 7, 1993). The Corporation and certain of its consolidated subsidiaries are parties to long-term debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, the Corporation agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request.
10 Material contracts:
(a) Management Performance Plan of USG Corporation (incorporated by reference to Annex C of Amendment No. 8 to USG Corporation's Registration Statement No. 33-40136 on Form S-4, dated February 3, 1993). (b) First Amendment to Management Performance Plan, effective November 15, 1993, and dated February 1, 1994 (incorporated by reference to Exhibit 10(aq) of Amendment No. 1 of USG Corporation's Registration Statement No. 33-51845 on Form S- 1). (c) Amendment and Restatement of USG Corporation Supplemental Retirement Plan, effective as of July 1, 1997, and dated August 25, 1997 (incorporated by reference to Exhibit 10(c) of USG Corporation's Annual Report on Form 10-K, dated February 20, 1998). (d) First Amendment to Supplemental Retirement Plan, effect- 21 ive July 1, 1997. (e) Termination Compensation Agreements (incorporated by reference to Exhibit 10(h) of USG Corporation's 1991 Annual Report on Form 10-K, dated March 5, 1992). (f) Amendment of Termination Compensation Agreements (incorporated by reference to Exhibit 10(j) of Amendment No. 1 to USG Corporation's Registration Statement No. 33-61152 on Form S-1). (g) Indemnification Agreements (incorporated by reference to Exhibit 10(g) of Amendment No. 1 to USG Corporation's Registration No. 33-51845 on Form S-1). (h) Form of Employment Agreement dated May 12, 1993 (incorporated by reference to Exhibit 10(h) of Amendment No. 1 to USG Corporation's Registration Statement No. 33-61152 on Form S-1). (i) Credit Agreement dated as of July 27, 1995, among USG Corporation and the Banks listed on the signature page thereto and Chase Manhattan Bank (formerly Chemical Bank) as Agent (incorporated by reference to Exhibit 99(a) of Amendment No. 3 to USG Corporation's Registration Statement No. 33-60563 on Form S-3, dated July 28, 1995). (j) Amendment No. 1, dated as of February 1, 1996, to the Credit Agreement (incorporated by reference to Exhibit 10(l) of USG Corporation's 1995 Annual Report on Form 10-K, dated February 29, 1996). (k) Amendment No. 2, dated as of May 14, 1997, to the Credit Agreement (incorporated by reference to Exhibit 10(l) of USG Corporation's Annual Report on Form 10-K, dated February 20, 1998). (l) 1995 Long-Term Equity Plan of USG Corporation (incorporated by reference to Annex A to USG Corporation's Proxy Statement and Proxy, dated March 31, 1995). (m) 1998 Annual Management Incentive Program - USG 24 Corporation. (n) Omnibus Management Incentive Plan (incorporated by reference to Annex A to USG Corporation's Proxy Statement and Proxy, dated March 28, 1997). (o) First Amendment to Omnibus Management Incentive Plan, dated as of November 11, 1997 (incorporated by reference to Exhibit 10(p) of USG Corporation's Annual Report on Form 10-K, dated February 20, 1998). (p) Amended and Restated Stock Compensation Program for Non- Employee Directors of USG Corporation, dated July 1, 1997 (incorporated by reference to Exhibit 10(q) of USG Corporation's Annual Report on Form 10-K, dated February 20, 1998).
13 Portions of USG Corporation's 1998 Annual Report to Stockholders. 32 (Such report is not deemed to be filed with the Commission as part of this Annual Report on Form 10-K, except for the portions thereof expressly incorporated by reference.) 21 Subsidiaries 63 23 Consents of Experts and Counsel 64 24 Power of Attorney 65 27 Financial Data Schedule 66 (b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of 1998.
Index to exhibits filed with the Annual Report on Form 10-K for the year ended December 31, 1998 Exhibit Page
10(d) First Amendment of USG Corporation Supplemental Retirement Plan 21 10(m) 1999 Annual Management Incentive Program - USG Corporation 24 13 Portions of USG Corporation's 1998 Annual Report to Stockholders 32 21 Subsidiaries......................................................................... 63 23 Consent of Experts and Counsel........................................................ 64 24 Power of Attorney...................................................................... 65 27 Financial Data Schedule................................................................ 66
If you wish to receive a copy of any exhibit, it may be obtained, upon payment of reasonable expenses, by writing to: Dean H. Goossen, Corporate Secretary USG Corporation Department #188 P.O. Box 6721 Chicago, IL 60680-6721 USG CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Dollars in millions) Provision Receivables Charged to Written Off Beginning Costs and and Discounts Ending Balance Expenses Allowed Balance ------- -------- ------- ------- Year ended December 31, 1998:
Doubtful accounts................................. $ 14 $ 4 $ (4) $ 14 Cash discounts.................................... 3 59 (58) 4 Year ended December 31, 1997: Doubtful accounts................................. 14 5 (5) 14 Cash discounts.................................... 3 52 (52) 3 Year ended December 31, 1996: Doubtful accounts................................. 11 7 (4) 14 Cash discounts.................................... 3 46 (46) 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECT TO FINANCIAL STATEMENT SCHEDULE We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in USG Corporation's annual report to stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated January 22, 1999. Our audit was made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The financial statement schedule on page 18 is the responsibility of the Corporation's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the consolidated financial statements. The financial statement schedule has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the consolidated financial statements taken as a whole. /s/ Arthur Andersen LLP ---------------------- ARTHUR ANDERSEN LLP Chicago, Illinois February 26, 1999 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. USG CORPORATION February 26, 1999 By: /s/ Richard H. Fleming -------------------------- Richard H. Fleming Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ William C. Foote February 26, 1999 - - ---------------------- WILLIAM C. FOOTE Chairman and Chief Executive Officer (Principal Executive Officer) /s/ Richard H. Fleming February 26, 1999 - - ---------------------- RICHARD H. FLEMING Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Raymond T. Belz February 26, 1999 - - ---------------------- RAYMOND T. BELZ Senior Vice President and Controller (Principal Accounting Officer) ) By:/s/ Richard H. Fleming ROBERT L. BARNETT, KEITH A. BROWN, ) ------------------------- W.H. CLARK, JAMES C. COTTING, ) Richard H. Fleming LAWRENCE M. CRUTCHER, W. DOUGLAS ) Attorney-in-fact FORD, DAVID W. FOX, PHILIP C. JACKSON, JR., ) Pursuant to Power of Attorney VALERIE B. JARRETT, MARVIN E. LESSER, ) (Exhibit 24 hereto) P. JACK O'BRYAN, JOHN B. SCHEWEMM, ) February 26, 1999 JUDITH A. SPRIESER, ) Directors ) EX-10 2 1ST AMENDMENT TO SUPPLEMENTAL RETIREMENT PLAN EXHIBIT 10(d) FIRST AMENDMENT OF USG CORPORATION SUPPLEMENTAL RETIREMENT PLAN (As Amended and Restated Effective as of July 1, 1997) WHEREAS, USG Corporation maintains the USG Corporation Supplemental Retirement Plan (the "plan"), which plan was amended and restated in its entirety effective as of July 1, 1997; and WHEREAS, it is now considered desirable to amend the plan; NOW, THEREFORE, pursuant to the amending power reserved to the Corporation as the "Company" under Section 7 of the plan, as amended, the plan be and it hereby is further amended, effective as of January 1, 1999, in the following particulars: 1. By substituting the following for subsection 2.1 of the plan, effective January 1, 1997: "2.1. Covered Employee. A "Covered Employee" for any calendar year means an employee of an Employer under the plan who the Committee, in accordance with such rules as it may establish, anticipates will have "compensation" (as defined below) for such year in excess of $80,000 (or such greater amount as may be determined by the Secretary of the United States Treasury under Section 414(q)(1)(B)(i) of the Internal Revenue Code), unless the Committee specifies that such employee shall not be considered as a Covered Employee for any purpose of the plan by writing filed with the Secretary of the Company prior to, or within 30 days after, the date the employee otherwise would become eligible for participation in the plan. For purposes of this subsection 3.1, compensation shall mean base salary." 2. By adding the following subparagraph 3.4(d) to the plan, effective January 1, 1999: "(d) A Covered Employee who first becomes eligible (or first becomes eligible following rehire) to make before-tax contributions under this subsection 3.4 effective on or after January 1, 1999 will be deemed to have elected to make before-tax contributions, unless he elects otherwise in accordance with rules established by the Committee." 3. By substituting the following for subsection 4.3 of the plan, effective January 1, 1999: "4.3 Elective Participant Contributions. A Participant may elect to make part or all of the additional before-tax contributions described in the first sentence of subsection 4.1. A Participant's before-tax contributions under this subsection 4.3 shall be made by a compensation deferral election that is made in such form and in such manner as the Committee shall determine; provided any such election shall be made prior to the calendar year such contributions are to begin, or if a Participant first becomes eligible to make such contributions after the beginning of any calendar year, not more than 30 days after so becoming eligible. A Participant who first becomes eligible (or first becomes eligible following rehire) to make additional before-tax contributions under this subsection 4.3 effective on or after January 1, 1999 will be deemed to have elected to make additional before-tax contributions under this subsection 4.3 in such amount that his additional before-tax contributions under this subsection 4.3 and to the Investment Plan equal 3% of his earnings (as defined in the Investment Plan but without regard to the limitation imposed by Section 401(a)(17) of the Internal Revenue Code), unless he elects otherwise in accordance with rules established by the Committee. A Participant's compensation deferral election under this subsection 4.3 shall apply to employment compensation otherwise payable after the later to occur of the date the Participant becomes eligible to make before-tax contributions and the date the compensation deferral election is made. A Participant's compensation deferral election may be revoked by the Participant before the beginning of any subsequent calendar year. The revocation shall be effective as to employment compensation the Participant is entitled to receive during that and subsequent calendar years unless prior to the commencement of any subsequent calendar year the Participant makes another compensation deferral election. Such later election shall apply as to employment compensation otherwise payable during calendar years beginning after such later election is made. Notwithstanding the foregoing, a Participant's compensation deferral election automatically shall be revoked for any period he ceases to be a Covered Employee." IN WITNESS WHEREOF, the company has caused these presents to be signed on its behalf by an officer thereunto duly authorized this 23rd day of December, 1998. USG CORPORATION By: /s/ Harold E. Pendexter, Jr. --------------------------------- Senior Vice President and Chief Administrative Officer EX-10 3 1998 ANNUAL MANAGEMENT INCENTIVE PLAN EXHIBIT 10(m) 1998 Annual Management Incentive Program USG Corporation PURPOSE To enhance USG Corporation's ability to attract, motivate, reward and retain key employees of the Corporation and its operating subsidiaries and to strengthen the existing mutual interest between such key employees and the Corporation's stockholders by providing incentive award opportunities to such key employees who discharge their accountabilities in a manner which makes a measurable contribution to the Corporation's earnings. INTRODUCTION This Annual Management Incentive Program is in effect from January 1, 1998 through December 31, 1998. ELIGIBILITY Individuals eligible for participation in this Program are those officers and other key employees occupying management positions in Broadband 13 or higher (775 or more points). Employees who participate in any other annual incentive program of the Corporation or any of its subsidiaries are not eligible to participate in this Program. GOALS For the 1998 Annual Management Incentive Program, Net Earnings, Goal Income and Strategic Targets for USG Corporation, Subsidiaries and Profit Centers will be determined by the Grants and Awards Subcommittee of the Compensation and Organization Committee of the USG Board of Directors (the "Subcommittee") after considering recommendations submitted from USG Corporation and Operating Subsidiaries. Except in the case of a Named Executive Officer (as defined in the Administrative Guidelines below), Profit Center goals may be adjusted by the Chairman of USG Corporation if business conditions or other significant unforeseen circumstances beyond the control of the Profit Center have a major impact on opportunity. AWARD VALUES For the Annual Management Incentive Program, position target incentive values are based on level of accountability and are expressed as a percent of approved annualized salary. Resulting award opportunities represent a fully competitive incentive opportunity for 100% (target) achievement of Corporate, Operating Subsidiary and/or Profit Center goals:
- - ------------------------------------------------------------------------------------------------------------------- Position Target Incentive Chairman & CEO - USG Corporation 70% - - ------------------------------------------------------------------------------------------------------------------- President & COO, USG Corporation; 60% President & CEO, U.S. Gypsum Company; President & CEO, USG Interiors, Inc. - - ------------------------------------------------------------------------------------------------------------------- USG CORPORATION Senior Vice President & General Counsel 50% Senior Vice President & Chief Administrative Officer Senior Vice President & Chief Financial Officer - - ------------------------------------------------------------------------------------------------------------------- USG CORPORATION & OPERATING SUBSIDIARIES OFFICERS AND MANAGERS President & CEO, L&W Supply Corporation 45% Executive Vice President & COO, Worldwide Ceilings Vice President, USG Corporation; Executive Vice President Strategic Manufacturing & Capital Investments, North American Gypsum and Worldwide Ceilings Executive Vice President - Operations, U.S. Gypsum Company Executive Vice President Marketing, U.S. Gypsum Company - - ------------------------------------------------------------------------------------------------------------------- President & Managing Director - USG Europe 40% Vice President & Controller, USG Corporation; Vice President Financial Operations, North American Gypsum and Worldwide Ceilings Vice President Research & Technology, USG Corporation Vice President & Treasurer, USG Corporation President & CEO, CGC, Inc. Vice President Corporate Communications, USG Corporation - - ------------------------------------------------------------------------------------------------------------------- USG CORPORATION, OPERATING SUBSIDIARIES & PROFIT CENTERS OFFICERS AND MANAGERS Position Reference Point: $144,660 - and over 35% Position Reference Point: $128,880 - $144,659 25% Position Reference Point: $114,960 - $128,879 20% Position Reference Point: $ 92,100 - $114,959 15% Position Reference Point: $ 88,680 - $ 92,099 10% - - ------------------------------------------------------------------------------------------ ------------------------
AWARDS Incentive awards for all participants in the 1998 Annual Management Incentive Program will be reviewed and approved by the Subcommittee. The total of all incentive awards paid under this program will not exceed 4.0% of USG Corporation's 1998 consolidated goal income. In the event that awards otherwise payable pursuant to the Annual Management Incentive Program exceed such amount, all awards will be reduced prorata to an aggregate amount equal to 4.0%. For all participants, the annual incentive award opportunity is the annualized salary in effect at the beginning of the calendar year (March 1 of the calendar year for the eighteen most senior executives) multiplied by the applicable position target incentive value percent. Incentive awards for 1998 will be based on:
o NET EARNINGS: 20% - 60% OF INCENTIVE based on the Corporation's year-end financial statements. o GOAL INCOME: 20% - 60% OF INCENTIVE (net sales less cost of sales and selling and administrative expenses) based on the Corporation's year-end financial statements. o STRATEGIC FOCUS TARGET: 20% OF INCENTIVE o PERSONAL PERFORMANCE: 20% OF INCENTIVE [except in the case of the eighteen (18) most senior executives whose awards are based solely on degree of achievement of Net Earnings and/or Goal Income (60%) and Strategic Focus Target (40%) results]. o Except in the case of a Named Executive Officer, other appropriate performance measures as approved by the Subcommittee. 1. For participants to qualify for the NET EARNINGS and/or GOAL INCOME segment comprising 60% of their award, their respective organization (e.g. Corporation/Group/ Subsidiary, etc. as described on page 6) must achieve 75% or higher of its net earnings or goal income target. 2. NET EARNINGS and GOAL INCOME segment award amounts will be determined according to the following schedule:
Net Earnings/ Adjustment Factor for Corporate, Group, Goal Income Achievement Subsidiary or Profit Center Performance - - -------------------------------------------------------------------------------------------------
Below 75% 0% 75% 50% 80% 60% 90% 80% 100% 100% 110% 120% 120% 140% 140% 180% 150% 200% 3. For participants to qualify for the STRATEGIC FOCUS TARGET segment comprising 20% (40% for the eighteen most senior executives) of their incentive award, their respective organization must achieve a minimum level of performance related to the specified strategic focus. The Strategic Focus Targets will be measurable, verifiable and derived from the formal strategic planning process (e.g., cost reduction, sales growth, market share gain, margins, etc.). The award adjustment factor for this segment will range from 0.5 (after achieving minimum performance levels) to 2.0 for maximum attainment. Participants will receive schedules of Strategic Focus Targets upon approval by the Subcommittee. 4. Except with respect to the eighteen (18) most senior executives (including the Named Executive Officers) whose awards are based solely on achievement of Net Earnings, Goal Income and Strategic Focus Targets, participants will have a third segment comprising 20% of their incentive award based upon their individual Personal Performance Rating according to the following schedule:
Personal Personal Performance Performance Rating Adjustment Range - - -------------------------------------------------- ---------------------------------------- Far Exceeded Expectations 1.70 - 2.00 - - -------------------------------------------------- ---------------------------------------- Exceeded Expectations 1.20 - 1.50 - - -------------------------------------------------- ---------------------------------------- Achieved Expectations 0.80 - 1.10 - - -------------------------------------------------- ---------------------------------------- The maximum incentive award including all segments of this Program is 200% of the target incentive opportunity. The Subcommittee may eliminate awards to any participant who fails to receive a Personal Performance Rating of "Achieved Expectations" or better under the Corporation's Performance Planning and Review (PPR) system. 5. Target incentive award opportunities and calculations of awards for participants will be based on the achievement of specific Corporate, Group, Subsidiary and/or Profit Center net earnings, goal income and strategic focus targets as displayed on the following page or as otherwise may be established subject to approval of the Chairman:
Basis for Financial Measures Basis for Incentive Award Strategic Focus Participants (60% of Target Incentive) Incentive Award - - -------------------------------------------------------------------------------------------------------------------
USG Corporation USG Corporation Senior Executive 60% Net Earnings, USG Corporation 40% Management USG Corporation Staff 60% Net Earnings, USG Corporation 20% - - ------------------------------------------------------------------------------------------------------------------- North American Gypsum Executive VP - Operations, U.S. Gypsum 20% Net Earnings, USG Corporation 40% NAG Company Executive VP - Marketing, U.S. Gypsum 40% Goal Income, North American Gypsum Company General Mgr - IGD 10% Goal Income, North American Gypsum 20% Profit Center General Mgr - Materials Division 20% Goal Income, Subsidiary Profit Center Staff 30% Goal Income, Profit Center/Division President & CEO, CGC, Inc 20% Net Earnings, USG Corporation 40% NAG 20% Goal Income, North American Gypsum 20% Goal Income, CGC, Inc President & General Mgr, YPSA 20% Goal Income, North American Gypsum 20% YPSA 40% Goal Income, YPSA U.S. Gypsum Staff 25% Goal Income, North American Gypsum 20% NAG 35% Goal Income, U.S. Gypsum Company CGC, Inc Staff 20% Goal Income, North American Gypsum 20% CGC 40% Goal Income, CGC, Inc - - ------------------------------------------------------------------------------------------------------------------- Worldwide Ceilings Executive VP & COO, Worldwide Ceilings 20% Net Earnings, USG Corporation 40% WWC President & Managing Director - 40% Goal Income, Worldwide Ceilings USG Europe USG Interiors, Inc Staff 25% Goal Income, Worldwide Ceilings 20% WWC 35% Goal Income, USG Interiors, Inc USG International, Ltd Staff 25% Goal Income, Worldwide Ceilings 20% WWC 35% Goal Income, USG International, Ltd - - ------------------------------------------------------------------------------------------------------------------- L&W Supply Corporation President & CEO 20% Net Earnings, USG Corporation 40% L&W 20% Goal Income, North American Gypsum 20% Goal Income, L&W Supply L&W Supply Corporation Staff 20% Goal Income, North American Gypsum 20% L&W 40% Goal Income, L&W Supply 10% Goal Income, North American Gypsum 20% L&W 20% Goal Income, L&W Supply Corporation 30% Goal Income, Profit Center (Business Unit) - - ------------------------------------------------------------------------------------------------------------------- 6. SPECIAL AWARDS In addition to the incentive opportunity provided by this Program, a special award may be recommended for any participant or non-participant, other than a Named Executive Officer, who has made an extraordinary contribution to the Corporation's welfare or earnings.
GENERAL PROVISIONS - - --------------------------------------------------------------------------------------------------------------------------
1. The Subcommittee shall review and approve the awards recommended for officers and other employees who are eligible participants in the 1998 Annual Management Incentive Program. The Subcommittee shall submit to the Board of Directors, for their ratification, a report of the awards for all eligible participants including corporate officers approved by the Subcommittee in accordance with the provisions of the Program. 2. The Subcommittee shall have full power to make the rules and regulations with respect to the determination of achievement of goals and the distribution of awards. No awards will be made until the Subcommittee has certified goal achievement and applicable awards in writing. 3. The judgement of the Subcommittee in construing this Program or any provisions thereof, or in making any decision hereunder, shall be final and conclusive and binding upon all employees of the Corporation and its subsidiaries whether or not selected as beneficiaries hereunder, and their heirs, executors, personal representatives and assigns. 4. Nothing herein contained shall limit or affect in any manner or degree the normal and usual powers of management, exercised by the officers and the Board of Directors or committees thereof, to change the duties or the character of employment of any employee of the Corporation or to remove the individual from the employment of the Corporation at any time, all of which rights and powers are expressly reserved. 5. No award will be paid to a Program participant who is not a regular full-time employee in good standing at the end of the calendar year to which the award applies; except an award which would otherwise be payable based on goal achievement may be recommended in the event of retirement, disability or death or in the event the participant is discharged without cause from the employment of the company during the year. 6. The awards made to employees shall become a liability of the Corporation or the appropriate subsidiary as of December 31, 1998 and all payments to be made hereunder will be made as soon as practicable after said awards have been approved.
ADMINISTRATIVE GUIDELINES - - -------------------------------------------------------------------------------------------------------------------
1. Award values will be based on annualized salary in effect for each qualifying participant at the beginning of the year (March 1 for the eighteen most senior executives). Any change in duties, dimensions or responsibilities of a current position resulting in a new evaluation and an increase or decrease in reference points will be applied for Incentive Program purposes on a prorata basis with the respective reference point and target incentive value to apply for the actual number of full months of service at each evaluation except for such a change with respect to a Named Executive Officer, in which case any change in reference points and target incentive value, for any reason, shall not become effective until January 1 of the following year. 2. As provided by the Program, no award is to be paid any participant who is not a regular full-time employee in good standing at the end of the calendar year to which the award applies. However, in the event an eligible participant with three (3) or more months of active service in the Program year subsequently retires, becomes disabled or dies, or is discharged from the employment of the Company without cause, the participant (or beneficiary) may receive an award which would otherwise be payable based on goal achievement, prorated for the actual months of active service during the year. 3. Employees participating in any other incentive or bonus program of the parent Corporation or a Subsidiary who are transferred during the year to a position covered by the Annual Management Incentive Program (other than a Named Executive Officer) will be eligible to receive a potential award prorated for actual full months of service in the two positions with the respective incentive program and target incentive values to apply. For example, a Marketing Manager promoted to Director, Marketing on August 1, will be eligible to receive a prorata award for seven months based on the Marketing Manager Plan provisions and values, and for five months under the Annual Management Incentive Program provisions and target incentive values. 4. In the event of transfer of an employee (other than a Named Executive Officer) from an assignment which does not qualify for participation in any incentive or bonus plan to a position covered by the 1998 Annual Management Incentive Program, the employee is eligible to participate in the Annual Incentive Program with any potential award prorated for the actual months of service in the position covered by the Program during the year. A minimum of three months of service in the eligible position is required. 5. Participation during the current Program year for individuals employed from outside the Corporation is possible with any award to be prorated for actual full months of service in the eligible position. A minimum of three full months of service is required for award consideration. 6. Exceptions to established administrative guidelines can only be made by the Subcommittee and only with respect to participants other than Named Executive Officers. 7. For purposes of this Program, a "NAMED EXECUTIVE OFFICER" will include any executive officer who is deemed a "named executive officer" for 1998 under Item 402 (a)(3) of Regulation S-K under the Securities Exchange Act of 1934 and was employed by the Corporation or a Subsidiary on the last day of the year.
EX-13 4 PORTIONS OF THE 1998 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 USG CORPORATION FINANCIAL REVIEW Page MANAGEMENT'S DISCUSSION AND ANALYSIS 33 CONSOLIDATED FINANCIAL STATEMENTS Statement of Earnings 42 Balance Sheet 43 Statement of Cash Flows 44 Statements of Stockholders' Equity and Comprehensive Income 45 NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies 46 2. Earnings Per Share 48 3. Common Stock 48 4. Debt 49 5. Financing Arrangements 50 6. Financial Instruments and Risk Management 50 7. Purchase of Subsidiary Minority Interest 51 8. Inventories 51 9. Property, Plant and Equipment 51 10. Leases 51 11. Income Taxes 52 12. Employee Retirement Plans 53 13. Stock-Based Compensation 54 14. Segments 55 15. Litigation 56 REPORT OF MANAGEMENT REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 60 SELECTED QUARTERLY FINANCIAL DATA 61 FIVE-YEAR SUMMARY 62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Consolidated Results NET SALES USG's net sales in 1998 were a record $3.13 billion, up 9% from $2.87 billion in 1997. Conditions in all segments of the U.S. construction industry were favorable in 1998. The highest level of U.S. housing starts in more than a decade and continued growth of repair and remodel activity led to record shipments and selling prices of SHEETROCK brand gypsum wallboard. Strong demand from the nonresidential construction market produced record shipments of ceiling tile and DONN brand suspension grid. These results reflect a continuation of the favorable trends experienced in 1997, when net sales increased 11% versus 1996. A bar chart entitled "Net Sales (millions of dollars)" on page 17 of the Annual Report to Stockholders shows that for the years 1996, 1997 and 1998, the Corporation had net sales of $2,590 million, $2,874 million and $3,130 million, respectively. GROSS PROFIT Gross profit as a percentage of net sales was 28.2% in 1998, compared with 27.4% in 1997 and 24.9% in 1996. Gross margins improved in 1998 and 1997 primarily due to higher selling prices and lower unit costs each year for SHEETROCK brand wallboard. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses increased to $299 million in 1998, from $281 million in 1997 and $268 million in 1996. However, selling and administrative expenses as a percent of net sales improved to 9.6% in 1998, from 9.8% in 1997 and 10.3% in 1996. The increase in expense dollars in 1998 primarily relates to marketing programs and information technology initiatives. The increase in 1997 versus 1996 primarily reflects higher levels of expenses related to incentive compensation and benefits as well as costs to consolidate and upgrade customer service functions for the gypsum and ceilings businesses. AMORTIZATION OF EXCESS REORGANIZATION VALUE The noncash, no-tax-impact amortization of excess reorganization value, which concluded September 30, 1997, reduced operating profit by $127 million in 1997 and by $169 million in 1996. Excess reorganization value was established in connection with USG's 1993 financial restructuring that was accounted for using the principles of fresh start accounting. See "Note 11. Income Taxes" for additional information related to this amortization. INTEREST EXPENSE Interest expense declined in 1998 and 1997 as a result of debt reduction. Interest expense of $53 million in 1998 was down 12% from $60 million in 1997. This followed a 20% decrease in 1997 from $75 million in 1996. INCOME TAXES Income tax expense amounted to $202 million in 1998, compared with $172 million in 1997 and $117 million in 1996. In 1997 and 1996, the Corporation's income tax expense was computed based on pretax earnings excluding the amortization of excess reorganization value, which was not deductible for income tax purposes. The Corporation's effective tax rates for 1998, 1997 and 1996 were 37.8%, 53.9% and 88.9%, respectively. Excluding the amortization of excess reorganization value, the Corporation's 1997 and 1996 effective tax rates were 38.6% and 38.9%, respectively. See "Note 11. Income Taxes" for additional information. NET EARNINGS Net earnings in 1998 were a record $332 million. Diluted earnings per share were $6.61. In 1997, net earnings of $148 million, or $3.03 per diluted share, were net of the amortization of excess reorganization value of $127 million, or $2.60 per diluted share. In 1996, net earnings amounted to $15 million, or $0.31 per diluted share. These results were net of the amortizations of excess reorganization value of $169 million and reorganization debt discount of $1 million, which together reduced 1996 net earnings by $170 million, or $3.58 per diluted share. EBITDA EBITDA represents earnings before interest, taxes, depreciation, depletion, amortization and certain other income and expense items. Because of the effect on earnings of the amortization of excess reorganization value through September 30, 1997, USG reports EBITDA to facilitate comparisons of current and historical results. EBITDA is also helpful in understanding cash flow generated from operations that is available for taxes, debt service and capital expenditures. EBITDA should not be considered by investors as an alternative to net earnings as an indicator of USG's operating performance or to cash flows as a measure of its overall liquidity. EBITDA of $659 million in 1998 represented a 15% increase versus $572 million in 1997. This followed a 31% increase in 1997 from $437 million in 1996. A bar chart entitled "EBITDA (millions of dollars)" on page 17 of the Annual Report to Stockholders shows that for the years 1996, 1997 and 1998, the Corporation had EBITDA of $437 million, $572 million and $659 million, respectively. Core Business Results (millions) Net Sales EBITDA - - ---------- --------- ------ 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ----
