-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, V1yZ1T4NTLnIO0qSwRy8Ld2t0Cm4YvifM26p5g3tK+CJXU/vallSttwqgePAtF3E o8zQCxh566MFuAVGQFJXQw== 0000757011-95-000001.txt : 19950613 0000757011-95-000001.hdr.sgml : 19950613 ACCESSION NUMBER: 0000757011-95-000001 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950308 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: USG CORP CENTRAL INDEX KEY: 0000757011 STANDARD INDUSTRIAL CLASSIFICATION: CONCRETE GYPSUM PLASTER PRODUCTS [3270] IRS NUMBER: 363329400 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08864 FILM NUMBER: 95519180 BUSINESS ADDRESS: STREET 1: 125 S FRANKLIN ST STREET 2: DEPT. 188 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3126065439 10-K405 1 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, 1994 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 Common Stock, $0.10 par value New York Stock Exchange Midwest Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Midwest Stock Exchange 7.875% Sinking Fund New York Stock Exchange Debentures, due 2004 Warrants New York Stock Exchange Midwest 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, 1995, the aggregate market value of USG Corporation common stock held by nonaffiliates (based upon the New York Stock Exchange ("NYSE") closing prices) was approximately $742,555,000. As of January 31, 1995, 45,086,248 shares of common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Applicable to: Document: PART IV Item 14. Exhibits, Financial Statement A list of exhibits incorporated Schedules and Reports on by reference is contained in Form 8-K this report. TABLE OF CONTENTS PART I Item 1. Business Item 2. Properties Item 3. Legal Proceeding Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition Item 8. Financial Statements and Supplementary Data: Restructured Company Predecessor Company Selected Quarterly Financial Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K Signatures INDEX OF DEFINED TERMS Anderson Case Bank Term Loans Cash Sweep Center CGC Combined Guarantors Combined Non-Guarantors Common Stock Corporation Coverage Action Credit Agreement EBITDA Equity Offering FIFO Georgine Interpretation 39 L&W Supply LIFO Master Trust NOL Carryforwards Note Placement NYSE Parent Company Personal Injury Cases Predecessor Company Prepackaged Plan Property Damage Cases Receivables Facility Restructured Company Restructuring Revolving Credit Facility Rights Rights Agreement SEC Senior 1996 Notes Senior 1997 Notes Senior 2001 Notes Senior 2002 Notes SFAS SOP 90-7 Subsidiary Guarantees Supporting Insurers Third Amendment Transactions U.S. Gypsum USG USG Funding USG Interiors USG International Warrants Water Street Wellington Agreement YPSA PART I Item 1. BUSINESS (a) General Development of Business 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. On May 6, 1993, the Corporation completed a comprehensive restructuring of its debt (the "Restructuring") through implementation of a "prepackaged" plan of reorganization under United States bankruptcy law (the "Prepackaged Plan"). The debt impacted by the Restructuring was incurred primarily as a result of a plan of recapitalization which was implemented in 1988. Subsequent to that recapitalization, the Corporation was adversely affected by a cyclical downturn in its construction-based markets which resulted in the Corporation's inability to achieve projected operating results and service certain debt obligations in a timely manner. In accordance with the terms of the Prepackaged Plan, $1.4 billion of debt and accrued interest was converted into equity, interest expense was significantly reduced and the maturities of a substantial portion of its remaining debt were extended. The Corporation accounted for the Restructuring using the principles of fresh start accounting as required by AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." Post-bankruptcy accounting rules require that financial results of the Corporation occurring before the Restructuring (the "Predecessor Company") be reported separately from subsequent results of the Corporation (the "Restructured Company"). As such, the Corporation's financial statements effective May 7, 1993, are presented under "Restructured Company" in Part II, Item 8. "Financial Statements and Supplementary Data," while financial statements for periods prior to that date are presented under "Predecessor Company." See Part II, Item 8. "Financial Statements and Supplementary Data - Predecessor Company - Notes to Financial Statements - Financial Restructuring" note for additional information on the Restructuring and implementation of fresh start accounting. In the first quarter of 1994, the Corporation implemented a refinancing plan which included (i) a public offering of 14,375,000 shares of common stock (the "Equity Offering"), of which 7,900,000 shares, yielding net proceeds to the Corporation of $224 million, were newly issued by the Corporation and 6,475,000 were sold by Water Street Corporate Recovery Fund I, L.P., the Corporation's largest stockholder ("Water Street"); (ii) the issuance of $150 million of 9 1/4% senior notes due 2001 (the "Senior 2001 Notes") to certain institutional investors (the "Note Placement") in exchange for $30 million aggregate principal amount of its outstanding 8% senior notes due 1996 (the "Senior 1996 Notes"), $35 million aggregate principal amount of its outstanding 8% senior notes due 1997 (the "Senior 1997 Notes") and $85 million in cash; and (iii) amendment of the Corporation's bank credit agreement (the "Credit Agreement"). (Collectively, the Equity Offering, the Note Placement and the amendment to the Credit Agreement are referred to as the "Transactions.") In addition to the Transactions, other refinancing activities were implemented in 1994 which resulted in the prepayment of debt, reduction of interest expense and increased operating flexibility. See Part II, Item 8. "Financial Statements and Supplementary Data - Restructured Company - Notes to Financial Statements - Accounts Receivable Facility and Indebtedness" notes for more information on the Transactions and other 1994 refinancing activities. On December 30, 1994, USG Interiors, Inc. ("USG Interiors") sold its domestic access floor systems business (including a manufacturing plant in Red Lion, Pennsylvania) to Tate Access Floor Incorporated. The Corporation received $12 million in net proceeds for this sale and no gain or loss on the sale was recorded. In 1994, this business had net sales of $30 million and an operating loss of $0.4 million. (b) Financial Information About Industry Segments The Corporation operates in two core businesses: North American Gypsum (which includes the Gypsum Products industry segment in the United States, Canada and Mexico and the Building Products Distribution industry segment in the United States) and Worldwide Ceilings (which includes interior systems operations worldwide). See "(c) Narrative Description of Business" below and Part II, Item 8. "Financial Statements and Supplementary Data - Notes to Financial Statements - Industry and Geographic Segments" notes for both the Restructured Company and the Predecessor Company for financial information and other related disclosures about the Corporation's industry and geographic segments. (c) Narrative Description of Business Through its subsidiaries, USG is a leading manufacturer of building materials which produces a wide range of products for use in residential and non-residential construction, repair and remodeling, as well as products used in certain industrial processes. USG's operations are organized into two core businesses: North American Gypsum and Worldwide Ceilings. North American Gypsum Business The North American Gypsum core business, which manufactures and markets gypsum 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 the Corporation's 76%-owned subsidiary, CGC Inc. ("CGC"), in Canada and Yeso Panamericano S.A. de C.V. ("YPSA") in Mexico. U.S. Gypsum is the largest producer of gypsum wallboard in the United States and accounted for approximately one-third of total domestic gypsum wallboard sales in 1994. L&W Supply is the country's largest distributor of wallboard and related products and in 1994 distributed approximately 9% of all gypsum wallboard in the United States (including approximately 22% of U.S. Gypsum's wallboard production). 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 mobile home 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 is produced to provide fire-resistant and water damage resistant assemblies for both interior and exterior construction. The Corporation also 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 and 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 sold to agricultural and industrial customers for use in a number of applications, including soil conditioning, road repair, fireproofing and ceramics. Manufacturing Gypsum and related products are produced by the Corporation at 41 plants located throughout the United States, eastern Canada and in central Mexico. In 1994, the Corporation implemented an incremental wallboard capacity expansion at nine strategically located plants in the United States. By the end of 1995, this program is expected to increase U.S. Gypsum's wallboard capacity by approximately 600 million square feet. Further, the Corporation increased its capital spending program to maintain and enhance its control of manufacturing costs. Gypsum rock is mined or quarried at 14 company-owned locations in the United States and Canada. In 1994, these facilities provided approximately 95% of the gypsum used by the Corporation's plants in North America. Certain plants purchase synthetic gypsum or natural gypsum rock instead of or in addition to gypsum rock from company mines and quarries. Such purchases accounted for approximately 5% of 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 232 million tons, of which approximately 70% are located in the United States and 30% in Canada. Additional reserves of approximately 153 million tons exist 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 9.7 million tons. USG 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. USG maintains a research and development facility in Libertyville, Illinois which conducts fire, structural and acoustical testing and product and process development. Research and development activities involve technology related to gypsum, cellulosic fiber and cement as the primary raw materials on which panel products and systems, such as gypsum board, cement board and ceiling tile, are based. Related technologies are those pertaining to joint compounds and textures for wallboard finishing, specialty plaster products for both construction and industrial applications, coatings and latex polymers. Marketing and Distribution Distribution is carried out through L&W Supply, home improvement centers and other retailers, building material dealers, contractors and 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 1994, about 49% of total industry volume demand for gypsum wallboard was generated by new residential construction activity, 35% of volume demand was generated by residential and non-residential repair and remodel activity, 9% of volume demand was generated by new non-residential construction activity and the remaining 7% of volume demand was generated by other activities such as exports and temporary construction. L&W Supply was founded in 1971 by U.S. Gypsum and currently has 139 distribution centers in 34 states. It is a service-oriented organization that stocks a variety 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 49% 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 ceiling grid and products of other manufacturers, including drywall metal, insulation, roofing products and accessories. L&W Supply leases approximately 80% of its facilities from third parties. Usually, initial leases are from three to five years with a five-year renewal option. Competition The Corporation competes in North America as the largest of 18 producers of gypsum wallboard products and, in 1994, accounted for approximately one-third of total gypsum wallboard sales in the United States. Shipments of gypsum wallboard in the United States totaled 7.7 billion square feet in 1994, the highest in the Corporation's history, compared with total domestic industry shipments of 23.7 billion square feet which was also a record level. Principal competitors in the United States are: National Gypsum Company, Georgia-Pacific Corporation, Domtar, Inc., The Celotex Corporation, which has operated under Chapter 11 of the Bankruptcy Code since 1990 and several smaller, regional competitors. Major competitors in eastern Canada include Domtar, Inc. and Westroc Industries Ltd. In Mexico, the Corporation's major competitor is Panel Rey. L&W Supply's largest competitor, Gypsum Management Supply, is an independent distributor with approximately 70 locations in the southern, central and western United States. There are several regional competitors, such as Gypsum Drywall Management Association in the southern United States and Strober Building Supply in the northeastern United States. L&W Supply's many local competitors include lumber dealers, hardware stores, home improvement centers, acoustical tile distributors and manufacturers. Worldwide Ceilings Business USG's Worldwide Ceilings core business, which manufactures and markets interiors systems products worldwide, includes USG Interiors, the international interiors systems businesses managed as USG International ("USG International") and the interiors systems business of CGC. USG Interiors is a leading supplier of interior ceiling and wall products used primarily in commercial applications. In 1994, USG Interiors was the largest producer of ceiling grid and the second largest producer of ceiling tile in the United States, accounting for over one-half and approximately one-third of total domestic sales of such products, respectively. Products Worldwide Ceilings manufactures and markets ceiling grid and ceiling tile, wall systems, mineral wool insulation and soundproofing products and, in Europe and the Pacific, access floor systems. The Corporation's United States access floor systems business was sold in 1994. USG's integrated line of ceiling 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 "ACOUSTONE" and "AURATONE" brands of ceiling tile and the "DX," "FINELINE," "CENTRICITEE" and "DONN" brands of ceiling grid. USG's wall systems provide the versatility of an open floor plan with the privacy of floor-to-ceiling partitions which are compatible with leading office equipment and furniture systems. Wall systems are designed to be installed quickly and reconfigured easily. In addition, USG manufactures a line of access floor systems in Europe and the Pacific that permit easy access to wires and cables for repairs, modifications, and upgrading of electrical and communication networks as well as convenient movement of furniture and equipment. Manufacturing Worldwide Ceilings products are manufactured at 21 plants located in North America, Europe, New Zealand and Malaysia, including 5 ceiling tile plants and 9 ceiling grid plants. The remaining plants produce other interior products and raw materials for ceiling tile and grid. Principal raw materials used in the production of Worldwide Ceilings products include mineral fiber, steel, aluminum extrusions 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 1995, the Corporation plans to initiate a major expansion of its ceiling tile manufacturing capacity to meet increasing worldwide demand. This expansion is expected to be completed in 1996. USG Interiors maintains its own research and development facility in Avon, Ohio, which provides product design, engineering and testing services in addition to manufacturing development, primarily in metal forming, with tool and machine design and construction services. Additional research and development is carried out at the Corporation's research and development center in Libertyville, Illinois and at its "Solutions Center"SM in Chicago. Marketing and Distribution Worldwide Ceilings products are sold primarily in markets related to the new construction and renovation of commercial buildings as well as the retail market for small commercial contractors. Marketing and distribution to large commercial users is conducted through a network of distributors and installation contractors as well as through L&W Supply. In recent years, Worldwide Ceilings has increased its emphasis on the retail market. Competition The Corporation estimates that it accounts for approximately one-third of sales of acoustical ceiling tile to the U.S. market. 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. USG's most significant competitor is Chicago Metallic Corporation, which participates in the U.S. and European markets. Other competitors in ceiling grid include W.A.V.E. (a joint venture of Armstrong World Industries, Inc. and Worthington Industries/National Rolling Mills). Other Information The Corporation's plants are substantial users of thermal energy. Five major fuel types are used in a mix consisting of 78% natural gas, 10% electricity, 6% oil, 4% coke and 2% purchased hot air. With few exceptions, plants which use natural gas are equipped with fuel stand-by 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. See Part II, Item 8. "Financial Statements and Supplementary Data - Restructured Company - Notes to Financial Statements - Commitments and Contingencies" note for more information on energy price swap agreements. None of the industry segments 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 4% of the Corporation's 1994 or 1993 consolidated net sales. Because orders are filled upon receipt, none of the industry segments 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 has performed extensive research and development activities and makes the necessary capital expenditures to maintain production facilities in sufficient operating condition. One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos lawsuits alleging both property damage and personal injury. Virtually all costs of the Personal Injury Cases are being paid by insurance. However, many of U.S. Gypsum's insurance carriers are denying coverage for the Property Damage Cases, although U.S. Gypsum believes that substantial coverage exists and the trial court and an intermediate appellate court in U.S. Gypsum's Coverage Action have so ruled (such ruling may be appealed). In view of the limited insurance funding currently available to U.S. Gypsum for Property Damage Cases resulting from continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. See Part II, Item 8. "Financial Statements and Supplementary Data - Restructured Company - Notes to Financial Statements - Litigation" note for more information on legal proceedings. (d) Financial Information About Foreign and Domestic Operations and Export Sales See Part II, Item 8. "Financial Statements and Supplementary Data - Notes to Financial Statements - Industry and Geographic Segments" notes for both the Restructured and Predecessor Companies. Item 2. PROPERTIES The Corporation's plants, mines, quarries, transport ships and other facilities are located in North America, Europe, New Zealand and Malaysia. Many of these facilities are operating at or near full capacity. All facilities and equipment are in good operating condition and, in management's judgment, sufficient expenditures have been made annually to maintain them. The locations of the production properties of the Corporation's subsidiaries, grouped by industry segment, are as follows (plants are owned unless otherwise indicated): North American Gypsum Gypsum Board and Other Gypsum Products United States Canada Baltimore, MD Norfolk, VA Hagersville, Ontario Boston (Charlestown), MA Oakfield, NY Montreal, Quebec Detroit (River Rouge), MI Plaster City, CA St. Jerome, Quebec East Chicago, IN Plasterco (Saltville), VA (currently idle) Empire, NV Santa Fe Springs, CA Mexico Fort Dodge, IA Shoals, IN Puebla, Puebla Fremont, CA Sigurd, UT Galena Park, TX Southard, OK Gypsum, OH Sperry, IA Jacksonville, FL Stony Point, NY New Orleans, LA Sweetwater, TX Joint Compound Surface preparation and joint treatment products are produced in plants located at Chamblee, GA; Dallas, TX; East Chicago, IN; Fort Dodge, IA; Gypsum, OH; Jacksonville, FL; Port Reading, NJ (leased); Sigurd, UT; Tacoma, WA (leased); Torrance, CA; Hagersville, Ontario, Canada; Montreal, Quebec, Canada; Puebla, Mexico; and Port Klang, Malaysia (leased). Gypsum Rock Gypsum rock is mined or quarried at Alabaster (Tawas City), MI; Empire, NV; Fort Dodge, IA; Oakfield, NY; Plaster City, CA; Plasterco (Saltville), VA; Shoals, IN; Sigurd, UT; Southard, OK; Sperry, IA; Sweetwater, TX; Hagersville, Ontario, Canada; Little Narrows, Nova Scotia, Canada; and Windsor, Nova Scotia, Canada. Paper Paper for gypsum board is manufactured at Clark, NJ; Galena Park, TX; Gypsum, OH; Jacksonville, FL; North Kansas City, MO; Oakfield, NY; and South Gate, CA. 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 haul gypsum rock from Nova Scotia to the East Coast and Gulf port plants of U.S. Gypsum. Excess ship time, when available, is offered for charter on the open market. Other Products A mica-processing plant is located at Spruce Pine, NC; perlite ore is produced at Grants, NM. 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, CA (adhesives); and New Orleans, LA (lime products). Worldwide Ceilings Ceiling Tile Acoustical ceiling tile and panels are manufactured at Cloquet, MN; Greenville, MS; Walworth, WI; San Juan Ixhautepec, Mexico; and Aubange, Belgium. Ceiling Grid Ceiling grid products are manufactured at Cartersville, GA; Stockton, CA; Westlake, OH; Auckland, New Zealand (leased); Dreux, France; Oakville, Ontario, Canada; Peterlee, England (leased); Port Klang, Malaysia (leased); and Viersen, Germany. A coil coater and slitter plant used in the production of ceiling grid is also located in Westlake, OH. Other Products Access floor systems products are manufactured at Dreux, France; Peterlee, England (leased); and Port Klang, Malaysia (leased). Mineral wool products are manufactured at Birmingham, AL; Red Wing, MN; Tacoma, WA; Wabash, IN; Walworth, WI; and Weston, Ontario, Canada. Wall system products are manufactured at Medina, OH (leased). Drywall metal products are manufactured at Prestice, Czech Republic (leased). Item 3. LEGAL PROCEEDINGS See Part II, Item 8. "Financial Statements and Supplementary Data - Notes to Financial Statements - Litigation" note for information on legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1994. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) See Item 8. "Financial Statements and Supplementary Data - Selected Quarterly Financial Data" for information with respect to the principal market on which the Corporation's Common Stock is traded and the range of high and low closing market prices. (b) As of January 31, 1995, there were 6,072 stockholders of record of the Corporation's Common Stock. (c) There have been no dividends declared since the third quarter of 1988. The Credit Agreement and certain other debt instruments prohibit or restrict the payment of cash dividends. Item 6. SELECTED FINANCIAL DATA USG CORPORATION COMPARATIVE FIVE-YEAR SUMMARY (a) (b) (unaudited) (Dollars in millions, except per share data)
Year May 7 January 1 ended through through Dec. 31, Dec. 31, May 6, Years ended December 31 1994 1993 1993 1992 1991 1990 Earnings Statement Data: Net sales $2,290 $1,325 $ 591 $1,777 $1,712 $1,915 Gross profit 517 263 109 317 327 416 Selling and administrative expenses 244 149 71 218 194 203 Amortization of excess reorganization value 169 113 - - - - Operating profit 104 1 38 99 133 195 Interest expense 149 92 86 334 333 292 Interest income (10) (4) (2) (12) (11) (8) Other (income)/expense, net 3 (8) 6 1 5 5 Reorganization items - - (709) - - - Earnings/(loss) from continuing operations before extraordinary gain/(loss) and changes in accounting principles (92) (108) 640 (191) (141) (54) Extraordinary gain/(loss), net of taxes - (21) 944 - - - Cumulative effect of accounting changes - - (150) - - - Net earnings/(loss) (92) (129) 1,434 (191) (161) (90) Net loss per common share (c) (2.14) (3.46) Balance Sheet Data (as of the end of the period): Working capital/(deficit) 189 121 217 (2,608) (2,372) (2,198) Current ratio 1.42 1.24 1.74 .21 .21 .24 Property, plant and equipment, net 755 754 767 800 819 825 Total assets 2,124 2,163 2,194 1,659 1,626 1,675 Total debt (d) 1,149 1,531 1,556 2,711 2,660 2,600 Total stockholders' equity/(deficit) (8) (134) 4 (1,880) (1,680) (1,518) Other Information: EBITDA 325 155 63 159 194 280 Capital expenditures 64 29 12 49 49 64 Gross margin % 22.6 19.8 18.4 17.8 19.1 21.7 EBITDA margin % 14.2 11.7 10.7 8.9 11.3 14.6 Market value per common share (c) 19 1/2 29 1/4 Average number of employees 12,300 11,900 11,750 11,850 11,800 12,700 (a) Results reflect DAP Inc. (sold in 1991) as discontinued operations. (b) Due to the Restructuring and implementation of fresh start accounting, the financial statements effective May 7, 1993 for the restructured company are not comparable to financial statements prior to that date. See Item 8 "Financial Statements & Supplementary Data - Predecessor Company - Notes to Financial Statements - Financial Restructuring" note for more information on the Restructuring and implementation of fresh start accounting. (c) Per-share information for periods prior to May 7, 1993 is omitted because, due to the Restructuring and implementation of fresh start accounting, it is not meaningful. Market value per common share amounts shown are the closing stock price on December 31 of the applicable year. (d) 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 Corporation's balance sheets as of December 31, 1994, December 31, 1993 and May 6, 1993 are $1,122 million, $1,476 million and $1,461 million, respectively.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Due to the May 6, 1993 Restructuring and implementation of fresh start accounting, the Corporation's financial statements effective May 7, 1993 are not comparable to financial statements for periods prior to that date. See Item 8. "Financial Statements and Supplementary Data - Predecessor Company - Notes to Financial Statements - Financial Restructuring" note for information on the Restructuring and implementation of fresh start accounting. To facilitate a meaningful comparison of the Corporation's operating performance, the following information includes comparisons of "EBITDA" (earnings before interest, taxes, depreciation, depletion, amortization, and for 1993, reorganization items, extraordinary items and changes in accounting principles). The Corporation believes EBITDA is helpful in understanding cash flow generated from operations that is available for taxes, debt service and capital expenditures. In addition, EBITDA facilitates the monitoring of covenants related to certain long-term debt and other agreements entered into in conjunction with the Restructuring. EBITDA should not be considered by investors as an alternative to net earnings as an indicator of the Corporation's operating performance or to cash flows as a measure of its overall liquidity. Post-bankruptcy accounting rules require separate reporting of financial results for the Restructured Company and the Predecessor Company. However, the following information presents 1993 on an annual basis to facilitate a meaningful year-to-year comparison. Consolidated Results (dollars in millions)
Years ended December 31 1994 1993 1992 Net Sales $2,290 $1,916 $1,777 Gross Profit 517 372 317 % of net sales 22.6% 19.4% 17.8% Selling and administrative expenses 244 220 218 % of net sales 10.7% 11.5% 12.3% Amortization of excess reorganization value 169 113 - Operating Profit 104 39 99 Calculation of EBITDA: Operating profit $ 104 $ 39 $ 99 Amortization of excess reorganization value 169 113 - Depreciation and depletion 53 54 58 Other (1) 12 2 EBITDA 325 218 159 % of net sales 14.2% 11.4% 8.9%
In 1994, improved results in nearly all of the Corporation's businesses led to increased net sales for the third consecutive year, up $374 million, or 19.5%, over 1993. In 1993, net sales increased $139 million, or 7.8%, over the 1992 level. EBITDA for 1994 increased $107 million, or 49.1%, over the 1993 level, which was up $59 million, or 37.1%, over 1992. Continued improvement in gypsum wallboard prices and record shipments of gypsum wallboard, joint compound, ceiling tile and cement board accounted for these results. These trends reflect continued strength in building materials markets despite rising interest rates in 1994. Based on preliminary information issued by the Bureau of Census, housing starts in the United States amounted to 1.455 million units in 1994, up 13% over the 1993 level of 1.288 million units. The 1993 level of housing starts was 7% above the 1992 amount of 1.200 million units. New non-residential construction also improved, the second consecutive year of such growth, and demand from repair and remodel expenditures continued to grow. In the fourth quarter of 1994, U.S. Gypsum recorded a $30 million pre-tax charge to cost of products sold ($17 million after-tax) primarily to cover the cash portion of two asbestos litigation settlements. Approximately two- thirds of this amount was paid in 1994 with the remainder payable in 1995 and 1996. See Item 8. "Financial Statements and Supplementary Data - Restructured Company - Notes to Financial Statements - Litigation" note for information on these settlements. Despite this charge, gross profit as a percentage of net sales increased to 22.6% in 1994 from 19.4% in 1993 and 17.8% in 1992 reflecting increased gypsum wallboard prices. Selling and administrative expenses in 1994 increased $24 million, or 10.9%, over the prior year largely due to increased expenses related to compensation and benefits and product and marketing programs. As a percent of net sales, however, these expenses improved to 10.7% in 1994 compared to 11.5% in 1993 and 12.3% in 1992. The Corporation began amortizing its excess reorganization value, which was established in connection with the Restructuring, on May 7, 1993. This non- cash amortization, which will continue through April 1998, amounted to $169 million and $113 million in 1994 and 1993, respectively, with no counterpart in 1992. Consequently, operating profit is not comparable for any of the three years shown in the table above. Core Business/Industry Segment Results (dollar in millions)