North American Gypsum: U.S. Gypsum Company $ 1,721 $ 1,565 $ 1,390 $ 533 $ 458 $ 347 L&W Supply Corporation 1,103 981 841 44 36 29 CGC Inc. (gypsum) 145 124 114 25 20 16 Other subsidiaries 95 95 83 28 28 25 Eliminations (488) (427) (361) (1) (3) - ------ ------ ------ ------ ------ ------ Total 2,576 2,338 2,067 629 539 417 ------ ------ ------ ------ ------ ------ Worldwide Ceilings: USG Interiors, Inc. 446 425 398 66 65 53 USG International 237 229 228 13 13 2 CGC Inc. (ceilings) 37 34 30 4 3 3 Eliminations (63) (54) (44) - - - ------ ------ ------ ------ ------ ------ Total 657 634 612 83 81 58 ------ ------ ------ ------ ------ ------ Corporate - - - (53) (48) (38) Eliminations (103) (98) (89) - - - ------ ------ ------ ------ ------ ------ Total USG Corporation 3,130 2,874 2,590 659 572 437
NORTH AMERICAN GYPSUM Net sales in 1998 were $2.58 billion, up 10% from $2.34 billion in 1997. EBITDA in 1998 was $629 million, up 17% from $539 million in 1997. Net sales and EBITDA in 1997 increased 13% and 29%, respectively, versus 1996. A bar chart entitled "Net Sales (millions of dollars)" on page 18 of the Annual Report to Stockholders shows that for the years 1996, 1997 and 1998, North American Gypsum had net sales of $2,067 million, $2,338 million and $2,576 million, respectively. A bar chart entitled "EBITDA (millions of dollars)" shows that for the years 1996, 1997 and 1998, North American Gypsum had EBITDA of $417 million, $539 million and $629 million, respectively. United States Gypsum Company: Strong results in 1998 for U.S. Gypsum primarily reflect records for average price and shipments of SHEETROCK brand gypsum wallboard. The average selling price of SHEETROCK brand wallboard in 1998 was $129.50 per thousand square feet, up 6% compared with the 1997 average price of $122.65. The average price in 1996 was $110.56. Shipments of SHEETROCK brand wallboard totaled 8.8 billion square feet in 1998, compared with 8.4 billion square feet in 1997 and 8.0 billion square feet in 1996. In addition, shipments of SHEETROCK brand joint compound and DUROCK brand cement board set records in 1998. U.S. Gypsum's manufacturing costs for SHEETROCK brand wallboard were lower in 1998 largely due to lower prices for wastepaper, the primary raw material of wallboard paper. Comparing 1997 with 1996, lower unit costs were largely the result of improved operating efficiencies resulting from cost-reduction projects implemented in those years. U.S. Gypsum's plants operated at 100% of capacity in 1998, compared with the estimated average rate of 99% for the U.S. wallboard industry. L&W Supply Corporation: Net sales for L&W Supply, the leading specialty building products distribution business in the United States, exceeded $1.1 billion, establishing a new record. This performance reflects record sales of wallboard and complementary building materials. EBITDA for L&W Supply has improved significantly in each of the past three years as a result of gross profit improvements for all of its product lines. In 1998, L&W Supply added a net 11 locations, bringing the total to a record 187. In addition, L&W Supply's market representation increased to 36 states from 34. CGC Inc.: The gypsum business of USG's principal Canadian subsidiary experienced improved net sales and EBITDA in both 1998 and 1997. These trends reflect higher SHEETROCK brand wallboard selling prices and increased wallboard shipments in Canada and exports to the United States. WORLDWIDE CEILINGS Net sales in 1998 were $657 million, up 4% from $634 million in 1997. EBITDA in 1998 was $83 million, compared with $81 million in 1997. Record shipments of ceiling tile and DONN brand suspension grid were attributable to strong demand in the U.S. nonresidential market (both new construction and renovation) and favorable demand in Western Europe and Latin America. USG's international sales, which are primarily concentrated in Western Europe, have not been materially affected by economic problems in Asia and Russia. Comparing 1997 with 1996, net sales increased 4% to $634 million, while EBITDA increased 40% to $81 million. Adjusting for a $7 million charge taken in 1996 to improve operating efficiencies for USG's European businesses, EBITDA in 1997 increased 25%. The higher level of sales reflects improved sales of ceiling tile and DONN brand suspension grid. EBITDA in 1997 was favorably affected by higher volume and prices, reduced manufacturing costs and improved international operating efficiencies. A bar chart entitled "Net Sales (millions of dollars)" on page 19 of the Annual Report to Stockholders shows that for the years 1996, 1997 and 1998, Worldwide Ceilings had net sales of $612 million, $634 million and $657 million, respectively. A bar chart entitled "EBITDA (millions of dollars)" shows that for the years 1996, 1997 and 1998, Worldwide Ceilings had EBITDA of $58 million, $81 million and $83 million, respectively. Market Conditions and Outlook Industry shipments of wallboard in the United States grew in 1998 to an estimated 28.2 billion square feet, a record level and a 6% rise from 1997. This increase was supported by growth in new residential construction and repair and remodel activity. Very strong demand from nonresidential construction was also a contributing factor. Based on preliminary data issued by the U.S. Bureau of the Census, U.S. housing starts in 1998 were an estimated 1.616 million units, up 10% over 1997. Although management believes that new residential construction may not maintain this high level in 1999, housing starts are expected to approximate the healthy pace of the past several years. Housing starts totaled 1.474 million units in 1997 and 1.477 million units in 1996. The repair and remodel market is the fastest growing segment for USG and accounts for the second-largest portion of its sales. Opportunity from repair and remodel activity continued to grow in 1998, increasing approximately 7%. Sales of existing homes were a record 4.8 million units in 1998. Because many buyers remodel an existing home within 18 months of purchase, the residential repair and remodel market should be healthy over the next several years. Repair and remodel activity is expected to continue to account for an increasing proportion of USG's sales. Sales of USG products to the nonresidential construction market increased in 1998 and are expected to remain strong in 1999. Future demand for USG products from new nonresidential construction is gauged by floor space for which contracts are signed. Installation of gypsum and ceilings products follows signing of the construction contract by about a year. Floor space for which contracts were signed rose 10% in 1997 and increased 5% in 1998, although segments that are most relevant to USG's business, such as offices, stores, hotels and motels, grew at a much higher rate. Most of USG's sales outside of the United States come from Canada, Western Europe and Latin America. USG's exposure to the economic problems of Asia and Russia is small. Conditions in Canadian construction are expected to be positive in 1999, as is the outlook for Western Europe and Latin America, despite some economic uncertainties in each region. Liquidity and Capital Resources FINANCIAL STRATEGY USG is executing a strategy to create future earnings growth through investment in its businesses and immediate returns to investors through dividends and share repurchases. Earnings Growth: USG's plan for earnings growth includes: introducing new products and product platforms; improving service; strengthening its brands; adding capacity to serve growing customers and markets; renovating manufacturing capacity to make USG the undisputed low-cost producer; and expanding distribution. USG anticipates that these initiatives will also reduce the impact of cyclicality on its earnings. Dividends: In September 1998, USG's board of directors voted to initiate a quarterly cash dividend of $0.10 per share, beginning in December 1998. This was the first cash dividend USG has paid since 1988. Share Repurchases: USG has also begun a multiyear share-repurchase program, under which it will repurchase up to 5 million shares, or approximately 10% of USG's common stock currently outstanding. Share repurchases are being made in the open market or through privately negotiated transactions and are being financed with available cash from operations. As of December 31, 1998, USG had purchased 225,000 shares. See "Note 3. Common Stock" for additional information. CAPITAL EXPENDITURES Capital spending amounted to $309 million in 1998, compared with $172 million in 1997. As of December 31, 1998, capital expenditure commitments for the replacement, modernization and expansion of operations amounted to $481 million, compared with $363 million as of December 31, 1997. USG's capital expenditures program includes the following projects: A bar chart entitled "Capital Spending (millions of dollars)" on page 21 of the Annual Report to Stockholders shows that for the years 1996, 1997 and 1998, USG had capital spending of $120 million, $172 million and $309 million, respectively. Wallboard Capacity Modernization and Expansion: As a major part of USG's earnings growth strategy, U.S. Gypsum is replacing high-cost wallboard capacity with new, low-cost plants and lines. These projects also will add a net 2 billion square feet of capacity to serve growing markets and customers in five regions of the United States. In the Southeast, construction of a new plant in Bridgeport, Ala., is nearly complete. This facility, which will manufacture SHEETROCK brand wallboard using 100% synthetic gypsum, is expected to begin operation in the second quarter of 1999. In the Midwest, U.S. Gypsum is building a new production line for SHEETROCK brand wallboard at its East Chicago, Ind., plant. This new line is scheduled for startup in the fourth quarter of 1999. In the Northeast, ground was broken in 1998 for a new wallboard plant in Aliquippa, Pa. The Aliquippa plant will manufacture SHEETROCK brand wallboard using 100% synthetic gypsum. Construction of this facility is expected to be completed in early 2000. In September 1998, U.S. Gypsum announced the following two projects, one in the Northwest and one in the Southwest, both of which are expected to be fully operational in 2001. In the Northwest, a new facility to be located in Rainier, Ore., will include a 142,000-square-foot manufacturing plant and a 247,000-square-foot distribution center. The facility will serve the wallboard needs of the northwestern United States and western Canada. A significant portion of the new capacity provided by this plant will replace existing USG shipments into the region from plants as far away as Iowa, Texas and Ontario, Canada. In the Southwest, a new production line at U.S. Gypsum's plant in Plaster City, Calif., will provide annual capacity of 700 million square feet of wallboard and replace a 41-year-old, high-cost production line. Gypsum Fiber Project: Construction continues on a facility to manufacture FIBEROCK brand gypsum fiber panels, USG's newest product platform. This production line, which is being built at the Gypsum, Ohio, wallboard plant, is scheduled for startup in the third quarter of 1999. It will complement the gypsum fiber panel plant in Port Hawkesbury, Nova Scotia, acquired in 1997. Cost-Reduction Projects: Additional capital investments include cost-reduction projects such as the installation of stock-cleaning equipment to utilize lower grades of recycled paper and process control upgrades to improve raw material usage and operating efficiencies. Ceiling Tile Capacity Modernization: A project that replaced two old production lines with one modern, high-speed line at the ceiling tile plant in Cloquet, Minn., was completed during the first quarter of 1998. The startup of the new line occurred during the second quarter, and the new line is now fully operational. WORKING CAPITAL Working capital (current assets less current liabilities) as of December 31, 1998, amounted to $368 million, and the ratio of current assets to current liabilities was 1.9 to 1. As of December 31, 1997, working capital was $264 million, and the ratio of current assets to current liabilities was 1.7 to 1. Receivables increased to $349 million as of December 31, 1998, from $297 million as of December 31, 1997. Inventories increased to $234 million from $208 million, and accounts payable rose to $157 million from $146 million. These variations reflect the increased level of business in 1998. Cash and cash equivalents as of December 31, 1998, amounted to $152 million, an increase of $80 million from the December 31, 1997, level. During 1998, net cash flows from operating and financing activities were $374 million and $13 million, respectively, while net cash flows to investing activities were $307 million. Net cash flows related to financing activities included cash proceeds of $40 million from the exercise of approximately 2.46 million warrants issued on May 6, 1993, in connection with a debt restructuring. Each warrant entitled the holder to purchase one share of USG common stock at a price of $16.14 any time prior to May 6, 1998. The proceeds from the exercises were added to the cash resources of the Corporation and used for general corporate purposes. DEBT Total debt amounted to $596 million as of December 31, 1998, down from $620 million as of year end 1997. During 1998, USG retired $67 million of 8.75% debentures, increased industrial revenue bonds by $38 million and increased seasonal foreign borrowings by $5 million. USG intends to retire in 1999 the remaining $25 million of 8.75% debentures due 2017 and, therefore, has classified this debt as a current liability on its consolidated balance sheet. A bar chart entitled "Total Debt (as of December 31 - millions of dollars)" on page 21 of the Annual Report to Stockholders shows that for the years 1996, 1997 and 1998, USG had total debt of $772 million, $620 million and $596 million, respectively. AVAILABLE LIQUIDITY The Corporation has additional liquidity available through several financing arrangements. Revolving credit facilities in the United States, Canada and Europe allow the Corporation to borrow up to an aggregate of $605 million (including a $125 million letter of credit subfacility in the United States), under which, as of December 31, 1998, outstanding revolving loans totaled $104 million and letters of credit issued and outstanding amounted to $20 million, leaving the Corporation with $481 million of unused and available credit. The Corporation had additional borrowing capacity of $50 million as of December 31, 1998, under a revolving accounts receivable facility. See "Note 5. Financing Arrangements." A shelf registration statement filed with the Securities and Exchange Commission allows the Corporation to offer from time to time debt securities, shares of preferred and common stock or warrants to purchase shares of common stock, all having an aggregate initial offering price not to exceed $300 million. As of the filing date of the Corporation's 1998 Annual Report on Form 10-K, no securities had been issued pursuant to this registration. Other Matters MARKET RISK In the normal course of business, USG uses financial instruments, including fixed and variable rate debt, to finance its operations. In addition, USG uses derivative instruments to manage well-defined interest rate, energy cost and foreign currency exposures. USG does not use derivative instruments for trading purposes. Interest Rate Risk: The table below provides information about USG's financial instruments that are sensitive to changes in interest rates, specifically debt obligations and interest rate swaps. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates at the reporting date. The information is presented in U.S. dollar equivalents, which is USG's reporting currency. (dollars in millions) Maturity Date ----------------------------------------------------------------- 1999 2000 2001 2002 2003 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ----------
Debt U.S. Dollar: Fixed rate $ 25 - $ 150 $ 1 - $ 236 $ 412 $ 435 Average interest rate 8.8% - 9.3% 7.1% - 6.3% 7.2% Variable rate - - - $ 25 $ 40 $ 40 $ 105 $ 105 Average interest rate - - - 5.7% 5.6% 5.6% 5.6% Canadian Dollar: Variable rate - - - $ 69 - - $ 69 $ 69 Average interest rate - - - 5.4% - - 5.4% European Multicurrency Line: Variable rate $ 10 - - - - - $ 10 $ 10 Average interest rate 3.8% - - - - - 3.8% Interest Rate Swaps U.S. Dollar: Notional amount - $ 25 $ 80 - - - $ 105 $ (8) Average pay rate - 7.2% 8.2% - - - 8.1% Average receive rate - 5.1% 5.2% - - - 5.2% Canadian Dollar: Notional amount - - $ 26 - - - $ 26 - Average pay rate - - 5.5% - - - 5.5% Average receive rate - - 5.0% - - - 5.0%
Foreign Currency Exchange Risk: The table below summarizes USG's foreign currency forward contracts as of December 31, 1998. The table presents the notional amounts (in millions of U.S. dollar equivalents) and weighted average contract rates. All outstanding foreign currency forward contracts mature within 12 months. Currency Currency Notional Contract Sold Purchased Value Rate
British Pounds Belgian Francs $ 8 56.25 Australian Dollars New Zealand Dollars 1 1.20 U.S. Dollars Canadian Dollars 40 1.49 Australian Dollars U.S. Dollars 3 0.64 Singapore Dollars U.S. Dollars 1 1.60 Belgian Francs U.S. Dollars 7 33.95
Commodity Price Risk: USG uses natural gas swap contracts to manage price exposure on anticipated natural gas purchases. A sensitivity analysis has been prepared to estimate the potential loss in fair value of such instruments assuming a hypothetical 10% increase in market prices. The sensitivity analysis includes the underlying exposures that are being hedged. Based on the results of the sensitivity analysis, which may differ from actual results, USG's potential loss in fair value is $8 million. See "Note 1. Significant Accounting Policies" and "Note 6. Financial Instruments and Risk Management" for additional information on USG's financial exposures. STOCKHOLDER RIGHTS PLAN On March 27, 1998, the Corporation approved the redemption of the preferred share purchase rights declared under a 10-year rights agreement adopted in May 1993 and adopted a new share purchase rights plan. The new plan is designed to strengthen the previous provisions assuring fair and equal treatment for all stockholders in the event of any unsolicited attempt to acquire USG. See "Note 3. Common Stock" for additional information. YEAR 2000 COMPLIANCE In 1996, USG began an evaluation of its computer-based systems to determine the extent of the modifications required to make those systems year 2000 compliant and to devise a plan to complete such modifications prior to January 1, 2000. The plan that was devised is divided into five phases: identification (a basic inventory of all systems), assessment, remediation, testing and completion. The plan encompasses all of USG's computer systems including mainframe, midrange, client server and desktop systems as well as all specialized control systems for plant operations or other facilities including those that are considered embedded systems. USG's mainframe systems are responsible for most of the information processing done by the Corporation and will receive a majority of the efforts dedicated to this project as well as a majority of the budget allocated to it. Of the plan phases, identification and assessment are essentially completed, and the process of modification, encompassing the three phases of remediation, testing and completion, is substantially under way. As of December 31, 1998, approximately 84% of the planned modifications to USG's mainframe systems had been completed. The remaining 16% of the modifications are currently in the process of remediation, testing and completion and are expected to be completed by the second quarter of 1999. With respect to the midrange, client server and desktop systems, upgrading to these systems is expected to be completed by mid-1999. With respect to embedded systems, all operations have been assessed and remediation plans, where necessary, are under way. All necessary upgrades and remediation are scheduled for completion by the middle of 1999. For purposes of this description, embedded systems are intended to cover manufacturing plant control equipment and building information and mechanical systems such as telecommunication systems, HVAC, security systems and other monitoring equipment. USG's year 2000 compliance plan also includes an analysis of critical third-party suppliers of material and services to determine their year 2000 compliance status. Virtually all critical suppliers to U.S. and Canadian operations have been surveyed regarding their compliance status. Any remaining unsurveyed critical suppliers and those supporting other operations will be contacted by early 1999. At this point, based on responses received to date, it is not possible to forecast whether there will be, or the extent of, any significant disruption due to third-party supplier failures. However, the plan contemplates that USG will be in ongoing contact with its critical suppliers through at least January 1, 2000, to assure that those suppliers either are able to continue to perform without disruption or where feasible are replaced by ones that can so perform. USG also has been in contact with most of its major customers on the status of each party's year 2000 compliance plans and expects to continue such information exchanges through January 1, 2000, in order to maintain those business relationships and to obtain updated information for its own ongoing contingency planning. The cost of carrying out USG's compliance plan is currently estimated at $12 million. In the Corporation's third-quarter report for 1998, it was projected that by the end of the fourth quarter of 1998, 64% of the total budget would have been spent. Due to timing differences and decreases in the actual expenditures for certain items as compared to budget, the total amount incurred as of December 31, 1998, was actually 47%. The remainder will be spent in 1999, most of it in the first half. At this time, USG expects to be internally compliant with respect to year 2000 issues by the middle of 1999. It is too soon to know whether it might experience significant disruptions due to year 2000 problems that affect the operating environment in which it conducts business such as disruptions to transportation, communications and electric power or other energy systems or due to other similar causes. However, the inability of USG or its critical suppliers and customers to effectuate solutions to their respective year 2000 issues on a timely and cost-effective basis may have a material adverse effect on USG. In view of the uncertainties that USG faces with respect to year 2000 issues, it has begun to formulate contingency plans to provide for continuation of its operations in the event of possible year 2000 disruptions. It expects to complete an initial version of its contingency planning by midyear 1999, but its plans will be continually evaluated and modified as required by developments and circumstances that may emerge between now and January 1, 2000. EURO CURRENCY CONVERSION Effective January 1, 1999, 11 of the 15 countries that are members of the European Union introduced a new, single currency unit, the euro. Prior to full implementation of the new currency for the participating countries on January 1, 2002, there will be a three-year transition period during which parties may use either the existing currencies or the euro. However, during the transition period, all exchanges between currencies of the participating countries are required to be first converted through the euro. USG has conducted a comprehensive analysis to address the euro currency issue. USG's efforts are focused on two phases. The first phase addresses USG's European operations during the transition period. The second phase covers the full conversion of these operations to the euro. The Corporation is ready for the transition period that began on January 1, 1999, and expects to be ready for the full conversion by January 1, 2001, one year ahead of the mandatory conversion date. USG also is prepared to deal with its critical suppliers and customers during the transition period and will communicate with them as appropriate. The Corporation does not expect the introduction of the euro currency to have a material adverse impact on its business, results of operations or financial position. LEGAL CONTINGENCIES One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos lawsuits alleging both property damage and personal injury. U.S. Gypsum historically has accrued $18 million annually for asbestos-related costs. In view of the high level of personal injury filings that followed the termination of the Georgine settlement, as discussed in "Note 15. Litigation," U.S. Gypsum accrued an additional $8 million in the fourth quarter of 1998. Although U.S. Gypsum expects that this increased level of accrual will continue to be necessary during 1999 and possibly longer, the amount of future periodic accruals will depend upon factors that include, but may not be limited to, the rate at which new asbestos-related claims are filed, the imposition of medical criteria through legislation or negotiated agreements, U.S. Gypsum's average settlement cost and the necessity of higher-cost settlements in particular jurisdictions. In addition, U.S. Gypsum will continue to evaluate whether its ultimate probable liability for future personal injury cases can be reasonably estimated. If such an estimate can be made, it is probable that additional charges to results of operations would be necessary, although whether such an estimate can be made and, if so, the timing and amount of the resulting charge to results of operations cannot presently be determined. However, the amount of the periodic and other charges described above could be material to results of operations in the period in which they are taken. The asbestos litigation is not expected to have a significant impact on the Corporation's liquidity or cash flows during 1999. See "Note 15. Litigation" for additional information on asbestos litigation. The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its results of operations or financial position. See "Note 15. Litigation" for additional information on environmental litigation. Forward-Looking Statements This report contains forward-looking statements related to management's expectations about future conditions. Actual business or other conditions may differ significantly from management's expectations and accordingly affect the Corporation's sales and profitability or other results. Actual results may differ due to factors over which the Corporation has no control, including economic activity such as new housing construction, interest rates and consumer confidence; competitive activity such as price and product competition; increases in raw material and energy costs; risk of disruption due to year 2000 issues such as those described above; euro currency issues such as the ability and willingness of third parties to convert affected systems in a timely manner and the actions of governmental agencies or other third parties; and the outcome of contested litigation. The Corporation assumes no obligation to update any forward-looking information contained in this report. USG CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (dollars in millions, except per share data) Years Ended December 31, ------------------------------------------- 1998 1997 1996 -------------- ------------ ------------
Net sales....................................................... $ 3,130 $ 2,874 $ 2,590 Cost of products sold........................................... 2,246 2,087 1,945 -------------- ------------ ------------ Gross profit.................................................... 884 787 645 % of net sales............................................... 28.2 27.4 24.9 Selling and administrative expenses............................. 299 281 268 Amortization of excess reorganization value..................... - 127 169 -------------- ------------ ------------ Operating profit................................................ 585 379 208 Interest expense................................................ 53 60 75 Interest income................................................. (5) (3) (2) Other expense, net.............................................. 3 2 3 -------------- ------------ ------------ Earnings before income taxes.................................... 534 320 132 Income taxes.................................................... 202 172 117 -------------- ------------ ------------ Net earnings ................................................... 332 148 15 ============== ============ ============ Net Earnings Per Common Share: Basic........................................................... 6.81 3.19 0.32 ============== ============ ============ Diluted......................................................... 6.61 3.03 0.31 ============== ============ ============ The notes to financial statements are an integral part of this statement.
USG CORPORATION CONSOLIDATED BALANCE SHEET (dollars in millions, except per share data) As of December 31, ------------------------------- 1998 1997 ------------ ------------
Assets Current Assets: Cash and cash equivalents.................................................... $ 152 $ 72 Receivables (net of reserves of $18 and $17)................................. 349 297 Inventories.................................................................. 234 208 Current and deferred income taxes............................................ 62 63 ------------ ------------ Total current assets.................................................... 797 640 ------------ ------------ Property, plant and equipment, net........................................... 1,214 982 Other assets................................................................. 346 304 ------------ ------------ Total assets............................................................ 2,357 1,926 ============ ============ Liabilities and Stockholders' Equity Current Liabilities: Accounts payable............................................................. 157 146 Accrued expenses............................................................. 237 220 Notes payable................................................................ 10 - Current portion of long-term debt............................................ 25 10 ------------ ------------ Total current liabilities............................................... 429 376 ------------ ------------ Long-term debt............................................................... 561 610 Deferred income taxes........................................................ 169 163 Other liabilities............................................................ 680 630 Stockholders' Equity: Preferred stock - $1 par value; authorized 36,000,000 shares; $1.80 convertible preferred stock (initial series); outstanding - none......................................... - - Common stock - $0.10 par value; authorized 200,000,000 shares; outstanding 49,524,952 and 46,780,845 shares (after deducting 296,235 and 48,919 shares held in treasury)........................ 5 5 Treasury stock ........................................................... (10) - Capital received in excess of par value...................................... 317 258 Deferred currency translation................................................ (30) (25) Reinvested earnings (deficit)................................................ 236 (91) ------------ ------------ Total stockholders' equity ............................................. 518 147 ------------ ------------ Total liabilities and stockholders' equity.............................. 2,357 1,926 ============ ============ The notes to financial statements are an integral part of this statement.
USG CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (millions) Years Ended December 31, -------------------------------------------- 1998 1997 1996 -------------- ------------ -------------
Operating Activities Net earnings ................................................... $ 332 $ 148 $ 15 Adjustments to Reconcile Net Earnings to Net Cash: Amortization of excess reorganization value.................. - 127 169 Depreciation, depletion and amortization..................... 81 70 65 Current and deferred income taxes............................ 7 (2) (8) Net gain on asset dispositions............................... - - (2) (Increase) Decrease in Working Capital: Receivables.................................................. (52) (23) (28) Inventories.................................................. (26) (23) (10) Payables..................................................... 11 5 10 Accrued expenses............................................. 17 20 14 (Increase) decrease in other assets............................. 6 (10) (2) Increase in other liabilities................................... - 19 64 Other, net...................................................... (2) 1 (4) -------------- ------------- ------------ Net cash from operating activities........................... 374 332 283 -------------- ------------- ------------ Investing Activities Capital expenditures............................................ (309) (172) (120) Net proceeds from asset dispositions............................ 2 2 10 Purchase of subsidiary minority interest........................ - - (49) -------------- ------------- ------------ Net cash to investing activities ............................ (307) (170) (159) -------------- ------------- ------------ Financing Activities Issuance of debt................................................ 78 116 77 Repayment of debt............................................... (107) (265) (231) Short-term borrowings (repayments), net......................... 9 (3) - Issuances of common stock....................................... 48 18 4 Purchases of common stock....................................... (10) - - Cash dividends paid............................................. (5) - - -------------- ------------- ------------ Net cash from (to) financing activities...................... 13 (134) (150) -------------- ------------- ------------ Net Increase (Decrease) in Cash and Cash Equivalents............ 80 28 (26) Cash and cash equivalents at beginning of period................ 72 44 70 -------------- ------------- ------------ Cash and cash equivalents at end of period...................... 152 72 44 ============== ============= ============ Supplemental Cash Flow Disclosures: Interest paid................................................... 56 64 74 Income taxes paid............................................... 186 168 116 The notes to financial statements are an integral part of this statement.