Years ended December 31 Net Sales EBITDA 1994 1993 1992 1994 1993 1992 North American Gypsum: U.S. Gypsum $1,209 $ 970 $ 871 $ 248 $ 148 $ 101 CGC (gypsum division) 110 91 92 15 9 3 Other subsidiaries 90 77 77 28 23 21 Eliminations (84) (63) (66) - - - Total Gypsum Products 1,325 1,075 974 291 180 125 Building Products Distribution 659 528 464 15 7 5 Eliminations (204) (160) (142) (2) - - Total North American Gypsum 1,780 1,443 1,296 304 187 130 Worldwide Ceilings: USG Interiors 400 360 354 53 48 47 USG International 202 185 189 6 4 5 CGC (interiors division) 29 30 33 3 4 5 Eliminations (37) (35) (35) - - - Total Worldwide Ceilings 594 540 541 62 56 57 Corporate - - - (41) (25) (28) Eliminations (84) (67) (60) - - - Total USG Corporation 2,290 1,916 1,777 325 218 159
North American Gypsum Net sales and EBITDA for North American Gypsum continued to increase in 1994. Net sales increased $337 million, or 23.4%, over the 1993 level, which was up $147 million, or 11.3%, above 1992. EBITDA increased $117 million, or 62.6%, in 1994 compared with 1993 after increasing $57 million, or 43.8%, from 1992 to 1993. EBITDA for 1994 includes the impact of the aforementioned $30 million charge associated with asbestos litigation settlements. For U.S. Gypsum, continuing improvement in gypsum wallboard prices and record shipments of gypsum wallboard, joint compound and DUROCK cement board led to improved sales and profits. In 1994, net sales and EBITDA increased $239 million, or 24.6%, and $100 million, or 67.6%, over the respective 1993 amounts. Comparing 1993 to 1992, net sales and EBITDA increased $99 million, or 11.4%, and $47 million, or 46.5%, respectively. Gypsum wallboard prices continued to rise from the 14-year low experienced in the first quarter of 1992. For 1994, the average price of wallboard rose 26.6% above 1993, after increasing 10.5% in 1993 from the 1992 average. U.S. Gypsum's average gypsum wallboard prices per thousand square feet by quarter for 1992 through 1994 were as follows:
1994 1993 1992 First Quarter $ 89.53 $ 74.97 $ 67.77 Second Quarter 98.39 77.71 72.20 Third Quarter 104.65 80.70 73.03 Fourth Quarter 106.92 82.46 73.35 Total Year 100.08 79.07 71.58
Shipments of gypsum wallboard in 1994 topped 7.7 billion square feet, the highest level in the Corporation's history, and up 5% over the previous record of 7.3 billion square feet in 1993. U.S. Gypsum's wallboard manufacturing plants operated at 97% of capacity in 1994 compared with 94% in 1993. In 1994, higher costs for purchased waste paper contributed to increased unit manufacturing cost for gypsum wallboard. U.S. Gypsum's unit manufacturing cost for wallboard in 1994 increased 7% over the 1993 level. Unit manufacturing cost rose 3% in 1993 from the 1992 level primarily due to higher levels of maintenance expenditures and energy cost. L&W Supply (which comprises the Corporation's Building Products Distribution segment) reported its highest annual sales ever, up $131 million, or 24.8%, from 1993. EBITDA for 1994 increased $8 million, or 114.3%, from the prior year amount. Comparing 1993 to 1992, net sales and EBITDA increased $64 million, or 13.8%, and $2 million, or 40.0%, respectively. These improvements reflect higher gypsum wallboard selling prices and increased volume, as well as increased sales of other building materials product lines. CGC's gypsum division experienced improved volume for gypsum wallboard, particularly in shipments to the United States, and increased prices for wallboard, primarily due to increased wallboard demand in North America as a whole. Net sales in 1994 increased $19 million, or 20.9%, over the prior year, while EBITDA increased $6 million, or 66.7%, in the same period. As a result of the strengthened U.S. dollar compared with the Canadian dollar, net sales for 1993 decreased slightly from the 1992 level. EBITDA, however, tripled from 1992 to $9 million in 1993 due to higher selling prices for wallboard. Wallboard prices in Canada were positively impacted in 1993 by the Canadian government's ruling that dumping of U.S.-made wallboard had occurred and the resulting imposition of duties on gypsum wallboard imported into Canada from the United States at prices below certain levels. This ruling will be in effect until January 1998. Worldwide Ceilings Net sales and EBITDA for Worldwide Ceilings in 1994 increased $54 million, or 10.0%, and $6 million, or 10.7%, respectively, over 1993. These improvements are in contrast to 1992 to 1993 results, when net sales and EBITDA each decreased $1 million. USG Interiors experienced record shipments and higher prices for ceiling tile in 1994, primarily due to recovering non-residential construction markets, increased sales to retail markets and increased exports. Sales of ceiling suspension grid also improved in 1994. Compared to the prior year, 1994 net sales and EBITDA increased $40 million, or 11.1%, and $5 million, or 10.4%, respectively. Net sales and EBITDA for 1993 increased $6 million, or 1.7%, and $1 million, or 2.1%, respectively, above 1992. These results reflect increased sales to retail markets, which offset a low level of non-residential construction in 1993. USG International's results reflect improved sales in all regions as well as continued cost improvements in European operations. In 1994, net sales and EBITDA increased $17 million, or 9.2%, and $2 million, or 50.0%, over the respective 1993 amounts. Comparing 1993 to 1992, net sales and EBITDA decreased $4 million, or 2.1%, and $1 million, or 20.0%, respectively. The 1993 results reflect the combined impact of a European recession and a strengthened U.S. dollar compared with European currencies. Other Earnings Information Interest expense continues to decline as a result of the Restructuring and subsequent debt repayment and refinancing activities. Interest expense amounted to $149 million in 1994, down $29 million, or 16.3%, from $178 million recorded in 1993. In 1994, interest expense includes a fourth quarter non-cash pre-tax charge of $16 million for the write-off of reorganization debt discount primarily in conjunction with the Corporation's plan to accelerate the payment of bank term loans issued under the Credit Agreement ("Bank Term Loans") and $12 million of additional amortization of reorganization debt discount. In 1993, interest expense includes $8 million of amortization of reorganization debt discount and $46 million of interest expense that was forgiven or converted to equity as a result of the Restructuring. Interest expense decreased $156 million in 1993 from the 1992 amount of $334 million due to the Restructuring. The Corporation's income tax expense is computed based on pre-tax earnings excluding the non-cash amortization of excess reorganization value, which is not deductible for federal income tax purposes. In 1994, income tax expense amounted to $54 million compared with $46 million in 1993. The Corporation's effective tax rate for 1994 was negative 142.1%; however, excluding amortization of excess reorganization value, the Corporation's effective tax rate was 41.2%. An income tax benefit of $33 million was recorded in 1992. See Part II, Item 8. "Financial Statements and Supplementary Data - Notes to Financial Statements - Taxes on Income and Deferred Income Taxes" notes for both the Restructured and Predecessor Companies for additional information on income taxes. A reorganization items gain of $709 million was recorded in the period of January 1 through May 6, 1993, reflecting fresh start accounting adjustments totaling $778 million, net of restructuring fees and expenses of $69 million. In the same period, a one-time after-tax extraordinary gain of $944 million was recorded, primarily reflecting the gain on the exchange of subordinated debt for common stock in connection with the Restructuring. See Part II, Item 8. "Financial Statements and Supplementary Data - Predecessor Company - Notes to Financial Statements - Reorganization Items and Extraordinary Gain" notes for additional information on these Restructuring-related items. In the period of May 7 through December 31, 1993, the Corporation recorded an after- tax extraordinary loss of $21 million reflecting the write-off of reorganization discount associated with debt issues which were prepaid, redeemed or purchased in 1994 with a portion of the proceeds from the Equity Offering and the Note Placement. See Part II, Item 8. "Financial Statements and Supplementary Data - Restructured Company - Notes to Financial Statements - - Indebtedness" note for additional information on the Equity Offering and Note Placement. A one-time after-tax net charge of $150 million was recorded in the first quarter of 1993 representing the cumulative impact of the adoption of Statement of Financial Accounting Standard ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 109, "Accounting for Income Taxes." See Part II, Item 8. "Financial Statements and Supplementary Data - Predecessor Company - Notes to Financial Statements - Taxes on Income and Deferred Income Taxes and Postretirement Benefits" notes for information related to these accounting changes. A net loss of $92 million was recorded in 1994. However, this loss included the: (i) non-cash amortization of excess reorganization value of $169 million; (ii) non-cash amortization of reorganization debt discount of $12 million; (iii) non-cash after-tax write-off of reorganization debt discount amounting to $9 million primarily associated with the Bank Term Loans; and (iv) after-tax charge of $17 million associated with asbestos litigation settlements. Together, these items reduced net earnings by $207 million, or $4.81 per common share. A net loss of $129 million was recorded in the period of May 7 through December 31, 1993 after amortization of excess reorganization value of $113 million, amortization of reorganization debt discount of $8 million, and the after-tax extraordinary loss of $21 million. Net earnings of $1,434 million were recorded in the period of January 1 through May 6, 1993, reflecting the reorganization items gain of $709 million and the after-tax extraordinary gain of $944 million. A net loss of $191 million was recorded in 1992 primarily due to high levels of interest expense. Liquidity and Capital Resources On May 6, 1993, the Corporation completed the Restructuring through implementation of the Prepackaged Plan. In accordance with the terms of the Prepackaged Plan, $1.4 billion of debt and accrued interest was converted into equity, interest expense was significantly reduced and the maturities of a substantial portion of its remaining debt were extended. The Corporation accounted for the Restructuring using the principles of fresh start accounting. See Part II, Item 8. "Financial Statements and Supplementary Data - - Predecessor Company - Notes to Financial Statements - Financial Restructuring" note for information on the Restructuring and implementation of fresh start accounting. On August 10, 1993, the Corporation issued an additional $138 million of its 10 1/4% senior notes due 2002 ("Senior 2002 Notes") in exchange for Bank Term Loans and other debt then outstanding under the Credit Agreement in order to improve the Corporation's financial flexibility by replacing near-term maturities of the Bank Term Loans with the longer term notes. In connection with this exchange, the cash sweep provisions of the Credit Agreement (the "Cash Sweep") were modified, allowing the Corporation to apply cash otherwise subject to the Cash Sweep through 1996 to repayment or purchase of senior debt. See Part II, Item 8. "Financial Statements and Supplementary Data - Restructured Company - Notes to Financial Statements - Indebtedness" note for additional information on this transaction. The Corporation completed several refinancing activities in 1994 to further reduce debt and interest expense and improve operating flexibility. In the first quarter, the Corporation completed the Transactions which included the Equity Offering, yielding net proceeds to the Corporation of $224 million; the Note Placement, through which $150 million of newly issued Senior 2001 Notes were exchanged for $30 million of Senior 1996 Notes, $35 million of Senior 1997 Notes and $85 million in cash; and the second amendment to the Credit Agreement, which increased the size of the Corporation's revolving credit facility by $70 million (solely for the purchase or repayment of Senior 1996 Notes and Senior 1997 Notes) and further amended the Cash Sweep provisions to allow the Corporation to retain additional free cash flow for capital expenditures and repayment of its debt. In the third quarter, the Credit Agreement was amended for the third time since the Restructuring. In connection with this amendment (the "Third Amendment"), the Corporation made a $25 million prepayment of the Cash Sweep due February 15, 1995. Major revisions to the Credit Agreement provided by the Third Amendment included further modification of the Cash Sweep provisions, authorization for the Corporation to immediately prepay certain debt, authorization for the Corporation to enter into a revolving accounts receivable sale facility and certain other changes to increase the Corporation's operating flexibility. Finally, in the fourth quarter of 1994, the Corporation entered into an accounts receivable facility (the "Receivables Facility") in which USG Funding Corporation ("USG Funding"), a special purpose subsidiary of the Corporation, will purchase trade receivables (excluding intercompany receivables owed by L&W Supply) of U.S. Gypsum and USG Interiors as generated. The purchased receivables will be held in a master trust (the "Master Trust") for the benefit of certificate holders in such trust. Under a supplement to the Master Trust, certificates representing an ownership interest in the Master Trust of up to $100 million were issued to Citicorp Securities, Inc. The interest rate on the debt issued under the Receivables Facility is fixed at approximately 8.9% (including facility costs) through a long-term interest rate swap. Under a pending amendment to the Receivables Facility, debt issued under such facility will have a final maturity in 2004 and the Corporation will have the option to expand the facility up to $130 million. Debt issued under the facility may be prepaid at any time. Pursuant to the applicable reserve and eligibility requirements, the maximum amount of debt issuable under the Receivables Facility as of December 31, 1994 (including $80 million outstanding at such date) was $103 million. Under the relevant agreements and related documentation, USG Funding is a separate corporate entity with its own separate creditors which 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, 1994, the outstanding balance of receivables sold to USG Funding and held under the Master Trust was $151 million and debt outstanding under the Receivables Facility was $80 million. The proceeds of this debt issuance were used to make open market purchases of $80 million of Senior 2002 Notes, generating interest savings of approximately $1 million annually. Receivables and debt outstanding in connection with the Receivables Facility remain in receivables and long-term debt, respectively, on the Corporation's consolidated balance sheet. See Part II, Item 8. "Financial Statements and Supplementary Data - Restructured Company - Notes to Financial Statements - Accounts Receivable Facility and Indebtedness" notes for more information on the Transactions and other 1994 refinancing activities. Utilizing the net proceeds of the Transactions, the Cash Sweep as of December 31, 1993, cash generated from operations in 1994 and increased flexibility provided by other refinancing activities implemented in 1994, the Corporation reduced the aggregate principal amount of its total debt by $382 million in 1994. As of December 31, 1994, the Cash Sweep amounted to $132 million, of which 50%, or $66 million, was required to be used to pay Bank Term Loans while the remaining 50% was retained by the Corporation for general corporate purposes. The portion of the Cash Sweep required to be used to pay Bank Term Loans included a $25 million prepayment in the third quarter of 1994 and a $41 million payment in January 1995. In February 1995, the Corporation made a further payment of $50 million to reduce Bank Term Loans outstanding. Since the May 6, 1993 Restructuring, the Corporation has reduced the aggregate principal amount of its debt by approximately $500 million. The portion of the Cash Sweep retained by the Corporation may be used to reduce other selected debt issues as appropriate. See Part II, Item 8. "Financial Statements and Supplementary Data - Restructured Company - Indebtedness" note for more information on 1994 debt reduction. The Corporation significantly strengthened its liquidity and capital resources through the Restructuring, the Transactions and other refinancing activities. In the absence of significant unanticipated cash demands, the Corporation believes that cash generated by operations and the estimated levels of liquidity available to it will be sufficient to satisfy its ongoing debt service and other capital requirements. Working Capital As of December 31, 1994, working capital (current assets less current liabilities) amounted to $189 million and the ratio of current assets to current liabilities was 1.42 to 1, versus December 31, 1993 when working capital amounted to $121 million and the ratio of current assets to current liabilities was 1.24 to 1. Cash and cash equivalents decreased $14 million to $197 million in 1994 primarily due to the net impact of the Transactions, debt repayments and capital expenditures, largely offset by cash generated from operations. Comparing December 31, 1994 balances with December 31, 1993, receivables (net) increased $10 million, or 3.8%, to $274 million (including $151 million of receivables held in the Master Trust), inventories increased $28 million, or 19.3%, to $173 million, and accounts payable increased $18 million, or 17.3%, to $122 million. These increases primarily reflect the increased level of business. From year-end 1993, accrued expenses increased $45 million, or 21.6%, to $253 million as of December 31, 1994, primarily due to increased levels of accrued compensation and benefits and the aforementioned charge related to asbestos litigation. Capital Expenditures The Corporation augmented its capital spending program as a result of the Transactions. In 1994, capital expenditures amounted to $64 million, up from $41 million in 1993 ($29 million in the period of May 7 through December 31, 1993 and $12 million in the period of January 1 through May 6, 1993). As of December 31, 1994, capital expenditure commitments for the replacement, modernization and expansion of operations amounted to $61 million compared with $11 million as of December 31, 1993. The Corporation expects that capital expenditures will exceed $100 million in 1995. In addition, the Corporation periodically evaluates possible acquisitions or combinations involving other businesses or companies in businesses and markets related to the Corporation's current operations, and the Corporation believes that its available liquidity would be generally adequate to support appropriate opportunities. Litigation One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos lawsuits alleging both property damage and personal injury.Virtually all costs of the Personal Injury Cases are being paid by insurance. However, many of U.S. Gypsum's insurance carriers are denying coverage for the Property Damage Cases, although U.S. Gypsum believes that substantial coverage exists and the trial court and an intermediate appellate court in U.S. Gypsum's Coverage Action have so ruled (such ruling may be appealed). In view of the limited insurance funding currently available to U.S. Gypsum for Property Damage Cases resulting from continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. 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 earnings or consolidated financial position. See Part II, Item 8. "Financial Statements and Supplementary Data - Restructured Company - Notes to Financial Statements - Litigation" note for more information on legal proceedings. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Restructured Company: (a) Consolidated Statement of Earnings - year ended December 31, 1994 and the period of May 7 through December 31, 1993 Consolidated Balance Sheet - as of December 31, 1994 and 1993 Consolidated Statement of Cash Flows - year ended December 31, 1994 and the period of May 7 through December 31, 1993 Notes to Financial Statements Report of Independent Public Accountants Schedule II, Valuation and Qualifying Accounts Supplemental Note on Financial Information for United States Gypsum Company Report of Independent Public Accountants with Respect to Supplemental Note and Financial Statement Schedule Predecessor Company: (a) Consolidated Statement of Earnings - the period of January 1 through May 6, 1993 and the year ended December 31, 1992 Consolidated Balance Sheet - as of May 6, 1993 Consolidated Statement of Cash Flows - the period of January 1 through May 6, 1993 and the year ended December 31, 1992 Notes to Financial Statements Report of Independent Public Accountants Schedule II, Valuation and Qualifying Accounts Supplemental Note on Financial Information for United States Gypsum Company Report of Independent Public Accountants with Respect to Supplemental Note and Financial Statement Schedule Selected Quarterly Financial Data (a) Post-bankruptcy accounting rules require separate reporting of financial results for the Restructured company and the Predecessor company. As such, the Corporation's financial statements effective May 7, 1993 are presented under "Restructured Company" while financial statements for periods prior to that date are presented under "Predecessor Company." Due to the Restructuring and implementation of fresh start accounting, financial statements for the Restructured Company are not comparable to those for the Predecessor Company. See "Predecessor Company - Notes to Financial Statements - Financial Restructuring" note for information on the Restructuring and implementation of fresh start accounting. All other schedules have been omitted because they are not applicable, are not required, or the information is included in the financial statements or notes thereto. USG CORPORATION (Restructured Company) CONSOLIDATED STATEMENT OF EARNINGS (Dollars in millions except per share data)
Year May 7 ended through December 31, December 31, 1994 1993 Net Sales $ 2,290 $ 1,325 Cost of products sold 1,773 1,062 Gross Profit 517 263 Selling and administrative expenses 244 149 Amortization of excess reorganization value 169 113 Operating Profit 104 1 Interest expense 149 92 Interest income (10) (4) Other (income)/expense, net 3 (8) Loss Before Taxes on Income and Extraordinary Loss (38) (79) Taxes on income 54 29 Loss Before Extraordinary Loss (92) (108) Extraordinary loss, net of taxes - (21) Net Loss (92) (129) Loss Per Common Share: Before extraordinary loss $ (2.14) $ (2.90) Extraordinary loss - (0.56) Net Loss Per Common Share (2.14) (3.46) The notes to financial statements are an integral part of this statement.
USG CORPORATION (Restructured Company) CONSOLIDATED BALANCE SHEET (Dollars in millions)
As of December 31 1994 1993 Assets Current Assets: Cash and cash equivalents (primarily time deposits) $ 197 $ 211 Receivables (net of reserves of $14 and $13) 274 264 Inventories 173 145 Total current assets 644 620 Property, Plant and Equipment, Net 755 754 Excess Reorganization Value (net of accumulated amortization of $282 and $113) 561 735 Other Assets 164 54 Total assets 2,124 2,163 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 122 $ 104 Accrued expenses 253 208 Notes payable 1 2 Long-term debt maturing within one year 44 165 Taxes on income 35 20 Total current liabilities 455 499 Long-Term Debt 1,077 1,309 Deferred Income Taxes 179 180 Other Liabilities 421 309 Stockholders' Equity/(Deficit): 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 45,083,211 and 37,158,085 shares (after deducting 33,988 and 27,876 shares held in treasury) 5 4 Capital received in excess of par value 221 - Deferred currency translation (13) (9) Reinvested earnings/(deficit) (221) (129) Total stockholders' equity/(deficit) (8) (134) Total liabilities and stockholders' equity 2,124 2,163 The notes to financial statements are an integral part of this statement.
USG CORPORATION (Restructured Company) CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in millions)
Year May 7 ended through December 31, December 31, 1994 1993 Cash Flows from Operating Activities: Net loss $ (92) $ (129) Adjustments to reconcile net loss to net cash: Amortization of excess reorganization value 169 113 Extraordinary loss - 21 Depreciation, depletion and amortization 84 44 Deferred income taxes (1) 22 Net gain on asset dispositions (2) (9) (Increase)/decrease in working capital: Receivables (10) 51 Inventories (28) 4 Payables 33 14 Accrued expenses 45 37 (Increase)/decrease in other assets (9) 7 Increase in other liabilities 12 12 Other, net (3) (4) Net cash flows from operating activities 198 183 Cash Flows from Investing Activities: Capital expenditures (64) (29) Net proceeds from asset dispositions 16 29 Net cash flows to investing activities (48) - Cash Flows from Financing Activities: Issuance of debt 262 36 Repayment of debt (650) (57) Proceeds from public offering of common stock 224 - Net cash flows to financing activities (164) (21) Net Increase/(Decrease) in Cash and Cash Equivalents (14) 162 Cash and cash equivalents as of beginning of period 211 49 Cash and cash equivalents as of end of period 197 211 Supplemental Cash Flow Disclosures: Interest paid $ 115 $ 73 Income taxes paid 38 5 The notes to financial statements are an integral part of this statement.
USG CORPORATION (Restructured Company) NOTES TO FINANCIAL STATEMENTS (Terms in initial capital letters are defined elsewhere in this Form 10-K) Principles of Consolidation The consolidated financial statements include the accounts of the Corporation and its subsidiaries after elimination of intercompany accounts and transactions. Revenue is recognized upon the shipment of products. Net currency translation gains or losses on foreign subsidiaries are included in deferred currency translation, a component of stockholders' equity. Excess reorganization value, which was recorded as a result of the implementation of fresh start accounting, is being amortized through April 1998. The Corporation continues to evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of excess reorganization value may warrant revision or that the remaining balances may not be recoverable. The Corporation uses an estimate of its undiscounted cash flows over the remaining life of the excess reorganization value in measuring whether the asset is recoverable. See "Financial Restructuring" note below for more information on the implementation of fresh start accounting. For purposes of the Consolidated Balance Sheet and Consolidated Statement of Cash Flows, all highly liquid investments with a maturity of three months or less at the time of purchase are considered to be cash equivalents. Financial Restructuring On May 6, 1993, the Corporation completed a comprehensive restructuring of its debt (the "Restructuring") through implementation of a "prepackaged" plan of reorganization under United States bankruptcy law (the "Prepackaged Plan"). In accordance with the terms of the Prepackaged Plan, $1.4 billion of debt and accrued interest was converted into equity, interest expense was significantly reduced and the maturities of a substantial portion of its remaining debt were extended. The Corporation accounted for the Restructuring using the principles of fresh start accounting as required by AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). Pursuant to such principles, individual assets and liabilities were adjusted to fair market value as of May 6, 1993. Excess reorganization value, the portion of the reorganization value not attributable to specific assets, is being amortized over a five-year period, effective May 7, 1993. The following unaudited Pro Forma Condensed Consolidated Statement of Earnings for the year ended December 31, 1993 has been prepared giving effect to the consummation of the Restructuring, including the implementation of fresh start accounting, as if the consummation had occurred on January 1, 1993. Due to the Restructuring and implementation of fresh start accounting, financial statements effective May 7, 1993 for the Restructured Company are not comparable to financial statements prior to that date for the Predecessor Company. However, for presentation of this statement, total results for 1993 are shown under the caption "Total Before Adjustments." The adjustments set forth under the caption "Pro Forma Adjustments" reflect the implementation of the Prepackaged Plan and the adoption of fresh start accounting as if they had occurred on January 1, 1993. USG CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS Year ended December 31, 1993 (unaudited) (Dollars in millions)
Total Before Pro Forma Adjustments Adjustments Pro Forma Net sales $ 1,916 $ - $ 1,916 Cost of products sold 1,544 - 1,544 Gross profit 372 - 372 Selling and administrative expense 220 - 220 Amortization of excess reorganization value 113 57 (a) 170 Operating profit/(loss) 39 (57) (18) Interest expense 178 (42) (b) 136 Interest income (6) - (6) Other (income)/expense, net (2) (1) (c) (3) Reorganization items (709) 709 (d) - Earnings/(loss) before taxes on income, extraordinary gain and changes in accounting principles 578 (723) (145) Taxes on income 46 (16) 30 Earnings/(loss) before extraordinary gain and changes in accounting principles 532 (707) (175) (a) Reflects amortization of excess reorganization value which would have been recorded during the period of January 1 through May 6, 1993. (b) Reflects the adjustment to restate interest expense for the period of January 1 through May 6, 1993 to the amount that would have been recorded. (c) Represents the reversal of first quarter 1993 amortization of historical capitalized financing costs which were written off in connection with the Restructuring. (d) Represents the reversal of actual reorganization items incurred in connection with the Restructuring and implementation of fresh start accounting. This gain would have been recorded in 1992 had the Restructuring occurred on January 1, 1993.
Accounts Receivable Facility In the fourth quarter of 1994, the Corporation entered into an accounts receivable facility (the "Receivables Facility") in which USG Funding, a special purpose subsidiary of the Corporation, formed under Delaware law, entered into agreements with U.S. Gypsum and USG Interiors. These agreements provide that USG Funding will purchase 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 Chemical 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 $100 million were issued to Citicorp Securities, Inc. The interest rate on the debt issued under the Receivables Facility is fixed at approximately 8.9% (including facility costs) through a long-term interest rate swap. Under a pending amendment to the Receivables Facility, debt issued under such facility will have a final maturity in 2004 and the Corporation will have the option to expand such facility up to $130 million. Debt issued under the Receivables Facility may be prepaid at any time. Pursuant to the applicable reserve and eligibility requirements, the maximum amount of debt issuable under the Receivables Facility as of December 31, 1994 (including the $80 million outstanding at such date) was $103 million. Under the foregoing agreements and related documentation, USG Funding is a separate corporate entity with its own separate creditors which 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, 1994, the outstanding balance of receivables sold to USG Funding and held under the Master Trust was $151 million and debt outstanding under the Receivables Facility was $80 million. Receivables and debt outstanding in connection with the Receivables Facility remain in receivables and long-term debt, respectively, on the Corporation's consolidated balance sheet. Extraordinary Loss In December 1993, the Corporation recorded an extraordinary loss of $21 million, net of related income tax benefit of $11 million, reflecting the write-off of the reorganization discount associated with debt issues prepaid, redeemed or purchased in 1994 in connection with the Equity Offering and Note Placement. See "Indebtedness" and "Stockholders' Equity" notes for more information on the Equity Offering and Note Placement. Research and Development Research and development expenditures are charged to earnings as incurred and amounted to $17 million in the year ended December 31, 1994 and $10 million in the period of May 7 through December 31, 1993. Taxes on Income and Deferred Income Taxes Earnings/(loss) before taxes on income and extraordinary loss consisted of the following (dollars in millions):
Year May 7 ended through December 31, December 31, 1994 1993 U.S. $ (42) $ (72) Foreign 4 (7) Total (38) (79)
Taxes on income consisted of the following (dollars in millions):
Year May 7 ended through December 31, December 31, 1994 1993 Current: U.S. Federal $ 39 $ 12 Foreign 12 5 State 10 1 61 18 Deferred: U.S. Federal (7) 11 Foreign - - State - - (7) 11 Total 54 29
The difference between the statutory U.S. Federal income tax/(benefit) rate and the Corporation's effective income tax rate is summarized as follows:
Year May 7 ended through December 31, December 31, 1994 1993 Statutory U.S. Federal income tax/(benefit) rate (35.0)% (35.0) % Excess reorganization value amortization 154.8 49.6 Foreign tax rate differential 10.6 11.4 Statutory rate adjustment to historical deferred taxes - 4.0 Valuation allowance adjustment - 3.3 State income taxes 16.7 - Depletion (7.5) - Other, net 2.5 3.4 Effective income tax rate 142.1 36.7
Temporary differences and carryforwards which give rise to current and long-term deferred tax (assets)/liabilities as of December 31, 1994 and 1993 were as follows (dollars in millions):
As of December 31 1994 1993 Property, plant and equipment $ 164 $ 164 Debt discount 11 19 Deferred tax liabilities 175 183 Pension and retiree medical benefits (94) (90) Reserves not deductible until paid (71) (61) Other (6) (8) Deferred tax assets before valuation allowance (171) (159) Valuation allowance 90 90 Deferred tax assets (81) (69) Net deferred tax liabilities 94 114
A valuation allowance has been provided for deferred tax assets relating to pension and retiree medical benefits due to the long-term nature of their realization. Because of the uncertainty regarding the application of the Internal Revenue Code to the Corporation's net operating loss carryforwars (the "NOL Carryforwards") as a result of the Prepackaged Plan, no deferred tax asset is recorded. Under fresh start accounting rules, any benefit realized from utilizing predecessor company NOL Carryforwards will not impact net earnings. The Corporation has NOL Carryforwards of $49 million remaining from 1992 after using approximately $50 million to offset U.S. taxable income in 1994. These NOL Carryforwards may be used to offset U.S. taxable income through 2007. The Internal Revenue Code limits the Corporation's annual use of its NOL Carryforwards to the lesser of its taxable income or approximately $30 million plus any unused limit from prior years. Furthermore, due to the uncertainty regarding the application of the Code to the exchange of stock for debt, the Corporation's NOL Carryforwards to 1994 and later years could be reduced or eliminated. The Corporation has a $4 million minimum tax credit which may be used to offset U.S. regular tax liability in future years. The Corporation does not provide for U.S. Federal income taxes on the portion of undistributed earnings of foreign subsidiaries which are intended to be permanently reinvested. The cumulative amount of such undistributed earnings totaled approximately $93 million as of December 31, 1994. Any future repatriation of undistributed earnings would not, in the opinion of management, result in significant additional taxes. Inventories Most of the Corporation's domestic inventories are valued under the last-in, first-out ("LIFO") method. In accordance with the implementation of fresh start accounting, inventories were stated at fair market value as of May 6, 1993. As of December 31, 1994, the LIFO values of these inventories were $121 million and would have been $5 million higher if they were valued under the first-in, first-out ("FIFO") and average production cost methods. As of December 31, 1993, inventories valued under the LIFO method totaled $103 million and would have been the same if they were valued under the FIFO and average production cost methods. The remaining inventories are stated at the lower of cost or market, under the FIFO or average production cost methods. Inventories include material, labor and applicable factory overhead costs. Inventory classifications were as follows (dollars in millions):
As of December 31 1994 1993 Finished goods and work-in-process $ 102 $ 84 Raw materials 62 53 Supplies 9 8 Total 173 145
The LIFO value of U.S. domestic inventories under fresh start accounting exceeded that computed for U.S. Federal income tax purposes by $30 million and $25 million as of December 31, 1994 and 1993, respectively. Property, Plant and Equipment Property, plant and equipment were stated at fair market value as of May 6, 1993 in accordance with fresh start accounting. Provisions for depreciation 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. Interest during construction is capitalized on major property additions. Property, plant and equipment classifications were as follows (dollars in millions):
As of December 31 1994 1993 Land and mineral deposits $ 56 $ 61 Buildings and realty improvements 230 233 Machinery and equipment 549 496 835 790 Reserves for depreciation and depletion (80) (36) Total 755 754
Leases The Corporation leases certain of its offices, buildings, machinery and equipment, and autos under noncancellable operating leases. These leases have various terms and renewal options. Lease expense amounted to $37 million and $22 million in the year ended December 31, 1994 and the period of May 7 through December 31, 1993, respectively. Future minimum lease payments, by year and in the aggregate, under operating leases with initial or remaining noncancellable terms in excess of one year as of December 31, 1994 were as follows (dollars in millions):
Minimum Lease Payments 1995 $ 28 1996 24 1997 19 1998 15 1999 12 Thereafter 30 Aggregate minimum payments 128
Indebtedness Total debt, including currently maturing debt, consisted of the following (dollars in millions):
As of December 31 1994 1993 Secured Debt: Bank Term Loans, installments due 1997 through 2000 $ 283 $ 448 Receivables Facility, due 2003 and 2004 80 - Senior notes and debentures: 8% Senior Notes due 1995 - 75 8% Senior Notes due 1996 28 90 8% Senior Notes due 1997 41 100 9% Senior Notes due 1998 - 35 9 1/4% Senior Notes, due 2001 150 - 10 1/4% Senior Notes due 2002 298 478 7 7/8% Sinking Fund Debentures due 2004 33 36 8 3/4% Sinking Fund Debentures due 2017 190 200 Other secured debt, average interest rate 9.4% and 8.0%, varying payments through 1999 7 31 Unsecured Debt: Industrial revenue bonds, 5.9% ranging to 8.0%, due through 2019 39 38 Total principal amount of debt 1,149 1,531 Less unamortized reorganization discount (27) (55) Total carrying amount of debt 1,122 1,476
As of December 31, 1994, the Corporation and its subsidiaries had $1,149 million total principal amount of debt (before unamortized reorganization discount) on a consolidated basis. Of such total debt, $159 million represented direct borrowings by the subsidiaries, including $80 million borrowed under the Receivables Facility, $39 million of industrial revenue bonds, $33 million of 7 7/8% sinking fund debentures issued by U.S. Gypsum in 1974 and subsequently assumed by the Corporation on a joint and several basis in 1985, and $7 million of debt incurred by the Corporation's foreign subsidiaries. The Bank Term Loans and most other senior debt are secured by a pledge of all of the shares of the Corporation's major domestic subsidiaries and 65% of the shares of certain of its foreign subsidiaries including CGC, pursuant to a collateral trust arrangement controlled primarily by holders of the Bank Term Loans. The rights of the Corporation and its creditors to the assets of any subsidiary upon the latter's liquidation or reorganization will be subject to the prior claims of such subsidiary's creditors, except to the extent that the Corporation may itself be a creditor with enforceable claims against such subsidiary. The fair market value of debt outstanding as of December 31, 1994 was $1,109 million, based on indicative bond prices as of that date, excluding other secured debt, which was not practicable to estimate. As of December 31, 1993, the fair market value of debt was $1,481 million, based on indicative bond prices as of that date, excluding other secured debt, primarily representing financing for construction of the Aubange plant, which was not practicable to estimate. The "other secured debt" category shown in the table above primarily includes short-term and long-term borrowings from several foreign banks. As of December 31, 1993, this category primarily included borrowings by USG International used principally to finance construction of the Aubange, Belgium ceiling tile plant. This debt, which was repaid in 1994, was secured by a lien on the assets of the Aubange plant and had restrictive covenants that restricted, among other things, the payment of dividends. Foreign borrowings made by the Corporation's international operations are generally allowed, within certain limits, under provisions of the Credit Agreement. The weighted average interest rate on outstanding short-term borrowings was 9.2% and 6.6% as of December 31, 1994 and 1993, respectively. As of December 31, 1994, aggregate scheduled maturities of long-term debt, excluding amounts classified as current liabilities, were $37 million, $45 million, $4 million and $73 million for the years 1996 through 1999, respectively. The Credit Agreement The Bank Term Loans were issued in connection with the Credit Agreement. In general, the Credit Agreement restricts, among other things, the incurrence of additional indebtedness, mergers, asset dispositions, investments, prepayment of other debt, dealings with affiliates, capital expenditures, payment of dividends and lease commitments and requires the Corporation, beginning January 1, 1995, to satisfy certain financial covenants. An agreement with Water Street also requires the Corporation to satisfy certain financial covenants. The average rate of interest on the Bank Term Loans was 6.2% and 5.3% in the year ended December 31, 1994 and the period of May 7 through December 31, 1993, respectively. The Credit Agreement provides for a revolving credit facility (the "Revolving Credit Facility"). As of December 31, 1994, the Revolving Credit Facility amounted to $245 million, including a $115 million letter of credit subfacility and $70 million available solely for the purchase or repayment of Senior 1996 Notes and Senior 1997 Notes. As of December 31, 1993, the Revolving Credit Facility amounted to $175 million, including the aforementioned $115 million letter of credit subfacility. Amounts committed and undrawn under such letter of credit subfacility were $58 million and $60 million as of December 31, 1994 and 1993, respectively. There were no amounts outstanding under the Revolving Credit Facility as of December 31, 1994 and 1993. Under the Cash Sweep provision of the Credit Agreement, a portion of excess cash as of the end of any year, calculated in accordance with the Credit Agreement, must be used to pay Bank Term Loans. As of December 31, 1994, the Cash Sweep amounted to $132 million, of which 50%, or $66 million was required to be used to pay Bank Term Loans while the remaining 50% was retained by the Corporation for general corporate purposes. The portion of the Cash Sweep required to be used to pay Bank Term Loans included $25 million which was prepaid in the third quarter of 1994 and $41 million which was reclassified to currently maturing long-term debt as of December 31, 1994 and paid in January 1995. In February 1995, the Corporation made a further payment of $50 million to reduce Bank Term Loans outstanding. This additional payment was applied to the 1999 maturity of the Bank Term Loans thereby reducing the 1999 aggregate scheduled maturity shown above. Debt Refinancing In the fourth quarter of 1994, the Corporation entered into the Receivables Facility. As of December 31, 1994, debt issued in connection with the Receivables Facility totaled $80 million and accounts receivable held in the Master Trust totaled $151 million. See "Accounts Receivable Facility" note for more information on the Receivables Facility. Also during the fourth quarter of 1994, the Corporation decided to pursue various refinancing alternatives related to its Bank Term Loans. The Corporation intends to accelerate the payment of such loans in 1995 through a combination of excess cash flow and proceeds from a potential refinancing. As a result, the Corporation recorded a non-cash pre-tax charge of $16 million to interest expense reflecting the write-off of reorganization debt discount primarily associated with the Bank Term Loans. In the third quarter of 1994, the Third Amendment to the Credit Agreement was consummated. In connection with such amendment, the Corporation made the aforementioned $25 million prepayment of the Cash Sweep. Major revisions to the Credit Agreement provided by the Third Amendment included modification of the Cash Sweep provision, authorization for the Corporation to immediately prepay certain debt, authorization for the Corporation to enter into a revolving accounts receivable sale facility and certain other changes to increase the Corporation's operating flexibility. In the first quarter of 1994, the Corporation implemented a refinancing plan which included (i) a public offering of 14,375,000 shares of common stock (the "Equity Offering"), of which 7,900,000 shares, yielding net proceeds to the Corporation of $224 million, were newly issued by the Corporation and 6,475,000 were sold by Water Street Corporate Recovery Fund I, L.P., a stockholder; (ii) the issuance of $150 million of Senior 2001 Notes to certain institutional investors (the "Note Placement") in exchange for $30 million aggregate principal amount of its outstanding Senior 1996 Notes, $35 million aggregate principal amount of its outstanding Senior 1997 Notes and $85 million in cash; and (iii) amendment of the Credit Agreement for the second time since the Restructuring. This amendment, (together with the Equity Offering and the Note Placement, the "Transactions") increased the size of the Corporation's revolving credit facility by $70 million (solely for the purchase or repayment of Senior 1996 Notes and Senior 1997 Notes) and amended the Cash Sweep provision to allow the Corporation, upon the achievement of certain financial tests, to retain additional free cash flow for capital expenditures and repayment of its public debt. In August, 1993, the Corporation issued $138 million of Senior 2002 Notes in exchange for Bank Term Loans and other debt then outstanding under the Credit Agreement. The Corporation did not receive any cash proceeds from the issuance of these securities. In connection with this transaction, an amendment to the Credit Agreement provided for the elimination of scheduled Bank Term Loans payments through 1996, prepayment of $9 million of other debt outstanding under the Credit Agreement and modification of the Cash Sweep provision. Pension Plans The Corporation and most of its subsidiaries have defined benefit retirement plans for all eligible employees. Benefits of the plans are generally based on years of service and employees' compensation during the last years of employment. The Corporation's contributions are made in accordance with independent actuarial reports which, for most plans, required minimal funding in the year ended December 31, 1994 and the period of May 7 through December 31, 1993. Net pension expense included the following components (dollars in millions):
Year May 7 ended through December 31, December 31, 1994 1993 Service cost-benefits earned during the period $ 11 $ 7 Interest cost on projected benefit obligation 31 21 Actual (return)/loss on plan assets 1 (37) Net amortization/(deferral) (35) 16 Net pension expense 8 7
The pension plan assets, which consist primarily of publicly traded common stocks and debt securities, had an estimated fair market value that was lower than the projected benefit obligation as of December 31, 1994 and 1993. The following table presents a reconciliation of the total assets of the pension plans to the projected benefit obligation (dollars in millions):
As of December 31 1994 1993 Amount of assets available for benefits: Funded assets of the plans at fair market value $ 370 $ 400 Accrued pension expense 29 25 Total assets of the plans 399 425 Present value of estimated pension obligation: Vested benefits 300 329 Nonvested benefits 25 27 Accumulated benefit obligation 325 356 Additional benefits based on projected future salary increases 79 85 Projected benefit obligation 404 441 Projected benefit obligation in excess of assets (5) (16)
The projected benefit obligation in excess of assets consisted of an unrecognized net loss in each period due to changes in assumptions and differences between actual and estimated experience. The expected long-term rate of return on plan assets was 9% for the year ended December 31, 1994 and the period of May 7 through December 31, 1993. The assumed weighted average discount rate used in determining the accumulated benefit obligation was 8.25% and 7% as December 31, 1994 and 1993, respectively. The rate of increases in projected future compensation levels was 5% for both periods. Postretirement Benefits The Corporation 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 of these benefits is shared with retirees. The following table summarizes the components of net periodic postretirement benefit cost for the year ended December 31, 1994 and the period of May 7 through December 31, 1993 (dollars in millions):
Year May 7 ended through December 31, December 31, 1994 1993 Service cost of benefits earned $ 6 $ 4 Interest on accumulated postretirement benefit obligation 12 9 Net periodic postretirement benefit cost 18 13
The status of the Corporation's accrued postretirement benefit cost as of December 31, 1994 and 1993 were as follows (dollars in millions):
As of December 31 1994 1993 Accumulated postretirement benefit obligation: Retirees $ 81 $ 123 Fully eligible active participants 11 14 Other active participants 59 66 151 203 Unrecognized net gain/(loss) 42 (2) Accrued postretirement benefit cost liability recognized on the Consolidated Balance Sheet 193 201
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 10% and 11% as of December 31, 1994 and 1993, respectively, with a gradually declining rate to 5% by the year 2000 and remaining at that level thereafter. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation by $20 million and $22 million as of December 31, 1994 and 1993, respectively, and increase the net periodic postretirement benefit cost by $3 million and $2 million for the year ended December 31, 1994 and the period of May 7 through December 31, 1993, respectively. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 8.25% and 7% as of December 31, 1994 and 1993, respectively. Commitments and Contingencies The Corporation has limited involvement with derivative financial instruments and does not use them for trading purposes. They are used primarily to manage well-defined interest rate and energy cost risks as well as occasional foreign currency exchange exposure. The following table presents the carrying amounts and estimated fair value of the Corporation's derivative portfolio as of December 31, 1994 (dollars in millions):
Notional Carrying Fair Amount Amount Value Interest rate contracts $ 545 $ 5 $ 8 Energy price swaps 23 - (1)
The amounts reported as fair value represent the market value as obtained from broker quotations. The negative fair value of the energy price swaps is an estimate of the amounts the Corporation would need to pay as of December 31, 1994 to cancel the contracts or transfer them to other parties. As of December 31, 1993, the Corporation had approximately $455 million notional amount of interest rate contracts outstanding, extending up to three years, and approximately $42 million notional amount and $11 million notional amount of energy price and foreign currency exchange contracts outstanding, respectively, extending one year or less. The difference in the value of all of the aforementioned contracts and the December 31, 1993 market value was not material. The Corporation is exposed to credit losses in the event of nonperformance by the counterparties on all its derivative contracts but has no off-balance sheet credit risk of accounting loss. All counterparties have investment grade credit standing and accordingly, the Corporation anticipates that these counterparties will be able to fully satisfy their obligation under the contracts. The Corporation does not obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of counterparties. Interest Rate Risk Management The Corporation purchased prepaid interest rate caps and swap options to manage the impact of interest rate changes on LIBOR-based bank debt. As of December 31, 1994, such instruments owned by the Corporation totaled $445 million, which capped the Corporation's expected LIBOR-based bank debt payments at 5.2% for 1995 ($250 million notional amount), 7% for 1996 ($120 million notional amount) and 7% for 1997 ($75 million notional amount). In addition, as of December 31, 1994, the Corporation had entered into $100 million of interest rate swap and collar agreements to hedge its Receivables Facility, under which $80 million was outstanding as of December 31, 1994. In January 1995, such interest rate swap and collar agreements were terminated at par and replaced with $80 million of new interest rate swap agreements. Under the interest rate swap agreements, the Corporation pays a fixed rate of approximately 8.9% (including facility costs) in exchange for the monthly commercial paper-based payments due on the Receivables Facility until its final maturity. Premiums paid for purchased interest rate cap agreements are amortized to interest expense over the term of the caps. Unamortized premiums are included in other assets on the consolidated balance sheet. Amounts receivable under cap agreements and receivables or payables under swap agreements are accrued as an increase or decrease to interest expense as appropriate. Energy Cost Risk Management The Corporation uses energy price swap agreements to hedge anticipated purchases of fuel to be utilized in the manufacturing process for gypsum wallboard. 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. As of December 31, 1994, the Corporation had over-the-counter swap agreements to exchange monthly payments on notional amounts of energy amounting to $23 million, all extending one year or less. Upon settlement of energy price contracts, the resulting gain or loss is included in cost of products sold, along with the actual spot energy cost of the corresponding underlying hedged transaction, the combination of which amounts to the predetermined specified contract price. Foreign Exchange Risk Management The Corporation had no foreign currency exchange contracts as of December 31, 1994. Management Performance Plan On May 6, 1993, all outstanding stock options were cancelled without consideration and all shares of restricted and deferred stock were cashed-out pursuant to "change in control" provisions contained in the Management Performance Plan except for 25,580 shares of restricted stock and awards for deferred stock yet to be issued which remained outstanding as a consequence of certain waivers of the change in control event by senior members of management. Those shares which remained outstanding on May 6, 1993 were freed of restrictions in 1994, an acceleration from the original terms which freed the restrictions on incremental portions of the shares through 1998. As permitted by the Prepackaged Plan, a certain number of common shares were reserved for future issuance in conjunction with stock options. Options were granted in 1993 and 1994 at an exercise price equal to the mean of the high and low sales prices for a share of the Corporation's common stock (the "Common Stock") as reported on the NYSE composite tape on the grant dates. These options become exercisable at the rate of one-third of the aggregate grant on each of the first three anniversaries of the date of the grant and expire on the tenth 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. Stock option activity for the year ended December 31, 1994 and the period of May 7 through December 31, 1993 was as follows:
Year May 7 ended through December 31, December 31, 1994 1993 Outstanding at beginning of period 1,673,000 - Granted 1,161,500 1,673,000 Exercised (at a price of $10.3125 per share) (23,800) - Canceled (46,200) - Outstanding at end of period (at prices ranging from $10.3125 to $32.5625 per share) 2,764,500 1,673,000 Exercisable at end of period 578,020 - Available for grant at end of period 50 1,115,350
Preferred Share Purchase Rights On May 6, 1993, a rights plan (the "Rights Agreement") was adopted pursuant to which the Corporation declared a distribution of one right (the "Rights") upon each share of Common Stock. The Rights, which are intended to protect stockholders in the event of an unsolicited attempt to acquire the Corporation, generally become exercisable 10 days following the announcement of the acquisition of 20% or more of the outstanding Common Stock by someone other than the Corporation or one of its employee benefit plans (10% in the case of an acquisition which the Corporation's Board of Directors determines to represent a threat of acquisition not in the best interests of the Corporation's stockholders). When exercisable, each of the Rights entitles the registered holder to purchase one-hundredth of a share of a junior participating preferred stock, series C, $1.00 par value per share, at a price of $35.00 per one-hundredth of a preferred share, subject to adjustment. The Rights also provide for a so-called "flip-in" feature and exchange feature and certain exemptions permitting certain acquisitions and the continued holding of common shares by Water Street and its affiliates in excess of the otherwise specified thresholds. In the event that the Corporation is the surviving corporation and the Common Stock remains outstanding and unchanged in a merger or other business combination with such acquiring party or the acquiring party engages in one of a number of self-dealing transactions specified in the Rights Agreement, each holder of a Right other than the acquiring party will thereafter have the right, subject to the exchange feature, to receive upon exercise thereof that number of shares of Common Stock having a market value at the time of such transaction of two times the exercise price of the Right. Warrants On May 6, 1993, a total of 2,602,566 warrants, each to purchase a share of Common Stock at an exercise price of $16.14 per share (the "Warrants"), in addition to Common Stock, were issued to holders of certain debt which was converted to equity in the Restructuring. Upon issuance, each of the Warrants 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. The Warrants are exercisable, subject to applicable securities laws, at any time prior to May 6, 1998. Each share of Common Stock issued upon exercise of a Warrant prior to the Distribution Date (as defined in the Rights Agreement) and prior to the redemption or expiration of the Rights will be accompanied by an attached Right issued under the terms and subject to the conditions of the Rights Agreement as it may then be in effect. As of December 31, 1994 and 1993, outstanding Warrants amounted to 2,594,181 and 2,601,619, respectively. Stockholders' Equity Changes in stockholders' equity are summarized as follows (dollars in millions):