USG CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Years Ended December 31, ------------------------------------------- (millions) 1998 1997 1996 ------------- ------------ ------------
Stockholders' Equity Common Stock: Balance at January 1..............................................$ 5 $ 5 $ 5 Balance at December 31............................................ 5 5 5 -------------- ------------ ------------ Treasury Stock: Balance at January 1.............................................. - - - Purchases of common stock......................................... (10) - - -------------- ------------ ------------ Balance at December 31............................................ (10) - - -------------- ------------ ------------ Capital Received in Excess of Par Value: Balance at January 1.............................................. 258 231 223 Issuances of common stock......................................... 48 18 4 Other, net........................................................ 11 9 4 -------------- ------------- ------------ Balance at December 31............................................ 317 258 231 -------------- ------------- ------------ Reinvested Earnings (Deficit): Balance at January 1.............................................. (91) (239) (254) Net earnings...................................................... 332 148 15 Cash dividends paid............................................... (5) - - -------------- ------------- ------------ Balance at December 31............................................ 236 (91) (239) -------------- ------------- ------------ Accumulated Other Comprehensive Income: Balance at January 1.............................................. (25) (20) (11) Other comprehensive income........................................ (5) (5) (9) -------------- ------------- ------------- Balance at December 31............................................ (30) (25) (20) -------------- ------------- ------------- Total stockholders' equity (deficit).............................. 518 147 (23) ============== ============= ============= Comprehensive Income Net earnings......................................................$ 332 $ 148 $ 15 -------------- ------------- ------------- Other Comprehensive Income (net of tax): Foreign currency translation adjustments.......................... (5) (15) (4) Minimum pension liability......................................... - 10 (5) -------------- ------------ ------------- (5) (5) (9) -------------- ------------ ------------- Total comprehensive income........................................ 327 143 6 ============== ============ ============= The notes to financial statements are an integral part of these statements.
NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies NATURE OF OPERATIONS Through its subsidiaries, USG Corporation (the "Corporation") is a leading manufacturer and distributor of building materials, producing a wide range of products for use in new residential, new nonresidential and repair and remodel construction, as well as products used in certain industrial processes. USG's operations are organized into two operating segments: North American Gypsum, which manufactures and markets gypsum wallboard and related products in the United States, Canada and Mexico, and Worldwide Ceilings, which manufactures and markets ceiling tile, ceiling grid and other interior systems products worldwide. USG's products are distributed through its wholly owned subsidiary, L&W Supply Corporation, as well as through building materials dealers, home improvement centers and other retailers, specialty wallboard distributors, and contractors. CONSOLIDATION The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. RECLASSIFICATIONS Certain amounts in the prior years' financial statements and notes thereto have been reclassified to conform with the 1998 presentation. REVENUE RECOGNITION The Corporation recognizes revenue upon the shipment of products. EARNINGS PER SHARE Basic earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share includes the dilutive effect of the potential exercise of outstanding stock options and warrants under the treasury stock method. COMPREHENSIVE INCOME In 1998, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") 130, "Reporting Comprehensive Income." For USG, components of comprehensive income include net earnings, foreign currency translation gain or loss adjustments and, for 1997 and 1996, minimum pension liability adjustments. Taxes related to the minimum pension liability adjustment for 1997 were $7 million. For the 1996 adjustment, a $4 million tax benefit was recorded. There was no tax impact on the foreign currency translation adjustments. CASH AND CASH EQUIVALENTS Cash and cash equivalents primarily consist of time deposits with original maturities of three months or less. INVENTORY VALUATION Most of the Corporation's domestic inventories are valued under the last-in, first-out ("LIFO") method. The remaining inventories are stated at the lower of cost or market under the first-in, first-out ("FIFO") or average production cost methods. Inventories include material, labor and applicable factory overhead costs. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, except for those assets that were revalued under fresh start accounting in May 1993. Provisions for depreciation of property, plant and equipment are determined principally on a straight-line basis over the expected average useful lives of composite asset groups. Depletion is computed on a basis calculated to spread the cost of gypsum and other applicable resources over the estimated quantities of material recoverable. EXCESS REORGANIZATION VALUE In the third quarter of 1997, the remaining balance of excess reorganization value was eliminated. The $83 million balance, which would have been amortized through April 1998, was offset by the elimination of a valuation allowance in accordance with AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). See "Note 11. Income Taxes" for additional information. Excess reorganization value was recorded in 1993 in connection with a comprehensive restructuring of the Corporation's debt under the principles of fresh start accounting as required by SOP 90-7. GOODWILL Goodwill is amortized on a straight-line basis over a period of 40 years. On a periodic basis, the Corporation estimates the future undiscounted cash flows of the businesses to which goodwill relates in order to ensure that the carrying value of goodwill has not been impaired. Goodwill is included in other assets on the consolidated balance sheet. FINANCIAL INSTRUMENTS The Corporation uses derivative instruments to manage well-defined interest rate, energy cost and foreign currency exposures. The Corporation does not use derivative instruments for trading purposes. The criteria used to determine if hedge accounting treatment is appropriate are (i) the designation of the hedge to an underlying exposure (ii) whether or not overall uncertainty is being reduced and (iii) if there is a correlation between the value of the derivative instrument and the underlying obligation. Interest Rate Derivative Instruments: The Corporation utilizes interest rate swap agreements to manage the impact of interest rate changes on its underlying floating-rate debt. These agreements are designated as hedges and qualify for hedge accounting. Amounts payable or receivable under these swap agreements are accrued as an increase or decrease to interest expense on a current basis. To the extent the underlying floating-rate debt is reduced, the Corporation terminates swap agreements accordingly so as not to be in an overhedged position. In such cases, the Corporation recognizes gains and/or losses in the period in which the agreement is terminated. Energy Derivative Instruments: The Corporation uses swap agreements to hedge anticipated purchases of fuel to be utilized in the manufacturing processes for gypsum wallboard and ceiling tile. Under these swap agreements, the Corporation receives or makes payments based on the differential between a specified price and the actual closing price for the current month's energy price contract. These contracts are designated as hedges and qualify for hedge accounting. Amounts payable or receivable under these swap agreements are accrued as an increase or decrease to cost of products sold, along with the actual spot energy cost of the corresponding underlying hedge transaction, the combination of which amounts to the predetermined specified contract price. Foreign Exchange Derivative Instruments: The Corporation has operations in a number of countries and has intercompany transactions among them and, as a result, is exposed to changes in foreign currency exchange rates. The Corporation manages these exposures on a consolidated basis, which allows netting of certain exposures to take advantage of any natural offsets. To the extent the net exposures are hedged, forward contracts are used. Gains and/or losses on these foreign currency hedges are included in net earnings in the period in which the exchange rates change. RESEARCH AND DEVELOPMENT Research and development expenditures are charged to earnings as incurred and amounted to $20 million, $19 million and $19 million in the years ended December 31, 1998, 1997 and 1996, respectively. RECENT ACCOUNTING PRONOUNCEMENT In 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for fiscal years beginning after June 15, 1999, and cannot be applied retroactively. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Corporation plans to adopt SFAS 133 effective January 1, 2000, and will determine both the method and impact of adoption prior to that date. 2. Earnings Per Share The reconciliation of basic earnings per share to diluted earnings per share is shown in the following table: (millions, except Net Shares Per Share share data) Earnings (000) Amount - - --------------------------------------------------------------------
1998 Basic earnings $ 332 48,710 $ 6.81 Effect of Dilutive Securities: Options 861 Warrants 613 - - -------------------------------------------------------------------- Diluted earnings 332 50,184 6.61 ==================================================================== 1997 Basic earnings 148 46,269 3.19 Effect of Dilutive Securities: Options 930 Warrants 1,528 - - -------------------------------------------------------------------- Diluted earnings 148 48,727 3.03 ==================================================================== 1996 Basic earnings 15 45,542 0.32 Effect of Dilutive Securities: Options 853 Warrants 1,115 - - -------------------------------------------------------------------- Diluted earnings 15 47,510 0.31 ====================================================================
3. Common Stock TREASURY STOCK There were 296,235 and 48,919 shares of $0.10 par value common stock held in treasury as of December 31, 1998 and 1997, respectively. The increase in 1998 primarily reflects shares acquired under the new share repurchase program described below. CASH DIVIDENDS In September 1998, USG's board of directors voted to initiate a quarterly cash dividend of $0.10 per share. The first dividend was paid on December 16, 1998, to stockholders of record as of November 27, 1998. SHARE REPURCHASES In September 1998, USG's board of directors also voted to initiate a multiyear share-repurchase program, under which up to 5 million shares of common stock may be purchased. Under the program, USG intends to acquire shares in a systematic manner to offset the issuance of shares under its long-term equity compensation plans for employees and directors. USG also intends to acquire shares from time to time that will be utilized for general corporate purposes. The volume and timing of the latter purchases will depend on market and business conditions. Share repurchases are being made in the open market or through privately negotiated transactions and are being financed with available cash from operations. As of December 31, 1998, USG had purchased 225,000 shares. STOCKHOLDER RIGHTS PLAN In March 1998, the Corporation approved the redemption of the preferred share purchase rights declared under a 10-year rights agreement adopted in 1993 and adopted a new share purchase rights plan. The new rights plan, which became effective on April 15, 1998, and will expire on March 27, 2008, has four basic provisions. First, if an acquirer buys 15% or more of USG's outstanding common stock, the plan allows other stockholders to buy, with each right, additional USG shares at a 50% discount. Second, if USG is acquired in a merger or other business combination transaction, rights holders will be entitled to buy shares of the acquiring company at a 50% discount. Third, if an acquirer buys between 15% and 50% of USG's outstanding common stock, the Corporation can exchange part or all of the rights of the other holders for shares of the Corporation's stock on a one-for-one basis, or shares of the new junior preferred stock on a one-for-one-hundredth basis. Fourth, before an acquirer buys 15% or more of USG's outstanding common stock, the rights are redeemable for $0.01 per right at the option of the board of directors. This provision permits the board to enter into an acquisition transaction that is determined to be in the best interests of stockholders. The board is authorized to reduce the 15% threshold to not less than 10%. WARRANTS In 1998, the Corporation received cash proceeds of $40 million from the exercise of 2,455,383 warrants issued in connection with a financial restructuring implemented in 1993. Each warrant entitled the holder to purchase one share of common stock at a purchase price of $16.14 per share, subject to adjustment under certain events, at any time prior to the May 6, 1998, expiration date. The proceeds from the exercises were added to the cash resources of the Corporation and used for general corporate purposes. 4. Debt Total debt, including debt maturing within one year, as of December 31 consisted of the following: (millions) 1998 1997 - - ----------------------------------------------------------------
European line of credit due 1999 $ 10 $ - 9.25% senior notes due 2001 150 150 U.S. revolving credit facility due 2002 25 25 Canadian credit facility due 2002 69 72 Receivables facility due 2003 and 2004 80 80 8.5% senior notes due 2005 150 150 8.75% sinking fund debentures due 2017 25 92 Industrial revenue bonds 84 46 Other 3 5 - - -------------------------------------------------------------- Total 596 620 ==============================================================
U.S. REVOLVING CREDIT FACILITY USG maintains a $500 million unsecured revolving credit facility, which includes a $125 million letter of credit subfacility, with a syndicate of banks under a credit agreement. The revolving credit facility expires in 2002 with no required amortization prior to maturity. As of December 31, 1998, outstanding revolving loans totaled $25 million, and letters of credit issued and outstanding amounted to $20 million, leaving the Corporation with $455 million of available credit under the revolving credit facility. The revolving loans bear interest at the London Interbank Offered Rate ("LIBOR") as determined from time to time plus an applicable spread based on the Corporation's net debt to EBITDA ratio (as defined in the credit agreement) for the preceding four quarters. As of December 31, 1998, the applicable spread was 0.4%. The average rate of interest on the revolving loans was 6.0% during 1998 and 6.1% during 1997. See "Note 6. Financial Instruments and Risk Management" for information on instruments used by the Corporation to manage the impact of interest rate changes on LIBOR-based bank debt. The credit agreement contains restrictions on the operation of the Corporation's business, including covenants pertaining to liens, sale and leaseback transactions, and mergers with and acquisitions of businesses not related to the building industry. CANADIAN CREDIT FACILITY On June 2, 1997, the Corporation executed through CGC Inc. a $72 million (U.S.) ($110 million Canadian), parent-guaranteed Canadian credit facility due 2002. This facility was later supplemented by a 364-day facility for $13 million (U.S.) ($20 million Canadian) that was established in December 1997 and renewed in December 1998. As of year end 1998, outstanding loans totaled $69 million (U.S.), leaving $16 million (U.S.) of available credit under these facilities. The method of calculating interest and the covenants related to these facilities are virtually the same as those for the U.S. facility described above. The average rate of interest on the Canadian loans was 6.0% during 1998 and 4.6% during the period of June 2, 1997, through December 31, 1997. The average rate of interest on a different Canadian credit facility that was in effect during the period of January 1, 1997, through its termination on June 4, 1997, was 6.2%. EUROPEAN LINE OF CREDIT USG also maintains a parent-guaranteed, multicurrency ($20 million U.S. equivalent) European line of credit. As of December 31, 1998, short-term borrowings outstanding under this line of credit amounted to $10 million (U.S.). The weighted average interest rate on these borrowings during 1998 was 4.2%. INDUSTRIAL REVENUE BONDS Industrial revenue bonds reflected in the above table had interest rates ranging from 5.6% to 8.8%, with maturities through 2032. USG uses industrial revenue bonds to finance certain capital projects. Proceeds from these bonds are deposited into construction escrow accounts. The bonds are recorded incrementally on USG's books as funds are drawn from the escrow accounts throughout the construction process. In 1998 and 1997, USG issued industrial revenue bonds totaling $99 million, of which $38 million was drawn and recorded in 1998 and $7 million was drawn and recorded in 1997. OTHER INFORMATION The fair market value of total debt outstanding was $619 million and $646 million as of December 31, 1998 and 1997, respectively, based on indicative market prices as of those dates. As of December 31, 1998, aggregate scheduled maturities of long-term debt were zero in 2000, $150 million in 2001, $95 million in 2002 and $40 million in 2003. The $25 million of 8.75% debentures due 2017 was classified as a current liability on the consolidated balance sheet in 1998, since USG will retire this debt at par in 1999. 5. Financing Arrangements ACCOUNTS RECEIVABLE FACILITY The Corporation has an accounts receivable facility in which USG Funding Corporation, a special-purpose subsidiary of the Corporation formed under Delaware law, entered into agreements with U.S. Gypsum and USG Interiors, Inc. These agreements provide that USG Funding purchases trade receivables (excluding intercompany receivables owed by L&W Supply) of U.S. Gypsum and USG Interiors as generated, in a transaction designed to be a "true sale" under applicable law. USG Funding is a party to a Master Trust arrangement (the "Master Trust") under which the purchased receivables are then transferred to Chase Manhattan Bank as Trustee to be held for the benefit of certificate holders in such trust. A residual interest in the Master Trust is owned by USG Funding through subordinated certificates. Under a supplement to the Master Trust, certificates representing an ownership interest in the Master Trust of up to $130 million have been issued to Citicorp Securities, Inc. Debt issued under the receivables facility has a final maturity in 2004 but may be prepaid at any time. The interest rate on such debt is fixed through 2001 at 8.2% through a long-term interest rate swap. Pursuant to the applicable reserve and eligibility requirements, the maximum amount of debt issuable under the receivables facility as of December 31, 1998 and 1997, (including $80 million outstanding as of each date) was $112 million and $107 million, respectively. Under the foregoing agreements and related documentation, USG Funding is a separate corporate entity with its own separate creditors that will be entitled to be satisfied out of USG Funding's assets prior to distribution of any value to its shareholder. As of December 31, 1998 and 1997, the outstanding balance of receivables sold to USG Funding and held under the Master Trust was $189 million and $179 million, respectively, and debt outstanding under the receivables facility was $80 million as of each date. Receivables and debt outstanding in connection with the receivables facility remain in receivables and long-term debt, respectively, on the consolidated balance sheet. SHELF REGISTRATION In 1996, the Securities and Exchange Commission declared effective a shelf registration statement that allows the Corporation to offer from time to time (i) debt securities (ii) shares of $1.00 par value preferred stock (iii) shares of $0.10 par value common stock and/or (iv) warrants to purchase shares of common stock, all having an aggregate initial offering price not to exceed $300 million. As of the filing date of the Corporation's 1998 Annual Report on Form 10-K, no securities had been issued pursuant to this registration. 6. Financial Instruments and Risk Management The amounts reported below as fair values represent the market value as obtained from broker quotations. Any negative fair values are estimates of the amounts USG would need to pay to cancel the contracts or transfer them to other parties. INTEREST RATE RISK MANAGEMENT USG uses interest rate swap agreements to manage the impact of interest rate changes on the underlying floating-rate debt. USG's swap portfolio consists of pay fixed/receive floating swaps, which effectively convert floating-rate obligations into fixed-rate instruments. As of December 31, 1998 and 1997, USG had swap agreements in place to convert $131 million and $105 million, respectively, of notional principal from floating-rate to fixed-rate instruments. As of December 31, 1998, all swap agreements mature within three years. The fair values of these swap agreements as of December 31, 1998 and 1997, were $(8) million and $(10) million, respectively. ENERGY RISK MANAGEMENT USG uses swap agreements to hedge anticipated purchases of fuel to be utilized in its manufacturing processes. As of December 31, 1998 and 1997, USG had swap agreements to exchange monthly payments on notional amounts of energy amounting to $57 million and $30 million, respectively. These agreements mature within three years. The fair value of these swap agreements as of December 31, 1998 and 1997, was $(6) million and zero, respectively. FOREIGN EXCHANGE RISK MANAGEMENT As of December 31, 1998 and 1997, USG had a number of foreign currency forward contracts in place (primarily Canadian dollars and Belgian francs) to hedge its exposure to exchange rate fluctuations on foreign currency transactions. These foreign exchange contracts mature on the anticipated cash requirement date of the hedged transaction, all within 12 months. The notional amounts of foreign currency forward contracts as of December 31, 1998 and 1997, were $60 million and $22 million, respectively. The fair values of these contracts as of December 31, 1998 and 1997, were $(1) million and zero, respectively. COUNTERPARTY RISK USG is exposed to credit losses in the event of nonperformance by the counterparties on its financial instruments. All counterparties have investment grade credit standing; accordingly, USG anticipates that these counterparties will be able to satisfy fully their obligations under the contracts. USG does not obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of all counterparties. 7. Purchase of Subsidiary Minority Interest In the fourth quarter of 1996, the Corporation purchased the minority interest in its Canadian subsidiary, CGC Inc. The common shares of publicly held stock totaled approximately 6 million and were acquired at a price of $11 (Canadian) per share. The total amount paid in U.S. dollars for the shares was $49 million. This payment was financed initially through an interim Canadian credit facility due 1997 that was replaced in 1997 by a long-term Canadian credit facility due 2002. As a result of the transaction, CGC recorded goodwill of $41 million (U.S.), which is included in other assets on the consolidated balance sheet and is being amortized over 40 years. 8. Inventories As of December 31, 1998 and 1997, the LIFO values of domestic inventories were $168 million and $153 million, respectively, and would have been $1 million lower for 1998 and $4 million higher for 1997 if they were valued under the FIFO and average production cost methods. The LIFO value of U.S. domestic inventories exceeded that computed for U.S. federal income tax purposes by $30 million as of December 31, 1998 and 1997. Inventory classifications as of December 31 were as follows: (millions) 1998 1997 - - ----------------------------------------------------------------
Finished goods and work in progress $ 151 $ 132 Raw materials 69 65 Supplies 14 11 - - ---------------------------------------------------------------- Total 234 208 ================================================================
9. Property, Plant and Equipment Property, plant and equipment classifications as of December 31 were as follows: (millions) 1998 1997 - - ---------------------------------------------------------------
Land and mineral deposits $ 63 $ 61 Buildings and realty improvements 331 262 Machinery and equipment 1,118 895 - - --------------------------------------------------------------- 1,512 1,218 Reserves for depreciation and depletion (298) (236) - - --------------------------------------------------------------- Total 1,214 982 ===============================================================
10. Leases The Corporation leases certain of its offices, buildings, machinery and equipment, and autos under noncancelable operating leases. These leases have various terms and renewal options. Lease expense amounted to $59 million, $51 million and $46 million in the years ended December 31, 1998, 1997 and 1996, respectively. Future minimum lease payments required under operating leases with initial or remaining noncancelable terms in excess of one year as of December 31, 1998, were $42 million in 1999, $37 million in 2000, $30 million in 2001, $25 million in 2002 and $14 million in 2003. The aggregate obligation subsequent to 2003 was $16 million. 11. Income Taxes Earnings before income taxes consisted of the following: (millions) 1998 1997 1996 - - ----------------------------------------------------
U.S. $ 487 $ 301 $ 138 Foreign 47 19 (6) - - ---------------------------------------------------- Total 534 320 132 ==================================================== Income taxes consisted of the following: (millions) 1998 1997 1996 - - ---------------------------------------------------- Current: Federal $ 165 $ 147 $ 90 Foreign 12 10 5 State 29 26 17 - - ---------------------------------------------------- 206 183 112 ==================================================== Deferred: Federal (3) (12) 3 Foreign (1) 2 1 State - (1) 1 - - ---------------------------------------------------- (4) (11) 5 - - ---------------------------------------------------- Total 202 172 117 ====================================================
Differences between actual provisions for income taxes and provisions for income taxes at the U.S. federal statutory rate (35%) were as follows: (millions) 1998 1997 1996 - - ------------------------------------------------------------
Taxes on income at federal statutory rate $ 187 $ 112 $ 46 Excess reorganization value amortization - 44 59 Foreign sales corporation (1) - - Foreign earnings subject to different tax rates (1) 2 2 State income tax, net of federal benefit 19 16 12 Percentage depletion (3) (3) (3) Other, net 1 1 1 - - ------------------------------------------------------------ Provision for income taxes 202 172 117 ============================================================ Effective income tax rate 37.8% 53.9% 88.9% ============================================================
Significant components of deferred tax (assets) liabilities as of December 31 were as follows: (millions) 1998 1997 - - ------------------------------------------------------------
Property, plant and equipment $ 173 $ 155 Other 1 - - - ------------------------------------------------------------ Deferred tax liabilities 174 155 - - ------------------------------------------------------------ Pension and postretirement benefits (87) (78) Reserves not deductible until paid (137) (126) Other - 2 - - ------------------------------------------------------------ Deferred tax assets (224) (202) - - ------------------------------------------------------------ Net deferred tax assets (50) (47) ============================================================
A valuation allowance of $90 million, which had been provided for deferred tax assets relating to pension and postretirement benefits prior to the Corporation's financial restructuring in 1993, was eliminated in the third quarter of 1997. The elimination of this allowance reflected a change in management's judgment regarding the realizability of these assets in future years as a result of the Corporation's pretax earnings levels and improved capital structure over the prior three years. In accordance with SOP 90-7, the benefit realized from the elimination of this allowance was used to reduce the balance of excess reorganization value to zero in the third quarter of 1997. The Corporation used a net operating loss carryforward of $100 million to offset U.S. taxable income in 1994 through 1996. Because of the uncertainty regarding the application of the Internal Revenue Code to this carryforward as a result of the Corporation's financial restructuring in 1993, the carrryforward could be reduced or eliminated. The Corporation does not provide for U.S. income taxes on the portion of undistributed earnings of foreign subsidiaries that are intended to be permanently reinvested. The cumulative amount of such undistributed earnings totaled approximately $173 million as of December 31, 1998. These earnings would become taxable in the United States upon the sale or liquidation of these foreign subsidiaries or upon the remittance of dividends. It is not practicable to estimate the amount of the deferred tax liability on such earnings. 12. Employee Retirement Plans The Corporation and most of its subsidiaries have defined benefit pension plans for all eligible employees. Benefits of the plans are generally based on years of service and employees' compensation during the final years of employment. The Corporation also maintains plans that provide retiree health care and life insurance benefits for all eligible employees. Employees generally become eligible for the retiree benefit plans when they meet minimum retirement age and service requirements. The cost of providing most retiree health care benefits is shared with retirees. In 1998, the Financial Accounting Standards Board issued SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which the Corporation adopted as of December 31, 1998. The components of net pension and postretirement benefit costs are summarized in the following tables: Pension Benefits ------------------------------ (millions) 1998 1997 1996 - - ---------------------------------------------------------------------
Service cost of benefits earned $ 14 $ 12 $ 12 Interest cost on projected benefit obligation 39 36 35 Expected return on plan assets (44) (39) (35) Net amortization 1 - - - - --------------------------------------------------------------------- Net pension cost 10 9 12 ===================================================================== Postretirement Benefits ------------------------------ (millions) 1998 1997 1996 - - --------------------------------------------------------------------- Service cost of benefits earned 6 6 6 Interest cost on projected benefit obligation 14 15 16 Net amortization (1) - - - - --------------------------------------------------------------------- Net postretirement cost 19 21 22 =====================================================================
The following tables summarize pension and postretirement benefit obligations, plan assets and funded status as of December 31: Pension Postretirement ---------------- ---------------- (millions) 1998 1997 1998 1997 - - ---------------------------------------------------------------------------------
Change in Benefit Obligation: Benefit obligation as of January 1 $ 528 $ 492 $ 219 $ 222 Service cost 14 12 6 6 Interest cost 39 36 14 15 Employee contributions 9 8 2 2 Benefits paid (47) (37) (13) (10) Plan amendment 3 - - - Actuarial (gain) loss 90 17 (14) (16) Foreign currency rate change (3) - - - - - --------------------------------------------------------------------------------- Benefit obligation as of December 31 633 528 214 219 ================================================================================= Change in Plan Assets: Fair value as of January 1 554 464 - - Actual return on plan assets 79 96 - - - Employer contributions 7 27 - - Employee contributions 9 8 - - Benefits paid (47) (37) - - Foreign currency rate change (5) - - - Other - (4) - - - - --------------------------------------------------------------------------------- Fair value as of December 31 597 554 - - ================================================================================= Funded Status: As of December 31 (36) 26 (214) (219) Unrecognized prior service 4 - 1 1 Unrecognized net (gain) loss 14 (39) (23) (10) - - --------------------------------------------------------------------------------- Net balance sheet liability (18) (13) (236) (228) ================================================================================= Assumptions as of December 31: Discount rate 6.75% 7.25% 6.75% 7.25% Pension plans expected return 9% 9% - - Compensation increase rate 5% 5% 5% 5% - - ---------------------------------------------------------------------------------
The assumed health-care-cost trend rate used in measuring the accumulated postretirement benefit obligation was 7% as of December 31, 1998, and 8% as of December 31, 1997, with a rate gradually declining to 5% by 2000 and remaining at that level thereafter. A one-percentage-point change in the assumed health-care-cost trend rate would have the following effects: One Percentage One Percentage (millions) Point Increase Point Decrease - - ---------------------------------------------------------------------------------
Effect on total service and interest cost components $ 3 $ (3) Effect on postretirement benefit obligation 32 (26) - - ---------------------------------------------------------------------------------
13. Stock-Based Compensation The Corporation has issued stock options from three successive plans under its long-term equity program. Under each of the plans, options were granted at an exercise price equal to the market value on the date of grant. All options granted under the plans have 10-year terms and vesting schedules of two or three years. The options expire on the 10th anniversary of the date of grant, except in the case of retirement, death or disability, in which case they expire on the earlier of the fifth anniversary of such event or the expiration of the original option term. The Corporation accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 and discloses such compensation under the provisions of SFAS 123, "Accounting for Stock-Based Compensation." The fair value of each option grant was estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for options granted in 1998, 1997 and 1996. 1998 1997 1996 - - -------------------------------------------------------------
Expected life (years) 7.4 7.4 7.4 Risk-free interest rate 5.7% 6.8% 5.9% Expected volatility 30.7% 29.6% 33.0% Dividend yield - - - - - -------------------------------------------------------------
The weighted average fair values of options granted on January 2 and January 19, 1998, were $22.32 and $24.53, respectively. The weighted average fair values of options granted during the years ended December 31, 1997 and 1996, were $15.61 and $14.17, respectively. If the Corporation had elected to recognize compensation cost for stock-based compensation grants consistent with the method prescribed by SFAS No. 123, net earnings and net earnings per common share for 1998, 1997 and 1996 would have changed to the following pro forma amounts: (millions, except per share data) 1998 1997 1996 - - ------------------------------------------------------------------------