Year May 7 ended through December 31, December 31, 1994 1993 Common Stock: Beginning Balance $ 4 $ 4 Public offering of common stock 1 - Ending Balance 5 4 Capital Received in Excess of Par Value: Beginning Balance - - Public offering of common stock 223 - Other, net (2) - Ending Balance 221 - Deferred Currency Translation: Beginning Balance (9) - Change during the period (4) (9) Ending Balance (13) (9) Reinvested Earnings/(Deficit): Beginning Balance (129) - Net loss (92) (129) Ending Balance (221) (129) Total stockholders' equity/(deficit) (8) (134)
There were 33,988 and 27,876 shares of $0.10 par value Common Stock held in treasury as of December 31, 1994 and 1993, respectively. These shares were acquired through the forfeiture of restricted stock and the surrender of shares in settlement of tax withholding obligations. In the first quarter of 1994, the Corporation completed the Equity Offering under which 14,375,000 shares of Common Stock was sold to the public, consisting of 7,900,000 shares newly issued by the Corporation and 6,475,000 sold by Water Street. Net proceeds to the Corporation from the newly issued shares amounted to $224 million. The Corporation did not receive any proceeds from the sale of shares by Water Street. See "Indebtedness" note for more information on the Equity Offering. Litigation One of the Corporation's subsidiaries, U.S. Gypsum, is among numerous defendants in lawsuits arising out of the manufacture and sale of asbestos- containing building materials. U.S. Gypsum sold certain asbestos-containing products beginning in the 1930's; in most cases the products were discontinued or asbestos was removed from the product formula by 1972, and no asbestos- containing products were sold after 1977. Some of these lawsuits seek to recover compensatory and in many cases punitive damages for costs associated with maintenance or removal and replacement of products containing asbestos (the "Property Damage Cases"). Others of these suits (the "Personal Injury Cases") seek to recover compensatory and in many cases punitive damages for personal injury allegedly resulting from exposure to asbestos and asbestos- containing products. It is anticipated that additional personal injury and property damage cases containing similar allegations will be filed. As discussed below, U.S. Gypsum has substantial personal injury and property damage insurance for the years involved in the asbestos litigation. Prior to 1985, when an asbestos exclusion was added to U.S. Gypsum's policies, U.S. Gypsum purchased comprehensive general liability insurance policies covering personal injury and property damage in an aggregate face amount of approximately $850 million. Insurers that issued approximately $106 million of these policies are presently insolvent. After deducting insolvencies and exhaustion of policies, approximately $550 million of insurance remains potentially available. Because U.S. Gypsum's insurance carriers initially responded to its claims for defense and indemnification with various theories denying or limiting coverage and the applicability of their policies, U.S. Gypsum filed a declaratory judgment action against them in the Circuit Court of Cook County, Illinois on December 29, 1983. (U. S. Gypsum Co. v. Admiral Insurance Co., et al.) (the "Coverage Action"). U.S. Gypsum alleges in the Coverage Action that the carriers are obligated to provide indemnification for settlements and judgments and, in some cases, defense costs incurred by U.S. Gypsum in property damage and personal injury claims in which it is a defendant. The current defendants are ten insurance carriers that provided comprehensive general liability insurance coverage to U.S. Gypsum between the 1940's and 1984. As discussed below, several carriers have settled all or a portion of the claims in the Coverage Action. U.S. Gypsum's aggregate out-of-pocket cash expenditures for all asbestos- related matters, including property damage, personal injury, insurance coverage litigation and related expenses, exceeded aggregate insurance payments by $25.8 million in 1992, $8.2 million in 1993 and $33.4 million in 1994. For the same periods, the Corporation has charged $18 million to earnings annually for all asbestos-related matters, excluding the $30 million charge described in "Property Damage Cases" below. Property Damage Cases The Property Damage Cases have been brought against U.S. Gypsum by a variety of plaintiffs, including school districts, state and local governments, colleges and universities, hospitals and private property owners. As of December 31, 1994, 41 Property Damage Cases were pending against U.S. Gypsum; however, the number of buildings involved is greater than the number of cases because many of these cases, including the class actions referred to below, involve multiple buildings. In addition, approximately 37 property damage claims have been threatened against U.S. Gypsum. U.S. Gypsum has denied the substantive allegations of each of the Property Damage Cases and intends to defend them vigorously except when advantageous settlements are possible. U.S. Gypsum is one of many defendants in three pending cases that have been certified as class actions and others that request such certification. On April 10, 1992, a state court in Philadelphia certified a class consisting of all owners of buildings leased to the federal government. (Prince George Center, Inc. v. U.S. Gypsum Co., et al., Court of Common Pleas, Philadelphia, Pa.) On September 4, 1992, a Federal district court in South Carolina conditionally certified a class 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.). In October 1994, U.S. Gypsum executed agreements to settle two other class actions (one of which has now been closed), subject to court approval following notice to the respective classes. One suit was brought on behalf of owners and operators of all elementary and secondary schools in the United States that contain or contained friable asbestos-containing material. (In re Asbestos School Litigation, U.S.D.C, E.D. Pa.) Approximately 1,350 school districts opted out of the class, some of which have filed or may file separate lawsuits. The other class action settlement involved approximately 333 school districts in Michigan that had opted out of the nationwide class action. (Board of Education of the City of Detroit, et al. v. The Celotex Corp., et al., Circuit Court for Wayne County, MI.) The Corporation took a $30 million pre-tax charge to earnings in the fourth quarter of 1994 primarily to cover the cash payments, approximately two-thirds of which was paid in 1994 with the rest payable over the next two years. In addition, U.S. Gypsum will also issue discount coupons to the school districts in the nationwide class action for the purchase of plaster products. The coupons, which will be redeemable over ten years subject to annual "caps," will have an aggregate face amount of $50 million. No charge against earnings was recorded for future coupon redemptions. Such redemptions will reduce margins when redeemed, and although the amount of redemptions cannot be estimated, the impact on results of operations is expected to be immaterial. The Michigan settlement was approved by the Court on December 2, 1994, and no appeal was filed. The settlement of the nationwide class action has not yet been presented to the Court for approval. A case pending in state court in South Carolina, which has not been certified as a class action, purports to be a "voluntary" class action on behalf of owners of all buildings containing certain types of asbestos- containing products manufactured by the nine named defendants, including U.S. Gypsum, other than buildings owned by the federal or state governments, single family residences, or buildings at issue in the other described class actions. (Anderson County Hospital v. W.R. Grace & Co., et al., Court of Common Pleas, Hampton Co., S.C. (the "Anderson Case")). The Anderson Case also names the Corporation as a defendant, alleging, among other things, that the guarantees executed by U.S. Gypsum in connection with the 1988 Recapitalization, as well as subsequent distributions of cash from U.S. Gypsum to the Corporation, rendered U.S. Gypsum insolvent and constitute a fraudulent conveyance. In July 1994, the court in the Anderson Case ruled that claims involving building owners outside South Carolina cannot be included in the suit. A case which has yet to be certified as a class action was filed in federal court in the Eastern District of Texas on August 8, 1994. (Kirbyville Independent School District v. U.S. Gypsum, et al., United States District Court for the Eastern District of Texas, Beaumont Division). The case purports to be a class action on behalf of all public building owners and political subdivisions of the State of Texas, including all cities, counties and municipalities. The damages claimed against U.S. Gypsum in the class action cases are unspecified. In total, U.S. Gypsum has settled approximately 93 property damage cases, involving 209 plaintiffs, in addition to the two school class action settlements referred to above. Twenty-four cases have been tried to verdict, 15 of which were won by U.S. Gypsum and 5 lost; three other cases, one won at the trial level and two lost, were settled during appeals. Another case that was lost at the trial court level was reversed on appeal and remanded to the trial court, which has now entered judgment for U.S. Gypsum. Appeals are pending in 3 of the tried cases. In the cases lost, compensatory damage awards against U.S. Gypsum have totaled $11.5 million. Punitive damages totalling $5.5 million were entered against U.S. Gypsum in four trials. Two of the punitive damage awards, totalling $1.45 million, were paid after appeals were exhausted; and two were settled during the appellate process. In 1992, 7 new Property Damage Cases were filed against U.S. Gypsum, 10 were dismissed before trial, 18 were settled, 3 were closed following trial or appeal, and 76 were pending at year-end. U.S. Gypsum expended $34.9 million for the defense and resolution of Property Damage Cases and received insurance payments of $10.2 million in 1992. During 1993, 5 new Property Damage Cases were filed against U.S. Gypsum, 7 were dismissed before trial, 11 were settled, 1 was closed following trial or appeal, 2 were consolidated into 1, and 61 were pending at year end; U. S Gypsum expended $13.9 million for the defense and resolution of Property Damage Cases and received insurance payments of $7.6 million in 1993. In 1994, 5 new Property Damage Cases were filed against U.S. Gypsum, 5 were dismissed before trial, 19 were settled, 1 was closed following trial or appeal, and 41 were pending at year-end. U.S. Gypsum expended $40.6 million for the defense and resolution of Property Damage Cases (excluding payments not yet due and future credits for coupon redemption under a 1994 class action settlement) and received insurance payments of $9 million in 1994. In the Property Damage Cases litigated to date, a defendant's liability for compensatory damages, if any, has been limited to damages associated with the presence and quantity of asbestos-containing products manufactured by that defendant which are identified in the buildings at issue, although plaintiffs in some cases have argued that principles of joint and several liability should apply. Because of the unique factors inherent in each of the Property Damage Cases, including the lack of reliable information as to product identification and the amount of damages claimed against U.S. Gypsum in many cases, including the class actions described above, management is unable to make a reasonable estimate of the cost of disposing of pending Property Damage Cases. Personal Injury Cases U.S. Gypsum was among numerous defendants in asbestos personal injury suits and administrative claims involving approximately 54,000 claimants pending as of December 31, 1994 although, as discussed below, approximately 22,000 of such claims are settled but not yet closed. All asbestos bodily injury claims pending in the federal courts, including approximately one-third of the Personal Injury Cases pending against U.S. Gypsum, have been consolidated in the United States District Court for the Eastern District of Pennsylvania. U.S. Gypsum is a member, together with 19 other former producers of asbestos-containing products, of the Center for Claims Resolution (the "Center"). The Center has assumed the handling, including the defense and settlement, of all Personal Injury Cases pending against U.S. Gypsum and the other members of the Center. Each member of the Center is assessed a portion of the liability and defense costs of the Center for the Personal Injury Cases handled by the Center, according to predetermined allocation formulas. Five of U.S. Gypsum's insurance carriers that in 1985 signed an Agreement Concerning Asbestos-Related Claims (the "Wellington Agreement") are supporting insurers (the "Supporting Insurers") of the Center. The Supporting Insurers are obligated to provide coverage for the defense and indemnity costs of the Center's members pursuant to the coverage provisions in the Wellington Agreement. Claims for punitive damages are defended but not paid by the Center; if punitive damages are recovered, insurance coverage may be available under the Wellington Agreement depending on the terms of particular policies and applicable state law. Punitive damages have not been awarded against U.S. Gypsum in any of the Personal Injury Cases. Virtually all of U.S. Gypsum's personal injury liability and defense costs are paid by those of its insurance carriers that are Supporting Insurers. The Supporting Insurers provided approximately $350 million of the total coverage referred to above, of which approximately $222 million remains unexhausted. On January 15, 1993, U.S. Gypsum and the other members of the Center entered into a class action settlement in the U. S. District Court for the Eastern District of Pennsylvania. (Georgine et al. v. Amchem Products Inc., et al., Case No. 93-CV-0215; hereinafter "Georgine.") The class of plaintiffs includes all persons who have been occupationally exposed to asbestos- containing products manufactured by the defendants, who had not filed an asbestos personal injury suit as of the date of the filing of the class action. The settlement has been approved by the trial court, and if upheld on appeal will implement for all future Personal Injury Cases, except as noted below, an administrative compensation system to replace judicial claims against the defendants, and will provide fair and adequate compensation to future claimants who can demonstrate exposure to asbestos-containing products manufactured by the defendants and the presence of an asbestos-related disease. Approximately 250,000 purported class members "opted out," or elected to be excluded from the settlement, although a substantial portion of such "opt outs" had previously filed claims or are in groups considered unlikely to generate significant numbers of future claims. As of December 31, 1994, approximately 10,000 claims naming U.S. Gypsum as a defendant had been filed by "opt outs." In addition, in each year a limited number of class members will have certain rights to prosecute their claims for compensatory (but not punitive) damages in court in the event they reject the compensation offered by the administrative processing of their claim. The Center members, including U.S. Gypsum, have instituted proceedings against those of their insurance carriers that had not consented to support the settlement, seeking a declaratory judgment that the settlement is reasonable and, therefore, that the carriers are obligated to fund their portion of it. Consummation of the settlement is contingent upon, among other things, court approval of the settlement and a favorable ruling in the declaratory judgment proceedings against the non-consenting insurers. Each of the defendants has committed to fund a defined portion of the settlement, up to a stated maximum amount, over the initial ten year period of the agreement (which is automatically extended unless terminated by the defendants). Taking into account the provisions of the settlement agreement concerning the maximum number of claims that must be processed in each year and the total amount to be made available to the claimants, the Center estimates that U.S. Gypsum will be obligated to fund a maximum of approximately $125 million of the class action settlement, exclusive of expenses, with a maximum payment of less than $18 million in any single year; of the total amount of U.S. Gypsum's obligation, all but approximately $7 million is expected to be paid by U.S. Gypsum's insurance carriers. During 1992, approximately 20,100 Personal Injury Cases were filed against U.S. Gypsum and approximately 10,600 were settled or dismissed. U.S. Gypsum incurred expenses of $21.6 million in 1992 with respect to Personal Injury Cases of which $21.5 million was paid by insurance. During 1993, approximately 26,900 Personal Injury Cases were filed against U.S. Gypsum and approximately 22,900 were settled or dismissed. U.S. Gypsum incurred expenses of $34.9 million in 1993 with respect to Personal Injury Cases of which $34.0 million was paid by insurance. During 1994, approximately 14,000 Personal Injury Cases were filed against U.S. Gypsum, U.S. Gypsum was added as a defendant in approximately 4,000 cases that had been previously filed, and approximately 23,000 were settled or dismissed. U.S. Gypsum incurred expenses of $38 million in 1994 with respect to Personal Injury Cases of which $37.3 million was paid by insurance. As of December 31, 1994, 1993, and 1992, 54,000, 59,000, and 54,000 Personal Injury Cases were outstanding against U.S. Gypsum, respectively. U.S. Gypsum's average settlement cost for Personal Injury Cases over the past three years has been approximately $1,600 per claim, exclusive of defense costs. Management anticipates that its average settlement cost may increase due to such factors as the possible insolvency of co-defendants, although this increase may be offset to some extent by other factors, including the possibility for block settlements of large numbers of cases and the apparent increase in the percentage of asbestos personal injury cases that appear to have been brought by individuals with little or no physical impairment. Through the Center, U.S. Gypsum had reached settlements on approximately 22,000 Personal Injury Cases pending on December 31, 1994 for amounts totalling approximately $32 million, to be expended over a three to five year period. In management's opinion, based primarily upon U.S. Gypsum's experience in the Personal Injury Cases disposed of to date and taking into consideration a number of uncertainties, it is probable that all asbestos- related Personal Injury Cases pending against U.S. Gypsum as of December 31, 1994, can be disposed of for a total amount, including both indemnity costs and legal fees and expenses, estimated to be between $90 million and $100 million (of which all but less than $5 million is expected to be paid by insurance). The estimated cost of resolving pending claims takes into account, among other factors, (i) the number of pending claims; (ii) the settlements of certain large blocks of claims for higher per-case averages than have historically been paid; (iii) the committed but unconsummated settlements described above; and (iv) a small increase in U.S. Gypsum's historical settlement average. Assuming that the Georgine class action settlement referred to above is approved substantially in its current form, management estimates, based on assumptions supplied by the Center, U.S. Gypsum's maximum total exposure in Personal Injury Cases during the next ten years (the initial term of the agreement), including liability for pending claims and claims resolved as part of the class action settlement, as well as defense costs and other expenses, at approximately $250 million, of which approximately $235 million is expected to be paid by insurance. U.S. Gypsum's additional exposure for claims filed by persons who have opted out of Georgine would depend on the number and severity of such claims that are filed, which cannot presently be determined. Coverage Action As indicated above, all of U.S. Gypsum's carriers initially denied coverage for the Property Damage Cases and the Personal Injury Cases, and U.S. Gypsum initiated the Coverage Action to establish its right to such coverage. U.S. Gypsum has voluntarily dismissed the Supporting Insurers referred to above from the personal injury portion of the Coverage Action because they committed to providing personal injury coverage in accordance with the Wellington Agreement. U.S. Gypsum's claims against the remaining carriers for coverage for the Personal Injury Cases have been stayed since 1984. On January 7, 1991, the trial court in the Coverage Action ruled on the applicability of U.S. Gypsum's insurance policies to settlements and one adverse judgment in eight Property Damage Cases. The court ruled that the eight cases were generally covered, and imposed coverage obligations on particular policy years based upon the dates when the presence of asbestos- containing material was "first discovered" by the plaintiff in each case. The court awarded reimbursement of approximately $6.2 million spent by U.S. Gypsum to resolve the eight cases. U.S. Gypsum appealed the court's ruling with respect to the policy years available to cover particular claims, and the carriers appealed most other aspects of the court's ruling. On November 4, 1994, the Illinois Appellate Court issued a ruling affirming the trial court's finding that the eight cases were covered, but expanding the years of coverage available by holding that all insurance policies in effect from the date of installation to the date of removal of asbestos-containing products are obligated to provide coverage (known as the "continuous trigger" of coverage). The defendant carriers' rehearing petition was denied by the Appellate Court in January 1995. The defendant carriers have indicated their intention to seek review by the Illinois Supreme Court, which is discretionary with the Court. If the Supreme Court accepts the appeal, the appeal will continue for a year or more. Once the appellate process has concluded, further proceedings will be necessary in the trial court with respect to the application of the appellate ruling to all Property Damage Cases other than the eight cases involved in the earlier trial, as well as resolution of certain other issues. The Appellate Court's ruling, if applied to the Property Damage Cases generally, will allow U.S. Gypsum to access all of its available insurance coverage for Property Damage Cases, subject to reduction for amounts that are spent on Personal Injury Cases. Under the ruling, all Property Damage Cases would be covered by insurance unless or until such insurance becomes exhausted. U.S. Gypsum is evaluating the impact of the ruling on past property damage expenditures and, if the ruling is applied to such expenditures, U.S. Gypsum should be able to recover a substantial portion, subject to the allocation of costs to insolvent carriers, excess carriers with no defense cost obligations, and carriers that have previously settled. The Company is not yet able to estimate the amount of its past property damage expenditures that it could recover or when such recoveries would occur. Eight carriers, including two of the Supporting Insurers, have settled U.S. Gypsum's claims for both property damage and personal injury coverage and have been dismissed from the Coverage Action entirely. Four of these carriers agreed to pay all or a substantial portion of their policy limits to U.S. Gypsum beginning in 1991 and continuing over the following four years. Three other excess carriers, including the two settling Supporting Insurers, have agreed to provide coverage for the Property Damage Cases and the Personal Injury Cases subject to certain limitations and conditions, when and if underlying primary and excess coverage is exhausted. Taking into account the above settlements, including participation of certain of the settling carriers in the Wellington Agreement, and consumption through December 31, 1994, carriers providing a total of approximately $81 million of unexhausted insurance have agreed, subject to the terms of the various settlement agreements, to cover both Personal Injury Cases and Property Damage Cases. Carriers providing an additional $210 million of coverage that was unexhausted as of December 31, 1994 have agreed to cover Personal Injury Cases under the Wellington Agreement, but continue to contest coverage for Property Damage Cases and remain defendants in the Coverage Action. U.S. Gypsum continues to seek negotiated resolutions with its carriers in order to minimize the expense and delays of litigation. Insolvency proceedings have been instituted against four of U. S. Gypsum's insurance carriers. Midland Insurance Company, declared insolvent in 1986, provided excess insurance ($4 million excess of $1 million excess of $500,000 primary in each policy year) from February 15, 1975 to February 15, 1978; Transit Casualty Company, declared insolvent in 1985, provided excess insurance ($15 million excess of $1 million primary in each policy year) from August 1, 1980 to December 31, 1985; Integrity Insurance Company, declared insolvent in 1986, provided excess insurance ($10 million quota share of $25 million excess of $90 million) from August 1, 1983 to July 31, 1984; and American Mutual Insurance Company, declared insolvent in 1989, provided the primary layer of insurance ($500,000 per year) from February 1, 1963 to April 15, 1971. It is possible that U.S. Gypsum will be required to pay a presently indeterminable portion of the costs that would otherwise have been covered by these policies. In addition, portions of various policies issued by Lloyd's and other London market companies between 1966 and 1979 have also become insolvent; under the Wellington Agreement, U.S. Gypsum must pay these amounts, which total approximately $12 million. It is not possible to predict the number of additional lawsuits alleging asbestos-related claims that may be filed against U.S. Gypsum. Many Property Damage Cases are still at an early stage and the potential liability therefrom is consequently uncertain. In view of the limited insurance funding currently available for the Property Damage Cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in the Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. Accounting Change Effective January 1, 1994, the Corporation adopted the requirements of Financial Accounting Standards Board Interpretation No. 39 ("Interpretation 39"). In accordance with Interpretation 39, U.S. Gypsum recorded an accrual for its liabilities for asbestos-related matters which are deemed probable and can be reasonably estimated, and separately recorded an asset equal to the amount of such liabilities that is expected to be paid by uncontested insurance. Due to management's inability to reasonably estimate U.S. Gypsum's liability for Property Damage Cases and (until the implementation of Georgine is deemed probable) future Personal Injury Cases, the liability and asset recorded in 1994 relate only to pending Personal Injury Cases. As of December 31, 1994, the liability (which is included in other liabilities on the consolidated balance sheet) and the asset (which is included in other assets on the consolidated balance sheet) for pending Personal Injury Cases each amounted to $100 million. This implementation of Interpretation 39 did not impact earnings, cash flow or net assets. 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 substantially all 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 estimable 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 are also 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 earnings or consolidated financial position. Industry and Geographic Segments Transactions between geographic areas are accounted for on an "arm's-length" basis. No single customer accounted for 4% or more of consolidated net sales. Export sales to foreign unaffiliated customers represent less than 10% of consolidated net sales. Intrasegment and intersegment eliminations largely reflect intercompany sales. Segment operating profit/(loss) includes all costs and expenses directly related to the segment involved and an allocation of expenses which benefit more than one segment. Segment operating profit/(loss) also includes the non-cash amortization of excess reorganization value which had the impact of reducing operating profit. Assets for USG Funding, which was established in 1994, represent the outstanding balance of receivables purchased from U.S. Gypsum and USG Interiors, net of reserves, and are included in "corporate identifiable assets" in the table below. As of December 31, 1994, such receivables, net of reserves, amounted to $123 million, including $84 million purchased from U.S. Gypsum and $39 million purchased from USG Interiors. Information for the period of May 7 through December 31, 1993, shown in the following tables has been restated to conform to the Corporation's current industry segment organization.
Amortization Depreciation Operating of Excess Depletion Year ended December 31, 1994 Net Profit/ Reorganization and Capital Identifiable Industry Segments Sales (Loss) Value Amortization Expenditures Assets (Dollars in millions) North American Gypsum: U.S. Gypsum $ 1,209 $ 158 $ 61 $ 29 $ 37 $ 887 CGC (gypsum division) 110 (6) 18 3 4 120 Other subsidiaries 90 24 - 4 5 56 Eliminations (84) - - - - 1 Total Gypsum Products 1,325 176 79 36 46 1,064 Building Products Distribution 65 10 3 2 3 147 Eliminations (204) (2) - - - (33) Total North American Gypsum 1,780 184 82 38 49 1,178 Worldwide Ceilings: USG Interiors 400 (28) 71 10 12 403 USG International 202 (13) 16 3 3 189 CGC (interiors division) 29 3 - - - 8 Eliminations (37) - - - - - Total Worldwide Ceilings 594 (38) 87 13 15 600 Corporate - (42) - 33 - 352 Eliminations (84) - - - - (6) Total USG Corporation 2,290 104 169 84 64 2,124 Geographic Segments United States $ 2,008 $ 94 $ 135 $ 74 $ 52 $ 1,770 Canada 164 2 18 5 9 153 Other Foreign 228 8 16 5 3 200 Transfers between geographic areas (110) - - - - 1 Total USG Corporation 2,290 104 169 84 64 2,124
Amortization Depreciation Operating of Excess Depletion May 7 through December 31, 1993 Net Profit/ Reorganization and Capital Identifiable Industry Segments Sales (Loss) Value Amortization Expenditures Assets (Dollars in millions) North American Gypsum: U.S. Gypsum $ 673 $ 48 $ 41 $ 20 $ 17 $ 912 CGC (gypsum division) 61 (8) 12 2 2 145 Other subsidiaries 53 13 - 2 4 61 Eliminations (43) - - - - - Total Gypsum Products 744 53 53 24 23 1,118 Building Products Distribution 372 4 2 1 1 125 Eliminations (111) - - - - (25) Total North American Gypsum 1,005 57 55 25 24 1,218 Worldwide Ceilings: USG Interiors 245 (20) 47 6 2 507 USG International 126 (11) 11 2 3 181 CGC (interiors division) 19 1 - 1 - 9 Eliminations (23) - - - - - Total Worldwide Ceilings 367 (30) 58 9 5 697 Corporate - (26) - 10 - 251 Eliminations (47) - - - - (3) Total USG Corporation 1,325 1 113 44 29 2,163 Geographic Segments United States $ 1,147 $ 3 $ 90 $ 36 $ 20 $ 1,789 Canada 95 (6) 12 5 6 178 Other Foreign 143 4 11 3 3 197 Transfers between geographic areas (60) - - - - (1) Total USG Corporation 1,325 1 113 44 29 2,163
Year May 7 ended through December 31, December 31, Transfers Between Geographic Areas 1994 1993 (Dollars in millions) United States $ 44 $ 25 Canada 36 16 Other Foreign 30 19 Total 110 60
Subsidiary Debt Guarantees The Corporation had $298 million and $478 million aggregate principal amount of Senior 2002 Notes outstanding as of December 31, 1994 and 1993, respectively. Each of U.S. Gypsum, USG Industries, Inc., USG Interiors, USG Foreign Investments, Ltd., L&W Supply, Westbank Planting Company, USG Interiors International, Inc., American Metals Corporation and La Mirada Products Co., Inc. (together, the "Combined Guarantors") guaranteed, in the manner described below, both the obligations of the Corporation under the Credit Agreement and the Senior 2002 Notes. The Combined Guarantors are jointly and severally liable under these guarantees (the "Subsidiary Guarantees"). Holders of the Bank Debt have the right to (i) determine whether, when and to what extent the guarantees will be enforced (provided that each guarantee payment will be applied to the Bank Debt and Senior 2002 Notes pro rata based on the respective amounts owed thereon) and (ii) amend or eliminate the guarantees. The guarantees will terminate when the Bank Debt is retired regardless of whether any Senior 2002 Notes remain unpaid. The liability of each of the Combined Guarantors on its guarantee is limited to the greater of (i) 95% of the lowest amount, calculated as of July 13, 1988, sufficient to render the guarantor insolvent, leave the guarantor with unreasonably small capital or leave the guarantor unable to pay its debts as they become due (each as defined under applicable law) and (ii) the same amount, calculated as of the date any demand for payment under such guarantee is made, in each case plus collection costs. The guarantees are senior obligations of the applicable guarantor and rank pari passu with all unsubordinated obligations of the guarantor. Subsidiaries other than the Combined Guarantors (the "Combined Non- Guarantors"), substantially all of which are subsidiaries of guarantors, primarily include CGC, Gypsum Transportation Limited, USG Canadian Mining Ltd., and the Corporation's Mexican, European and Pacific subsidiaries. USG Funding is also a Non-Guarantor. The long-term debt of the Combined Non- Guarantors of $84 million and $24 million as of December 31, 1994 and 1993, respectively, has restrictive covenants that restrict, among other things, the payment of dividends. The following condensed consolidating information presents: (i) Condensed financial statements as of December 31, 1994 and 1993, for the year ended December 31, 1994 and for the period of May 7 through December 31, 1993 of: (a) the Corporation on a parent company only basis (the "Parent Company," which was the only entity of the Corporation included in the bankruptcy proceeding); (b) the Combined Guarantors; (c) the Combined Non-Guarantors; and (d) the Corporation on a consolidated basis. Due to the Restructuring and implementation of fresh start accounting, the financial statements for the restructured company (periods after May 6, 1993) are not comparable to those of the predecessor company. Except for the following condensed financial statements, separate financial information with respect to the Combined Guarantors is omitted as such separate financial information is not deemed material to investors. (ii) The Parent Company and Combined Guarantors shown with their investments in their subsidiaries accounted for on the equity method. (iii) Elimination entries necessary to consolidate the Parent Company and its subsidiaries. USG CORPORATION (Restructured Company) CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (Dollars in millions)
Combined Parent Combined Non- Company Guarantors Guarantors Eliminations Consolidated Year ended December 31, 1994 Net sales $ - $2,008 $ 391 $ (109) $ 2,290 Gross profit (2) 432 87 - 517 Operating profit/(loss) (43) 137 10 - 104 Equity in net loss of the subsidiaries 34 6 - (40) - Interest expense, net 134 2 3 - 139 Corporate service charge (164) 164 - - - Other expense/(income) 45 (41) (1) - 3 Earnings/(loss) before taxes on income (92) 6 8 40 (38) Taxes on income - 40 14 - 54 Net loss (92) (34) (6) 40 (92) May 7 through December 31, 1993 Net sales $ - $1,153 $ 238 $ (66) $ 1,325 Gross profit - 216 47 - 263 Operating profit/(loss) (27) 30 (2) - 1 Equity in net loss of the subsidiaries 291 11 - (302) - Interest expense, net 84 2 2 - 88 Corporate service charge (106) 106 - - - Other expense/(income) (197) 188 1 - (8) Loss before taxes on income and extraordinary loss (99) (277) (5) 302 (79) Taxes on income 9 14 6 - 29 Loss before extraordinary loss (108) (291) (11) 302 (108) Extraordinary loss, net of taxes (21) - - - (21) Net loss (129) (291) (11) 302 (129)
USG CORPORATION (Restructured Company) CONDENSED CONSOLIDATING BALANCE SHEET (Dollars in millions)
Combined Parent Combined Non- Company Guarantors Guarantors Eliminations Consolidated As of December 31, 1994 Cash and cash equivalents $ 178 $ (11) $ 30 $ - $ 197 Receivables, net - 135 173 (34) 274 Inventories - 136 43 (6) 173 Total current assets 178 260 246 (40) 644 Property, plant and equipment, net 15 623 117 - 755 Investment in subsidiaries 1,436 261 - (1,697) - Excess reorganization value, net - 447 114 - 561 Other assets (227) 426 (28) (7) 164 Total assets 1,402 2,017 449 (1,744) 2,124 Accounts payable and accrued expenses $ 83 $ 298 $ 63 $ (34) $ 410 Notes payable and long-term debt maturing within one year 41 2 2 - 45 Total current liabilities 124 300 65 (34) 455 Long-Term Debt 956 37 84 - 1,077 Deferred Income Taxes 9 155 15 - 179 Other Liabilities 308 109 4 - 421 Common stock 5 1 6 (7) 5 Capital received in excess of par value 221 1,438 364 (1,802) 221 Deferred currency translation - - (13) - (13) Reinvested earnings/(deficit) (221) (23) (76) 99 (221) Total stockholders' equity/ (deficit) 5 1,416 281 (1,710) (8) Total liabilities and stockholders' equity 1,402 2,017 449 (1,744) 2,124 As of December 31, 1993 Cash and cash equivalents $ 187 $ (8) $ 32 $ - $ 211 Receivables, net 8 240 44 (28) 264 Inventories - 114 34 (3) 145 Total current assets 195 346 110 (31) 620 Property, plant and equipment, net 21 620 113 - 754 Investment in subsidiaries 1,511 277 - (1,788) - Excess reorganization value, net - 582 153 - 735 Other assets (35) 91 3 (5) 54 Total assets 1,692 1,916 379 (1,824) 2,163 Accounts payable and accrued expenses $ 100 $ 207 $ 52 $ (27) $ 332 Notes payable and long-term debt maturing within one year 158 3 6 - 167 Total current liabilities 258 210 58 (27) 499 Long-Term Debt 1,249 36 24 - 1,309 Deferred Income Taxes 14 151 15 - 180 Other Liabilities 296 8 5 - 309 Common stock 4 1 6 (7) 4 Capital received in excess of par value - 1,472 310 (1,782) - Deferred currency translation - - (9) - (9) Reinvested earnings/(deficit) (129) 38 (30) (8) (129) Total stockholders' equity/ (deficit) (125) 1,511 277 (1,797) (134) Total liabilities and stockholders' equity 1,692 1,916 379 (1,824) 2,163
USG CORPORATION (Restructured Company) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Dollars in millions)
Combined Parent Combined Non- Company Guarantors Guarantors Eliminations Consolidated Year ended December 31, 1994 Net cash flows (to)/from operating activities $ (187) $ 296 $ 89 $ - $ 198 Capital expenditures (1) (51) (12) - (64) Net proceeds from asset dispositions 4 12 - - 16 Net cash flows (to)/from investing activities 3 (39) (12) - (48) Issuance of debt 85 4 173 - 262 Repayment of debt (524) (3) (123) - (650) Public offering of common stock 224 - - - 224 Cash dividends (paid)/received 21 28 (49) - - Net cash transfers (to)/from Corporate 369 (289) (80) - - Net cash flows (to)/from financing activities 175 (260) (79) - (164) Net decrease in cash & equivalents (9) (3) (2) - (14) Cash and cash equivalents - beginning 187 (8) 32 - 211 Cash and cash equivalents - end 178 (11) 30 - 197 May 7 through December 31, 1993 Net cash flows (to)/from operating activities $ (27) $ 185 $ 25 $ - $ 183 Capital expenditures - (20) (9) - (29) Net proceeds from asset dispositions 16 13 - - 29 Net cash flows (to)/from investing activities 16 (7) (9) - - Issuance of debt - - 36 - 36 Repayment of debt (8) (9) (40) - (57) Cash dividends (paid)/received - 12 (12) - - Net cash transfers (to)/ from Corporate 182 (182) - - - Net cash flows (to)/from financing activities 174 (179) (16) - (21) Net increase/(decrease) in cash & equivalents 163 (1) - - 162 Cash and cash equivalents - beginning 24 (7) 32 - 49 Cash and cash equivalents - end 187 (8) 32 - 211
USG CORPORATION MANAGEMENT REPORT Management is responsible for the preparation and integrity of the financial statements and related notes included herein. These statements have been prepared in accordance with generally accepted accounting principles and, of necessity, include some amounts that are based on management's best estimates and judgments. The Corporation's accounting systems include internal controls designed to provide reasonable assurance of the reliability of its financial records and the proper safeguarding and use of its assets. Such controls are based on established policies and procedures, are implemented by trained personnel, and are monitored through an internal audit program. 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 Audit Committee of the Board, consisting solely of outside Directors of the Corporation, maintains an ongoing appraisal, on behalf of the stockholders, of the effectiveness of the independent auditors and management with respect to the preparation of financial statements, the adequacy of internal controls and the Corporation's accounting policies. 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 (Restructured Company), a Delaware corporation, and subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of earnings and cash flows for the year ended December 31, 1994 and the period of May 7 through December 31, 1993. 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. As discussed in Notes to Financial Statements - "Financial Restructuring" note, on May 6, 1993, the Corporation completed a comprehensive financial restructuring through the implementation of a prepackaged plan of reorganization under Chapter 11 of the United States Bankruptcy Code and applied fresh start accounting. As such, results of operations through May 6, 1993 (Predecessor Company) are not comparable with results of operations subsequent to that date. 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, 1994 and 1993, and the results of their operations and their cash flows for the year ended December 31, 1994 and the period of May 7 through December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Notes to Financial Statements - "Litigation" note, in view of the limited insurance funding currently available for property damage cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in property damage cases that reach trial prior to the completion of the coverage action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the coverage action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the consolidated results of operations or the consolidated financial position of the Corporation. As discussed in Notes to Financial Statements - "Litigation" note, on January 1, 1994, the Corporation changed its method of accounting for asbestos-related matters. /s/Arthur Andersen LLP ARTHUR ANDERSEN LLP Chicago, Illinois January 26, 1995 USG CORPORATION (Restructured Company) 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, 1994 Doubtful accounts $ 11 $ 7 $ (7) $ 11 Cash discounts 2 26 (25) 3 May 7 through December 31, 1993 Doubtful accounts 11 4 (4) 11 Cash discounts 2 15 (15) 2
USG CORPORATION (Restructured Company) SUPPLEMENTAL NOTE ON FINANCIAL INFORMATION FOR UNITED STATES GYPSUM COMPANY (A SUBSIDIARY OF USG CORPORATION) USG Corporation, a holding company, owns several operating subsidiaries, including U.S. Gypsum. On January 1, 1985, all of the issued and outstanding shares of stock of U.S. Gypsum were converted into shares of USG Corporation and the holding company became a joint and several obligor for certain debentures originally issued by U.S. Gypsum. Debentures totaling $33 million and $36 million were recorded on the holding company's books of account as of December 31, 1994 and 1993, respectively. Financial results for U.S. Gypsum are presented below in accordance with disclosure requirements of the SEC (dollars in millions): Summary Statement of Earnings
Year May 7 ended through December 31, December 31, 1994 1993 Net sales $ 1,209 $ 673 Cost and expenses 990 584 Amortization of excess reorganization value 61 41 Operating profit 158 48 Interest income, net (5) (2) Other income, net - (1) Corporate charges 93 60 Earnings/(loss) before taxes on income 70 (9) Taxes on income 49 15 Net earnings/(loss) 21 (24)
Summary Balance Sheet
As of December 31 1994 1993 Current assets $ 345 $ 190 Property, plant and equipment, net 491 483 Excess reorganization value, net 204 265 Other assets 103 3 Total assets 1,143 941 Current liabilities $ 197 $ 124 Other liabilities and obligations 256 149 Stockholder's equity 690 668 Total liabilities and stockholder's equity 1,143 941
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECT TO SUPPLEMENTAL NOTE AND FINANCIAL STATEMENT SCHEDULE We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of USG Corporation (Restructured Company) included in this Form 10-K, and have issued our report thereon dated January 26, 1995. Our report on the consolidated financial statements includes explanatory paragraphs with respect to the asbestos litigation and the Corporation's change in its method of accounting for asbestos-related matters as discussed in Notes to Financial Statements - "Litigation" note. Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The supplemental note and financial statement schedule on pages 51 and 52 are the responsibility of the Corporation's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the consolidated financial statements. The supplemental note and financial statement schedule have been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, fairly state 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 January 26, 1995 USG CORPORATION (Predecessor Company) CONSOLIDATED STATEMENT OF EARNINGS (Dollars in millions)
January 1 Year through ended May 6, December 31, 1993 1992 Net Sales $ 591 $ 1,777 Cost of products sold 482 1,460 Gross Profit 109 317 Selling and administrative expenses 71 218 Operating Profit 38 99 Interest expense 86 334 Interest income (2) (12) Other expense, net 6 1 Reorganization items (709) - Earnings/(Loss) Before Taxes on Income, Extraordinary Gain and Changes in Accounting Principles 657 (224) Taxes on income/(income tax benefit) 17 (33) Earnings/(Loss) Before Extraordinary Gain and Changes in Accounting Principles 640 (191) Extraordinary gain, net of taxes 944 - Cumulative effect of changes in accounting principles, net (150) - Net Earnings/(Loss) 1,434 (191) Per-share information is omitted because, due to the Restructuring and implementation of fresh start accounting, it is not meaningful. The notes to financial statements on are an integral part of this statement.
USG CORPORATION (Predecessor Company) CONSOLIDATED BALANCE SHEET (Dollars in millions)
As of May 6, 1993 Assets Current Assets: Cash and cash equivalents (primarily time deposits) $ 49 Receivables (net of reserves of $13) 315 Inventories 148 Total current assets 512 Property, Plant and Equipment, Net 767 Excess Reorganization Value 851 Other Assets 64 Total assets 2,194 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 96 Accrued expenses 171 Notes payable 6 Long-term debt maturing within one year 9 Taxes on income 13 Total current liabilities 295 Long-Term Debt 1,446 Deferred Income Taxes 170 Other Liabilities 279 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 37,157,458 shares (after deducting 27,556 shares held in treasury) 4 Capital received in excess of par value - Deferred currency translation - Reinvested earnings - Total stockholders' equity 4 Total liabilities and stockholders' equity 2,194 The notes to financial statements are an integral part of this statement.
USG CORPORATION (Predecessor Company) CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in millions)
January 1 Year through ended May 6, December 31, 1993 1992 Cash Flows from Operating Activities: Net earnings/(loss) $ 1,434 $ (191) Adjustments to reconcile net earnings/(loss) to net cash: Cumulative effect of accounting changes 150 - Depreciation, depletion and amortization 22 66 Interest expense on pay-in-kind debentures 17 74 Deferred income taxes (13) (25) Net (gain)/loss on asset dispositions 4 (5) (Increase)/decrease in working capital: Receivables 18 (1) Inventories (8) (3) Payables 3 (4) Accrued expenses 15 213 Increase in other assets (12) (23) Changes due to reorganization items: Increase in reorganization items 65 - Net adjustments to fair market value (759) - Gain on discharge of prepetition liabilities (944) - Payment of liabilities net of collection of letters of credit (7) - Increase/(decrease) in other liabilities 4 (2) Other, net (3) (9) Net cash flows (to)/from operating activities (14) 90 Cash Flows from Investing Activities: Capital expenditures (12) (49) Net proceeds from asset dispositions - 6 Net cash flows to investing activities (12) (43) Cash Flows from Financing Activities: Issuance of debt 5 57 Repayment of debt (142) (75) (Increase)/decrease in restricted assets 32 (4) Net cash flows to financing activities (105) (22) Net Increase/(Decrease) in Cash and Cash Equivalents (131) 25 Cash and cash equivalents as of beginning of period 180 155 Cash and cash equivalents as of end of period 49 180 Supplemental Cash Flow Disclosures: Interest paid $ 58 $ 52 Income taxes paid 3 13 The notes to financial statements are an integral part of this statement.
USG CORPORATION (Predecessor Company) NOTES TO FINANCIAL STATEMENTS (Terms in initial capital letters are defined elsewhere in this Form 10-K) Principles of Consolidation The consolidated financial statements include the accounts of the Corporation and its subsidiaries after elimination of intercompany accounts and transactions. Revenue is recognized upon the shipment of products. For the period of January 1 through May 6, 1993, net currency translation gains or losses on foreign subsidiaries are included in deferred currency translation, a component of stockholders' equity. For the year ended December 31, 1992, Mexican currency translation losses were charged to earnings. Purchased goodwill, which was written off in accordance with the implementation of fresh start accounting, was previously being amortized over a period of 40 years. For purposes of the Consolidated Balance Sheet and Consolidated Statement of Cash Flows, all highly liquid investments with a maturity of three months or less at the time of purchase are considered to be cash equivalents. Financial Restructuring On May 6, 1993, the Corporation completed a comprehensive restructuring of its debt (the "Restructuring") through implementation of a "prepackaged" plan of reorganization under United States bankruptcy law (the "Prepackaged Plan"). In accordance with the terms of the Prepackaged Plan, $1.4 billion of debt and accrued interest was converted into equity, interest expense was significantly reduced and the maturities of a substantial portion of the Corporation's remaining debt were extended. The Corporation accounted for the Restructuring using the principles of fresh start accounting as required by AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). Pursuant to such principles, individual assets and liabilities were adjusted to fair market value as of May 6, 1993. Excess reorganization value, the portion of the reorganization value not attributable to specific assets, is being amortized over a five-year period, effective May 7, 1993. The following balance sheet details the adjustments that were made as of May 6, 1993 to record the Restructuring and implement fresh start accounting: USG CORPORATION (Predecessor Company) CONSOLIDATED BALANCE SHEET As of May 6, 1993 (Dollars in millions)
Pre- Post- Restructuring (a) (b) Restructuring and Restructuring Fresh Start and Fresh Start Adjustments Adjustments Fresh Start ASSETS Current Assets: Cash and cash equivalents $ 1503 $ (104) $ - $ 49 Receivables, net 281 35 (1) 315 Inventories 122 - 26 148 Restricted cash 99 (99) - - Total current assets 655 (168) 25 512 Property, Plant and Equipment, Net 792 - (25) 767 Purchased Goodwill, Net 69 - (69) - Excess Reorganization Value - - 851 851 Other Assets 65 (1) - 64 Total assets 1,581 (169) 782 2,194 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 96 $ - $ - $ 96 Accrued expenses 203 (28) (4) 171 Notes payable 6 - - 6 Revolving Credit Facility 140 (140) - - Long-term debt maturing within one year 9 - - 9 Long-term debt classified as current 427 (427) - - Taxes on income 17 - (4) 13 Total current liabilities 898 (595) (8) 295 Long-Term Debt 67 1,473 (94) 1,446 Deferred Income Taxes 111 24 35 170 Other Liabilities 194 - 85 279 Liabilities Subject to Compromise 2,458 (2,458) - - Stockholders' Equity/(Deficit): Preferred stock - - - - Common stock 5 (1) - 4 Capital received in excess of par value 23 444 (467) - Deferred currency translation (7) - 7 - Reinvested earnings/(deficit) (2,168) 944 1,224 - Total stockholders' equity/(deficit) (2,147) 1,387 764 4 Total liabilities and stockholders' equity 1,581 (169) 782 2,194 (a) To record the consummation of the Prepackaged Plan. (b) To record the adjustments to state assets and liabilities at their estimated fair market value, including establishment of Excess Reorganization Value.
Reorganization Items In connection with the Restructuring, the Corporation recorded a one-time reorganization items gain of $709 million in the period of January 1 through May 6, 1993. The (income)/expense components of this gain are as follows (dollars in millions):
January 1 through May 6, 1993 Excess reorganization value $ (851) Other fresh start adjustments 63 Restructuring fees and expenses 57 Write-off of 1988 capitalized financing costs 22 Total reorganization items (709)
Extraordinary Gain Also in connection with the Restructuring, the Corporation recorded a one- time after-tax extraordinary gain of $944 million in the period of January 1 through May 6, 1993. The income/(expense) components of this gain are as follows (dollars in millions):
January 1 through May 6, 1993 Gain on exchange of the Old Senior Subordinated Debentures for stock $ 477 Gain on exchange of the Old Junior Subordinated Debentures for stock and warrants 456 Write-off of bank debt default interest 49 Tax provision (24) Management incentive compensation (13) Other (1) Total extraordinary items 944
Cumulative Effect of Changes in Accounting Principles A one-time after-tax charge of $150 million was recorded in the first quarter of 1993 representing the adoption of Statement of Financial Accounting Standard ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," - $180 million, partially offset by the adoption of SFAS No. 109, "Accounting for Income Taxes," - $30 million. See "Postretirement Benefits" and "Taxes on Income and Deferred Taxes" notes for information on the adoption of these standards. Neither of these standards impact cash flow. Research and Development Research and development expenditures are charged to earnings as incurred and amounted to $4 million and $14 million in the period of January 1 through May 6, 1993 and the year ended December 31, 1992, respectively. Taxes on Income and Deferred Income Taxes Effective January 1, 1993, the Corporation adopted SFAS No. 109, "Accounting for Income Taxes." The cumulative effect as of January 1, 1993 of adopting SFAS No. 109 was a one-time benefit to first quarter 1993 net earnings of $30 million, primarily due to adjusting deferred taxes from historical to current tax rates. Financial statements for periods prior to January 1, 1993 have not been restated to reflect the adoption of this standard. Earnings/(loss) before taxes on income, extraordinary gain and changes in accounting principles consisted of the following (dollars in millions):
January 1 Year through ended May 6, December 31, 1993 1992 U.S. $ 483 $ (246) Foreign 174 22 Total 657 (224)
Taxes on income/(income tax benefit) consisted of the following (dollars in millions):
January 1 Year through ended May 6, December 31, 1993 1992 Current: U.S. Federal $ 13 $ (12) Foreign 2 6 15 (6) Deferred: U.S. Federal - (27) Foreign 2 - 2 (27) Total 17 (33)
The difference between the statutory U.S. Federal income tax/(benefit) rate and the Corporation's effective income tax/(benefit) rate is summarized as follows:
January 1 Year through ended May 6, December 31, 1993 1992 Statutory U.S. Federal income tax/(benefit) rate 34.0 % (34.0) % Nontaxable effects of adopting fresh start accounting (41.4) - Capitalized restructuring fees 2.0 - Foreign tax rate differential 1.3 7.7 Valuation allowance adjustment 2.3 - Unbenefited NOL Carryforward 2.3 12.6 Other, net 2.1 (1.3) Effective income tax/(benefit) rate 2.6 (15.0)
Temporary differences and carryforwards which give rise to current and long-term deferred tax (assets)/liabilities as of May 6, 1993 were as follows (dollars in millions):
As of May 6, 1993 Property, plant and equipment $ 148 Debt discount 32 Deferred tax liabilities 180 Pension and retiree medical benefits (85) Reserves not deductible until paid (47) Other (2) Deferred tax assets before valuation allowance (134) Valuation allowance 85 Deferred tax assets (49) Net deferred tax liabilities 131
A valuation allowance has been provided for deferred tax assets relating to pension and retiree medical benefits due to the long-term nature of their realization. Because of the uncertainty regarding the application of the Code to the Corporation's NOL Carryforwards as a result of the Prepackaged Plan, no deferred tax asset is recorded. The Corporation has NOL Carryforwards of $113 million remaining from 1992 after a reduction due to cancellation of indebtedness from the Prepackaged Plan. These NOL Carryforwards may be used to offset U.S. taxable income through 2007. The Code will limit the Corporation's annual use of its NOL Carryforwards to the lesser of its taxable income or approximately $30 million plus any unused limit from prior years. Furthermore, due to the uncertainty regarding the application of the Code to the exchange of stock for debt, the Corporation's NOL Carryforwards could be further reduced or eliminated. The Corporation has a $3 million minimum tax credit which may be used to offset U.S. regular tax liability in future years. During 1992, deferred income taxes resulted from certain items being treated differently for financial reporting purposes than for income tax purposes. The tax effect of such differences is summarized as follows (dollars in millions):
Year ended December 31, 1992 Tax benefit carryforwards $ (19) Accelerated tax depreciation (5) Other, net (3) Total deferred provision (27) Classification adjustment of prior years' deferrals 2 Decrease in deferred taxes (25)
The Corporation does not provide for U.S. Federal income taxes on the portion of undistributed earnings of foreign subsidiaries which are intended to be permanently reinvested. The cumulative amount of such undistributed earnings totaled approximately $75 million as of May 6, 1993. Any future repatriation of undistributed earnings would not, in the opinion of management, result in significant additional taxes. Inventories In accordance with the implementation of fresh start accounting, inventories were stated at fair market value as of May 6, 1993. Most of the Corporation's domestic and Mexican inventories are valued under the LIFO method. As of May 6, 1993, the LIFO values of these inventories were $103 million and would have been the same if they were valued under the FIFO and average production cost methods. Inventories include material, labor and applicable factory overhead costs. Inventory classifications were as follows (dollars in millions):
As of May 6, 1993 Finished goods and work-in-process $ 87 Raw materials 54 Supplies 7 Total 148
The LIFO value of U.S. domestic inventories under fresh start accounting exceeded that computed for U.S. Federal income tax purposes by $26 million as of May 6, 1993. Property, Plant and Equipment Property, plant and equipment were stated at fair market value as of May 6, 1993 in accordance with fresh start accounting. Provisions for depreciation 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. Interest during construction is capitalized on major property additions. Property, plant and equipment classifications were as follows (dollars in millions):
As of May 6, 1993 Land and mineral deposits $ 61 Buildings and realty improvements 228 Machinery and equipment 478 767 Reserves for depreciation and depletion - Total 767
Leases The Corporation leases certain of its offices, buildings, machinery and equipment, and autos under noncancellable operating leases. These leases have various terms and renewal options. Lease expense amounted to $11 million and $31 million in the period of January 1 through May 6, 1993 and the year ended December 31, 1992, respectively. Indebtedness Total debt, including currently maturing debt, consisted of the following (dollars in millions):
As of May 6, 1993 Secured Debt: Bank Debt: Bank Term Loans, installments due through 2000 $ 540 Capitalized Interest Notes, due through 2000 56 Senior notes and debentures: 8% Senior Notes due 1995 75 8% Senior Notes due 1996 90 8% Senior Notes due 1997 100 9% Senior Notes due 1998 35 10 1/4% Senior Notes due 2002 340 7 7/8% Sinking Fund Debentures due 2004 41 8 3/4% Sinking Fund Debentures due 2017 200 Other secured debt, average interest rates 10.5%, varying payments through 1999 40 Unsecured Debt: Industrial revenue bonds, 5.9% ranging to 10.25%, due through 2014 39 Total principal amount of debt 1,556 Less unamortized reorganization discount (95) Total carrying amount of debt 1,461
As of May 6, 1993, the Corporation and its subsidiaries had $1,556 million total principal amount of debt (before unamortized reorganization discount) on a consolidated basis. Of such total debt, $118 million represented direct borrowings by the subsidiaries, including $38 million of industrial revenue bonds, $41 million of 7 7/8% sinking fund debentures issued by U.S. Gypsum in 1974 and subsequently assumed by the Corporation on a joint and several basis in 1985, $33 million of debt (primarily project financing) incurred by the Corporation's foreign subsidiaries other than CGC, $4 million of working capital borrowings by CGC, and $3 million of other long-term borrowings by CGC. The Bank Debt and most other senior debt are secured by a pledge of all of the shares of the Corporation's major domestic subsidiaries and 65% of the shares of certain of its foreign subsidiaries, including CGC, pursuant to a collateral trust arrangement controlled primarily by holders of the Bank Term Loans. The rights of the Corporation and its creditors to the assets of any subsidiary upon the latter's liquidation or reorganization will be subject to the prior claims of such subsidiary's creditors, except to the extent that the Corporation may itself be a creditor with enforceable claims against such subsidiary. The average rate of interest on the Bank Term Loans, excluding default interest which was cured or waived in accordance with the Prepackaged Plan, was 6.5% in the period of January 1 through May 6, 1993. The rate of interest on certain capitalized interest notes issued under the Credit Agreement on May 6, 1993 in connection with the provisions of the Prepackaged Plan was 5.4% based on LIBOR plus 2 1/4%. The "other secured debt" category shown in the table above primarily includes short-term and long-term borrowings from several foreign banks by USG International used principally to finance construction of the Aubange, Belgium ceiling tile plant. This debt is secured by a lien on the assets of the Aubange plant and has restrictive covenants that restrict, among other things, the payment of dividends. Foreign borrowings made by the Corporation's international operations are generally allowed, within certain limits, under provisions of the Credit Agreement. In general, the Credit Agreement restricts, among other things, the incurrence of additional indebtedness, mergers, asset dispositions, investments, prepayment of other debt, dealings with affiliates, capital expenditures, payment of dividends and lease commitments. The fair market value of debt as of May 6, 1993 was $1,421 million, based on estimates of fair market value calculated in connection with implementation of fresh start accounting, excluding other secured debt, primarily representing financing for construction of the Aubange plant that is secured by a direct lien on its assets, which was not practicable to estimate. The weighted average interest rate on outstanding short-term borrowings was 7.3% as of May 6, 1993. Pension Plans The Corporation and most of its subsidiaries have defined benefit retirement plans for all eligible employees. Benefits of the plans are generally based on years of service and employees' compensation during the last years of employment. The Corporation's contributions are made in accordance with independent actuarial reports which, for most plans, required minimal funding in the period of January 1 through May 6, 1993 and the year ended December 31, 1992. Net pension expense included the following components (dollars in millions):