Net Earnings: As reported $ 332 $ 148 $ 15 Pro forma 328 144 13 Basic EPS: As reported 6.81 3.19 0.32 Pro forma 6.73 3.12 0.29 Diluted EPS: As reported 6.61 3.03 0.31 Pro forma 6.54 2.96 0.28 - - ------------------------------------------------------------------------ Stock option activity was as follows: (options in thousands) 1998 1997 1996 - - ------------------------------------------------------------------------ Options: Outstanding, January 1 2,049 2,565 2,560 Granted 413 378 359 Exercised (388) (882) (343) Canceled (40) (12) (11) - - ------------------------------------------------------------------------ Outstanding, December 31 2,034 2,049 2,565 Exercisable, December 31 1,292 1,339 1,889 Available for grant, December 31 1,122 1,671 467 Weighted Average Exercise Price: Outstanding, January 1 $ 25.54 $ 21.71 $ 19.19 Granted 48.44 34.60 29.40 Exercised 22.72 18.20 10.75 Canceled 40.53 32.00 28.29 Outstanding, December 31 30.43 25.54 21.71 Exercisable, December 31 23.80 22.06 18.82 - - ------------------------------------------------------------------------
The following table summarizes information about stock options outstanding as of December 31, 1998: Options Outstanding Options Exercisable - - ---------------------------------- ------------------------------------- Weighted Weighted Average Weighted Range of Average Remaining Average Exercise Options Exercise Contractual Options Exercise Prices (000) Price Life (yrs.) (000) Price
$ 5 - 15 391 $ 10 4.4 391 $ 10 15 - 25 161 22 5.6 161 22 25 - 35 1,086 32 6.6 740 31 35 - 55 396 48 9.0 - - - - ----------------------------------------------------------------------------- Total 2,034 1,292 =============================================================================
14. Segments USG adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," as of December 31, 1998. This statement established new disclosure requirements related to operating and geographic segments as presented in the following tables: OPERATING SEGMENTS (millions) 1998 1997 1996 - - ----------------------------------------------------------------
Net Sales: North American Gypsum $ 2,576 $ 2,338 $ 2,067 Worldwide Ceilings 657 634 612 Eliminations (103) (98) (89) - - ---------------------------------------------------------------- Total 3,130 2,874 2,590 ================================================================ Amortization of Excess Reorganization Value: North American Gypsum - 62 82 Worldwide Ceilings - 65 87 - - ---------------------------------------------------------------- Total - 127 169 ================================================================ Operating Profit (Loss): North American Gypsum 574 429 291 Worldwide Ceilings 65 (1) (44) Corporate (54) (49) (39) - - ---------------------------------------------------------------- Total 585 379 208 ================================================================ Depreciation, Depletion and Amortization: North American Gypsum 55 48 44 Worldwide Ceilings 18 17 15 Corporate 8 5 6 - - ---------------------------------------------------------------- Total 81 70 65 ================================================================ Capital Expenditures: North American Gypsum 269 126 63 Worldwide Ceilings 39 45 56 Corporate 1 1 1 - - ---------------------------------------------------------------- Total 309 172 120 ================================================================ Assets: North American Gypsum 1,548 1,247 1,161 Worldwide Ceilings 434 398 478 Corporate 383 289 230 Eliminations (8) (8) (5) - - ---------------------------------------------------------------- Total 2,357 1,926 1,864 ================================================================
GEOGRAPHIC SEGMENTS (millions) 1998 1997 1996 - - ----------------------------------------------------------------
Net Sales: United States $ 2,829 $ 2,570 $ 2,319 Canada 206 184 169 Other Foreign 256 251 242 Geographic transfers (161) (131) (140) - - ---------------------------------------------------------------- Total 3,130 2,874 2,590 ================================================================ Long-Lived Assets: United States 1,094 869 947 Canada 155 156 159 Other Foreign 83 71 99 - - ---------------------------------------------------------------- Total 1,332 1,096 1,205 ================================================================
Transactions between operating and geographic segments are accounted for at transfer prices that are approximately equal to market value. Intercompany transfers between operating and geographic segments are not material. Eliminations represent intercompany sales between operating segments. No single customer accounted for 10% or more of consolidated net sales. Revenues are attributed to geographic areas based on the location of the assets producing the revenues. Export sales to foreign unaffiliated customers represent less than 10% of consolidated net sales. Segment operating profit (loss) includes all costs and expenses directly related to the segment involved and an allocation of expenses that benefit more than one segment. Segment operating profit (loss) for 1997 and 1996 also includes the noncash amortization of excess reorganization value, which had the impact of reducing operating profit for North American Gypsum and Worldwide Ceilings. Corporate assets include the assets of USG Funding, which represent the outstanding balances of receivables purchased from U.S. Gypsum and USG Interiors, net of reserves. As of December 31, 1998, 1997 and 1996, such receivables, net of reserves, amounted to $141 million, $128 million and $121 million, respectively, including $106 million, $95 million and $89 million purchased from U.S. Gypsum and $35 million, $33 million and $32 million purchased from USG Interiors as of the respective dates. 15. Litigation ASBESTOS AND RELATED INSURANCE LITIGATION One of the Corporation's subsidiaries, U.S. Gypsum (or "the Company"), is among many defendants in lawsuits arising out of the manufacture and sale of asbestos-containing materials. U.S. Gypsum sold certain asbestos-containing products beginning in the 1930s; in most cases, the products were discontinued or asbestos was removed from the formula by 1972, and no asbestos-containing products were produced after 1977. Some of these lawsuits 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"). Others seek compensatory and in many cases punitive damages for personal injury allegedly resulting from exposure to asbestos-containing products (the "Personal Injury Cases"). Property Damage Cases: U.S. Gypsum is a defendant in 12 Property Damage Cases, most of which involve multiple buildings. One of the cases is a conditionally certified class action comprised of 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.). Fourteen additional property damage claims have been threatened against U.S. Gypsum. The Company anticipates that few additional Property Damage Cases will be filed as a result of the operation of statutes of limitations and the impact of certain other factors, although if the class action referred to above is decertified, it is likely that some colleges and universities will file individual Property Damage Cases against U.S. Gypsum. It is possible that any cases that are filed will seek substantial damages. In total, U.S. Gypsum has settled approximately 114 Property Damage Cases involving 244 plaintiffs, in addition to four class action settlements. Twenty- four cases have been tried to verdict, 16 of which were won by U.S. Gypsum and five lost; three other cases, one won at the trial level and two lost, were settled during appeals. In the cases lost, compensatory damage awards against U.S. Gypsum totaled $11.5 million. Punitive damages totaling $5.5 million were entered against U.S. Gypsum in four trials. Two of the punitive damage awards, totaling $1.45 million, were paid, and two were settled during the appellate process. In 1998, two Property Damage Cases were filed against U.S. Gypsum, two cases were dismissed before trial, four were settled, and 12 were pending at year end. U.S. Gypsum expended $29.5 million for the defense and resolution of Property Damage Cases (most of which consisted of payments for settlements agreed to in the prior year) and received insurance payments of $22.0 million in 1998. In 1997, one Property Damage Case was filed against U.S. Gypsum, three cases were dismissed before trial, six were settled, one closed case was reopened, and 16 were pending at year end. U.S. Gypsum expended $7.8 million for the defense and resolution of Property Damage Cases and received insurance payments of $15.5 million in 1997. During 1996, two Property Damage Cases were filed against U.S. Gypsum, three cases were dismissed before trial, eight were settled, and 23 were pending at year end; U.S. Gypsum expended $33.4 million for the defense and resolution of Property Damage Cases in 1996 and received insurance payments of $84 million. A substantial portion of the insurance payments received during the years 1996-1997 constituted reimbursement for amounts expended in connection with Property Damage Cases in prior years. U.S. Gypsum's estimated cost of resolving pending Property Damage Cases is discussed below (see "Estimated Cost"). Personal Injury Cases: U.S. Gypsum is also a defendant in approximately 98,000 Personal Injury Cases pending at December 31, 1998, as well as an additional approximately 43,000 cases that have been settled but will be closed over time. Filings of new Personal Injury Cases increased to 80,000 claims in 1998, compared to 23,500 claims in 1997 and 28,000 claims in 1996. The higher rate of personal injury case filings in 1998 is believed to have resulted, at least in part, from the Supreme Court ruling striking down the Georgine settlement described below. It is anticipated that Personal Injury Cases will continue to be filed in substantial numbers for the foreseeable future, although the percentage of such cases filed by claimants with little or no physical impairment is expected to remain high. U.S. Gypsum's average settlement cost for Personal Injury Cases over the past several years has been approximately $1,600 per claim, exclusive of defense costs. In 1998, U.S. Gypsum (through the Center for Claims Resolution, discussed below) agreed to settlements of approximately 60,000 Personal Injury Cases, including 39,000 cases that will be closed in future years at an average cost of approximately $1,600 per case, and 21,000 claims closed during 1998 for an average settlement of approximately $2,600 per case. The higher cost of settlements of those cases actually closed in 1998 was due primarily to more costly settlements in particular jurisdictions, and an increase in the number of such claims that came from individuals alleging serious illness, due in part to the courts' accelerated treatment of such claims. Management anticipates that the average settlement cost for most pending claims will continue to be moderated by opportunities for block settlements of large numbers of claims and the apparently high percentage of claims that appear to have been brought by individuals with little or no physical impairment. However, other factors, including the litigation strategies of certain co-defendants and an increasingly adverse litigation environment in particular jurisdictions, are expected to have an adverse impact on settlement costs for some pending and future cases and, therefore, on U.S. Gypsum's overall settlement costs. U.S. Gypsum is a member, together with 18 other former producers of asbestos-containing products, of the Center for Claims Resolution (the "Center"), which has assumed the handling of all Personal Injury Cases pending against U.S. Gypsum and the other members of the Center. Costs of defense and settlement are shared among the members of the Center pursuant to predetermined sharing formulae. Most of U.S. Gypsum's personal injury liability and defense costs have been paid by those of its insurance carriers that in 1985 signed an Agreement Concerning Asbestos-Related Claims (the "Wellington Agreement"), obligating them to provide coverage for the defense and indemnity costs incurred by U.S. Gypsum in Personal Injury Cases. Punitive damages have never been awarded against U.S. Gypsum in a Personal Injury Case; whether such an award would be covered by insurance under the Wellington Agreement would depend on state law and the terms of the individual policies. U.S. Gypsum and the Center were parties to a class action settlement known as Georgine that would have required most future Personal Injury Cases to be resolved through an administrative system and provided prescribed levels of benefits based on the nature of the claimants' physical impairment. However, on June 25, 1997, the Supreme Court affirmed a May 1996 ruling by a federal appellate court finding that class certification in Georgine was improper (Amchem Products, Inc. v. Windsor, Case No. 96-270). Since the invalidation of the Georgine settlement, U.S. Gypsum and the other Center members have been named in a substantial number of additional Personal Injury Cases. A number of defendants in asbestos personal injury claims, including U.S. Gypsum, have stated their intention to continue pursuit of an alternative to the current tort system, including possible federal legislation that would impose objective disease criteria on asbestos cases, although there can be no assurance that such an alternative can be implemented. In addition, some settlements negotiated by the Center during 1998 included agreements by plaintiffs' firms to recommend to their future clients that they defer filing personal injury claims unless and until they meet established disease criteria. The Center will continue to attempt to negotiate similar agreements in the future. The impact of such agreements cannot be determined at this time. During 1998, approximately 80,000 Personal Injury Cases were filed against U.S. Gypsum, and 21,000 were settled or dismissed. U.S. Gypsum incurred expenses of $61.1 million in 1998 with respect to the resolution and defense of Personal Injury Cases, of which $45.5 million was paid by insurance. During 1997, approximately 23,500 Personal Injury Cases were filed against U.S. Gypsum, approximately 5,000 claims were refiled or amended to add U.S. Gypsum as a defendant, and approximately 14,000 were settled or dismissed. U.S. Gypsum incurred expenses of $31.6 million in 1997 with respect to Personal Injury Cases, of which $27.2 million was paid by insurance. During 1996, approximately 28,000 Personal Injury Cases were filed against U.S. Gypsum, and approximately 20,000 were settled or dismissed. U.S. Gypsum incurred expenses of $28.6 million in 1996 with respect to Personal Injury Cases, of which $21.6 million was paid by insurance. U.S. Gypsum's estimated cost of resolving the pending Personal Injury Cases is discussed below (see "Estimated Cost"). Insurance Coverage Action: U.S. Gypsum sued its insurance carriers in 1983 to obtain coverage for asbestos cases (the "Coverage Action") and has settled all disputes with most of its solvent carriers. As of December 31, 1998, after deducting insolvent coverage and insurance paid out to date, approximately $262 million of potential insurance remained, including approximately $217 million of insurance from six carriers that have agreed, subject to certain limitations and conditions, to cover asbestos-related costs, and approximately $45 million from three carriers that have not yet agreed to make their coverage available on acceptable terms. A minimum of $10 million of the disputed coverage is expected to be available regardless of the outcome of further proceedings. U.S. Gypsum is attempting to resolve its disputes with the nonsettling carriers through either a negotiated resolution or further litigation in the Coverage Action. U.S. Gypsum's total expenditures for all asbestos-related matters, including property damage, personal injury, insurance coverage litigation and related expenses, exceeded aggregate insurance payments by $24 million in 1998, but insurance payments exceeded asbestos-related expenses by $0.7 million in 1997 and $41 million in 1996, due primarily to nonrecurring reimbursement for amounts expended in prior years. Insolvent Carriers: Four of U.S. Gypsum's domestic insurance carriers, as well as underwriters of portions of various policies issued by Lloyds and other London market companies, providing a total of approximately $106 million of coverage, are insolvent. Because these policies would already have been consumed by U.S. Gypsum's asbestos expenses to date if the carriers had been solvent, the insolvencies will not adversely affect U.S. Gypsum's coverage for future asbestos-related costs. However, U.S. Gypsum is pursuing claims for reimbursement from the insolvent estates and other sources and expects to recover a presently indeterminable portion of the policy amounts from these sources. Estimated Cost: The asbestos litigation involves numerous uncertainties that affect U.S. Gypsum's ability to estimate reliably its probable liability in the Personal Injury and Property Damage Cases. In the Property Damage Cases, such uncertainties include 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 include the number, characteristics and venue of Personal Injury Cases that are filed against U.S. Gypsum; the Center's ability to continue to negotiate pretrial settlements at historical or acceptable levels; the level of physical impairment of claimants; the viability of claims for punitive damages; any changes in membership in the Center and the ability to develop an alternate claims-handling vehicle that retains the key benefits of Georgine. As a result, any estimate of U.S. Gypsum's liability, while based upon the best information currently available, may not be an accurate prediction of actual costs and is subject to revision as additional information becomes available and developments occur. Subject to the above uncertainties, and based in part on information provided by the Center, U.S. Gypsum estimates