January 1 Year through ended May 6, December 31, 1993 1992 Service cost-benefits earned during the period $ 3 $ 9 Interest cost on projected benefit obligation 11 29 Actual return on plan assets (15) (14) Unrecognized prior service cost 1 2 Net amortization/(deferral) 2 (25) Net pension expense 2 1
The pension plan assets, which consist primarily of publicly traded common stocks and debt securities, had an estimated fair market value that equaled the projected benefit obligation as of May 6, 1993. The following table presents a reconciliation of the total assets of the pension plans to the projected benefit obligation (dollars in millions):
As of May 6, 1993 Amount of assets available for benefits: Funded assets of the plans at fair market value $ 379 Accrued pension expense 25 Total assets of the plans 404 Present value of estimated pension obligation: Vested benefits 298 Nonvested benefits 24 Accumulated benefit obligation 322 Additional benefits based on projected future salary increases 82 Projected benefit obligation 404 Assets in excess of projected benefit obligation -
For the period of January 1 through May 6, 1993, the expected long-term rate of return on plan assets was 9%, the assumed weighted average discount rate used in determining the accumulated benefit obligation was 8% and the rate of increases in projected future compensation levels was 5.5%. Postretirement Benefits The Corporation 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 of these benefits is shared with retirees. Effective January 1, 1993, the Corporation adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," for its retiree benefit plans. Under this accounting standard, the Corporation is required to accrue the estimated cost of retiree benefit payments during employees' active service period. The Corporation elected to recognize this change in accounting principle on the immediate recognition basis. The cumulative effect as of January 1, 1993 of adopting SFAS No. 106 was a one- time after-tax charge to first quarter 1993 net earnings of $180 million. The Corporation previously expensed the cost of these benefits, which principally relate to health care, as claims were incurred. These costs were $8 million in the year ended December 31, 1992. The following table summarizes the components of net periodic postretirement benefit cost for the period of January 1 through May 6, 1993 (dollars in millions):
January 1 through May 6, 1993 Service cost of benefits earned $ 1 Interest on accumulated postretirement benefit obligation 5 Net periodic postretirement benefit cost 6
The status of the Corporation's accrued postretirement benefit cost as of May 6, 1993 was as follows (dollars in millions):
As of May 6, 1993 Accumulated postretirement benefit obligation: Retirees $ 118 Fully eligible active participants 13 Other active participants 62 Accrued postretirement benefit cost liability recognized on the Consolidated Balance Sheet 193
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 13% as of May 6, 1993 with a gradually declining rate to 6% by the year 2000 and remaining at that level thereafter. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of May 6, 1993 by $18 million and increase the net periodic postretirement benefit cost for the period of January 1 through May 6, 1993 by $1 million. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 8%. Management Performance Plan The Management Performance Plan reserved 8,600,000 shares of Common Stock for issuance in connection with grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock, performance shares and performance units. In accordance with the Prepackaged Plan, all outstanding stock options (for 3,786,575 shares) were cancelled without consideration, 1,016,090 shares of restricted and deferred stock were cashed-out pursuant to "change in control" provisions contained in the Management Performance Plan, and 25,580 shares of restricted stock and awards for deferred stock yet to be issued remained outstanding as a consequence of certain waivers of the change in control event by senior members of management. The Prepackaged Plan limited future awards under the Management Performance Plan without stockholder approval to options to purchase a number of shares not to exceed 7.5% of the number of shares of Common Stock outstanding immediately after implementation of the Prepackaged Plan (2,788,350 shares), of which options for 4.5% of such number of outstanding shares may be granted immediately upon consummation of the Prepackaged Plan. Preferred Share Purchase Rights On June 6, 1988, the Corporation adopted a Preferred Share Purchase Rights Plan and pursuant to its provisions declared, subject to the consummation of the 1988 Recapitalization, the distribution of one Right upon each new share of Common Stock issued in the 1988 Recapitalization. The 1988 Recapitalization became effective July 13, 1988 and the distribution occurred immediately thereafter. The Rights contain provisions which are intended to protect stockholders in the event of an unsolicited attempt to acquire the Corporation. The Preferred Share Purchase Rights Plan was terminated in connection with implementation of the Prepackaged Plan. On May 6, 1993, the Rights Agreement was adopted with provisions substantially similar to the old rights except that: (i) the purchase price of the Rights was reset; (ii) the expiration of the Rights was extended; (iii) a so-called "flip-in" feature and exchange feature was added; (iv) certain exemptions were added permitting certain acquisitions and the continued holding of common shares by Water Street and its affiliates in excess of the otherwise specified thresholds; (v) the redemption price was reduced; and (vi) the amendment provision was liberalized. The Rights generally become exercisable 10 days following the announcement of the acquisition of 20% or more of the outstanding Common Stock by someone other than the Corporation or one of its employee benefit plans (10% in the case of an acquisition which the Corporation's Board of Directors determines to represent a threat of acquisition not in the best interests of the Corporation's stockholders). When exercisable, each of the Rights entitles the registered holder to purchase one-hundredth of a share of a junior participating preferred stock, series C, $1.00 par value per share, at a price of $35.00 per one-hundredth of a preferred share, subject to adjustment. In the event that the Corporation is the surviving corporation and the Common Stock remains outstanding and unchanged in a merger or other business combination such acquiring party or the acquiring party engages in one of a number of self-dealing transactions specified in the Rights Agreement, each holder of a Right other than the acquiring party will thereafter have the right to receive upon exercise thereof that number of shares of Common Stock having a market value at the time of such transaction of two times the exercise price of the Right. Warrants On May 6, 1993, a total of 2,602,566 Warrants, in addition to Common Stock, were issued to holders of certain debt which was converted to equity in the Restructuring. Upon issuance, each of the Warrants 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. The Warrants are exercisable, subject to applicable securities laws, at any time prior to May 6, 1998. Each share of Common Stock issued upon exercise of a Warrant prior to the distribution date as defined in the Rights Agreement and prior to the redemption or expiration of the Rights will be accompanied by an attached Right issued under the terms and subject to the conditions of the Rights Agreement as it may then be in effect. Stockholders' Equity Changes in stockholders' equity are summarized as follows (dollars in millions):
January 1 Year through ended May 6, December 31, 1993 1992 Common Stock: Beginning Balance $ 5 $ 5 Reverse Stock Split (4) - Issuance of New Common Stock 3 - Ending Balance 4 5 Capital Received in Excess of Par Value: Beginning Balance 23 24 Restructuring adjustments 444 - Fresh start accounting adjustment (467) - Other, net - (1) Ending Balance - 23 Deferred Currency Translation: Beginning Balance (8) - Change during the period 1 (8) Fresh start accounting adjustment 7 - Ending Balance - (8) Reinvested Earnings/(Deficit): Beginning Balance (1,900) (1,709) Net earnings/(loss) 1,434 (191) Fresh start accounting adjustment 467 - Other, net (1) - Ending Balance - (1,900) Total stockholders' equity/(deficit) 4 (1,880)
As of May 6, 1993, the Corporation held 27,556 shares of $0.10 par value common stock in treasury. The treasury shares were acquired through the forfeiture of restricted stock. Litigation Information in the following "Litigation" note is as of May 6, 1993. See "Restructured Company - Notes to Financial Statements - Litigation" note for current litigation information. One of the Corporation's subsidiaries, U.S. Gypsum, is among numerous defendants in lawsuits arising out of the manufacture and sale of asbestos- containing building materials. U.S. Gypsum sold certain asbestos-containing products beginning in the 1930's; in most cases the products were discontinued or asbestos was removed from the product formula by 1972, and no asbestos- containing products were sold after 1977. Some of these lawsuits seek to recover compensatory and in many cases punitive damages for costs associated with maintenance or removal and replacement of products containing asbestos (the "Property Damage Cases"). Others of these suits (the "Personal Injury Cases") seek to recover compensatory and in many cases punitive damages for personal injury allegedly resulting from exposure to asbestos and asbestos- containing products. It is anticipated that additional personal injury and property damage cases containing similar allegations will be filed. As discussed below, U.S. Gypsum has substantial personal injury and property damage insurance for the years involved in the asbestos litigation. Prior to 1985, when an asbestos exclusion was added to U.S. Gypsum's policies, U.S. Gypsum purchased comprehensive general liability insurance policies covering personal injury and property damage in an aggregate face amount of approximately $850 million. As of May 6, 1993, insurers that issued approximately $100 million of these policies were insolvent. Because U.S. Gypsum's insurance carriers initially responded to its claims for defense and indemnification with various theories denying or limiting coverage and the applicability of their policies, U.S. Gypsum filed a declaratory judgment action against them in the Circuit Court of Cook County, Illinois on December 29, 1983. (U.S. Gypsum Co. v. Admiral Insurance Co., et al.) (the "Coverage Action"). U.S. Gypsum alleges in the Coverage Action that the carriers are obligated to provide indemnification for settlements and judgments and, in some cases, defense costs incurred by U.S. Gypsum in personal injury and property damage cases in which it is a defendant. The current defendants are ten insurance carriers that provided comprehensive general liability insurance coverage to U.S. Gypsum between the 1940's and 1984. As discussed below, several carriers have settled all or a portion of the claims in the Coverage Action. U.S. Gypsum's aggregate expenditures for all asbestos-related matters, including property damage, personal injury, insurance coverage litigation and related expenses, exceeded aggregate insurance payments by $25.8 million in the year ended December 31, 1992, and by $3.8 million in the period of January 1 through May 6, 1993. Property Damage Cases The Property Damage Cases have been brought against U.S. Gypsum by a variety of plaintiffs, including school districts, state and local governments, colleges and universities, hospitals, and private property owners. As of May 6, 1993, U.S. Gypsum was one of many defendants in four cases that had been certified as class actions and others that requested such certification. One class action suit is brought on behalf of owners and operators of all elementary and secondary schools in the United States that contain or contained friable asbestos-containing material. (In re Asbestos School Litigation, U.S.D.C., E.D. Pa.) Approximately 1,350 school districts opted out of the class, some of which have filed or may file separate lawsuits or are participants in a state court class action involving approximately 333 school districts in Michigan. (Board of Education of the City of Detroit, et al. v. The Celotex Corp., et al., Cir. Ct. for Wayne County, Mich.) On April 10, 1992, a state court in Philadelphia certified a class consisting of all owners of buildings leased to the federal government. (Prince George Center, Inc. v. U.S. Gypsum Co., et al., Ct. of Common Pleas, Philadelphia, Pa.) On September 4, 1992, a Federal district court in South Carolina conditionally certified a class 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.). On December 23, 1992, a case was filed in state court in South Carolina purporting to be a "voluntary" class action on behalf of owners of all buildings containing certain types of asbestos-containing products manufactured by the nine named defendants, including U.S. Gypsum, other than buildings owned by the federal or state governments, single family residences, or buildings at issue in the four above described class actions (Anderson County Hospital v. W.R. Grace & Co., et al., Court of Common Pleas, Hampton Co., S.C. (the "Anderson Case"). On January 14, 1993, the plaintiff filed an amended complaint that added a number of defendants, including the Corporation. The amended complaint alleges, among other things, that the guarantees executed by U.S. Gypsum in connection with the 1988 Recapitalization, as well as subsequent distributions of cash from U.S. Gypsum to the Corporation, rendered U.S. Gypsum insolvent and constitute a fraudulent conveyance. The suit seeks to set aside the guarantees and recover the value of the cash flow "diverted" from U.S. Gypsum to the Corporation in an amount to be determined. This case has not been certified as a class action and no other threshold issues, including whether the South Carolina Courts have personal jurisdiction over the Corporation, had been decided as of May 6, 1993. The damages claimed against U.S. Gypsum in the class action cases are unspecified. U.S. Gypsum has denied the substantive allegations of each of the Property Damage Cases and intends to defend them vigorously except when advantageous settlements are possible. As of May 6, 1993, 67 Property Damage Cases were pending against U.S. Gypsum; however, the number of buildings involved is greater than the number of cases because many of these cases, including the class actions referred to above, involve multiple buildings. Approximately 40 property damage claims were threatened against U.S. Gypsum. In total, as of May 6, 1993, U.S. Gypsum had settled property damage claims of approximately 187 plaintiffs involved in approximately 71 cases. Twenty- two cases had been tried to verdict, 13 of which were won by U.S. Gypsum and 7 lost; two other cases, one won at the trial level and one lost, were settled after appeals. Appeals were pending in 4 of the tried cases. In the cases lost, compensatory damage awards against U.S. Gypsum totaled $12.5 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 after appeals were exhausted; a third was settled after the verdict was reversed on appeal. As of May 6, 1993, the remaining punitive award was on appeal. In 1991, 13 new Property Damage Cases were filed against U.S. Gypsum, 11 were dismissed before trial, 8 were settled, 2 were closed following trial or appeal, and 100 were pending at year end; U.S. Gypsum expended $22.2 million for the defense and resolution of Property Damage Cases and received insurance payments of $13.8 million in 1991. In 1992, 7 new Property Damage Cases were filed against U.S. Gypsum, 10 were dismissed before trial, 18 were settled, 3 were closed following trial or appeal, and 76 were pending at year end. U.S. Gypsum expended $34.9 million for the defense and resolution of Property Damage Cases and received insurance payments of $10.2 million in 1992. In the period of January 1 through May 6, 1993, no new Property Damage Cases were filed against U.S. Gypsum, 2 were dismissed before trial, 7 were settled, and 67 were pending at the end of the period. U.S. Gypsum expended $7.0 million for the defense and resolution of Property Damage Cases and received insurance payments of $3.7 million in the period. In the Property Damage Cases litigated to date, a defendant's liability for compensatory damages, if any, has been limited to damages associated with the presence and quantity of asbestos-containing products manufactured by that defendant which are identified in the buildings at issue, although plaintiffs in some cases have argued that principles of joint and several liability should apply. Because of the unique factors inherent in each of the Property Damage Cases, including the lack of reliable information as to product identification and the amount of damages claimed against U.S. Gypsum in many cases, including the class actions described above, management is unable to make a reasonable estimate of the cost of disposing of pending Property Damage Cases. Personal Injury Cases U.S. Gypsum was among numerous defendants in asbestos personal injury suits and administrative claims involving 57,645 claimants pending as of May 6, 1993. All asbestos bodily injury claims pending in the federal courts, including approximately one-third of the Personal Injury Cases pending against U.S. Gypsum, have been consolidated in the United States District Court for the Eastern District of Pennsylvania. U.S. Gypsum is a member, together with 19 other former producers of asbestos-containing products, of the Center for Claims Resolution (the "Center"). The Center has assumed the handling, including the defense and settlement, of all Personal Injury Cases pending against U.S. Gypsum and the other members of the Center. Each member of the Center is assessed a portion of the liability and defense costs of the Center for the Personal Injury Cases handled by the Center, according to predetermined allocation formulas. Five of U.S. Gypsum's insurance carriers that in 1985 signed an Agreement Concerning Asbestos-Related Claims (the "Wellington Agreement") are supporting insurers (the "Supporting Insurers") of the Center. The Supporting Insurers are obligated to provide coverage for the defense and indemnity costs of the Center's members pursuant to the coverage provisions in the Wellington Agreement. Claims for punitive damages are defended but not paid by the Center; if punitive damages are recovered, insurance coverage may be available under the Wellington Agreement depending on the terms of particular policies and applicable state law. Punitive damages have not been awarded against U.S. Gypsum in any of the Personal Injury Cases. Virtually all of U.S. Gypsum's personal injury liability and defense costs are paid by those of its insurance carriers that are Supporting Insurers. The Supporting Insurers provided approximately $350 million of the total coverage referred to above. On January 15, 1993, U.S. Gypsum and the other members of the Center were named as defendants in a class action filed in the U.S. District Court for the Eastern District Pennsylvania (Georgine et al. v. Amchem Products Inc., et al., Case No. 93-CV-0215) (hereinafter "Georgine,"). The complaint generally defines the class of plaintiffs as all persons who have been occupationally exposed to asbestos-containing products manufactured by the defendants and who had not filed an asbestos personal injury suit as of the date of the filing of the class action. Simultaneously with the filing of the class action, the parties filed a settlement agreement in which the named plaintiffs, proposed class counsel, and the defendants agreed to settle and compromise the claims of the proposed class. The settlement, which was awaiting court approval as of May 6, 1993, will implement for all future Personal Injury Cases, except as noted below, an administrative compensation system to replace judicial claims against the defendants, and will provide fair and adequate compensation to future claimants who can demonstrate exposure to asbestos-containing products manufactured by the defendants and the presence of an asbestos-related disease. Class members will be given the opportunity to "opt out," or elect to be excluded from the settlement, although the defendants reserve the right to withdraw from the settlement if the number of opt outs is, in their sole judgment, excessive. In addition, in each year a limited number of claimants will have certain rights to prosecute their claims for compensatory (but not punitive) damages in court in the event they reject compensation offered by the administrative processing of their claim. The Center members, including U.S. Gypsum, have instituted proceedings against those of their insurance carriers that had not consented to support the settlement, seeking a declaratory judgment that the settlement is reasonable and, therefore, that the carriers are obligated to fund their portion of it. Consummation of the settlement is contingent upon, among other things, court approval of the settlement and a favorable ruling in the declaratory judgment proceedings against the non-consenting insurers. It is anticipated that appeals will follow the district court's ruling on the fairness and reasonableness of the settlement. Each of the defendants has committed to fund a defined portion of the settlement, up to a stated maximum amount, over the initial ten-year period of the agreement (which is automatically extended unless terminated by the defendants). Taking into account the provisions of the settlement agreement concerning the maximum number of claims that must be processed in each year and the total amount to be made available to the claimants, the Center estimates that U.S. Gypsum will be obligated to fund a maximum of approximately $125 million of the class action settlement, exclusive of expenses, with a maximum payment of less than $18 million in any single year; of the total amount of U.S. Gypsum's obligation, all but approximately $13 million or less is expected to be paid by U.S. Gypsum's insurance carriers. During 1992, approximately 20,100 Personal Injury Cases were filed against U.S. Gypsum and approximately 10,600 were settled or dismissed. U.S. Gypsum incurred expenses of $21.6 million in 1992 with respect to Personal Injury Cases of which $21.5 million was paid by insurance. In the period of January 1 through May 6, 1993, approximately 8,700 Personal Injury Cases were filed against U.S. Gypsum and approximately 5,300 were settled or dismissed. U.S. Gypsum incurred expenses of $10.9 million in the period with respect to Personal Injury Cases of which $10.8 million was paid by insurance. As of May 6, 1993, December 31, 1992 and December 31, 1991, approximately 58,000, 54,000 and 43,000 Personal Injury Cases were outstanding against U.S. Gypsum, respectively. As of May 6, 1993, U.S. Gypsum's average settlement cost for Personal Injury Cases over the past three years was approximately $1,350 per claim, exclusive of defense costs. Management anticipated that its average settlement cost was likely to increase due to such factors as the possible insolvency of co-defendants, although this increase might be offset to some extent by other factors, including the possibility for block settlements of large numbers of cases and the apparent increase in the percentage of asbestos personal injury cases that appear to have been brought by individuals with little or no physical impairment. In management's opinion, based primarily upon U.S. Gypsum's experience in the Personal Injury Cases disposed of and taking into consideration a number of uncertainties, it was probable that asbestos-related Personal Injury Cases pending against U.S. Gypsum as of December 31, 1992, could have been disposed of for an amount estimated to be between $80 million and $100 million, including both indemnity costs and legal fees and expenses. The estimated cost of resolving pending claims takes into account, among other factors, (i) an increase in the number of pending claims; (ii) the settlements of certain large blocks of claims for higher per-case averages than have historically been paid; and (iii) a slight increase in U.S. Gypsum's historical settlement average. No accrual was recorded for this amount because, pursuant to the Wellington Agreement, U.S. Gypsum's Supporting Insurers are obligated to pay these costs. Assuming that the Georgine class action settlement referred to above is approved substantially in its current form, management estimated, based on assumptions supplied by the Center, U.S. Gypsum's maximum total exposure as of May 6, 1993 in Personal Injury Cases during the next ten years (the initial term of the agreement), including liability for pending claims, claims resolved as part of the class action settlement, and opt out claims, as well as defense costs and other expenses, at approximately $271 million, of which at least $254 million was expected to be paid by insurance. U.S. Gypsum's additional exposure for claims filed by persons who have opted out of Georgine would depend on the number of such claims that are filed, which could not be determined. Coverage Action As indicated above, all of U.S. Gypsum's carriers initially denied coverage for the Property Damage Cases and the Personal Injury Cases, and U.S. Gypsum initiated the Coverage Action to establish its right to such coverage. U.S. Gypsum has voluntarily dismissed the Supporting Insurers referred to above from the personal injury portion of the Coverage Action because they are committed to providing personal injury coverage in accordance with the Wellington Agreement. U.S. Gypsum's claims against the remaining carriers for coverage for the Personal Injury Cases have been stayed since 1984. On January 7, 1991, the trial court in the Coverage Action ruled on the applicability of U.S. Gypsum's insurance policies to settlements and one adverse judgment in eight Property Damage Cases. The court ruled that the eight cases were generally covered, and imposed coverage obligations on particular policy years based upon the dates when the presence of asbestos- containing material was "first discovered" by the plaintiff in each case. The court awarded reimbursement of approximately $6.2 million spent by U.S. Gypsum to resolve the eight cases. U.S. Gypsum appealed the court's ruling with respect to the policy years available to cover particular claims, and the carriers appealed most other aspects of the court's ruling. U.S. Gypsum's experience in the Property Damage Cases suggests that "first discovery" dates in the eight cases referred to above (1978 through 1985) are likely to be typical of most pending cases. U.S. Gypsum's total insurance coverage for the years 1978 through 1984 totals approximately $350 million (after subtracting insolvencies and discounts given to settling carriers). However, some pending cases, as well as some cases filed in the future, may be found to have first discovery dates later than August 1, 1984, after which U.S. Gypsum's insurance policies did not provide coverage for asbestos-related claims. In addition, as described below, the first layer excess carrier for the years 1980 through 1984 is insolvent and U.S. Gypsum may be required to pay amounts otherwise covered by those and other insolvent policies. Accordingly, if the court's ruling is affirmed, U.S. Gypsum will likely be required to bear a portion of the cost of the property damage litigation. Eight carriers, including two of the Supporting Insurers, settled U.S. Gypsum's claims for both property damage and personal injury coverage and were dismissed from the Coverage Action entirely. Four of these carriers agreed to pay all or a substantial portion of their policy limits to U.S. Gypsum beginning in 1991 and continuing over the next four years. Three other excess carriers, including the two settling Supporting Insurers, agreed to provide coverage for the Property Damage Cases and the Personal Injury Cases subject to certain limitations and conditions, when and if underlying primary and excess coverage is exhausted. It cannot presently be determined when such coverage might be reached. Taking into account the above settlements, including participation of certain of the settling carriers in the Wellington Agreement, and consumption through December 31, 1992, carriers providing a total of approximately $97 million of unexhausted insurance had agreed, subject to the terms of the various settlement agreements, to cover both Personal Injury Cases and Property Damage Cases. Carriers providing an additional $276 million of coverage that was unexhausted as of December 31, 1992 had agreed to cover Personal Injury Cases under the Wellington Agreement, but continued to contest coverage for Property Damage Cases and remained defendants in the Coverage Action. U.S. Gypsum will continue to seek negotiated resolutions with its carriers in order to minimize the expense and delays of litigation. As of May 6, 1993, insolvency proceedings had been instituted against four of U.S. Gypsum's insurance carriers. Midland Insurance Company, declared insolvent in 1986, provided excess insurance ($4 million excess of $1 million excess of $500,000 primary in each policy year) from February 15, 1975 to February 15, 1978; Transit Casualty Company, declared insolvent in 1985, provided excess insurance ($15 million excess of $1 million primary in each policy year) from August 1, 1980 to December 31, 1985; Integrity Insurance Company, declared insolvent in 1986, provided excess insurance ($10 million quota share of $25 million excess of $90 million) from August 1, 1983 to July 31, 1984; and American Mutual Insurance Company, declared insolvent in 1989, provided the primary layer of insurance ($500,000 per year) from February 1, 1963 to April 15, 1971. It is possible that U.S. Gypsum will be required to pay a presently indeterminable portion of the costs that would otherwise have been covered by these policies. It is not possible to predict the number of additional lawsuits alleging asbestos-related claims that may be filed against U.S. Gypsum. The number of Personal Injury Claims pending against U.S. Gypsum has increased in each of the last several years. In addition, many Property Damage Cases are still at an early stage and the potential liability therefrom is consequently uncertain. In view of the limited insurance funding currently available for the Property Damage Cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in the Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, as of May 6, 1993, management was unable to determine whether an adverse outcome in the asbestos litigation would have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. Environmental Litigation The Corporation and certain of its subsidiaries had 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 substantially all 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 estimable 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 are also 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 earnings or consolidated financial position. Industry and Geographic Segments Transactions between geographic areas are accounted for on an "arm's-length" basis. No single customer accounted for 4% or more of consolidated net sales. Export sales to foreign unaffiliated customers represent less than 10% of consolidated net sales. Intrasegment and intersegment eliminations largely reflect intercompany sales. Segment operating profit/(loss) includes all costs and expenses directly related to the segment involved and an allocation of expenses which benefit more than one segment. Variations in the levels of corporate identifiable assets primarily reflect fluctuations in the levels of cash and cash equivalents. Restricted cash of $88 million, which represents the proceeds from the 1991 sale of DAP Inc., formerly a wholly owned subsidiary of the Corporation, is included in corporate identifiable assets for 1992. Information shown in the following tables has been restated to conform to the Corporation's current industry segment organization.
Operating Depreciation January 1 through May 6, 1993 Net Profit/ Depletion and Capital Identifiable Industry Segments Sales (Loss) Amortization Expenditures Assets (Dollars in millions) North American Gypsum: U.S. Gypsum $ 297 $ 29 $ 10 $ 6 $ 964 CGC (gypsum division) 30 2 1 1 165 Other subsidiaries 24 6 2 - 60 Eliminations (20) - - - - Total Gypsum Products 331 37 13 7 1,189 Building Products Distribution 156 (1) 1 1 118 Eliminations (49) - - - (22) Total North American Gypsum 438 36 14 8 1,285 Worldwide Ceilings: USG Interiors 115 10 5 2 558 USG International 59 1 1 2 204 CGC (interiors division) 11 2 - - 9 Eliminations (12) - - - - Total Worldwide Ceilings 173 13 6 4 771 Corporate - (11) 2 - 139 Eliminations (20) - - - (1) Total USG Corporation 591 38 22 12 2,194 Geographic Segments United States $ 507 $ 28 $ 18 $ 9 $1,776 Canada 48 4 2 1 198 Other Foreign 65 6 2 2 221 Transfers between geographic areas (29) - - - (1) Total USG Corporation 591 38 22 12 2,194
Operating Depreciation Year ended December 31, 1992 Net Profit/ Depletion and Capital Identifiable Industry Segments Sales (Loss) Amortization Expenditures Assets (Dollars in millions) North American Gypsum: U.S. Gypsum $ 871 $ 70 $ 31 $ 25 $ 653 CGC (gypsum division) 92 - 3 3 67 Other subsidiaries 77 17 4 3 57 Eliminations (66) - - - - Total Gypsum Products 974 87 38 31 777 Building Products Distribution 464 3 2 3 98 Eliminations (142) - - - (22) Total North American Gypsum 1,296 90 40 34 853 Worldwide Ceilings: USG Interiors 354 35 12 11 256 USG International 189 - 5 3 125 CGC (interiors division) 33 4 1 - 8 Eliminations (35) - - - - Total Worldwide Ceilings 541 39 18 14 389 Corporate - (30) 8 1 423 Eliminations (60) - - - (6) Total USG Corporation 1,777 99 66 49 1,659 Geographic Segments United States $1,505 $ 76 $ 53 $ 40 $1,423 Canada 149 7 7 6 96 Other Foreign 208 16 6 3 140 Transfers between geographic areas (85) - - - - Total USG Corporation 1,777 99 66 49 1,659
January 1 Year through ended May 6 December 31, Transfers Between Geographic Areas 1993 1992 (Dollars in millions) United States $ 13 $ 35 Canada 8 23 Other Foreign 8 27 Total 29 85
Subsidiary Debt Guarantees As of May 6, 1993, $340 million aggregate principal amount of Senior 2002 Notes were outstanding. Each of U.S. Gypsum, USG Industries, Inc., USG Interiors, USG Foreign Investments, Ltd., L&W Supply, Westbank Planting Company, USG Interiors International, Inc., American Metals Corporation and La Mirada Products Co., Inc. (together, the "Combined Guarantors") guaranteed, in the manner described below, both the obligations of the Corporation under the Credit Agreement and the Senior 2002 Notes. The Combined Guarantors are jointly and severally liable under these guarantees (the "Subsidiary Guarantees"). Holders of the Bank Debt have the right to (i) determine whether, when and to what extent the guarantees will be enforced (provided that each guarantee payment will be applied to the Bank Debt and Senior 2002 Notes pro rata based on the respective amounts owed thereon) and (ii) amend or eliminate the guarantees. The guarantees will terminate when the Bank Debt is retired regardless of whether any Senior 2002 Notes remain unpaid. The liability of each of the Combined Guarantors on its guarantee is limited to the greater of (i) 95% of the lowest amount, calculated as of July 13, 1988, sufficient to render the guarantor insolvent, leave the guarantor with unreasonably small capital or leave the guarantor unable to pay its debts as they become due (each as defined under applicable law) and (ii) the same amount, calculated as of the date any demand for payment under such guarantee is made, in each case plus collection costs. The guarantees are senior obligations of the applicable guarantor and rank pari passu with all unsubordinated obligations of the guarantor. Subsidiaries other than the Combined Guarantors (the "Combined Non- Guarantors"), substantially all of which are subsidiaries of Guarantors, primarily included, as of May 6, 1993, CGC, Gypsum Transportation Limited, USG Canadian Mining Ltd. and the Corporation's Mexican, European and Pacific subsidiaries. The long-term debt of the Combined Non-Guarantors of $28 million as of May 6, 1993 has restrictive covenants that restrict, among other things, the payment of dividends. The following condensed consolidating information presents: (i) Condensed financial statements as of May 6, 1993 and for the period of January 1 through May 6, 1993, and the year ended December 31, 1992: (a) the Corporation on a parent company only basis (the "Parent Company," which was the only entity of the Corporation included in the bankruptcy proceeding); (b) the Combined Guarantors; (c) the Combined Non-Guarantors; and (d) the Corporation on a consolidated basis. Due to the Restructuring and implementation of fresh start accounting, the financial statements for the restructured company (periods after May 6, 1993) are not comparable to those of the predecessor company. Except for the following condensed financial statements, separate financial information with respect to the Combined Guarantors is omitted as such separate financial information is not deemed material to investors. (ii) The Parent Company and Combined Guarantors shown with their investments in their subsidiaries accounted for on the equity method. (iii) Elimination entries necessary to consolidate the Parent Company and its subsidiaries. USG CORPORATION (Predecessor Company) CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (Dollars in millions)
Combined Parent Combined Non- Company Guarantors Guarantors Eliminations Consolidated January 1 through May 6, 1993 Net sales $ - $ 501 $ 113 $ (23) $ 591 Gross profit 1 84 24 - 109 Operating profit/(loss) (11) 39 10 - 38 Equity in net earnings of the subsidiaries (751) (169) - 920 - Interest expense, net 80 3 1 - 84 Corporate service charge (92) 92 - - - Other expense 1 5 - - 6 Reorganization items 53 (597) (165) - (709) Earnings before taxes on income, extraordinary gain and changes in accounting principles 698 705 174 (920) 657 Taxes on income/(income tax benefit) 37 (24) 4 - 17 Earnings before extraordinary gain and changes in accounting principles 661 729 170 (920) 640 Extraordinary gain, net of taxes 944 - - - 944 Cumulative effect of changes in accounting principles (171) 22 (1) - (150) Net earnings 1,434 751 169 (920) 1,434 Year ended December 31, 1992 Net sales $ - $ 1,503 $ 359 $ (85) $1,777 Gross profit/(loss) (2) 251 68 - 317 Operating profit/(loss) (30) 105 24 - 99 Equity in net (earnings)/loss of the subsidiaries 230 (17) - (213) - Interest expense, net 310 10 2 - 322 Corporate service charge (340) 340 - - - Other expense/(income) (73) 75 (1) - 1 Earnings/(loss) before taxes on income (157) (303) 23 213 (224) Taxes on income/(income tax benefit) 34 (73) 6 - (33) Net earnings/(loss) (191) (230) 17 213 (191)
USG CORPORATION (Predecessor Company) CONDENSED CONSOLIDATING BALANCE SHEET (Dollars in millions)
Combined Parent Combined Non- Company Guarantors Guarantors Eliminations Consolidated As of May 6, 1993 Cash and cash equivalents $ 24 $ (7) $ 32 $ - $ 49 Receivables, net 55 236 49 (25) 315 Inventories - 111 39 (2) 148 Total current assets 79 340 120 (27) 512 Property, plant and equipment, net 22 628 117 - 767 Investment in subsidiaries 1,823 312 - (2,135) - Excess reorganization value - 671 180 - 851 Other assets (103) 159 5 3 64 Total assets 1,821 2,110 422 (2,159) 2,194 Accounts payable and accrued expenses $ 176 $ 76 $ 52 $ (24) $ 280 Notes payable and long-term debt maturing within one year 3 1 11 - 15 Total current liabilities 179 77 63 (24) 295 Long-term debt 1,371 47 28 - 1,446 Deferred income taxes - 155 15 - 170 Other liabilities 267 8 4 - 279 Common stock 4 1 6 (7) 4 Capital received in excess of par value - 1,678 306 (1,984) - Deferred currency translation - - - - - Reinvested earnings - 144 - (144) - Total stockholders' equity 4 1,823 312 (2,135) 4 Total liabilities and stockholders' equity 1,821 2,110 422 (2,159) 2,194
USG CORPORATION (Predecessor Company) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Dollars in millions)
Combined Parent Combined Non- Company Guarantors Guarantors Eliminations Consolidated January 1 through May 6, 1993 Net cash flows (to)/from operating activities $ (90) $ 76 $ - $ - $ (14) Capital expenditures - (9) (3) - (12) Net proceeds from asset dispositions - - - - - Net cash flows to investing activities - (9) (3) - (12) Issuance of debt - - 5 - 5 Repayment of debt - (140) (2) - (142) Cash dividends (paid)/received 2 - (2) - - (Increase)/decrease in restricted assets 44 (12) - - 32 Net cash transfers (to)/from Corporate 9 (9) - - - Net cash flows (to)/from financing activities 55 (161) 1 - (105) Net decrease in cash & equivalents (35) (94) (2) - (131) Cash and cash equivalents - beginning 59 87 34 - 180 Cash and cash equivalents - end 24 (7) 32 - 49 Year ended December 31, 1992 Net cash flows (to)/from operating activities $ (93) $ 117 $ 66 $ - $ 90 Capital expenditures (1) (39) (9) - (49) Net proceeds from asset dispositions - 2 4 - 6 Net cash flows to investing activities (1) (37) (5) - (43) Issuance of debt - - 57 - 57 Repayment of debt (4) (2) (69) - (75) Cash dividends (paid)/received - 56 (56) - - Increase in restricted assets - (4) - - (4) Net cash transfers (to)/from Corporate 121 (121) - - - Net cash flows (to)/from financing activities 117 (71) (68) - (22) Net increase/(decrease) in cash & equivalents 23 9 (7) - 25 Cash and cash equivalents - beginning 36 78 41 - 155 Cash and cash equivalents - end 59 87 34 - 180
USG CORPORATION MANAGEMENT REPORT Management is responsible for the preparation and integrity of the financial statements and related notes included herein. These statements have been prepared in accordance with generally accepted accounting principles and, of necessity, include some amounts that are based on management's best estimates and judgments. The Corporation's accounting systems include internal controls designed to provide reasonable assurance of the reliability of its financial records and the proper safeguarding and use of its assets. Such controls are based on established policies and procedures, are implemented by trained personnel, and are monitored through an internal audit program. 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 Audit Committee of the Board, consisting solely of outside Directors of the Corporation, maintains an ongoing appraisal, on behalf of the stockholders, of the effectiveness of the independent auditors and management with respect to the preparation of financial statements, the adequacy of internal controls and the Corporation's accounting policies. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of USG Corporation: We have audited the accompanying consolidated balance sheet of USG Corporation (Predecessor Company), a Delaware corporation, and subsidiaries as of May 6, 1993 and the related consolidated statements of earnings and cash flows for the period of January 1 through May 6, 1993 and for the year ended December 31, 1992. 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. As discussed in Notes to Financial Statements - "Financial Restructuring" note, on May 6, 1993, the Corporation completed a comprehensive financial restructuring through the implementation of a prepackaged plan of reorganization under Chapter 11 of the United States Bankruptcy Code and applied fresh start accounting. The restructuring resulted in an extraordinary gain of $944 million, primarily from the exchange of debt, and fresh start accounting resulted in a $709 million gain, primarily from revaluing assets and liabilities to reflect reorganization value. These one- time credits to income were recorded as of May 6, 1993 by the Predecessor Company. As such, results of operations through May 6, 1993 (Predecessor Company) are not comparable with results of operations subsequent to that date. 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 May 6, 1993 and the results of their operations and their cash flows for the period of January 1 through May 6, 1993 and for the year ended December 31, 1992, in conformity with generally accepted accounting principles. As discussed in Notes to Financial Statements - "Litigation" note, in view of the limited insurance funding currently available for property damage cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in property damage cases that reach trial prior to the completion of the coverage action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the coverage action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the consolidated results of operations or the consolidated financial position of the Corporation. As discussed in Notes to Financial Statements - "Cumulative Effect of Changes in Accounting Principles" note, on January 1, 1993 the Corporation changed its method of accounting for postretirement benefits other than pensions and accounting for income taxes. /s/Arthur Andersen LLP ARTHUR ANDERSEN LLP Chicago, Illinois January 31, 1994 USG CORPORATION (Predecessor Company) 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 January 1 through May 6, 1993 Doubtful accounts $ 9 $ 3 $ (1) $ 11 Cash discounts 2 8 (8) 2 Year ended December 31, 1992 Doubtful accounts 7 7 (5) 9 Cash discounts 2 24 (24) 2
USG CORPORATION (Predecessor Company) SUPPLEMENTAL NOTE ON FINANCIAL INFORMATION FOR UNITED STATES GYPSUM COMPANY (A SUBSIDIARY OF USG CORPORATION) USG Corporation, a holding company, owns several operating subsidiaries, including U.S. Gypsum. On January 1, 1985, all of the issued and outstanding shares of stock of U.S. Gypsum were converted into shares of USG Corporation and the holding company became a joint and several obligor for certain debentures originally issued by U.S. Gypsum. As of May 6, 1993, debentures totaling $41 million were recorded on the holding company's books of account. Financial results for U.S. Gypsum are presented below in accordance with disclosure requirements of the SEC (dollars in millions): Summary Statement of Earnings
January 1 Year through ended May 6, December 31, 1993 1992 Net sales $ 297 $ 871 Cost and expenses 268 801 Operating profit 29 70 Interest expense, net - 2 Other income, net - (2) Corporate charges 52 188 Reorganization items (295) - Earnings/(loss) before income tax benefit and change in accounting principle 272 (118) Income tax benefit (11) (44) Earnings/(loss) before change in accounting principle 283 (74) Cumulative effect of change in accounting principle 28 - Net earnings/(loss) 311 (74)
Summary Balance Sheet
As of May 6, 1993 Current assets $ 183 Property, plant and equipment, net 486 Excess reorganization value 306 Other assets 9 Total assets 984 Current liabilities $ 33 Other liabilities and obligations 154 Stockholder's equity 797 Total liabilities and stockholder's equity 984
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECT TO SUPPLEMENTAL NOTE AND FINANCIAL STATEMENT SCHEDULE We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of USG Corporation (Predecessor Company) included in this Form 10-K, and have issued our report thereon dated January 26, 1995. Our report on the consolidated financial statements includes an explanatory paragraph with respect to the asbestos litigation as discussed in Notes to the Financial Statements - "Litigation" note. Our report on the consolidated financial statements also includes an explanatory paragraph with respect to the changes in the methods of accounting for postretirement benefits other than pensions and accounting for income taxes as discussed in Notes to Financial Statements - "Cumulative Effect of Changes in Accounting Principles" note. Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The supplemental note and financial statement schedule on pages 81 and 82 are the responsibility of the Corporation's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the consolidated financial statements. The supplemental note and financial statement schedule have been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, fairly state 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 January 31, 1994 USG CORPORATION SELECTED QUARTERLY FINANCIAL DATA (a) (unaudited) (Dollars in millions, except per share data)
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year 1994 Net sales $ 506 $ 562 $ 621 $ 601 $ 2,290 Gross profit (b) 110 133 153 121 517 Operating profit (b) (c) 11 32 47 14 104 Net (loss) (b) (c) (34) (17) (6) (35) (92) Per common share: Net loss (d) (0.87) (0.38) (0.13) (0.79) (2.14) Price range (e) - high 36 32 1/4 24 1/2 21 3/4 36 low 27 1/2 17 3/4 18 3/8 17 1/4 17 1/4 EBITDA 66 87 105 67 325 April 1 May 7 First through through Third Fourth Quarter May 6 June 30 Quarter Quarter 1993 Net sales $ 436 $ 155 $ 315 $ 514 $ 496 Gross profit 79 30 63 105 95 Operating profit/(loss) (c) 27 11 (1) 6 (4) Net earnings/(loss) (c) (f) (279) 1,713 (21) (25) (83) Per common share (g): Net loss - - (0.57) (0.66) (2.23) Price range (e) - high - - 14 22 5/8 30 1/2 low - - 9 5/8 13 20 1/4 EBITDA 46 17 37 65 53 (a) Due to the Restructuring and implementation of fresh start accounting, the financial statements effective May 7, 1993 for the Restructured Company are not comparable to financial statements prior to that date for the Predecessor Company. (b) Fourth quarter 1994 gross profit, operating profit and net loss reflect a $30 million pre-tax charge ($17 million after-tax) to cost of sales for asbestos litigation settlements. Fourth quarter 1994 net loss also reflects a $16 million pre-tax charge ($9 million after-tax) for the write-off of reorganization debt discount. (c) Effective May 7, 1993, the Corporation began amortizing its excess reorganization value which reduced operating profit and net earnings. This non-cash amortization amounted to $42 million, $42 million, $43 million and $42 million in the first through fourth quarters of 1994, respectively. For the period of May 7 through June 30 and the third and fourth quarters of 1993, amortization of excess reorganization value amounted to $28 million, $43 million and $42 million, respectively. (d) As a result of common shares issued in the first quarter of 1994, the sum of the losses per common share for the four quarters of 1994, which are based on average shares outstanding during each quarter, does not equal the loss per common share for the year ended December 31, 1994, which is based on the average shares outstanding during the year. (e) 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, 1995: Common - 6,072; Preferred - none. (f) First quarter 1993 net loss reflects a one-time after-tax net charge of $150 million for the cumulative effect of changes in accounting principles and a pre-tax reorganization items expense of $69 million. Net earnings in the period of April 1 through May 6, 1993 include a one-time pre-tax reorganization items gain of $778 million and a one-time after-tax extraordinary gain of $944 million, both of which were associated with the Restructuring. Net loss in the fourth quarter of 1993 includes an after-tax extraordinary loss of $21 million related to the Corporation's 1994 Equity Offering and Note Placement. (g) Per-share information for periods prior to May 7, 1993 is omitted because, due to the Restructuring and implementation of fresh start accounting, it is not meaningful.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE A Form 8-K reporting a change of accountants has not been filed within 24 months prior to the date of the most recent financial statements. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information about directors has been omitted from this report as it will be filed with the SEC in a definitive proxy statement pursuant to Regulation 14A, which definitive proxy statement is incorporated herein by reference. Executive Officers of the Registrant (as of February 1, 1995 except as specified otherwise) Has Held Present Name, Age Prior Business Experience Position and Present Position in Past Five Years Since Eugene B. Connolly, 62 President and Chief January 1994 Chairman and Chief Executive Officer to Executive Officer May 1990; Chairman of the Board and Chief Executive Officer to March 1993; Chairman, President and Chief Executive Officer to January 1994. William C. Foote, 43 Senior Vice President January 1994 President and Chief and General Manager Operating Officer Products Central Construction Products Region, United States Gypsum Company to November 1990; Executive Vice President and Chief Operating Officer, L&W Supply Corporation to September 1991; President and Chief Executive Officer, L&W Supply Corporation from September 1991 to January 1994; President and Chief Executive Officer, USG Interiors, Inc. from January 1993 to January 1994. J. Bradford James, 48 Director, Corporate January 1995 Group Vice President, Strategic Planning USG Worldwide Ceilings & Corporation and Vice International; President, Finance President and Chief & Administration, USG Executive Officer USG Interiors,Inc. to Interiors,Inc. January 1990; Vice President, Financial and Strategic Plan- ning, USG Corporation to January 1991; Vice President and Chief Financial Officer, USG Corporation to March 1993; Senior Vice Pres- ident and Chief Financial Officer, USG Corporation to January 1994; Vice President, USG Corpor- ation, President and Chief Executive Officer, USG Interiors, Inc. to January 1995. Donald E. Roller, 57 President and Chief January 1995 Group Vice President, Executive Officer, USG North American Gypsum; Interiors, Inc. to January President and Chief 1993; Vice President, USG Executive Officer, Corporation, President and United States Gypsum Chief Executive Officer, Company United States Gypsum Company to January 1995. Richard H. Fleming, 47 Director, Corporate January 1995 Senior Vice President Finance, to January 1991; and Chief Vice President and Financial Officer Treasurer to January 1994; Vice President and Chief Financial Office to January 1995. Arthur G. Leisten, 53 Vice President and General February 1994 Senior Vice President Counsel to January 1990; and General Counsel Senior Vice President and General Counsel to March 1993; Senior Vice Presi- dent, General Counsel and Secretary to February 1994. P. Jack O'Bryan, 59 President and Chief August 1994 Senior Vice President, Executive Officer, United Worldwide Manufacturing States Gypsum Company to and Technology January 1993; Senior Vice President and Chief Tech- nology Officer, USG Corporation to August 1994. Harold E. Pendexter, Jr., 60 Vice President, Human January 1991 Senior Vice President Resources and Administration and Chief Administrative to January 1990; Senior Officer Vice President, Human Re- sources and Administration to January 1991. Raymond T. Belz, 54 Vice President Finance, January, 1995 Vice President and United States Gypsum Controller; Vice Company to November 1990; President and Chief Vice President Financial Financial Officer, Services and Financial North American Gypsum Administration, United States Gypsum Company to January 1994; Vice Pres- ident and Controller, USG Corporation, Vice President Financial Services, United States Gypsum Company to January 1995. Brian W. Burrows, 55 Same position. March 1987 Vice President, Research and Development Matthew P. Gonring, 39 Director, Public Relations March 1993 Vice President, to January 1991; Director, Corporate Corporate Communications Communications to March 1993. John E. Malone, 51 Vice President and Con- January 1994 Vice President and troller, USG Corporation Treasurer; Vice to December 1993; Vice- President - Finance, President - Finance, USG USG International International since March 1993. James S. Phillips, 65 Vice President, National January 1995 Vice President Accounts to December 1990 Vice President, Corporate Accounts to January 1995. Stanley R. Sak, 54 Executive Vice President, January 1994 Vice President; USG Interiors, Inc. to President and October 1990; President Chief Executive and Chief Executive Officer, Officer, USG USG International to International January 1994; President and Chief Executive Officer, CGC Inc., March 1994 to January 1995 Robert B. Sirgant, 54 Director, Marketing - East January 1995 Vice President, Region, United States Corporate Accounts Gypsum Company to November 1992; Vice President, National Accounts and Marketing - East, United States Gypsum Company to July 1994; Vice President, National Accounts, United States Gypsum Company to January 1995. S. Gary Snodgrass, 43 Director, Corporate Human February 1995 Vice President, Human Resources Planning, Resources - Operation; USG Corporation and Vice Vice President, Human President, Human Resources, Resources, Worldwide USG Interiors, Inc. to Ceilings November 1990; Director, Human Resources, USG Corpor- ation to September 1992; Vice President, Management Resources and Employee Relations to January 1994; Vice President, Human Resources - Operations to February 1995. Frank R. Wall, 61 Senior Vice President and March 1995 Vice President; General Manager, President and Western Construction Chief Executive Products Region, United Officer, L&W States Gypsum Company Supply Corporation to January 1990; Senior Vice President, Operating Services, United States Gypsum Company to April 1993; Executive Vice President and Chief Operating Officer, L&W Supply Corporation to January 1994, President and Chief Executive Officer, L&W Supply to March 1995. Dean H. Goossen, 47 Vice President, General February 1994 Corporate Secretary Counsel and Secretary, Corporation Xerox Financial Services Life Insurance Company to February 1993; Assistant Secretary, USG to February 1994. Paul J. Vanderberg, 35 Director, Planning, United January 1995 President and Chief States Gypsum Company to Executive Officer, February 1990; General CGC Inc. Manager, Materials Division, United States Gypsum Company to February 1992; General Manager, Durock, United States Gypsum Company to March 1994; Director, Marketing Services and Planning, United States Gypsum Company from November 1992 to March 1994; Executive Vice President and Chief Operating Officer, CGC Inc. to January 1995. Item 11. EXECUTIVE COMPENSATION The Information required by Item 11 has been omitted from this report as it will be filed with the SEC in a definitive proxy statement pursuant to Regulation 14A, which definitive proxy statement is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Information required by Item 12 has been omitted from this report as it will be filed with the SEC in a definitive proxy statement pursuant to Regulation 14A, which definitive proxy statement is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Information required by Item 13 has been omitted from this report as it will be filed with the SEC in a definitive proxy statement pursuant to Regulation 14A, which definitive proxy statement is incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K EXHIBIT INDEX (a) 1. & 2. Consolidated Financial Statements and Supplemental Financial Statement Schedules See Part II, Item 8. "Financial Statements and Supplementary Data" for an index of the Corporation's consolidated financial statements and supplementary data schedules. 3. Exhibits (Reg. S-K, Item 601): Exhibit No. 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) Amended and Restated By-Laws of USG Corporation, dated as of May 12, 1993 (incorporated by reference to Exhibit 3(b) of Amendment No. 1 to USG Corporation's Registration Statement No. 33-61162 on Form S-1, dated June 16, 1993). 