that it is probable that Property Damage and Personal Injury Cases pending at December 31, 1998, can be resolved for an amount totaling between $330 million and $410 million, including defense costs. Most of these amounts are expected to be expended over the next three to five years, although settlements of some Personal Injury Cases will be consummated over periods as long as seven years. Significant insurance funding is available for these costs, as detailed below, although resolution of the pending cases is expected to consume U.S. Gypsum's remaining insurance. At this time, U.S. Gypsum does not believe that the number and severity of asbestos-related cases that ultimately will be filed in the future can be predicted with sufficient accuracy to provide the basis for a reasonable estimate of the liability that will be associated with such cases. Accounting for Asbestos Liability: As of December 31, 1998, U.S. Gypsum had reserved $330 million for liability from pending Property Damage and Personal Injury Cases (equaling the lower end of the estimated range of costs provided above). U.S. Gypsum had a corresponding receivable from insurance carriers of approximately $227 million, the estimated portion of the reserved amount that is expected to be paid or reimbursed by insurance that is either committed or probable of recovery. Additional amounts may be reimbursed by insurance depending upon the outcome of litigation and negotiations relating to the $35 million of insurance that is presently disputed. U.S. Gypsum compares its estimates of liability to then-existing reserves and available insurance assets and adjusts its reserves as appropriate. As of December 31, 1998, U.S. Gypsum had an additional $43 million reserved for asbestos liabilities and asbestos-related expenses. The Company historically has accrued $18 million annually for asbestos costs. In view of the high level of personal injury filings that followed the termination of Georgine, U.S. Gypsum accrued an additional $8 million in the fourth quarter of 1998. The Company expects that an increased level of accrual will continue to be necessary during 1999 and possibly longer. The amount of future periodic accruals will depend upon factors that include, but may not be limited to, the rate at which new asbestos-related claims are filed, the imposition of medical criteria through legislation or negotiated agreements, U.S. Gypsum's average settlement cost, and the necessity of higher-cost settlements in particular jurisdictions. In addition, the Company will continue to evaluate whether its ultimate probable liability for future Personal Injury Cases can be reasonably estimated. If such an estimate can be made, it is probable that additional charges to results of operations would be necessary, although whether such an estimate can be made and, if so, the timing and amount of the resulting charge to results of operations cannot presently be determined. However, the amount of the periodic and other charges described above could be material to results of operations in the period in which they are taken. Conclusion: The above estimates and reserves are re-evaluated periodically as additional information becomes available. Additional periodic charges to results of operations are expected to be necessary in light of future events, and such charges could be material to results of operations in the period in which they are taken. However, it is management's opinion, taking into account all of the above information and uncertainties, including currently available information concerning U.S. Gypsum's liabilities, reserves and probable insurance coverage, that the asbestos litigation will not have a material adverse effect on the liquidity or financial position of the Corporation. 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 USG-owned property also are covered by reserves established in accordance with the foregoing. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its results of operations or financial position. REPORT OF MANAGEMENT Management of USG Corporation is responsible for the preparation, integrity and fair presentation of the financial information included in this report. The financial statements have been prepared in accordance with generally accepted accounting principles and necessarily include certain amounts that are based on management's estimates and judgment. Management is responsible for maintaining a system of internal accounting controls to provide reasonable assurance as to the integrity and reliability of the financial statements, the proper safeguarding and use of assets, and the accurate execution and recording of transactions. Such controls are based on established policies and procedures and are implemented by trained personnel. The system of internal accounting controls is monitored by the Corporation's internal auditors to confirm that the system is proper and operating effectively. The Corporation's policies and procedures prescribe that the Corporation and its subsidiaries are to maintain ethical standards and that its business practices are to be consistent with those standards. The Corporation's financial statements have been audited by Arthur Andersen LLP, independent public accountants. Their audit was conducted in accordance with generally accepted auditing standards and included consideration of the Corporation's internal control system. Management has made available to Arthur Andersen LLP all the Corporation's financial records and related data, as well as minutes of the meetings of the Board of Directors. Management believes that all representations made to Arthur Andersen LLP were valid and appropriate. The Board of Directors, operating through its Audit Committee composed entirely of nonemployee directors, provides oversight to the financial reporting process. The Audit Committee meets periodically with management, the internal auditors and Arthur Andersen LLP, jointly and separately, to review financial reporting matters, internal accounting controls and audit results to assure that all parties are properly fulfilling their responsibilities. Both Arthur Andersen LLP and the internal auditors have unrestricted access to the Audit Committee. /s/ William C. Foote - - ---------------------- Chairman and Chief Executive Officer /s/ Richard H. Fleming - - ---------------------- Executive Vice President and Chief Financial Officer /s/ Raymond T. Belz - - ---------------------- Senior Vice President and Controller REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of USG Corporation: We have audited the accompanying consolidated balance sheets of USG Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, cash flows, stockholders' equity and comprehensive income for the years ended December 31, 1998, 1997 and 1996. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of USG Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for the years ended December 31, 1998, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP - - ----------------------- ARTHUR ANDERSEN LLP Chicago, Illinois January 22, 1999 USG CORPORATION SELECTED QUARTERLY FINANCIAL DATA (unaudited) (millions, except per share data) First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- -------
1998 Net sales................. $ 735 $ 775 $ 814 $ 806 $ 3,130 Gross profit.............. 196 221 233 234 884 Operating profit ......... 124 147 158 156 585 Net earnings ............. 67 82 91 92 332 Per Common Share: Net earnings (a) - basic 1.42 1.68 1.83 1.85 6.81 - diluted 1.35 1.63 1.80 1.83 6.61 Price range (b) - high 56.750 58.000 58.750 51.625 58.750 - low 47.000 49.500 41.375 35.500 35.500 Cash dividends paid .... - - - 0.10 0.10 EBITDA.................... 142 165 177 175 659 1997 Net sales................. 673 723 757 721 2,874 Gross profit.............. 177 202 210 198 787 Operating profit (c)...... 69 88 97 125 379 Net earnings (c).......... 15 27 34 72 148 Per Common Share: Net earnings (a) - basic 0.33 0.57 0.74 1.53 3.19 - diluted 0.32 0.55 0.70 1.45 3.03 Price range (b) - high 38.750 38.625 48.000 51.500 51.500 - low 30.000 29.875 35.750 41.375 29.875 EBITDA.................... 127 147 156 142 572 (a) Basic earnings per share is calculated using average shares outstanding during the period. Diluted earnings per share is calculated using average shares and common stock equivalents outstanding during the period. Consequently, the sum of the four quarters is not necessarily the same as the total for the year. (b) Stock price ranges are for transactions on the New York Stock Exchange (trading symbol USG), which is the principal market for these securities. Stockholders of record as of January 31, 1999: Common - 4,773; Preferred - none. (c) Includes excess reorganization value amortization of $42 million in each of the first and second quarters and $43 million in the third quarter of 1997. Excess reorganization value, which was established in connection with a financial restructuring in 1993, was eliminated as of September 30, 1997.
USG CORPORATION FIVE-YEAR SUMMARY (unaudited) (dollars in millions, except per share data) Years Ended December 31, ----------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------
Earnings Statement Data: Net sales........................................ $ 3,130 $ 2,874 $ 2,590 $ 2,444 $ 2,290 Gross profit..................................... 884 787 645 603 517 Selling and administrative expenses.............. 299 281 268 244 244 Amortization of excess reorganization value...... - 127 169 169 169 Operating profit................................. 585 379 208 190 104 Interest expense................................. 53 60 75 99 149 Interest income.................................. (5) (3) (2) (6) (10) Other expense, net............................... 3 2 3 32 3 Income taxes..................................... 202 172 117 97 54 Net earnings (loss).............................. 332 148 15 (32) (92) Net Earnings (Loss) Per Common Share: Basic......................................... 6.81 3.19 0.32 (0.71) (2.14) Diluted....................................... 6.61 3.03 0.31 (0.71) (2.14) Balance Sheet Data (as of the end of the period): Working capital ................................. 368 264 159 167 311 Current ratio.................................... 1.86 1.70 1.41 1.46 1.83 Property, plant and equipment, net............... 1,214 982 887 842 755 Total assets..................................... 2,357 1,926 1,864 1,927 2,173 Total debt (a)................................... 596 620 772 926 1,149 Total stockholders' equity (deficit)............. 518 147 (23) (37) (8) Other Information: EBITDA........................................... 659 572 437 417 325 Capital expenditures............................. 309 172 120 147 64 Gross margin %................................... 28.2 27.4 24.9 24.7 22.6 EBITDA margin %.................................. 21.1 19.9 16.9 17.1 14.2 Stock price (per common share) (b)............... 50.94 49.00 33.88 30.00 19.50 Average number of employees...................... 13,700 13,000 12,500 12,400 12,300 (a) Total debt is shown at principal amounts for all periods presented. The carrying amounts of total debt (net of unamortized reorganization discount) as reflected on the consolidated balance sheets as of December 31, 1996, 1995 and 1994, were $755 million, $907 million and $1,122 million, respectively. (b) Stock price per common share reflects the closing price on December 31.
EX-21 5 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES The companies listed below are the primary subsidiaries of the Corporation. The financial data for these subsidiaries, as well as for other subsidiaries that are not considered to be significant and are therefore excluded from this exhibit, comprised the Corporation's consolidated financial statements.
Organized Under Name of Company Laws of Domestic: United States Gypsum Company(a)......................................................... Delaware USG Interiors, Inc. (a)................................................................. Delaware L&W Supply Corporation (a)(b)........................................................... Delaware USG International, Ltd.................................................................. Delaware USG Foreign Investments, Ltd. (a)....................................................... Delaware USG Interiors International, Inc........................................................ Ohio USG Funding Corporation................................................................. Delaware La Mirada Products Co., Inc............................................................. Ohio USG Foreign Sales Corporation........................................................... Virgin Islands Gypsum Engineering Company.............................................................. Delaware Alabaster Assurance Company, Ltd........................................................ Vermont H & B Gypsum, Inc. (c) ................................................................. Oklahoma USG Latin America ...................................................................... Delaware International: CGC Inc. (a)............................................................................ Canada USG Canadian Mining Ltd................................................................. Ontario Gypsum Transportation Limited........................................................... Bermuda Yeso Panamericano, S.A. de C.V.......................................................... Mexico Grupo Yeso de Mexico, S.A. de C.V....................................................... Mexico Exploracion de Yeso, S.A. de C.V....................................................... Mexico USG Manufacturing Worldwide, Ltd........................................................ Caymans USG Interiors (Donn) S.A................................................................ Belgium Donn Products GmbH...................................................................... Germany USG Interiors Eastern Manufacturing Baulemente GmbH..................................... Germany USG Interiors East Innenausbau-vertriebsgesellschaft mbH................................ Germany USG (U.K.) Ltd.......................................................................... United Kingdom USG France S.A.......................................................................... France USG (Netherlands) B.V................................................................... Netherlands USG Interiors (Europe) S.A.............................................................. Belgium USG Interiors Coordination Centre S.A................................................... Belgium USG Europe, S.A......................................................................... Belgium USG Belgium Holdings S.A................................................................ Belgium USG Asia Pacific Holdings Pty. Ltd...................................................... Singapore USG Interiors Pacific Ltd............................................................... New Zealand USG Interiors Australia Pty. Ltd........................................................ Australia USG Interiors (Far East) SDN BHD........................................................ Malaysia Shenzhen USG Zhongbei Building Materials Co. (60% ownership)............................ China Alabaster Engineering (Nederland) B.V................................................... Netherlands Red Top Technology (Nederland) B.V...................................................... Netherlands (a) Accounts for material revenues. (b) As of December 31, 1998, L&W Supply conducted its business out of 187 locations in 36 states using various names registered under applicable assumed business name statutes. (c) Acquired on January 6, 1999.
EX-23 6 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports dated January 22, 1999, included in this Form 10-K for the year ended December 31, 1998, into the Corporation's previously filed Registration Statements Nos. 33-60563 and 33-64217 on Form S-3 and 33-22581, as amended, 33-36303, 33-52715, 33-63554, 33-65383, 333-34147, 333-29137 and 33-11496 on Form S-8. /s/Arthur Andersen LLP - - ---------------------- ARTHUR ANDERSEN LLP Chicago, Illinois February 26, 1999 EX-24 7 POWER OF ATTORNEY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose name appears below constitutes and appoints Richard H. Fleming, Raymond T. Belz, and Dean H. Goossen and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the year ending December 31, 1998 of USG Corporation and any or all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney has been signed as of the 10th day of February, 1999, by the following persons:
/s/ William C. Foote /s/ W.H. Clark - - -------------------------------- -------------------------------- William C. Foote, W.H. Clark, Director, Chairman of the Board Director and Chief Executive Officer /s/ P.J. O'Bryan /s/ James C. Cotting - - -------------------------------- -------------------------------- P.J. O'Bryan, James C. Cotting, Director, President and Chief Director Operating Officer /s/ Robert L. Barnett /s/ Lawrence M. Crutcher - - -------------------------------- -------------------------------- Robert L. Barnett, Lawrence M. Crutcher, Director Director /s/ Keith A. Brown /s/ W. Douglas Ford - - -------------------------------- -------------------------------- Keith A. Brown, W. Douglas Ford, Director Director /s/ David W. Fox /s/ John B. Schwemm - - -------------------------------- -------------------------------- David W. Fox, John B. Schwemm, Director Director /s/ Philip C. Jackson, Jr. /s/ Judith A. Sprieser - - -------------------------------- -------------------------------- Philip C. Jackson, Jr. Judith A. Sprieser, Director Director /s/ Valerie B. Jarrett - - -------------------------------- Valerie B. Jarrett Director /s/ Marvin E. Lesser - - -------------------------------- Marvin E. Lesser Director
EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS DEC-31-1998 DEC-31-1998 152 0 367 18 234 797 1,512 298 2,357 429 561 0 0 5 513 2,357 3,130 3,130 2,246 2,246 299 0 53 534 202 332 0 0 0 332 6.81 6.61
-----END PRIVACY-ENHANCED MESSAGE-----