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) Resolutions dated December 16, 1986 of a Special Committee created by the Board of Directors of USG Corporation (incorporated by reference to Exhibit 4(b) of USG Corporation's 1993 Annual Report on Form 10-K, dated March 14, 1994). (c) Resolutions dated March 5, 1987 of a Special Committee created by the Board of Directors of USG Corporation (incorporated by reference to Exhibit 4(c) of USG Corporation's 1993 Annual Report on Form 10-K, dated March 14, 1994). (d) Resolutions dated March 6, 1987 of a Special Committee created by the Board of Directors of USG Corporation(incorporated by reference to Exhibit 4(d) of USG Corporation's 1993 Annual Report on Form 10-K, dated March 14, 1994). (e) Consent Resolutions adopted by a Special Committee created by the Board of Directors of USG Corporation relating to USG Corporation's 9 1/4% Senior Notes due 2001 (incorporated by reference to Exhibit 4(f) of USG Corporation's Registration No. 33-51845 on Form S-1). (f) Indenture dated as of April 26, 1993 among USG Corporation, certain guarantors and State Street Bank and Trust Company, as Trustees, relating to USG Corporation's 10 1/4% Senior Notes due 2002 (incorporated by reference to Exhibit 4.2 of USG Corporation's Form 8-K, dated May 7, 1993). (g) Indenture dated as of August 10, 1993 among USG Corporation, certain guarantors and State Street Bank and Trust Company, as Trustee, relating to USG Corporation's 10 1/4% Senior Notes due 2002, Series B (incorporated by reference to Exhibit 4(f) of USG Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 dated August 12, 1993. (h) Warrant Agreement dated May 6, 1993 between USG Corporation and Harris Trust and Savings Bank, as Warrant Agent, relating to USG Corporation's Warrants (incorporated by reference to Exhibit 4.3 of USG Corporation's Form 8-K, dated May 7, 1993). (i) Form of Warrant Certificate (incorporated by reference to Exhibit 4(g) of Amendment No. 4 to USG Corporation's Registration Statement No. 33-40136 on Form S-4, dated November 12, 1992). (j) Rights Agreement dated May 6, 1993 between USG Corporation and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 10.1 of USG Corporation's Form 8-K, dated May 7, 1993). (k) 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) Amendment and Restatement of USG Corporation Supplemental Retirement Plan, effective as of July 1, 1993 and dated November 30, 1993 (incorporated by reference to Exhibit 10(c) of USG Corporation's Registration No. 33-51845 on Form S-1). (c) First Amendment of USG Corporation Supplemental Retirement Plan, effective as of November 15, 1993 and dated December 2, 1993 (incorporated by reference to Exhibit 10(d) of USG Corporation's Registration No. 33-51845 on Form S-1). (d) 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). (e) USG Corporation Severance Plan for Key Managers, dated May 15, 1991 (incorporated by reference to Exhibit 10(i) of USG Corporation's 1991 Annual Report on Form 10-K, dated March 5, 1992). (f) 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). (g) Form of Change of Control Waiver (incorporated by reference to Exhibit 10(t) of USG Corporation's 1992 Annual Report on Form 10-K dated March 26, 1993). (h) Incentive Recovery Program - Waiver of Full Payment (incorporated by reference to Exhibit 10(u) of USG Corporation's 1992 Annual Report on Form 10-K, dated March 26, 1993). (i) Amended and Restated Credit Agreement dated as of May 6, 1993 among USG Corporation and USG Interiors, Inc., as borrowers; the Financial Institutions listed on the signature pages thereof, as Senior Lenders; Bankers Trust Company, Chemical Bank and Citibank, N.A., as Agents; and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 of Form 8-K filed by USG Corporation on May 7, 1993). (j) First Amendment to Amended and Restated Credit Agreement (incorporated by reference to Exhibit 4M of USG Corporation's Registration Statement No. 35-65804 on Form S-1, dated July 9, 1993). (k) Second Amendment to Amended and Restated Credit Agreement (incorporated by reference to 10(n) of Amendment No. 1 to USG Corporation's Registration No. 33-51845 on Form S-1). (l) Third Amendment to Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10 of USG Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 dated August 12, 1994). (m) Letter of Credit Issuance and Reimbursement Agreement dated as of May 6, 1993 between USG Interiors, Inc. and Chemical Bank (incorporated by reference to Exhibit 10.12 of Form 8-K filed by USG Corporation on May 7, 1993). (n) Amended and Restated Collateral Trust Agreement dated as of May 6, 1993 among USG Corporation, USG Interiors, Inc. and USG Foreign Investments, Ltd., as grantors, and Wilmington Trust Company and William J. Wade, as Trustees (incorporated by reference to Exhibit 10.6 of Form 8-K filed by USG Corporation on May 7, 1993). (o) Amended and Restated Company Pledge Agreement dated as of May 6, 1993 among USG Corporation, Wilmington Trust Company and William J. Wade (incorporated by reference to Exhibit 10.7 of Form 8-K filed by USG Corporation on May 7, 1993). (p) Amended and Restated Subsidiary Pledge Agreement dated as of May 6, 1993 among USG Interiors, Inc., Wilmington Trust Company and William J. Wade (incorporated by reference to Exhibit 10.8 of Form 8-K filed by USG Corporation on May 7, 1993). (q) Amended and Restated Subsidiary Pledge Agreement dated as of May 6, 1993 among USG Foreign Investments, Ltd., Wilmington Trust Company and William J. Wade (incorporated by reference to Exhibit 10.9 of Form 8-K filed by USG Corporation on May 7, 1993). (r) Amended and Restated Share Pledge Agreement dated as of May 6, 1993 among USG Foreign Investments, Ltd., Wilmington Trust Company and William J. Wade (incorporated by reference to Exhibit 10.10 of Form 8-K filed by USG Corporation on May 7, 1993). (s) Amended and Restated Deed of Charge dated as of May 6, 1993 among USG Foreign Investments, Ltd., Wilmington Trust Company and William J. Wade (incorporated by reference to Exhibit 10.11 of Form 8-K filed by USG Corporation on May 7, 1993). (t) Amended and Restated Company Guaranty dated as of May 6, 1993 made by USG Corporation (incorporated by reference to Exhibit 10.3 of Form 8-K filed by USG Corporation on May 7, 1993). (u) Amended and Restated Subsidiary Guaranty dated as of May 6, 1993 made by USG Interiors, Inc. (incorporated by reference to Exhibit 10.1 of Form 8-K filed by USG Corporation on May 7, 1993). (v) Form of Amended and Restated Subsidiary Guaranty dated as of May 6, 1993 made by each of United States Gypsum Company, USG Foreign Investments, Ltd., L&W Supply Corporation, USG Interiors International, Inc., La Mirada Products Co., Inc., Westbank Planting Company, American Metals Corporation and USG Industries, Inc. (incorporated by reference to Exhibit 10.5 of Form 8-K filed by USG Corporation on May 7, 1993). (w) Consent and Agreement dated as of August 22, 1991 with respect to the Old Credit Agreement dated as of July 1, 1988 (incorporated by reference to Exhibit 10(ai) of USG Corporation's Form 8-K, dated August 23, 1991). (x) First Amendment dated as of March 12, 1993 with respect to the Consent and Agreement dated as of August 22, 1991 (incorporated by reference to Exhibit 10(ap) of USG Corporation's 1992 Annual Report on Form 10-K, dated March 26, 1993). (y) Deposit Agreement dated as of September 19, 1991 (incorporated by reference to Exhibit 10(aq) of USG Corporation's 1992 Annual Report on Form 10-K, dated March 26, 1993). (z) First Amendment dated as of March 12, 1993 to the Deposit Agreement (incorporated by reference to Exhibit 10(ar) of USG Corporation's 1992 Annual Report on Form 10-K, dated March 26, 1993). (aa) Agreement, dated August 31, 1992, among USG Corporation and the Ad Hoc Committee of Holders of 13 1/4% Senior Subordinated Debentures of USG Corporation due 2000 (incorporated by reference to Exhibit 10(aq) of Amendment No. 4 to USG Corporation's Registration Statement No. 33-40136 on Form S-4). (ab) Letter Agreement dated February 25, 1993 among USG Corporation, Water Street Corporate Recovery Fund, L.P., the Goldman Sachs Group, L.P. and Goldman, Sachs & Co. (incorporated by reference to Exhibit 10(au) of USG Corporation's 1992 Annual Report on Form 10-K, dated March 26, 1993). (ac) Bankruptcy Court Order issued April 23, 1993 confirming USG Corporation's Prepackaged Plan of Reorganization (incorporated by reference to Exhibit 28.1 of Form 8-K filed by USG Corporation on May 7, 1993). (ad) Consulting Agreement dated July 1, 1990, as amended March 23, 1992, between USG Corporation and William L. Weiss (incorporated by reference to Exhibit 10(au) of Amendment No. 4 to USG Corporation's Registration Statement No. 33-40136 on Form S-4). (ae) Consulting Agreement dated August 11, 1993 between USG Corporation and James W. Cozad (incorporated by reference to Exhibit 10(aw) in USG Corporation's Registration Statement 33-51845, on Form S-1). (af) 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). (ag) 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). (ah) Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10(l) of Amendment No. 1 on USG Corporation's Registration Statement No. 33-61152 on Form S-1). (ai) Form of First Amendment to Amended and Restated Collateral Trust Agreement (incorporated by reference to Exhibit 10(w) of Amendment No. 1 to USG Corporation's Registration Statement No. 33-61152 on Form S-1). (aj) Form of First Amendment to Amended and Restated Subsidiary Guaranty (incorporated by reference to Exhibit 10(ae) of Amendment No. 2 to USG Corporation's Registration Statement No. 33-61152 on Form S-1). (ak) 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). (al) Modification letter dated February 1, 1994 to Nonqualified Stock Option Agreement dated June 1, 1993 between USG Corporation and Eugene B. Connolly (incorporated by reference to Exhibit 10(ar) of Amendment No. 1 of USG Corporation's Registration Statement No. 33-51845 on Form S-1). (am) 1994 Annual Management Incentive Program - USG Corporation (an) Letter Agreement dated July 28, 1994 between USG Corporation and Eugene B. Connolly. 11 Computation of Earnings/(Loss) Per Common Share 22 Subsidiaries 24 Consents of Experts and Counsel (a) Consent of Arthur Andersen LLP 25 Power of Attorney 27 Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of 1994. 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 March 8, 1995 By: /s/ Richard H. Fleming Richard H. Fleming Senior 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/ Eugene B. Connolly March 8, 1995 EUGENE B. CONNOLLY Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) /s/ Richard H. Fleming March 8, 1995 RICHARD H. FLEMING Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Raymond T. Belz March 8, 1995 RAYMOND T. BELZ Vice President and Controller (Principal Accounting Officer) ROBERT L. BARNETT, KEITH A. BROWN, ) By:/s/ Richard H. Fleming W. H. CLARK, JAMES C. COTTING, LAWRENCE ) Richard H. Fleming M. CRUTCHER, WADE FETZER III, WILLIAM C. ) Attorney-in-fact FOOTE, DAVID W. FOX, PHILIP C. JACKSON, ) Pursuant to Power of Attorney JR. MARVIN E. LESSER, JOHN B. SCHWEMM, ) (Exhibit 24 hereto) JUDITH A. SPRIESER, BARRY L. ZUBROW, ) March 8, 1995 Directors ) EX-10 2 EXHIBIT 10(am) 1994 ANNUAL MANAGEMENT INCENTIVE PROGRAM - USG CORPORATION 1994 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 mutuality of interest between such key employees and the Corporation's stockholders by offering such key employees, who discharge their accountabilities in a manner which makes a measurable contribution to the Corporation's earnings, incentive award opportunities. INTRODUCTION This Annual Management Incentive Program is in effect from January 1, 1994 through December 31, 1994. ELIGIBILITY Individuals eligible for participation in this Program are those officers and other key employees occupying management positions having 775 or more points as determined by the Corporation's position evaluation system. 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 1994 Annual Management Incentive Program, goal income targets for USG Corporation, Subsidiaries and Profit Centers will be determined by the Compensation and Organization Committee after considering recommendations submitted from USG Corporation, Operating Subsidiaries and Profit Centers respectively. Additionally, cash available for debt paydown targets will be established. Profit Center goals will be established which are consistent with Corporate and Operating Subsidiary goals 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 & CEO 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 1994 Annual Management Incentive Program, position par values are based on level of accountability and are expressed as a percent of approved position reference point (midpoint). Resulting award opportunities represent a fully competitive incentive opportunity for 100% (target) achievement of Corporate, Operating Subsidiary and/or Profit Center goals: POSITION PAR VALUE USG CORPORATION Chairman & CEO - USG Corporation 65% of Reference Point Vice Chairman - USG Corporation 55% of Reference Point President & COO - USG Corporation 55% of Reference Point USG CORPORATION 50% Of Reference Point Senior Vice President & Chief Technology Officer Senior Vice President, General Counsel & Secretary Senior Vice President & Chief Administrative Officer VICE PRESIDENT, USG CORPORATION; PRESIDENT & CEO United States Gypsum Company USG Interiors, Inc. USG International, Ltd. VICE PRESIDENT & CHIEF FINANCIAL OFFICER 45% of Reference Point USG CORPORATION & OPERATING SUBSIDIARIES 40% of Reference Point OFFICERS AND MANAGERS President & CEO, L&W Supply Corporation President & CEO, CGC, Inc. Vice President & Treasurer, USG Corporation; Vice President Finance, USG International, Ltd Vice President & Controller, USG Corporation; Vice President Financial Svcs, U.S. Gypsum Co. Vice President Research Executive Vice President, USG Interiors, Inc. 35% of Reference Point Vice President - Manufacturing, U.S. Gypsum Co. Associate General Counsel, USG Corporation Vice President Human Resources - Operations, USG Corporation GENERAL MANAGERS (PROFIT CENTER HEADS) Sales of $50 Million and over 30% of Reference Point Sales Under $50 Million 25% of Reference Point USG CORPORATION, OPERATING SUBSIDIARIES & PROFIT CENTERS OFFICERS AND MANAGERS Position Reference Point: $145,200 and Over 30% of Reference Point Position Reference Point: $117,900 - $145,199 25% of Reference Point Position Reference Point: $105,180 - $117,899 20% of Reference Point Position Reference Point: $ 84,300 - $105,179 15% of Reference Point Position Reference Point: Below $84,300 10% of Reference Point AWARDS Incentive awards for all participants in the 1994 Annual Management Incentive Program will be reviewed and approved by the Compensation and Organization Committee of the USG Corporation Board of Directors. For all participants, the annual incentive award opportunity is the annualized position reference point (midpoint) in effect at the beginning of the calendar year multiplied by the applicable position par value percent. Incentive awards for 1994 will be based on - Goal income (net sales less cost of sales and selling and administrative expenses) based on the Corporation's year-end financial statements. - Cash available for domestic debt paydown. - Except in the case of a Named Executive Officer, other appropriate performance measures as approved by the Compensation and Organization Committee of the Board of Directors. 1. For participants to qualify for the USG Corporation segment of an award, USG Corporation must achieve 75% or higher of the Corporation's goal income target. For Subsidiary and Profit Center participants to qualify for the Subsidiary/ Profit Center segment of an incentive opportunity, the respective Subsidiary or Profit Center must achieve 75% or higher of its goal income target. The Compensation and Organization Committee may eliminate awards to any participant who fails to receive a personal performance rating of "Achieved Expectations" (85) or better under the Corporation's Performance Planning and Review system (PPR). 2. Once the threshold qualifiers for an incentive award are satisfied, basic incentive award amounts will be determined by Corporate performance achievement which meets or exceeds 75% of the Corporate goal income or by Subsidiary or Profit Center achievements which meet or exceed 75% of their respective goal income targets, according to the following schedule: Goal Goal Income Adjustment Factor Income For Corporate, Subsidiary or Achievement Profit Center Performance Below 75% 0% 75% 75% 80% 80% 90% 90% 100% 100% 110% 120% 120% 150% 130% 185% 133% 200% 3. Basic incentive award amounts are adjusted to the extent cash is available for domestic debt paydown using the formula in ATTACHMENT I. The goal income/cash available for domestic debt paydown schedule is included as ATTACHMENT II of this Program. The maximum incentive award under this Program is 200% of par. 4. Basic incentive award opportunities and calculations of awards for participants will be based on the achievement of specific Corporate, Subsidiary and/or Profit Center goal income targets as displayed below or, except with respect to Named Executive Officers, as otherwise may be established subject to approval of the Chairman and CEO: Incentive Award Participants Opportunity/Calculation USG Corporation 100% on USG Corporation Performance (Threshold-75% of Goal) U.S. GYPSUM COMPANY President & CEO 50% USG Corporation Performance 25% North America Gypsum Performance 25% Subsidiary Performance (Threshold - 75% of Goal) VP Manufacturing 25% USG Corporation Performance VP National Accts & Mktg East 25% North America Gypsum Performance Dir, Market Dev & Plng 50% Subsidiary Performance VP Marketing - West (Threshold - 75% of Goal) Dir, Marketing - East Dir, Manufacturing General Mgr - IGD 25% USG Corporation Performance General Mgr - Materials Div 25% Subsidiary Performance 50% Profit Center Performance (Threshold - 75% of Goal) USG INTERIORS, INC 50% USG Corporation Performance President & CEO 25% World-Wide Ceilings Performance 25% Subsidiary Performance (Threshold - 75% of Goal) Executive VP 25% USG Corporation Performance VP Operations 25% World-Wide Ceilings Performance VP Sales 50% Subsidiary Performance VP Mktg & Business Dev (Threshold - 75% of Goal) Dir, Operations - Floors 25% USG Corporation Performance 25% Subsidiary Performance 50% Floors Division Performance (Threshold - 75% of Goal) Dir, Retail Programs 50% USG Corporation Performance 50% Subsidiary Performance USG INTERNATIONAL, LTD. President & CEO 50% USG Corporation Performance 25% North America Gypsum Performance & World Wide Ceilings Performance 25% Subsidiary Performance (Threshold - 75% of Goal) VP Pacific Rim & 25% North America Gypsum Performance General Mgr, Fiberboard & World Wide Ceilings Performance VP & Managing Director 25% Subsidiary Performance 50% Regional Performance (Threshold - 75% of Goal) L&W SUPPLY CORPORATION President & CEO 50% USG Corporation Performance 25% North America Gypsum Performance 25% Subsidiary Performance (Threshold - 75% of Goal) Director, Operations 25% USG Corporation Performance 25% North America Gypsum Performance 50% Subsidiary Performance (Threshold - 75% of Goal) Other Subsidiary Participants 25% USG Corporation Performance (Threshold - 75% of Goal) 75% Subsidiary Performance (Threshold - 75% of Goal) Profit Center Participants 25% Subsidiary Performance (Subject to subsidiary (Threshold - 75% of Goal) discretion) 75% Profit Center Performance (Threshold - 75% of Goal) CGC INC President & CEO 25% USG Corporation Performance 25% North America Gypsum Performance & World Wide Ceilings Performance 50% Subsidiary Performance (Threshold - 75% of Goal) VP & Gen Mgr - Gypsum 25% North America Gypsum Performance 25% Subsidiary Performance 50% Division Performance (Threshold - 75% of Goal) VP & Gen Mgr - 25% World Wide Ceilings Performance Interiors & Industries 25% Subsidiary Performance 50% Division Performance (Threshold - 75% of Goal) Other Subsidiary (CGC) Participants 25% North America Gypsum Performance & World Wide Ceilings Performance 75% Subsidiary Performance (Threshold - 75% of Goal) 5. 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 Compensation and Organization Committee of USG Corporation's Board of Directors shall review and approve the awards recommended for officers and other employees who are eligible participants in the 1994 Annual Management Incentive Program. The Compensation and Organization Committee 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 Committee in accordance with the provisions of the Program. 2. The Compensation and Organization Committee 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 Compensation and Organization Committee has certified goal achievement and applicable awards in writing. 3. The judgement of the Compensation and Organization Committee 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, 1994 and all payments to be made hereunder will be made as soon as practicable after said awards have been approved. USG CORPORATION ANNUAL MANAGEMENT INCENTIVE PROGRAM 1994 ADMINISTRATIVE GUIDELINES 1. Award values will be based on position reference points (midpoints) in effect for each qualifying position at the beginning of the year. 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 par 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 par 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) will 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 Management Incentive Compensation 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 par 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 Incentive Program provisions and par 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 1994 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 Compensation and Organization Committee 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 1994 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-10 3 EXHIBIT 10(an) LETTER AGREEMENT DATED JULY 28, 1994 BETWEEN USG CORPORATION AND EUGENE B. CONNOLLY July 28, 1994 Mr. Eugene B. Connolly 25360 Wagon Wheel Court Barrington, IL 60010 Dear Mr. Connolly: Reference is made to discussions between you and members of the Compensation and Organization Committee of the Board of Directors of USG Corporation (the "Corporation") and others with respect to the potential financial consequences of your death prior to retirement and to the desire of the Corporation to prevent the prospect of such event from influencing the timing of your retirement from the Corporation. In order to promote your retention as an employee of the Corporation through May 31, 1997, and to allay your concerns with respect to such potential financial consequences, the Corporation hereby agrees with you as follows: 1. In the event of your death while in the employ of the Corporation, the Corporation hereby agrees to pay to your spouse, Dorothy E. Connolly, if then living, or to your heirs, in the event that you and said spouse shall both die as the result of a common accident or disaster, an amount equal in aggregate to the amount, if any, by which (X) is less than (Y), where (X) equals the aggregate net present value (after tax) of all amounts payable on account of your death while so employed under (i) the USG Corporation Retirement Plan and Supplemental Retirement Plan - Part A, (ii) proceeds of Pre-Retirement Coverage under the USG Executive Death Benefit Plan, and (iii) the Employment Agreement dated as of May 13, 1993 between you and the Corporation, as the same may be modified, extended or superseded, together with the net present value (after tax) on the date of death of all vested options granted to you under the USG Management Performance Plan, whether or not subsequently transferred in whole or in part; and (Y) equals the aggregate net present value (after tax) of all amounts that would have been payable if you had lived and retired on such date of death ("Assumed Retirement Date") and elected lump sum distributions under the Corporation's Retirement Plan and Supplemental Retirement Plan - Part A, plus the net present value (after tax) of proceeds of Post Retirement Coverage under the USG Executive Death Benefit Plan, calculated as if you had retired and died one day after the Assumed Retirement Date, together with the net present value (after tax) of all vested options granted to you under the USG Management Performance Plan on the Assumed Retirement Date, whether or not subsequently transferred in whole or in part. 2. Payments hereunder or under the benefit plans and agreements referred to herein subject to income taxation, the payment of which is not otherwise provided for, shall be appropriately increased so as to provide for the payment of all federal, state and local income taxes payable on account thereof. 3. In determining the net present value of amounts payable under the plans and agreements described in paragraph 1, all annuity or annuity-type payments shall be converted to lump sum values using the actuarial methods and tables included in the USG Corporation Retirement Plan. 4. Payments made pursuant to this agreement shall not diminish payments to be made under any other agreement or benefit plan or otherwise affect the provisions of any thereof. 5. The Corporation has funded a portion of its obligations under this agreement through the purchase of life insurance on your life. You agree that you shall cooperate with the Corporation by all reasonable means in keeping such insurance in force, it being understood that the Corporation shall be solely responsible for the payment of premiums for such insurance. 6. This agreement shall terminate upon the earlier of your retirement from the employ of the Corporation or your voluntary termination of employment. If you are in agreement with the foregoing, please sign each of three originals in the space indicated below and return two fully executed counterpart originals to the Corporation. Very truly yours, USG Corporation By /s/Harold E. Pendexter, Jr. Senior Vice President and Chief Administrative Officer Agreed: /s/Eugene B. Connolly Eugene B. Connolly EX-11 4 EXHIBIT 11 COMPUTATION OF EARNINGS/(LOSS) PER COMMON SHARE (Dollar amounts in millions except per share data) Primary Earnings/(Loss) Per Share of Common Stock
Year May 7 ended through December 31, December 31, 1994 1993 Average common shares outstanding. . . . 43,243,497 37,157,672 Loss before extraordinary loss . . . . . $ (92) $ (108) Primary loss per common share before extraordinary loss . . . . . . . . . . (2.14) (2.90) Extraordinary loss, net of taxes . . . . - (21) Primary loss per common share from extraordinary loss . . . . . . . . . . - (0.56) Net loss available to common stockholders. (92) (129) Primary net loss per common share. . . . (2.14) (3.46) Computation of earnings/(loss) per common share on a fully-diluted basis is omitted because the options and warrants have an antidilutive effect. Information is omitted for periods prior to May 7, 1993 because, due to the Restructuring and implementation of fresh start accounting, per share data is not meaningful.
EX-22 5 EXHIBIT 22 SUBSIDIARIES The companies listed below are the primary subsidiaries of the Corporation. The financial data for these subsidiaries, as well as for other subsidiaries which 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. . . . . 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 International: CGC Inc.(a) . . . . . . . . . . . . . Canada USG Canadian Mining Ltd.. . . . . . . Ontario Gypsum Transportation Limited . . . . Bermuda Yeso Panamericano, S.A. de C.V. . . . Mexico USG Interiors (Donn) S.A. . . . . . . Belgium Donn Products GmbH. . . . . . . . . . Germany Donn Products (U.K.), Ltd.. . . . . . United Kingdom Donn Products France S.A. . . . . . . France USG (Netherlands) B.V.. . . . . . . . Netherlands USG Interiors (Europe) S.A. . . . . . Belgium USG Interiors Coordination Centre S.A. Belgium USG Pacific Holdings. . . . . . . . . Singapore USG Interiors Pacific Ltd.. . . . . . New Zealand USG Interiors (Australia) Pty. Ltd. . Australia USG Interiors (Far East) SDN BHD. . . Malaysia Alabaster Engineering (Nederland) B.V. Netherlands Red Top Technology (Nederland) B.V. . Netherlands (a) Accounts for material revenues (b) As of December 31, 1994, L&W Supply conducted its business out of 139 locations in 34 states using various names registered under applicable assumed business name statutes. EX-24 6 EXHIBIT 24 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECT TO FORM S-8 As independent public accountants, we hereby consent to the incorporation by reference of our report, dated January 26, 1995, included in this Form 10-K for the year ended December 31, 1994 into the Corporation's previously filed Registration Statements Nos. 33-22581, as amended, 33-22930, 33-36303, 33-40136, 33-52715 and 33-63554 on Form S-8. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Chicago, Illinois March 7, 1995 EX-25 7 EXHIBIT 25 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard H. Fleming, John E. Malone and Raymond T. Belz 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 ended December 31, 1994 of USG Corporation, and any of 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 substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney has been signed as of February 8, 1995 by the following persons. \s\Eugene B. Connolly \s\David W. Fox Eugene B. Connolly David W. Fox Chairman of the Board, Director Chief Executive Officer, and Director \s\William C. Foote \s\Philip C. Jackson, Jr. William C. Foote Philip C. Jackson, Jr. President, Chief Operating Director Officer and Director \s\Robert L. Barnett \s\Marvin E. Lesser Robert L. Barnett Marvin E. Lesser Director Director \s\Keith A. Brown \s\John B. Schwemm Keith A. Brown John B. Schwemm Director Director \s\W. H. Clark \s\Judith A. Sprieser W. H. Clark Judith A. Sprieser Director Director \s\James C. Cotting \s\Barry L. Zubrow James C. Cotting Barry L. Zubrow Director Director \s\Lawrence M. Crutcher Lawrence M. Crutcher Director \s\Wade Fetzer III Wade Fetzer III Director EX-27 8
5 1,000,000 YEAR DEC-31-1994 DEC-31-1994 197 0 288 14 173 644 843 282 2124 455 1077 5 0 0 (13) 2124 2290 2290 1773 1773 244 0 149 (38) 54 (92) 0 0 0 (92) (2.14) (2.14)
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